<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1998
REGISTRATION NO. 333-41239
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DUANE READE INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<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>
440 NINTH AVENUE
NEW YORK, NEW YORK 10001
TELEPHONE: 212-273-5700
(Address, including zip code, and telephone number, including area code,
of registrant's 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. [ ]
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>
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 JANUARY 15, 1998
PROSPECTUS
, 1998
6,700,000 SHARES
[DUANE READE INC. LOGO]
COMMON STOCK
All of the shares of common stock, $0.01 par value per share (the "Common
Stock"), offered hereby are being offered (the "Offering") by Duane Reade
Inc. ("Duane Reade" or the "Company").
Prior to this Offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will
be between $14.00 and $16.00 per share. See "Underwriting" for information
relating to the factors that will be considered in determining the initial
public offering price.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to notice of official issuance, under the symbol "DRD."
SEE "RISK FACTORS," BEGINNING ON PAGE 9, FOR A DISCUSSION OF CERTAIN
FACTORS WHICH SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------
<S> <C> <C> <C>
Per Share..... $ $ $
Total(3)...... $ $ $
- -----------------------------------------------------------
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $965,000.
(3) Certain stockholders have granted to the Underwriters an option,
exercisable within 30 days of the date hereof, to purchase up to an
aggregate of 1,005,000 additional shares of Common Stock, solely to
cover over-allotments, if any. If the Underwriters exercise such option
in full, the total Price to the Public, Underwriting Discounts and
Commissions, Proceeds to the Company and aggregate proceeds to such
stockholders will be $ , $ , $ and $ , respectively. See
"Principal Stockholders" and "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
subject to prior sale, when, as and if delivered to and accepted by them,
subject to certain prior conditions. The Underwriters reserve the right to
reject any order in whole or in part. It is expected that delivery of the
shares of Common Stock will be made in New York, New York on or about ,
1998.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
<PAGE>
[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>
[DUANE READE INC. LOGO]
[PHOTO]
[PHOTO]
<PAGE>
[PICTURES TO COME]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING TRANSACTIONS, SYNDICATE COVERING TRANSACTIONS, AND THE
IMPOSITION OF PENALTY BIDS. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN
CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE
COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<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. Unless otherwise stated, the information contained in this
Prospectus assumes no exercise of the Underwriters' over-allotment option.
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 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, 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 (as defined herein), 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, above industry average inventory shrink, 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 lower, on average, 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
3
<PAGE>
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").
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.
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 demographic trends, such as the aging
of the U.S. population, and industry changes, such as growth of
4
<PAGE>
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 has 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.
5
<PAGE>
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 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 (the "Notes Offering") of $80.0 million aggregate
principal amount of the Company's % Senior Subordinated Notes due 2008 (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 Notes 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
Common Stock offered hereby ... 6,700,000 shares (1)
Common Stock to be outstanding
after the Offering ............ 16,957,832 shares (1)
Use of Proceeds ............... The net proceeds from the Offering, together
with borrowings under the New Credit
Agreement and the net proceeds from the
Notes Offering, will be used to complete the
Refinancing Plan. See "Prospectus
Summary--Refinancing Plan" and "Use of
Proceeds."
Proposed New York Stock
Exchange symbol ............... "DRD"
- ------------
(1) Excludes (i) outstanding options to purchase an aggregate of 1,628,441
shares of Common Stock and (ii) 338,927 additional shares reserved for
issuance under the Company's stock option plans.
6
<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%
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%
Capital expenditures...................... $ 9,947 $ 6,868 $ 1,247 $ 913 $ 4,931
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 28, 1996 SEPTEMBER 27, 1997
----------------- --------------------------
(ACTUAL) (AS ADJUSTED) (5)
<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)
7
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(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, 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 incur on a continuing basis.
(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) Adjusted to give effect to (i) the Refinancing Plan, including the
consummation of the Offering and the Notes 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."
8
<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 Common Stock 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 Notes
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 Common Stock, 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 service its 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 may substantially dilute the ownership interest of holders of
Common Stock), 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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
9
<PAGE>
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 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-- New Credit
Agreement" and "Description of Certain Indebtedness--New Senior Subordinated
Notes."
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 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 Notes Offering and the New Credit Agreement
will be used to reduce overall indebtedness of the Company and associated
interest expense. See "Prospectus Summary--Refinancing Plan" and "Use of
Proceeds." 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. As of September 27,
1997, the Company's consolidated stockholders' deficiency was $73.6 million.
On a pro forma basis giving effect to the Refinancing Plan, including the
Offering, the Notes Offering and the application of the net proceeds
therefrom, the Company would have had stockholders' deficiency of $4.7
million as of September 27, 1997. 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
2rea. 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.
10
<PAGE>
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 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
11
<PAGE>
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 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 Offering, investment funds affiliated with
DLJMPBII, an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"), which is one of the Underwriters, and certain of its affiliates will
beneficially own an aggregate of approximately 52.4% of the Company's fully
diluted outstanding Common Stock (46.8% if the Underwriters' overallotment
option 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, 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. See "Description of Capital Stock."
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws may inhibit changes in control
of the Company not approved by the Company's Board of Directors. These
provisions, which, among other things, (i) authorize the Board of Directors
to issue preferred stock ranking senior to the Common Stock without any
action on the part of the shareholders and (ii) establish certain advance
notice procedures for shareholder proposals (including nominations of
directors) to be considered at shareholders' meetings may delay, defer or
prevent a takeover attempt that a stockholder might consider in its best
interests. These provisions also may adversely affect prevailing market
prices for the Common Stock. In addition, Section 203 of the Delaware General
Corporation Law restricts certain persons from engaging in business
combinations with the Company. See "Description of Capital Stock."
12
<PAGE>
RESTRICTIONS ON PAYMENT OF DIVIDENDS ON COMMON STOCK
Since 1993, the Company has not declared or paid any cash or other
dividends on the Common Stock and does not expect to pay dividends for the
foreseeable future. The Company's New Credit Agreement and the New Senior
Subordinated Note Indenture contain covenants that restrict the ability of
the Company to pay cash dividends. If these restrictions are subsequently
removed, any future cash dividends will depend upon the Company's results of
operations, financial conditions, cash requirements, the availability of a
surplus and other factors. See "Dividend Policy."
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."
IMMEDIATE AND SUBSTANTIAL DILUTION
Based upon an assumed public offering price of $15.00 per share (the
midpoint of the range set forth on the cover page of this Prospectus),
purchasers of Common Stock in the Offering will experience immediate and
substantial dilution of $23.35 per share in the net tangible book deficiency
per share of Common Stock. See "Dilution."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing, subject to
notice of issuance, on the New York Stock Exchange, there can be no assurance
that an active trading market for the Common Stock will develop or be
sustained or that purchasers of Common Stock in the Offering will be able to
resell their shares at prices at or above the initial offering price. The
initial public offering price of the Common Stock offered hereby will be
determined by negotiations among the Company and the representatives of the
Underwriters and may not be indicative of the market price for the Common
Stock after the Offering. See "Underwriting." After the Offering, the market
price for shares of the Common Stock may be volatile and may fluctuate based
upon a number of factors, including many that are beyond the control of the
Company, such as the Company's results of operations and business
performance, general industry trends, news announcements by competitors of
the Company, changes in the regulatory environment or in general, political,
market and economic conditions.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 16,957,832 shares
of Common Stock outstanding. The shares of Common Stock sold in the Offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless held by an
"affiliate" of the Company, as that term is defined under Rule 144 under the
Securities Act ("Rule 144"), which shares will be subject to the resale
limitations of Rule 144. In addition, certain existing stockholders,
including holders of restricted Common Stock, have registration rights with
respect to Common Stock held by them. In connection with the Offering, all
existing stockholders have agreed not
13
<PAGE>
to dispose of any shares for a period of 180 days from the date of this
Prospectus, and the Company has agreed not to dispose of any shares (other
than shares sold by the Company in the Offering or issuances by the Company
of certain employee stock options and shares covered thereby) for a period of
180 days from the date of this Prospectus, without the prior written consent
of representatives of the Underwriters. Upon expiration of such 180-day
period, up to 386,125 shares of Common Stock will be eligible for sale
pursuant to Rule 144. No prediction can be made as to the effect, if any,
that market sales of shares of Common Stock or the availability of shares of
Common Stock for sale will have on the market price of the Common Stock from
time to time. The sale of a substantial number of shares held by the existing
stockholders, whether pursuant to a subsequent public offering or otherwise,
or the perception that such sales could occur, could adversely affect the
market price of the Common Stock and could materially impair the Company's
future ability to raise capital through an offering of equity securities. See
"Certain Relationships and Related Transactions--Stockholders and
Registration Rights Agreement," "Shares Eligible for Future Sale" and
"Underwriting."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering (after deducting the
estimated underwriting discounts and estimated other general offering
expenses) are estimated to be approximately $92.5 million, based on an
assumed initial public offering price of $15.00 per share (which represents
the midpoint of the range set forth on the cover page of the Prospectus). The
Company intends to use such net proceeds, together with estimated net
proceeds from the Notes Offering of approximately $77.1 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 Notes
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 Notes 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.
15
<PAGE>
DIVIDEND POLICY
Since 1993, the Company has not declared or paid any cash or other
dividends on its Common Stock and does not expect to pay dividends for the
foreseeable future. The Company anticipates that, for the foreseeable future,
earnings will be reinvested in the business and used to service indebtedness.
The declaration and payment of cash dividends by the Company are subject to
the discretion of the Board of Directors and to restrictions placed thereon
by the New Credit Agreement and the New Senior Subordinated Notes. See
"Description of Certain Indebtedness." In addition, any future determination
to pay dividends will depend on the Company's results of operations,
financial condition, capital requirements, contractual restrictions under its
current or any future indebtedness, the availability of a surplus and other
factors deemed relevant by the Board of Directors. See "Risk
Factors--Restrictions on Payment of Dividends on Common Stock."
16
<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 6,700,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $15.00 (the midpoint of the range set forth
on the cover page of this Prospectus). 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) Adjusted to give effect to the Refinancing Plan, including the
consummation of the Offering and the Notes 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 the outstanding balance under the Company's credit agreement
in effect on September 27, 1997, which was replaced by 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 Notes
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 Notes 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.
17
<PAGE>
DILUTION
The net tangible book deficiency of the Company as of September 27, 1997
was approximately $211.1 million, or $20.58 per share of Common Stock. Net
tangible book deficiency per share represents the amount of the Company's
total tangible assets less its total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the receipt of
$92.5 million of estimated net proceeds from the Offering and the application
thereof as described under "Use of Proceeds," the pro forma net tangible book
deficiency of the Company at September 27, 1997 would have been approximately
$141.6 million, or $8.35 per share of Common Stock. This represents an
immediate reduction in net tangible book deficiency of $12.23 per share to
the existing shareholders and an immediate net tangible book value dilution
of $23.35 per share to new investors purchasing shares in the Offering. The
following table illustrates this dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share .................. $ 15.04
Net tangible book deficiency per share at September 27, 1997 ..... $(20.58)
Decrease in net tangible book deficiency per share attributable
to new investors................................................. 12.23
----------
Pro forma net tangible book deficiency value per share after the
Offering ........................................................ (8.35)
---------
Dilution per share to new investors .............................. $(23.35)
---------
</TABLE>
The following table summarizes, on a pro forma basis after giving effect
to the Offering and the application of the estimated net proceeds therefrom
as of September 27, 1997, the number of shares of Common Stock purchased from
the Company, the total consideration paid to the Company for such shares and
the average price per share paid by the existing stockholders and the new
investors purchasing shares of Common Stock in the Offering (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE PER
----------------------- --------------------- SHARE
NUMBER PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C>
Existing stockholders (1) 10,257,832 60.5% $ 24,665 19.7% $ 2.40
New investors ............. 6,700,000 39.5% $100,500 80.3% $15.00
------------ --------- ---------- --------- -----------
Total...................... 16,957,832 100.0% $125,165 100.0%
------------ --------- ---------- ---------
</TABLE>
- ------------
(1) Excludes 1,628,441 shares of Common Stock reserved for issuance upon the
exercise of stock options outstanding as of September 27, 1997 (with a
weighted average exercise price of $7.03 per share).
18
<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.
19
<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 expenses ........................................ 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
(2,200)(1) 13,693
Accrued expenses ........................................ 13,193 2,700 (2)
5,800 (1)
Current portion of senior debt .......................... 660 (660)(1) 5,800
Current portion of capital lease obligations............. 1,510 1,510
------------ ------------- -----------
TOTAL CURRENT LIABILITIES .............................. 46,696 5,040 51,736
124,200 (1)
80,000 (1)
(80,815)(1)
(93,938)(1)
Senior debt, less current portion ........................ 170,708 4,045 (4) 204,200
(99,803)(1)
3,746 (3)
Zero Coupon Notes, net.................................... 89,094 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
100,433 (1)
Paid-in-capital.......................................... 24,562 (8,000)(1) 116,995
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.
20
<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>
<S> <C>
TOTAL SOURCES:
Proceeds of 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 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.
(6) Represents compensation expense in connection with stock options
granted.
21
<PAGE>
DUANE READE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT 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 charge........................... 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)
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)(3) 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 ... 10,589 17,289
============ ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.
22
<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:
Interest expense related to the New Senior Subordinated Notes ... $ 5,850
Interest expense related to the New Credit Agreement ............ 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)
==========
(2) Reflects a provision for compensation expense in connection with stock
options issued.
(3) For the 52 weeks ended December 28, 1996:
Interest expense related to the New Senior Subordinated Notes ... $ 7,800
Interest expense related to the New Credit Agreement ............ 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)
==========
23
<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>
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 ....
Weighted average common shares
outstanding..........................
OPERATING AND OTHER DATA:
EBITDA (2) ........................... $ 20,380
EBITDA as a percentage of sales ..... 12.2%
Number of stores at end of period ... 37
Same store sales growth (3) .......... --
Pharmacy same store sales
growth (3)(5)........................
Average store size (square feet) at
end of period ....................... --
Sales per square foot (6)............. --
Pharmacy sales as a % of net sales
(5).................................. --
Third-Party Plan sales as a % of
pharmacy sales (7) ..................
Capital expenditures ................. $ 114
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital ...................... $ 13,943
Total assets ......................... 264,355
Total debt and capital lease
obligations (8)...................... 221,471
Stockholders' equity (deficiency) ... (35,622)
<PAGE>
<CAPTION>
COMPANY
------------------------------------------------------------------------------------
PERIOD 39 WEEKS ENDED
SEPTEMBER 26 ----------------
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 .... $ (.73) $ (2.34) $ (1.55) $ (1.70) $ (1.69) $ (1.18) $ (1.34)
============ ========= ========= ========= ========= ============= =============
Weighted average common shares
outstanding.......................... 10,046 10,448 10,633 10,650 10,575 10,589 10,600
============ ========= ========= ========= ========= ============= =============
OPERATING AND OTHER DATA:
EBITDA (2) ........................... $ 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 (3) .......... 2.4%(4) 3.3% 1.6% (3.5)% 8.3% 7.8% 7.9%
Pharmacy same store sales
growth (3)(5)........................ -- -- 14.2% 7.0% 25.5% 25.1% 25.4%
Average store size (square feet) at
end of period ....................... 6,166(4) 6,172 6,596 6,712 6,733 6,733 6,832
Sales per square foot (6)............. $ 1,001(4) $ 1,022 $ 970 $ 898 $ 956 $ 708 $ 751
Pharmacy sales as a % of net sales
(5).................................. -- 16.6% 17.6% 19.0% 21.8% 21.5% 24.8%
Third-Party Plan sales as a % of
pharmacy sales (7) .................. 45.7% 58.2% 64.4% 63.3% 72.9%
Capital expenditures ................. $ 960 $ 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 (8)...................... 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>
24
<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, 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) 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 27,
<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>
(3) Same store sales figures include stores that have been in operation for
at least 13 months.
(4) For the year ended December 31, 1992.
(5) Prior to 1993, the Company did not separately track pharmacy sales.
(6) 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."
(7) Prior to fiscal year 1994, the Company's pharmacy system did not
separately track third-party sales.
(8) Excludes deferred rent obligations of approximately $4.0 million and
$5.4 million at December 28, 1996 and at September 27, 1997,
respectively.
25
<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 base 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 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.
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, one of
the Underwriters, 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,
26
<PAGE>
the Company 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 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 I, Inc. ("DRI"), a direct wholly-owned
subsidiary of Daboco, together owning all of the outstanding partnership
interests of Duane Reade, a New York general partnership ("Duane Reade")
(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 Duane Reade. 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
Duane Reade (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) 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
27
<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
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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
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(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 $1.3 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 31, 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 resells 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 week period 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 week period 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 experienced a significant increase in inventory during
the 1997 period as a result of taking advantage of a number of forward
purchasing opportunities, accumulation of inventory in advance of additional
store openings and seasonal inventory buildup. For the 39 week period ended
September 27, 1997, net cash used in investing activities was $3.9 million,
compared to $2.9 million for the 39 week period 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 week period 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 week period 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 collectively 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 Notes 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, 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
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on the amount of pre-ownership change NOLs that a corporation may use to
offset its post-ownership 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 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 such Third Party Plans typically result in
lower gross margins compared to cash purchases, 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, 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,
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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, above industry average inventory shrink, 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 lower, on average, 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.
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
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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 for 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. 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 has 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
35
<PAGE>
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.
36
<PAGE>
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.
37
<PAGE>
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.
38
<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 reduce
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.
39
<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 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
40
<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%.
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.
41
<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 ........ 49 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.
42
<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 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 $-- $-- 496,553 $--
Chief Executive Officer
Gary Charboneau............. 1997 263,000 -- -- 141,875 --
Senior Vice
President--Sales and
Merchandising
Jerry M. Ray................ 1997 200,000 -- -- 118,229 --
Senior Vice
President--Store
Operations
William J. Tennant..........
Senior Vice 1997 151,000(2) -- -- 47,292 --
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.
43
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table discloses options granted during fiscal 1997 to the
Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION 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 (3). 496,553 48.7% $8.33 6/18/07 $2,601,938 $6,594,224
Gary Charboneau (4). 141,875 13.9 8.33 6/18/07 743,425 1,884,100
Jerry M. Ray (4) ... 118,229 11.6 8.33 6/18/07 619,520 1,570,081
William J. Tennant 47,292 4.6 8.33 6/18/07 247,810 628,038
Joseph S. Lacko ... 11,823 1.2 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. 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. At an
annual rate of appreciation of 10% per year for the option term, the
price of the Common Stock would be approximately $21.61 per share as of
the expiration date.
(3) All of such options were granted under separate agreements with the
Company.
(4) All of such options were granted under the Equity Plan (as defined
below). The options granted under such plan are subject to repurchase
provisions upon termination of employment. See "--Stock Options."
44
<PAGE>
FISCAL YEAR END OPTION VALUES
The following table summarizes the number and value of all unexercised
options held by the Named Executive Officers at the end of 1997. There were
no options exercised in the Company's last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED ON OPTIONS AT AT FISCAL YEAR END
NAME EXERCISE VALUE REALIZED FISCAL YEAR END ($)(1)
- ---- ------------- -------------- --------------- ---------------------
EXERCISABLE/ EXERCISABLE/
UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Anthony J. Cuti..... -- -- 364,525/496,553 2,825,068/0
Gary Charboneau..... -- -- 56,012/141,875 306,443/0
Jerry M. Ray........ -- -- 45,031/118,229 285,161/0
William J. Tennant -- -- 0/47,293 67,419/0
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.
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. 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 496,553 shares of Common Stock at an exercise price
of $8.33 per share. Subject to Mr. Cuti's continued employment with the
45
<PAGE>
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 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,
Needleman and Ray and certain other executives that provide for their initial
base salary as well as annual incentive bonuses based on certain EBITDA
targets. Each of Messrs. Charboneau, Needleman 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. 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. 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
46
<PAGE>
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 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).
47
<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 (one of the Underwriters 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 standby commitment fees of
approximately $1.2 million in connection with change of control offers for
the 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 its pro
rata portion of the underwriters compensation set forth on the cover page of
this Prospectus. DLJ is also serving as sole underwriter in connection with
the Notes Offering and will receive an estimated $2.4 million of 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 Offering.
48
<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 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 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.
49
<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 November 15, 1997.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
---------------------------------------
% OF CLASS % OF CLASS
PRIOR TO AFTER
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% 57.3%
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................................. 68,100 * *
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 is exercised,
DLJMBPII Entities will be selling stockholders. In addition, in such
event, certain other stockholders of the Company may exercise their
rights to participate in such sales. In the event that DLJMBPII
Entities sell all of the shares pursuant the overallotment option, such
entities will own approximately 51.2% of the Common Stock.
(4) Mr. Jaffe and Ms. Arnaboldi are each Managing Partners of DLJMB, and
Mr. Nathanson is a Managing Director of DLJ. Share data shown for such
individuals excludes shares shown as held by DLJ Merchant Banking
Partners II, L.P. and related investors, as to which such individuals
disclaim beneficial ownership.
50
<PAGE>
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 Notes 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.
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.
NEW SENIOR SUBORDINATED NOTES
Upon consummation of the Notes Offering, the Company will have outstanding
$80.0 million aggregate principal amount of New Senior Subordinated Notes,
which will bear interest at a rate of % per annum, payable semi-annually
in arrears on each and . The New Senior Subordinated Notes will mature
on , 2008. The New Senior Subordinated Notes will represent senior
subordinated unsecured obligations of the Company. The Company's payment
obligations under the New Senior Subordinated Notes will be guaranteed on a
senior subordinated basis by all of the Company's present and future
subsidiaries.
The New Senior Subordinated Notes will not be redeemable at the option of
the Company prior to , 2003, except that prior to , 2001 the Company
will be permitted to redeem up to 35% of the New Senior Subordinated Notes at
a redemption price of % of the principal amount thereof, plus accrued and
unpaid interest, if any, with the net proceeds of one or more public or
private sales of common stock or preferred stock of the Company, provided
that at least 65% of the New Senior Subordinated Notes remain outstanding
immediately after the occurrence of any such redemption. At any time on or
after , 2003, the New Senior Subordinated Notes will be redeemable at the
option of the Company, in whole or in part, at a premium declining ratably to
par on , 2005.
The New Senior Subordinated Note Indenture will provide that, in the event
of a Change of Control (as defined in the New Senior Subordinated Note
Indenture) of the Company, the Company will be required to make an offer to
purchase in cash all or any part of the outstanding New Senior Subordinated
Notes at a price of 101% of the aggregate principal amount thereof.
51
<PAGE>
The New Senior Subordinated Note Indenture contains restrictive covenants
that, among other things, impose limitations on the ability of the Company
and its subsidiaries (i) to incur additional indebtedness, (ii) to merge,
consolidate or sell or dispose of all or substantially all of its assets,
(iii) to issue certain preferred stock, pay cash dividends or make other
distributions on account of the Company's equity interests, repurchase equity
interests or subordinated indebtedness and make certain other restricted
payments, (iv) to create certain liens, (v) to enter into transactions with
affiliates and (vi) to sell assets.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offering, the total amount of authorized capital
stock of the Company will consist of 30,000,000 shares of Common Stock, par
value $0.01 per share, and 5,000,000 shares of preferred stock, par value
$0.01 per share (the "Preferred Stock"). Upon completion of the Offering,
16,957,832 shares of Common Stock will be outstanding and no shares of
Preferred Stock will be outstanding. Unless otherwise noted, the discussion
herein describes the Company's capital stock, the Amended and Restated
Certificate of Incorporation (the "Restated Certificate") and Amended and
Restated Bylaws (the "Bylaws") as anticipated to be in effect upon
consummation of the Offering. The following summary of certain provisions of
the Company's capital stock does not purport to be complete and is subject to
and qualified in its entirety by the Restated Certificate and the Bylaws of
the Company that are included as exhibits to the Registration Statement of
which this Prospectus forms a part and by the provisions of applicable law.
COMMON STOCK
The holders of the Company's Common Stock are entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders.
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered hereby will, upon payment therefor, be validly
issued, fully paid and nonassessable. Subject to the rights of the holders of
any shares of Preferred Stock, the holders of outstanding shares of Common
Stock are entitled to receive dividends out of assets legally available
therefor at such times and in such amounts as the Board may from time to time
determine. See "Dividend Policy." The shares of Common Stock are not be
redeemable or convertible, and the holders thereof have no preemptive or
subscription rights to purchase any securities of the Company. Upon
liquidation, dissolution or winding up of the Company, the holders of shares
of Common Stock are entitled to receive on pro rata basis the assets of the
Company which are legally available for distribution, after payment of all
debts and other liabilities and subject to the preferential rights of any
holders of Preferred Stock.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to notice of issuance, under the symbol "DRD."
PREFERRED STOCK
The Board of Directors has the authority, without further action of the
shareholders of the Company, to issue up to an aggregate of 5,000,000 shares
of Preferred Stock in one or more series and to fix or determine the
designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series.
The Board of Directors, without shareholder approval, can issue Preferred
Stock with voting and conversion rights that could adversely affect the
voting power of holders of Common Stock. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, may have the effect of
discouraging, delaying, or preventing a change in control of the Company.
52
<PAGE>
CERTAIN PROVISIONS OF THE BYLAWS
The Bylaws provide that special meetings of shareholders may be called
only by the Chairman of the Board of Directors, the President, or the Board
of Directors of the Company and that no business shall be transacted and no
corporate action may be taken at a special meeting of shareholders other than
as stated in the notice of the meeting. The Bylaws also provide that the only
business that may be brought before an annual meeting of shareholders is
limited to matters (i) brought before the meeting at the direction of the
Board of Directors or (ii) specified in a written notice given by or on
behalf of a shareholder of the Company in accordance with certain procedural
requirements specified in the Bylaws. These provisions could have the effect
of delaying shareholder actions that are favored by the holders of a majority
of the outstanding voting securities of the Company. These provisions may
also discourage another person or entity from making a tender offer for the
Company's Common Stock because such person or entity, even if it acquired a
majority of the outstanding voting securities of the Company, would be unable
to call a special meeting of shareholders to take action as a shareholder
(such as electing new directors or approving a merger).
SECTION 203 OF DELAWARE LAW
Following the consummation of the Offering, the Company will be subject to
the "business combination" provisions of the Delaware General Corporation
Law. In general, such provisions prohibit a publicly-held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder" for a period of three years after the date of
the transaction in which the person became an "interested stockholder,"
unless (i) the transaction is approved by the board of directors prior to the
date the interested stockholder obtained such status, (ii) upon consummation
of the transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or subsequent to such
date the "business combination" is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned
by the "interested stockholder." A "business combination" is defined to
include mergers, asset sales and other transactions resulting in financial
benefit to a stockholder. In general, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or, within three years,
did own) 15% or more of a corporation's voting stock. The statute could
prohibit or delay mergers or other takeover or change in control attempts
with respect to the Company and, accordingly, may discourage attempts to
acquire the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate provides that, to the fullest extent permitted by
Delaware law, no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary
duties as a director. The effect of this provision is to eliminate the rights
of the Company and its stockholders (through stockholder derivative suits on
behalf of the Company) to recover monetary damages against a director for
breach of fiduciary duty as a director (including breaches resulting from
grossly negligent conduct). This provision does not, however, exonerate the
directors from liability under federal securities laws or for (i) breach of a
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or
knowing violation of law, (iii) certain willful or negligent acts in
connection with the payment of dividends or the repurchase or redemption of
securities, or (iv) any transaction from which the director derived an
improper personal benefit. The Bylaws provide for indemnification of the
officers and directors of the Company to the fullest extent permitted by
applicable law.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock will be BankBoston,
N.A.
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices of the Common Stock.
Upon the closing of the Offering, there will be 16,957,832 shares of
Common Stock outstanding. All of the shares of Common Stock sold in the
Offering will be freely tradable without restriction or further registration
under the Securities Act, unless held by an "affiliate" of the Company, as
that term is defined in Rule 144 under the Securities Act, which shares will
be subject to the resale limitations of Rule 144. All of the outstanding
shares have not been registered under the Securities Act and may not be sold
unless they are registered or unless an exemption from registration, such as
the exemption provided by Rule 144, is available.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities
acquired from the Company or an affiliate of the Company in a non-public
transaction) for at least one year, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of one
percent of the outstanding Common Stock or the average weekly trading volume
in the Common Stock during the four calendar weeks preceding the date on
which notice of such sale is filed pursuant to Rule 144. Sales under Rule 144
are also subject to certain provisions regarding the manner of sale, notice
requirements and the availability of current public information about the
Company. A stockholder (or stockholders whose shares are aggregated) who is
not an affiliate of the Company for at least 90 days prior to a proposed
transaction and who has beneficially owned "restricted securities" for at
least two years is entitled to sell such shares under Rule 144 without regard
to the limitations described above. All of the Company's existing
stockholders, including the officers and directors of the Company, have
agreed that they will not, without the prior written consent of DLJ on behalf
of the Underwriters, sell or otherwise dispose of any shares of Common Stock
for a period of 180 days after the date hereof. An aggregate of 10,257,832
outstanding shares of Common Stock are subject to such agreement. Beginning
180 days after completion of the Offering, 386,125 shares of Common Stock
will be eligible for sale under Rule 144.
REGISTRATION RIGHTS
Pursuant to the Stockholders and Registration Rights Agreement, 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 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 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
the securities held by such Initial Shareholders.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting
Agreement (the "Underwriting Agreement"), the Underwriters named below (the
"Underwriters"), for whom DLJ, Goldman, Sachs & Co. and Smith Barney Inc. are
acting as representatives (the "Representatives"), have severally agreed to
purchase from the Company an aggregate of 6,700,000 shares of Common Stock.
The number of shares of Common Stock that each Underwriter has agreed to
purchase is set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation ....
Goldman, Sachs & Co. ....................................
Smith Barney Inc.........................................
-------------
Total .................................................. 6,700,000
=============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by
counsel and to certain other conditions. If any of the shares of Common Stock
are purchased by the Underwriters pursuant to the Underwriting Agreement, all
such shares (other than shares covered by the over-allotment option described
below) must be purchased.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus and to
certain dealers (who may include the Underwriters) at such price less a
concession not in excess of $ per share of Common Stock. The Underwriters
may allow, and such dealers may reallow, a discount not in excess of $ per
share of Common Stock on sales to any other Underwriter or certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
Certain selling stockholders have granted an option to the Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to
an aggregate of 1,005,000 additional shares of Common Stock at the initial
public offering price set forth on the cover page of this Prospectus, net of
underwriting discounts and commissions. Such option may be exercised at any
time until 30 days after the date of this Prospectus. To the extent that the
Representatives exercise such option, each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's initial commitment as indicated in
the preceding table. The Company will not receive any proceeds from the sale
of the Common Stock by the selling stockholders.
At the Company's request, the Underwriters have reserved up to 5% of the
shares offered hereby for sale at the initial public offering price to
certain of the Company's employees, members of their immediate families and
other individuals who are business associates of the Company. The number of
shares of Common Stock available for sale to the general public will be
reduced to the extent these individuals purchase such reserved shares. Any
reserved shares not purchased will be offered by the Underwriters to the
general public on the same basis as the other shares offered hereby.
The Company and all of its existing shareholders, including its officers
and directors and certain of its employees, have agreed, subject to certain
exceptions, not to directly or indirectly sell, offer to sell, grant any
option for the sale of or otherwise dispose of (or transfer any portion of
the economic consequences associated with the ownership of) any shares of
Common Stock or securities convertible
55
<PAGE>
into or exchangeable or exercisable for Common Stock, or demand or exercise
any registration rights with respect to such securities, in each case,
without the prior written consent of DLJ, on behalf of the Underwriters, for
a period of 180 days after the date of this Prospectus. See "Shares Eligible
for Future Sale."
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined through
negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, are price-earnings ratios of publicly traded
companies that the Representatives believe to be comparable to the Company,
certain financial information of the Company, the history of, and the
prospects for, the Company and the industry in which it competes and
assessment of the Company's management, its past and present operations, the
prospects for, and timing of, future revenues of the Company, the present
state of the Company's development and the above factors in relation to
market values and various valuation measures of other companies engaged in
activities similar to the Company. There can be no assurance that an active
trading market will develop for the Common Stock or that the Common Stock
will trade in the public market subsequent to the Offering at or above the
initial public offering price.
The Common Stock has been approved for listing on the New York Stock
Exchange, subject to notice of issuance, under the symbol "DRD."
The Underwriters do not intend to confirm sales of the Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the offering,
creating a syndicate short position. The Underwriters may bid for and
purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members
in the Offering, if the syndicate repurchases previously distributed Common
Stock in syndicate covering transactions, in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market price
of the Common Stock above independent market levels. The Underwriters are 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 equity
securities, the public offering price per share can be no 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 public
offering price for the Common Stock in compliance with the requirements of
Rule 2720. 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 has agreed to pay $10,000 to Goldman, Sachs &
Co.
DLJ is also acting as the underwriter in connection with the Notes
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 New Credit Agreement, are being used to effect the Refinancing,
including the repayment of the Existing Credit Agreement. DLJ Capital
Funding, Inc., an affiliate of DLJ, is expected to act as syndication agent
and be 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."
56
<PAGE>
LEGAL MATTERS
The validity of the Common Stock 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 Underwriters 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 three years ended 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 Common Stock 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 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
Common Stock 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.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
DUANE READE HOLDING CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
--------
<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 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:
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
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 in which the
Company received consideration from the Group to terminate the non-compete
agreements.
F-7
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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%.
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>
52 WEEKS ENDED DECEMBER 30, 52 WEEKS ENDED DECEMBER 28,
1995 1996
---------------------------- ---------------------------
OPTIONS OPTION PRICE OPTIONS OPTION PRICE
----------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
year ............................ 367,872 $0.58 to 40.88 160,437 $0.58 to 40.88
Options granted .................. 34,153 $0.58 to 40.88 714,872 $0.58 to 40.88
Options canceled ................. (241,588) $0.58 to 40.88 (54,906) $0.58 to 40.88
----------- --------------- ---------- ---------------
Options outstanding, end of year 160,437 $0.58 to 40.88 820,403 $0.58 to 40.88
=========== =============== ========== ===============
</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.
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.
F-14
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ------------ -------- --------- ------------- -----------
<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>
<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.
During the second quarter of 1997, the Company adopted an Equity
Participation Plan under which options for a total of 1,080,966 shares of
common stock of the Company may be granted if the Company meets specific
performance targets. At September 27, 1997, options for 1,321,181 shares have
been granted to employees.
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.
F-25
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Changes in options outstanding during the 39 weeks ended September 27,
1997 are summarized as follows:
<TABLE>
<CAPTION>
NUMBER
OF OPTIONS OPTION PRICE
------------ ---------------
<S> <C> <C>
Options outstanding, beginning of period 820,403 $0.58 to 40.88
Options granted .......................... 1,070,785 $0.58 to 40.88
Options canceled.......................... (262,747) $0.58 to 40.88
------------ ---------------
Options outstanding, end of period ....... 1,628,441 $0.58 to 40.88
============ ===============
</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 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.
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.
F-26
<PAGE>
DUANE READE HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
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 approximately $4.7
million to an affiliate of the Investors and approximately $0.6 million to an
affiliate of the Stockholders, and are included in other accrued expenses as
of September 27, 1997.
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>
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 UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY,
THE COMMON STOCK 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 ................................. 9
Use of Proceeds .............................. 15
Dividend Policy .............................. 16
Capitalization ............................... 17
Dilution ..................................... 18
Unaudited Pro Forma Condensed Consolidated
Financial Statements......................... 19
Selected Consolidated Historical Financial
and Operating Data .......................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................. 26
Business ..................................... 33
Management ................................... 42
Certain Relationships and Related
Transactions ................................ 48
Principal Stockholders ....................... 50
Description of Certain Indebtedness ......... 51
Description of Capital Stock ................. 52
Shares Eligible for Future Sale .............. 54
Underwriting ................................. 55
Legal Matters ................................ 57
Experts ...................................... 57
Additional Information ....................... 57
Index to Financial Statements................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN COMMON STOCK, 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.
6,700,000 SHARES
[DUANE READE INC. LOGO]
COMMON STOCK
PROSPECTUS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
, 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>
<S> <C>
SEC registration fee .................................... 34,849
NASD filing fee ......................................... 12,000
New York Stock Exchange original listing fee ........... *
Blue sky fees and expenses (including attorneys' fees
and expenses) .......................................... 10,000
Printing and engraving expenses ......................... *
Transfer agent's fees and expenses ...................... 10,000
Accounting fees and expenses ............................ *
Legal fees and expenses ................................. *
Miscellaneous expenses .................................. *
----------
Total.................................................... $965,000
==========
</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
II-1
<PAGE>
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director 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 28 shares of
Class B Common Stock, 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 355 shares of Class B Common Stock. In total, the
Company issued an aggregate of 85,405,524.5 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 CLASS B
SHAREHOLDERS CLASS A STOCK CLASS P STOCK CLASS P-1 STOCK COMMON STOCK COMMON 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.
3.1(ii)** Form of Amended and Restated Bylaws of the Company.
4.1* Form of certificate representing shares of Common Stock, $0.01 par value per share.
5.1* Opinion of Latham & Watkins
10.1** Form of Duane Reade Inc. 1997 Equity Participation Plan.
10.2** Duane Reade Holding Corp. 1992 Stock Incentive Plan.
10.3** Employment Agreement, dated as of October 27, 1997, between the Company and Anthony J.
Cuti.
10.4** Employment Agreement, dated as of February 22, 1993, as amended, between the Company and
Gary Charboneau.
10.5** Employment Agreement, dated as of April 10, 1995, as amended, between Duane Reade and
Jerry M. Ray.
10.6** Employment Letter Agreement, dated as of October 9, 1996, between Duane Reade and Joseph
Lacko.
10.7** Employment Letter Agreement, dated as of February 12, 1997, between the Company and
William Tennant.
10.8** Agreement, dated as of November 22, 1996, between Duane Reade and Drug, Chemical,
Cosmetic, Plastics and Affiliated Industries Warehouse Employees Local 815.
10.9** Agreement, dated July 16, 1992, as amended, between Duane Reade and Allied Trades
Council.
II-3
<PAGE>
NUMBER DESCRIPTION
- ------------- -----------
10.10** Agreement, dated February 4, 1997, as amended, between Duane Reade and The Pharmacy Fund,
Inc.
10.11 Indenture, dated as of September 15, 1992, between Duane Reade Holding Corp. and The
Connecticut National Bank, as trustee.
10.12 Indenture, dated as of September 15, 1992, among Duane Reade, Daboco Inc., Duane Reade
Inc. and The Connecticut National Bank, as trustee.
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.
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.
10.15 Partnership Security Agreement, dated as of September 30, 1997, among Daboco Inc., Duane
Reade Inc. and Fleet National Bank, as Administrative Agent.
10.16 Borrower Security Agreement, dated as of September 30, 1997, between Duane Reade and
Fleet National Bank, as Administrative Agent.
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.
10.18 Underwriting Agreement between the Company and Donaldson, Lufkin & Jenrette Securities
Corporation (incorporated by reference to Exhibit 1.1 to the Company's Form S-1
Registration Statement (File No. 333-43313)).
10.19* Form of Deposit Agreement with respect to Senior Notes and Zero Coupon Notes between the
Company and State Street Bank and Trust, as Trustee.
11.1** Computation of Earnings Per Share.
21.1* Subsidiaries of the Company.
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).
27.1** Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
** 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.
II-4
<PAGE>
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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 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 January 15, 1998.
DUANE READE INC.
By: /s/ Anthony J. Cuti
-------------------------------
Name: Anthony J. Cuti
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed on January 15, 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
Anthony J. Cuti Director (principal executive officer)
*
--------------------------- Chief Financial Officer
William J. Tennant (principal accounting and financial officer)
*
--------------------------- 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-6
<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.
3.1(ii)** Form of Amended and Restated Bylaws of the Company.
4.1* Form of certificate representing shares of Common Stock, $0.01 par value
per share.
5.1* Opinion of Latham & Watkins
10.1** Form of Duane Reade Inc. 1997 Equity Participation Plan.
10.2** Duane Reade Holding Corp. 1992 Stock Incentive Plan.
10.3** Employment Agreement, dated as of October 27, 1997, between the Company
and Anthony J. Cuti.
10.4** Employment Agreement, dated as of February 22, 1993, as amended, between
the Company and Gary Charboneau.
10.5** Employment Agreement, dated as of April 10, 1995, as amended, between
Duane Reade and Jerry M. Ray.
10.6** Employment Letter Agreement, dated as of October 9, 1996, between Duane
Reade and Joseph Lacko.
10.7** Employment Letter Agreement, dated as of February 12, 1997, between the
Company and William Tennant.
10.8** Agreement, dated as of November 22, 1996, between Duane Reade and Drug,
Chemical, Cosmetic, Plastics and Affiliated Industries Warehouse Employees
Local 815.
10.9** Agreement, dated July 16, 1992, as amended, between Duane Reade and Allied
Trades Council.
10.10** Agreement, dated February 4, 1997, as amended, between Duane Reade and The
Pharmacy Fund, Inc.
10.11 Indenture, dated as of September 15, 1992, between Duane Reade Holding
Corp. and The Connecticut National Bank, as trustee.
10.12 Indenture, dated as of September 15, 1992, among Duane Reade, Daboco Inc.,
Duane Reade Inc. and The Connecticut National Bank, as trustee.
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.
<PAGE>
<CAPTION>
EXHIBIT SEQUENTIAL PAGE
NUMBER EXHIBIT NUMBER
------ ------- ------
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.
10.15 Partnership Security Agreement, dated as of September 30, 1997, among
Daboco Inc., Duane Reade Inc. and Fleet National Bank, as Administrative
Agent.
10.16 Borrower Security Agreement, dated as of September 30, 1997, between Duane
Reade and Fleet National Bank, as Administrative Agent.
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.
10.18 Underwriting Agreement between the Company and Donaldson, Lufkin &
Jenrette Securities Corporation (incorporated by reference to Exhibit 1.1
to the Company's Form S-1 Registration Statement (File No. 333-43313)).
10.19* Form of Deposit Agreement with respect to Senior Notes and Zero Coupon
Notes between the Company and State Street Bank and Trust, as Trustee.
11.1** Computation of Earnings Per Share.
21.1* Subsidiaries of the Company.
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).
27.1** Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
** Filed herewith.
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DUANE READE INC.
Duane Read Inc., a corporation existing under the laws of the State of
Delaware, hereby certifies as follows:
1. The name of the corporation is Duane Reade Inc. The date of filing of
its original Certificate of Incorporation was June 16, 1992.
2. The Amended and Restated Certificate of Incorporation restates,
integrates and further amends the Restated Certificate of Incorporation of this
corporation by effecting a reclassification of the corporation's capital stock
and requiring notice for shareholder action.
3. The text of the Restated Certificate of Incorporation as amended or
supplemented heretofore is further amended hereby to read as set forth in full:
"FIRST: The name of the Corporation is Duane Reade Inc.
SECOND: The address of its registered office in the State of Delaware is
1013 Centre Road, City of Wilmington, County of New Castle 19805. The name of
the registered agent at such address is The Prentice-Hall Corporation System,
Inc.
THIRD: The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock that the
Corporation shall have the authority to issue is 35,000,000 shares of stock,
consisting of (i) 30,000,000 shares of common stock, par value $.01 per share
(the "Common Stock") and (ii) 5,000,000 shares of preferred stock, par value
$.01 per share (the "Preferred Stock"), which may be designated as provided
below.
The board of directors of the Corporation (the "Board of Directors") is
hereby empowered to authorize by resolution or resolutions from time to time
the issuance of one or more classes or series of Preferred Stock and to fix the
designations, powers, preferences and relative, participating, optional or
other rights, if any, and the qualifications, limitations or restrictions
thereof, if any, with respect to each such class or series of Preferred Stock
and the
<PAGE>
number of shares constituting each such class or series, and to increase or
decrease the number of shares of any such class or series to the extent
permitted by the General Corporation Law of the State of Delaware.
Effective upon the filing of this Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, each
outstanding share of class B common stock, par value $.01 per share, without
further action on the part of each holder thereof, shall automatically be
changed and converted into .12010735689 shares of Common Stock.
FIFTH: (a) The business and affairs of the Corporation shall be managed by
or under the direction of a Board of Directors consisting of not less than
three nor more than 14 directors, the exact number of directors to be
determined from time to time solely by resolution adopted by the affirmative
vote of a majority of the entire Board of Directors.
(b) Each director shall serve for a term ending on the date of the first
annual meeting of stockholders next following the annual meeting at which such
director was elected, provided that directors initially designated as directors
shall serve for a term ending on the date of the 1998 annual meeting of
stockholders of the Company. Notwithstanding the foregoing, each director shall
hold office until such director's successor shall have been duly elected and
qualified or until such director's earlier death, resignation or removal. In no
event will a decrease in the number of directors shorten the term of any
incumbent director.
(c) There shall be no cumulative voting in the election of directors.
Election of directors need not be by written ballot unless the bylaws of the
Corporation so provide.
(d) Vacancies on the Board of Directors resulting from death, resignation,
removal or otherwise and newly created directorships resulting from any
increase in the number of directors may be filled solely by a majority of the
directors then in office (although less than a quorum) or by the sole remaining
director, and each director so elected shall hold office until the next annual
meeting of the shareholders.
(e) No director may be removed from office by the stockholders except for
cause with the affirmative vote or consent of the holders of not less than a
majority of the total voting power of all outstanding securities of the
Corporation then entitled to vote generally in the election of directors,
voting together as a single class.
(f) Notwithstanding the foregoing, whenever the holders of one or more
classes or series of Preferred Stock shall have the right, voting separately as
a class or series, to elect directors, the election, term of office, filing of
vacancies, removal and other features of such directorships shall be governed
by the terms of the resolution or resolutions adopted by the Board of Directors
pursuant to ARTICLE FOURTH applicable thereto, and such directors so elected
shall not be subject to the provisions of this ARTICLE FIFTH unless otherwise
provided herein.
SIXTH: The Board of Directors shall have the power to adopt, amend or
repeal the bylaws of the Corporation.
<PAGE>
The stockholders may adopt, amend or repeal the bylaws only with the
affirmative vote of the holders of not less than 66 2/3% of the total voting
power of all outstanding securities of the Corporation then entitled to vote
generally in the election of directors, voting together as a single class.
SEVENTH: (1) A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director to the fullest extent permitted by Delaware Law.
(2)(a) Each person (and the heirs, executors or administrators of such
person) who was or is a party or is threatened to be made a party to, or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director of officer of the Corporation or is or
was serving at the request of the Corporation as a director of officer of
another corporation, partnership, joint venture, trust or other enterprise,
shall be indemnified and held harmless by the Corporation to the fullest extent
permitted by Delaware Law. The right to indemnification conferred in this
ARTICLE SEVENTH shall also include the right to be paid by the Corporation the
expenses incurred in connection with any such proceeding in advance of its final
disposition to the fullest extent authorized by Delaware Law. The right to
indemnification conferred in this ARTICLE SEVENTH shall be a contract right.
(b) The Corporation may, by action of its Board of Directors, provide
indemnification to such of the officers, employees and agents of the
Corporation to such extent and to such effect as the Board of Directors shall
determine to be appropriate and authorized by Delaware Law.
(3) The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any expense, liability or loss
incurred by such person in any such capacity or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under Delaware Law.
(4) The rights to authority conferred in this ARTICLE SEVENTH shall not be
exclusive of any other right that any person may otherwise have or hereafter
acquire.
(5) Neither the amendment nor repeal of this ARTICLE SEVENTH, nor the
adoption of any provision of this Certificate of Incorporation of the bylaws of
the Corporation, nor, to the fullest extent permitted by Delaware Law, any
modification of law, shall eliminate or reduce the effect of this ARTICLE
SEVENTH in respect of any acts or omission occurring prior to such amendment,
repeal, adoption or modification.
<PAGE>
EIGHTH: Special meetings of the stockholders may be called by the Board of
Directors, the Chairman of the Board of Directors, the President or the
Secretary of the Corporation and may not be called by any other person.
Notwithstanding the foregoing, whenever holders of one or more classes or
series of Preferred Stock shall have the right, voting separately as a class or
series, to elect directors, such holders may call, pursuant to the terms of the
resolution or resolutions adopted by the Board of Directors pursuant to ARTICLE
FOURTH hereto, special meetings of holders of such Preferred Stock.
NINTH: The Corporation reserves the right to amend this Certificate of
Incorporation in any manner permitted by Delaware Law and all rights and powers
conferred herein on stockholders, directors and officers, if any, are subject to
this reserved power."
4. This Amended and Restated Certificate of Incorporation was duly adopted
by the directors and shareholders of the Corporation in accordance with
Sections 228, 242 and 245 of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS WHEREOF, said Duane Reade Inc. has caused this Certificate of
be executed and attested to this 14th day of January, 1998.
Duane Reade Inc.
By: /s/ Anthony J. Cuti
----------------------------------
Name: Anthony J. Cuti
Title: Chief Executive Officer and
President
Attest:
/s/ Hyman Needleman
- --------------------------------
Name: Hyman Needleman
Title: Secretary
<PAGE>
FORM OF BYLAWS
OF
DUANE READE INC.
* * * *
ARTICLE I.
OFFICES
Section 1. Registered Office. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation
may require.
Section 3. Books. The books of the Corporation may be kept within or
without of the State of Delaware as the Board of Directors may from time to
time determine or the business of the Corporation may require.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 1. Time and Place of Meetings. All meetings of stockholders
shall be held at such place, either within or without the State of Delaware,
on such date and at such time as may be determined from time to time by the
Board of Directors (or the Chairman in the absence of a designation by the
Board of Directors).
Section 2. Annual Meetings. Annual meetings of stockholders,
commencing 1998, shall be held to elect the Board of Directors and transact
such other business as may properly be brought before the meeting.
Section 3. Special Meetings. Special meetings of stockholders may be
called by the Board of Directors or the Chairman of the Board of Directors, the
Chief Executive Officer, the President or the Secretary of the Corporation and
may not be called by any other person. Notwithstanding the foregoing, whenever
holders of one or more classes or series of Preferred Stock shall have the
right, voting separately as a class or series, to elect directors, such holders
may call, pursuant to the terms of the resolution or
<PAGE>
resolutions adopted by the Board of Directors pursuant to the certificate of
incorporation, special meetings of holders of such Preferred Stock.
Section 4. Notice of Meetings and Adjourned Meetings; Waivers of
Notice. (a) Whenever stockholders are required or permitted to take any action
at a meeting, a written notice of the meeting shall be given which shall state
the place, date and hour of the meeting, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called. Unless otherwise
provided by the General Corporation Law of the State of Delaware as the same
exists or may hereafter be amended ("Delaware Law"), such notice shall be given
not less than 10 nor more than 60 days before the date of the meeting to each
stockholder of record entitled to vote at such meeting. Unless these bylaws
otherwise require, when a meeting is adjourned to another time or place
(whether or not a quorum is present), notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken. At the adjourned meeting, the Corporation may transact
any business which might have been transacted at the original meeting. If the
adjournment is for more than 30 days, or after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote at the meeting.
(b) A written waiver of any such notice signed by the person entitled
thereto, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends the meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Business transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice.
Section 5. Quorum. Unless otherwise provided under the certificate of
incorporation or these bylaws and subject to Delaware Law, the presence, in
person or by proxy, of the holders of a majority of the outstanding capital
stock of the Corporation entitled to vote at a meeting of stockholders shall
constitute a quorum for the transaction of business.
Section 6. Voting. (a) Unless otherwise provided in the certificate of
incorporation and subject to Delaware Law, each stockholder shall be entitled
to one vote for each outstanding share of capital stock of the Corporation held
by such stockholder. Unless otherwise provided in Delaware Law, the certificate
of incorporation or these bylaws, the affirmative vote of a majority of the
shares of capital stock of the Corporation present, in person or by proxy, at a
meeting of stockholders and entitled to vote on the subject matter shall be the
act of the stockholders.
(b) Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to a corporate action in writing without a
meeting may authorize another person or persons to act for him by proxy, but no
such proxy shall be
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voted or acted upon after three years from its date, unless the proxy provides
for a longer period.
Section 7. Action by Consent. (a) Unless otherwise provided in the
certificate of incorporation, any action required to be taken at any annual or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting of stockholders, may be taken without a meeting, without
prior notice and without a vote, if a consent or consents in writing, setting
forth the action so taken, shall be signed by the holders of outstanding
capital stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and shall be delivered to the
Corporation by delivery to its registered office in Delaware, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to the Corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective
to take the corporate action referred to therein unless, within 60 days of the
earliest dated consent delivered in the manner required by this Section and
Delaware Law to the Corporation, written consents signed by a sufficient number
of holders to take action are delivered to the Corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer
or agent of the Corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested.
Section 8. Organization. At each meeting of stockholders, the Chairman
of the Board, if one shall have been elected, (or in his absence or if one
shall not have been elected, the Chief Executive Officer or the President)
shall act as chairman of the meeting. The secretary (or in his absence or
inability to act, the person whom the chairman of the meeting shall appoint
secretary of the meeting) shall act as secretary of the meeting and keep the
minutes thereof.
Section 9. Order of Business. The order of business at all meetings
of stockholders shall be as determined by the chairman of the meeting.
Section 10. Notice of Business. At any meeting of the stockholders,
only such business shall be conducted as shall have been brought before the
meeting (a) by or at the direction of the Board of Directors or (b) by any
stockholder of the Corporation who is a stockholder of record at the time of
giving of the notice provided for in this Section 10, who shall be entitled to
vote at such meeting and who complies with
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the notice procedures set forth this Section 10. For business to be properly
brought before a stockholder meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the secretary of the Corporation.
To be timely, a stockholder's notice must be delivered to or mailed and
received at the principal executive offices of the Corporation not less than
60 days nor more than 90 days prior to the meeting; provided, however, that in
the event that less than 70 days' notice or prior public disclosure of the date
of the meeting is given to made to stockholders, notice by the stockholder to
be timely must be received no later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. A stockholder's notice to the secretary shall
set forth as to each matter the stockholder proposes to bring before the
meeting (a) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting, (b)
the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation which such are beneficially owned by the stockholder and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in the bylaws to the contrary, no business shall be conducted at a stockholder
meeting except in accordance with the procedures set forth in this Section 10.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that business was not properly brought before the meeting and in
accordance with the provisions of the bylaws, and if he should so determine,
he shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing,
provisions of this Section 10, a stockholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, and the rules
and regulations thereunder with respect to the matters set forth in this Section
10.
ARTICLE III.
DIRECTORS
Section 1. General Powers. Except as otherwise provided in Delaware
Law or the certificate of incorporation, the business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors.
Section 2. Number, Election and Term of Office. The Board of Directors
shall consist of not less than five nor more than fourteen directors, with the
exact number of directors to be determined from time to time solely by
resolution adopted by the affirmative vote of a majority of the entire Board of
Directors. Except as otherwise provided in the certificate of incorporation,
each director shall serve for a term ending on the date of the first annual
meeting of stockholders next following the annual meeting at which such
director was elected. Notwithstanding the foregoing, each director shall hold
office until such director's successor shall have been duly elected and
qualified or until such director's earlier death, resignation or removal.
Directors need not be stockholders.
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<PAGE>
Section 3. Quorum and Manner of Acting. Unless the certificate of
incorporation or these bylaws require a greater number, a majority of the total
number of directors shall constitute a quorum for the transaction of business,
and the affirmative vote of a majority of the directors present at meeting at
which a quorum is present shall be the act of the Board of Directors. When a
meeting is adjourned to another time or place (whether or not a quorum is
present), notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the Board of Directors may transact any business
which might have been transacted at the original meeting. If a quorum shall
not be present at any meeting of the Board of directors, the directors present
thereat may adjourn the meeting, from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 4. Time and Place of Meetings. The Board of Directors shall
hold its meeting at such place, either within or without the State of Delaware,
and at such time as may be determined from time to time by the Board of
Directors (or the Chairman in the absence of a determination by the Board of
Directors).
Section 5. Annual Meeting. The Board of Directors shall meet for the
purpose of organization, the election of officers and the transaction of other
business, as soon as practicable after each annual meeting of stockholders, on
the same day and at the same place where such annual meeting shall be held.
Notice of such meeting need not be given. In the event such annual meeting is
not so held, the annual meeting of the Board of Directors may be held at such
place either within or without the State of Delaware, on such date and at such
time as shall be specified in a notice thereof given as hereinafter provided in
Section 7 of this Article III or in a waiver of notice thereof signed by any
director who chooses to waive the requirement of notice.
Section 6. Regular Meetings. After the place and time of regular
meetings of the Board of Directors shall have been determined and notice
thereof shall have been once given to each member of the Board of Directors,
regular meetings may be held without further notice being given.
Section 7. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President and shall
be called by the Chairman of the Board, President or Secretary on the written
request of three directors. Notice of special meetings of the Board of
Directors shall be given to each director at least three days before the date
of the meeting in such manner as is determined by the Board of Directors.
Section 8. Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. Any such committee,
5
<PAGE>
to the extent provided in the resolution of the Board of Directors, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to
amending the certificate of incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending the bylaws of the Corporation; and unless the
resolution of the Board of Directors or the certificate of incorporation
expressly so provide, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Each committee shall
keep regular minutes of its meetings and report the same to the Board of
Directors when required.
Section 9. Action by Consent. Unless otherwise restricted by the
certificate or incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Section 10. Telephonic Meetings. Unless otherwise restricted by the
certificate of incorporation or these bylaws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or such committee, as the
case may be, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
Section 11. Resignation. Any director may resign at any time by giving
written notice to the Board of Directors or to the Secretary of the
Corporation. The resignation of any director shall take effect upon receipt of
notice thereof or at such later time as shall be specified in such notice; and
unless otherwise specified therein, the acceptance of such resignation shall
not be necessary to make it effective.
Section 12. Vacancies. Unless otherwise provided in the certificate of
incorporation, vacancies on the Board of Directors resulting from death,
resignation, removal or otherwise and newly created directorships resulting
from any increase in the number of directors may be filled solely by a majority
of the directors then in office (although less than a quorum) or by the sole
remaining director. Each director so elected shall hold office for a term that
shall coincide with the term of the Class to which such director shall have
been elected. If there are no directors in the office, then an election of
directors may be held in accordance with Delaware Law. Unless otherwise
provided in the certificate of incorporation, when one or more directors shall
resign from the Board, effective at a future date, a majority of the directors
then in office, including those who
6
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have so resigned, shall have the power to fill such vacancy or vacancies, the
vote thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in the
filling of the other vacancies.
Section 13. Removal. No director may be removed from office by the
stockholders except for cause with the affirmative vote of the holders of not
less than a majority of the total voting power of all outstanding securities of
the Corporation then entitled to vote generally in the election of directors,
voting together as a single class.
Section 14. Compensation. Unless otherwise restricted by the
certificate of incorporation or these bylaws, the Board of Directors shall have
authority to fix the compensation of directors, including fees and
reimbursement of expenses.
Section 15. Preferred Directors. Notwithstanding anything else
contained herein, whenever the holders of one or more classes or series of
preferred Stock shall have the right, voting separately as a class or series,
to elect directors, the election, term of office, filing of vacancies, removal
and other features of such directorships shall be governed by the terms of the
resolutions applicable thereto adopted by the Board of Directors pursuant to
the certificate of incorporation, and such directors so elected shall not be
subject to the provisions of Sections 2, 12 and 13 of this Article III unless
otherwise provided therein.
ARTICLE IV.
OFFICERS
Section 1. Principal Officers. The principal officers of the
Corporation shall be a Chief Executive Officer, a President, a Chief Financial
Officer, one or more Vice Presidents, a Treasurer and a Secretary who shall
have the duty, among other things, to record the proceedings of the meetings of
stockholders and directors in a book kept for that purpose. The Corporation may
also have such other principal officers, including one or more Controllers, as
the Board may in its discretion appoint. One person may hold the offices and
perform the duties any two or more of said offices, except that no one person
shall hold the offices and perform the duties of President and Secretary.
Section 2. Election, Term of Office and Remuneration. The principal
officers Corporation shall be elected annually by the Board of Directors at the
annual meeting thereof. Each such officer shall hold office until his successor
is elected and qualified, or until his earlier death, resignation or removal.
The remuneration of all officers of the Corporation shall be fixed by the Board
of Directors. Any vacancy in any office shall be filled in such manner as the
Board of Directors shall determine.
Section 3. Subordinate Officers. In addition to the principal officers
enumerated in Section 1 of this Article IV, the Corporation may have one or
more Assistant Treasurers, Assistant Secretaries and Assistant Controllers and
such other subordinate officers, agents and employees as the Board of Directors
may deem
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<PAGE>
necessary, each of whom shall hold office for such period as the Board of
Directors may from time to time determine. The Board of Directors may delegate
to any principal officer the power to appoint and to remove any such
subordinate officers, agents or employees.
Section 4. Removal. Except as otherwise permitted with respect to
subordinate officers, any officer may be removed, with or without cause, at any
time, by resolution adopted by the Board of Directors.
Section 5. Resignations. Any officer may resign at any time by giving
written notice to the Board of Directors (or to a principal officer if the
Board of Directors has delegated to such principal officer the power to appoint
and to remove such officer). The resignation of any officer shall take effect
upon receipt of notice thereof or at such later time as shall be specified in
such notice; and unless otherwise specified therein, the acceptance of such
registration shall not be necessary to make it effective.
Section 6. Powers and Duties. The officers of the Corporation shall
have such powers and mild perform such duties incident to each of their
respective offices and such other duties as may from time to time be conferred
upon or assigned to them by the Board of Directors.
ARTICLE V.
GENERAL PROVISIONS
Section 1. Fixing the Record Date. (a) In order that the Corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than 60 nor less than 10 days before the
date of such meeting. If no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided that the Board of Directors may fix a new record date for the
adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted by the Board
of Directors, and which date shall not be more than 10 days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board
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of Directors, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors is required by Delaware Law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the Corporation by delivery to its registered office
in Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which Proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board of Directors and prior action by
the Board of directors is required by Delaware Law, the record day for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action.
(c) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the Stockholders entitled to exercise any rights in respect of
any change, conversion or exchange stock, of or for the purpose of any other
lawful action, the Board of Directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than 60 days prior to such
action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be the close of business on the day on
which the Board of Directors adopts the resolution relating thereto.
Section 2. Dividends. Subject to limitations contained in Delaware Law
and the certificate of incorporation, the Board of Directors may declare and
pay dividends upon the shares of capital stock of the Corporation, which
dividends may be paid either in cash, in property or in shares of the capital
stock of the Corporation.
Section 3. Fiscal Year. The fiscal year of the Corporation shall end
on the last Saturday in December of each year, and the next succeeding fiscal
year shall commence on the next succeeding day.
Section 4. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the
words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed, affixed or otherwise reproduced.
Section 5. Voting of Stock Owned by the Corporation. The Board of
Directors may authorize any person, on behalf of the Corporation, to attend,
vote at and grant proxies to be used at any meeting of stockholders of any
corporation (except this Corporation) in which the Corporation may hold stock.
Section 6. Amendments. These bylaws or any of them, may be altered,
amended or repealed, or new bylaws may be made, by the stockholders entitled
to vote thereon at any annual or special meeting thereof or by the Board of
Directors.
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THE 1997 EQUITY PARTICIPATION PLAN
OF
DUANE READE HOLDING CORP.
Duane Reade Holding Corp., a Delaware corporation, has adopted The
1997 Equity Participation Plan of Duane Reade Holding Corp. (the "Plan"),
effective June 18, 1997, for the benefit of its eligible employees, consultants
and directors.
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, Employees and
consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock and/or
rights which recognize such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of
directors, Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company and/or rights which will reflect the growth, development and financial
success of the Company.
ARTICLE I
DEFINITIONS
1.1 General. Wherever the following terms are used in this Plan they
shall have the meanings specified below, unless the context clearly indicates
otherwise.
1.2 Affiliate. "Affiliate" with respect to any person shall mean any
other person or entity directly or indirectly controlling, controlled by or
under common control with, such person where "control" shall have the meaning
given such term under Rule 405 of the Securities Act.
1.3 Award Limit. "Award Limit" shall mean 4,000,000 shares of Common
Stock, as adjusted pursuant to Section 10.3.
1.4 Board. "Board" shall mean the Board of Directors of the Company.
1.5 Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
1.6 Committee. "Committee" shall mean the Compensation Committee of
the Board, or another committee of the Board, appointed as provided in Section
9.1.
1.7 Common Stock. "Common Stock" shall mean the Class B common stock
of the Company, par value $.01 per share.
1.8 Company. "Company" shall mean Duane Reade Holding Corp., a
Delaware corporation.
1.9 Deferred Stock. "Deferred Stock" shall mean Common Stock awarded
under Article VII of this Plan.
<PAGE>
1.10 Director. "Director" shall mean a member of the Board.
1.11 Dividend Equivalent. "Dividend Equivalent" shall mean a right to
receive the equivalent value (in cash or Common Stock) of dividends paid on
Common Stock, awarded under Article VII of this Plan.
1.12 Employee. "Employee" shall mean any officer or other employee (as
defined in accordance with Section 3401(c) of the Code) of the Company, or of
any corporation which is a Subsidiary.
1.13 Exchange Act. "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
1.14 Fair Market Value. "Fair Market Value" of a share of Common Stock
as of a given date shall be (i) the average closing price of a share of Common
Stock on the principal exchange on which shares of Common Stock are then
trading, if any (or as reported on any composite index which includes such
principal exchange), over the thirty trading days immediately preceding the
date of determination, or (ii) if Common Stock is not traded on an exchange but
is quoted on Nasdaq or a successor quotation system, the average mean between
the closing representative bid and asked prices for the Common Stock over the
thirty trading days immediately preceding the date of determination as reported
by Nasdaq or such successor quotation system or (iii) if Common Stock is not
publicly traded on an exchange and not quoted on Nasdaq or a successor
quotation system, the fair market value of a share of Common Stock determined,
without regard to any minority discount or control premium, in good faith by
the Committee or as otherwise specified pursuant to any Option Agreement.
1.15 Grantee. "Grantee" shall mean an Employee or consultant granted a
Performance Award, Dividend Equivalent, Stock Payment or Stock Appreciation
Right, or an award of Deferred Stock, under this Plan.
1.16 Incentive Stock Option. "Incentive Stock Option" shall mean an
option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
1.17 Independent Director. "Independent Director" shall mean a member
of the Board who is not an Employee of the Company.
1.18 Independent Third Party. "Independent Third Party" shall mean any
entity other than (i) the Company, (ii) DLJ or (iii) any Affiliate or
Subsidiary of either the Company of DLJ.
1.19 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall
mean an Option which is not designated as an Incentive Stock Option by the
Committee.
1.20 Option. "Option" shall mean a stock option granted under Article
III of this Plan. An Option granted under this Plan shall, as determined by the
Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option;
provided, however, that Options granted to Independent Directors and
consultants shall be Non-Qualified Stock Options.
1.21 Optionee. "Optionee" shall mean an Employee, consultant or
Independent Director granted an Option under this Plan.
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1.22 Performance Award. "Performance Award" shall mean a cash bonus,
stock bonus or other performance or incentive award that is paid in cash,
Common Stock or a combination of both, awarded under Article VII of this Plan.
1.23 Plan. "Plan" shall mean The 1997 Equity Participation Plan of
Duane Reade Holding Corp.
1.24 QDRO. "QDRO" shall mean a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act
of 1974, as amended, or the rules thereunder.
1.25 Restricted Stock. "Restricted Stock" shall mean Common Stock
awarded under Article VI of this Plan.
1.26 Restricted Stockholder. "Restricted Stockholder" shall mean an
Employee or consultant granted an award of Restricted Stock under Article VI of
this Plan.
1.27 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under
the Exchange Act, as such Rule may be amended from time to time.
1.28 Sale of the Company. "Sale of the Company" shall mean the
consummation of one of the following events:
(a) any Independent Third Party is or becomes the Beneficial Owner (as
defined below), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the Company's then
outstanding securities. For purposes of this Plan, the term "Beneficial
Owner" shall have the meaning given to such term in Rule 13d-3 under the
Exchange Act;
(b) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation (or other entity), other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; provided,
however, that a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
acquires more than 25% of the combined voting power of the Company's then
outstanding securities shall not constitute a Sale of the Company; or
(c) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets.
1.29 Section 162(m) Participant. "Section 162(m) Participant" shall
mean any Employee so designated by the Committee and whose compensation for the
fiscal year in which the Employee is so designated or a future fiscal year may
be subject to the limit on deductible compensation imposed by Section 162(m) of
the Code.
1.30 Stock Appreciation Right. "Stock Appreciation Right" shall mean a
stock appreciation right granted under Article VIII of this Plan.
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1.31 Stock Payment. "Stock Payment" shall mean (i) a payment in the
form of shares of Common Stock, or (ii) an option or other right to purchase
shares of Common Stock, as part of a deferred compensation arrangement, made in
lieu of all or any portion of the compensation, including without limitation,
salary, bonuses and commissions, that would otherwise become payable to a
Employee or consultant in cash, awarded under Article VII of this Plan.
1.32 Subsidiary. "Subsidiary" shall mean any corporation in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing 50 percent or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
1.33 Termination of Consultancy. "Termination of Consultancy" shall
mean the time when the engagement of an Optionee, Grantee or Restricted
Stockholder as a consultant to the Company or a Subsidiary is terminated for
any reason, with or without cause, including, but not by way of limitation, by
resignation, discharge, death or retirement; but excluding terminations where
there is a simultaneous commencement of employment with the Company or any
Subsidiary. The Committee, in its sole discretion, shall determine the effect
of all matters and questions relating to Termination of Consultancy, including,
but not by way of limitation, the question of whether a Termination of
Consultancy resulted from a discharge for good cause, and all questions of
whether a particular leave of absence constitutes a Termination of Consultancy.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate a consultant's service at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
1.34 Termination of Directorship. "Termination of Directorship" shall
mean the time when an Optionee who is an Independent Director ceases to be a
Director for any reason, including, but not by way of limitation, a termination
by resignation, failure to be elected, death or retirement. The Board, in its
sole discretion, shall determine the effect of all matters and questions
relating to Termination of Directorship with respect to Independent Directors.
1.35 Termination of Employment. "Termination of Employment" shall mean
the time when the employee-employer relationship between an Optionee, Grantee
or Restricted Stockholder and the Company or any Subsidiary is terminated for
any reason, with or without cause, including, but not by way of limitation, a
termination by resignation, discharge, death, disability or retirement; but
excluding (i) a termination where there is a simultaneous reemployment or
continuing employment of such Optionee, Grantee or Restricted Stockholder by
the Company or any Subsidiary, (ii) at the sole discretion of the Committee, a
termination which results in a temporary severance of the employee-employer
relationship, and (iii) at the sole discretion of the Committee, a termination
which is followed by the simultaneous establishment of a consulting
relationship by the Company or a Subsidiary with the former employee. The
Committee, in its sole discretion, shall determine the effect of all matters
and questions relating to Termination of Employment, including, but not by way
of limitation, the question of whether a Termination of Employment resulted
from a discharge for good cause, and all questions of whether a particular
leave of absence constitutes a Termination of Employment; provided, however,
that, with respect to Incentive Stock Options, unless otherwise determined by
the Committee in its sole discretion, a leave of absence, change in status from
an employee to an independent contractor or other change in the
employee-employer relationship shall constitute a Termination of Employment if,
and to the extent that, such leave of absence, change in status or other change
interrupts employment for the purposes of Section 422(a)(2) of the Code and the
then applicable regulations and revenue rulings under said Code Section.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate an Employee's employment at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
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ARTICLE II
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan.
(a) The shares of stock subject to Options, awards of Restricted
Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock,
Stock Payments or Stock Appreciation Rights shall be Common Stock, initially
shares of the Company's Class B Common Stock, par value $.01 per share. The
aggregate number of such shares which may be issued upon exercise of such
Options, rights or awards under the Plan shall not exceed eleven million
(11,000,000). The shares of Common Stock issuable upon exercise of such
Options, rights or awards may be either previously authorized but unissued
shares or treasury shares.
(b) The maximum number of shares which may be subject to Options,
awards of Restricted Stock, Performance Awards, Dividend Equivalents, awards of
Deferred Stock, Stock Payments or Stock Appreciation Rights granted under the
Plan to any individual in any calendar year shall not exceed the Award Limit.
To the extent required by Section 162(m) of the Code, shares subject to Options
which are canceled shall continue to be counted against the Award Limit and if,
after grant of an Option, the price of shares subject to such Option is
reduced, such adjustment shall be treated as a cancellation of such Option and
a grant of a new Option and both the Option deemed to be canceled and the
Option deemed to be granted shall be counted against the Award Limit.
Furthermore, to the extent required by Section 162(m) of the Code, if, after
grant of a Stock Appreciation Right, the base amount on which stock
appreciation is calculated is reduced to reflect a reduction in the Fair Market
Value of the Company's Common Stock, such adjustment shall be treated as a
cancellation of such Stock Appreciation Right and a grant of a new Stock
Appreciation Right and both the Stock Appreciation Right deemed to be canceled
and the Stock Appreciation Right deemed to be granted shall be counted against
the Award Limit.
2.2 Add-back of Options and Other Rights. If any Option, or other
right to acquire shares of Common Stock under any other award under this Plan,
expires or is canceled without having been fully exercised, or is exercised in
whole or in part for cash as permitted by this Plan, the number of shares
subject to such Option or other right but as to which such Option or other
right was not exercised prior to its expiration, cancellation or exercise may
again be optioned, granted or awarded hereunder, subject to the limitations of
Section 2.1. Furthermore, any shares subject to Options or other awards which
are adjusted pursuant to Section 10.3 and become exercisable with respect to
shares of stock of another corporation shall be considered canceled and may
again be optioned, granted or awarded hereunder, subject to the limitations of
Section 2.1. Shares of Common Stock which are delivered by the Optionee or
Grantee or withheld by the Company upon the exercise of any Option or other
award under this Plan, in payment of the exercise price thereof or withholding
taxes thereon, may again be optioned, granted or awarded hereunder, subject to
the limitations of Section 2.1. If any share of Restricted Stock is forfeited
by a Grantee or repurchased by the Company pursuant to Section 6.6 hereof, such
share may again be optioned, granted or awarded hereunder, subject to the
limitations of Section 2.1. Notwithstanding the provisions of this Section 2.2,
no shares of Common Stock may again be optioned, granted or awarded if such
action would cause an Incentive Stock Option to fail to qualify as an incentive
stock option under Section 422 of the Code.
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ARTICLE III
GRANTING OF OPTIONS
3.1 Eligibility. Subject to the Award Limit, any Employee or
consultant selected by the Committee pursuant to Section 3.4(a)(i) and any
Independent Director selected by the Board pursuant to Section 3.4(b)(i) shall
be eligible to be granted an Option.
3.2 Disqualification for Stock Ownership. No person may be granted an
Incentive Stock Option under this Plan if such person, at the time the
Incentive Stock Option is granted, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or any then existing Subsidiary or parent corporation (within the meaning of
Section 422 of the Code) unless such Incentive Stock Option conforms to the
applicable provisions of Section 422 of the Code.
3.3 Qualification of Incentive Stock Options. No Incentive Stock
Option shall be granted to any person who is not an Employee.
3.4 Granting of Options
(a) The Committee shall from time to time, in its sole discretion, and
subject to applicable limitations of this Plan:
(i) Select from among the Employees and consultants (including
Employees or consultants who have previously received Options or other
awards under this Plan) such of them as in its opinion should be granted
Options;
(ii) Subject to the Award Limit, determine the number of shares
to be subject to such Options granted to the selected Employees or
consultants;
(iii) Subject to Section 3.3, determine whether such Options are
to be Incentive Stock Options or Non-Qualified Stock Options and whether
such Options are to qualify as performance-based compensation as described
in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and conditions
of Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall include, but not be
limited to, such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code.
(b) The Board shall from time to time, in its sole discretion, and
subject to applicable limitations of this Plan:
(i) determine which Independent Directors (including Independent
Directors who have previously received Options or other awards under this
Plan) such of them as in its opinion should be granted Options;
(ii) determine the number of shares to be subject to such Options
granted to the selected Independent Directors; and
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(iii) determine the terms and conditions of such Options,
consistent with this Plan.
(c) Upon the selection of a Employee, consultant or Independent
Director to be granted an Option, the Committee (or Board) shall instruct the
Secretary of the Company to issue the Option and may impose such conditions on
the grant of the Option as it deems appropriate. Without limiting the
generality of the preceding sentence, the Committee (the Board, with respect to
Independent Directors) may, in its sole discretion and on such terms as it
deems appropriate, require as a condition on the grant of an Option that the
Employee, consultant or Independent Director surrender for cancellation some or
all of the unexercised Options, awards of Restricted Stock or Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments or other rights which have been previously granted to him under this
Plan or otherwise. An Option, the grant of which is conditioned upon such
surrender, may have an Option price lower (or higher) than the exercise price
of such surrendered Option or other award, may cover the same (or a lesser or
greater) number of shares as such surrendered Option or other award, may
contain such other terms as the Committee deems appropriate, and shall be
exercisable in accordance with its terms, without regard to the number of
shares, price, exercise period or any other term or condition of such
surrendered Option or other award.
(d) Any Incentive Stock Option granted under this Plan may be modified
by the Committee to disqualify such Option from treatment as an "incentive
stock option" under Section 422 of the Code.
ARTICLE IV
TERMS OF OPTIONS
4.1 Option Agreement. Each Option shall be evidenced by a written
Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board, in the case of Options granted to
Independent Directors) shall determine, consistent with this Plan. Stock Option
Agreements evidencing Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain
such terms and conditions as may be necessary to meet the applicable provisions
of Section 162(m) of the Code. Stock Option Agreements evidencing Incentive
Stock Options shall contain such terms and conditions as may be necessary to
meet the applicable provisions of Section 422 of the Code.
4.2 Option Price. The price per share of the shares subject to each
Option shall be set by the Committee (or Board with respect to Independent
Directors); provided, however, that such price shall be no less than the par
value of a share of Common Stock, unless otherwise permitted by applicable
state law, and (i) in the case of Options intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the
Code, such price shall not be less than 100% of the Fair Market Value of a
share of Common Stock on the date the Option is granted; (ii) in the case of
Incentive Stock Options such price shall not be less than 100% of the Fair
Market Value of a share of Common Stock on the date the Option is granted (or
the date the Option is modified, extended or renewed for purposes of Section
424(h) of the Code); and (iii) in the case of Incentive Stock Options granted
to an individual then owning (within the meaning of Section 424(d) of the Code)
more than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary or parent corporation thereof (within the meaning of
Section 422 of the Code), such price shall not be less than 110% of the Fair
Market Value of a share of Common Stock on the date the Option is granted (or
the date the Option is modified, extended or renewed for purposes of Section
424(h) of the Code).
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4.3 Option Term. The term of an Option shall be set by the Committee
in its sole discretion; (or Board, with respect to Independent Directors)
provided, however, that, in the case of Incentive Stock Options, the term shall
not be more than ten (10) years from the date the Incentive Stock Option is
granted, or five (5) years from such date if the Incentive Stock Option is
granted to an individual then owning (within the meaning of Section 424(d) of
the Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any Subsidiary or parent corporation thereof (within
the meaning of Section 422 of the Code). Except as limited by requirements of
Section 422 of the Code and regulations and rulings thereunder applicable to
Incentive Stock Options, the Committee (or Board, with respect to Independent
Directors) may extend the term of any outstanding Option in connection with any
Termination of Employment, Termination of Consultancy or Termination of
Directorship of the Optionee, or amend any other term or condition of such
Option relating to such a termination.
4.4 Option Vesting
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee (or Board, with
respect to Independent Directors) and the Committee (or Board, with respect to
Independent Directors) may determine that an Option may not be exercised in
whole or in part for a specified period after it is granted. At any time after
grant of an Option, the Committee (or Board, with respect to Independent
Directors) may, in its sole discretion and subject to whatever terms and
conditions it selects, accelerate the period during which an Option vests.
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee (or Board, with respect to Independent Directors)
either in the Stock Option Agreement or by action of the Committee (or Board)
following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422
of the Code, but without regard to Section 422(d) of the Code) are exercisable
for the first time by an Optionee during any calendar year (under the Plan and
all other incentive stock option plans of the Company and any parent or
subsidiary corporation (within the meaning of Section 422 of the Code) of the
Company) exceeds $100,000, such Options shall be treated as Non-Qualified
Options to the extent required by Section 422 of the Code. The rule set forth
in the preceding sentence shall be applied by taking Options into account in
the order in which they were granted. For purposes of this Section 4.4(c), the
Fair Market Value of stock shall be determined as of the time the Option with
respect to such stock is granted.
4.5 Consideration. In consideration of the granting of an Option, the
Optionee shall agree, in the written Stock Option Agreement, to render faithful
and efficient services to the Company and its Subsidiaries. Nothing in this
Plan or in any Stock Option Agreement hereunder shall confer upon any Optionee
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary, or as a director of the Company, or shall interfere with or
restrict in any way the rights of the Company and any Subsidiary, which are
hereby expressly reserved, to discharge any at any time for any reason
whatsoever, with or without good cause.
4.6 Performance and Super-Performance Options. Notwithstanding the
foregoing, attached hereto and incorporated by this reference are forms of a
Non-Qualified Performance Option Agreement and a Non-Qualified
Super-Performance Option Agreement that set forth certain specified terms
applicable to those Options to be granted under the Plan as of June 18, 1997
that are intended to be "Performance Options" or "Super-Performance Options,"
respectively, as described more fully in each such form of agreement.
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ARTICLE V
EXERCISE OF OPTIONS
5.1 Partial Exercise. An exercisable Option may be exercised in whole
or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee (or the Board, in the case of Options
granted to Independent Directors) may require that, by the terms of the Option,
a partial exercise be with respect to a minimum number of shares.
5.2 Manner of Exercise. All or a portion of an exercisable Option
shall be deemed exercised upon delivery of all of the following to the
Secretary of the Company or his office:
(a) A written notice complying with the applicable rules established
by the Committee (or the Board, in the case of Options granted to Independent
Directors) stating that the Option, or a portion thereof, is exercised. The
notice shall be signed by the Optionee or other person then entitled to
exercise the Option or such portion of the Option;
(b) Such representations and documents as the Committee (or the Board,
in the case of Options granted to Independent Directors), in its sole
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any other
federal or state securities laws or regulations. The Committee or Board may, in
its sole discretion, also take whatever additional actions it deems appropriate
to effect such compliance including, without limitation, placing legends on
share certificates and issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 10.1 by any person or persons other than the Optionee, appropriate
proof of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised. However,
the Committee (or the Board, in the case of Options granted to Independent
Directors), may in its sole discretion (i) allow a delay in payment up to
thirty (30) days from the date the Option, or portion thereof, is exercised;
(ii) allow payment, in whole or in part, through the delivery of shares of
Common Stock owned by the Optionee, duly endorsed for transfer to the Company
with a Fair Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof; (iii) allow payment,
in whole or in part, through the surrender of shares of Common Stock then
issuable upon exercise of the Option having a Fair Market Value on the date of
Option exercise equal to the aggregate exercise price of the Option or
exercised portion thereof; (iv) allow payment, in whole or in part, through the
delivery of property of any kind which constitutes good and valuable
consideration; (v) allow payment, in whole or in part, through the delivery of
a full recourse promissory note bearing interest (at no less than such rate as
shall then preclude the imputation of interest under the Code) and payable upon
such terms as may be prescribed by the Committee or the Board; (vi) allow
payment, in whole or in part, through the delivery of a notice that the
Optionee has placed a market sell order with a broker with respect to shares of
Common Stock then issuable upon exercise of the Option, and that the broker has
been directed to pay a sufficient portion of the net proceeds of the sale to
the Company in satisfaction of the Option exercise price; or (vii) allow
payment through any combination of the consideration provided in the foregoing
subparagraphs (ii), (iii), (iv), (v) and (vi). In the case of a promissory
note, the Committee (or the Board, in the case of Options granted to
Independent Directors) may also prescribe the form of such note and the
security to be given for such note. The Option may not be exercised,
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however, by delivery of a promissory note or by a loan from the Company when or
where such loan or other extension of credit is prohibited by law.
5.3 Conditions to Issuance of Stock Certificates. The Company shall
not be required to issue or deliver any certificate or certificates for shares
of stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory
body which the Committee or Board shall, in its sole discretion, deem necessary
or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee (or Board, in the case of
Options granted to Independent Directors) shall, in its sole discretion,
determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise
of the Option as the Committee (or Board, in the case of Options granted to
Independent Directors) may establish from time to time for reasons of
administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
5.4 Rights as Stockholders. The holders of Options shall not be, nor
have any of the rights or privileges of, stockholders of the Company in respect
of any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders.
5.5 Ownership and Transfer Restrictions. The Committee (or Board, in
the case of Options granted to Independent Directors), in its sole discretion,
may impose such restrictions on the ownership and transferability of the shares
purchasable upon the exercise of an Option as it deems appropriate. Any such
restriction shall be set forth in the respective Stock Option Agreement or
another written agreement between the Company and the Optionee may be referred
to on the certificates evidencing such shares. The Committee may require the
Employee to give the Company prompt notice of any disposition of shares of
Common Stock acquired by exercise of an Incentive Stock Option within (i) two
years from the date of granting (including the date the Option is modified,
extended or renewed for purposes of Section 424(h) of the Code) such Option to
such Employee or (ii) one year after the transfer of such shares to such
Employee. The Committee may direct that the certificates evidencing shares
acquired by exercise of an Option refer to such requirement.
ARTICLE VI
AWARD OF RESTRICTED STOCK
6.1 Eligibility. Subject to the Award Limit, any Employee or
consultant selected by the Committee may be awarded Restricted Stock.
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6.2 Award of Restricted Stock
(a) The Committee may from time to time, in its sole discretion:
(i) Select from among the Employees and consultants (including
Employees or consultants who have previously received other awards under
this Plan) such of them as in its opinion should be awarded Restricted
Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with this Plan.
(b) The Committee shall establish the purchase price, if any, and form
of payment for Restricted Stock; provided, however, that such purchase price
shall be no less than the par value of the Common Stock to be purchased, unless
otherwise permitted by applicable state law. In all cases, legal consideration
shall be required for each issuance of Restricted Stock.
(c) Upon the selection of a Employee or consultant to be awarded
Restricted Stock, the Committee shall instruct the Secretary of the Company to
issue such Restricted Stock and may impose such conditions on the issuance of
such Restricted Stock as it deems appropriate.
6.3 Restricted Stock Agreement. Restricted Stock shall be issued only
pursuant to a written Restricted Stock Agreement, which shall be executed by
the selected Employee or consultant and an authorized officer of the Company
and which shall contain such terms and conditions as the Committee shall
determine, consistent with this Plan.
6.4 Consideration. As consideration for the issuance of Restricted
Stock, in addition to payment of any purchase price, the Restricted Stockholder
shall agree, in the written Restricted Stock Agreement, to render faithful and
efficient services to the Company and its Subsidiaries. Nothing in this Plan or
in any Restricted Stock Agreement hereunder shall confer on any Restricted
Stockholder any right to continue in the employ of, or as a consultant for, the
Company or any Subsidiary or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge any Restricted Stockholder at any time for any reason whatsoever,
with or without good cause.
6.5 Rights as Stockholders. Subject to Section 6.6, upon delivery of
the shares of Restricted Stock to the escrow holder pursuant to Section 6.7,
the Restricted Stockholder shall have, unless otherwise provided by the
Committee, all the rights of a stockholder with respect to said shares, subject
to the restrictions in his Restricted Stock Agreement, including the right to
receive all dividends and other distributions paid or made with respect to the
shares; provided, however, that in the sole discretion of the Committee, any
extraordinary distributions with respect to the Common Stock shall be subject
to the restrictions set forth in Section 6.6.
6.6 Restriction. All shares of Restricted Stock issued under this Plan
(including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Restricted Stock
Agreement, be subject to such restrictions as the Committee shall provide,
which restrictions may include, without limitation, restrictions concerning
voting rights and transferability and restrictions based on duration of
employment with the Company, Company performance and individual performance;
provided, however, that, except with respect to shares of Restricted Stock
granted pursuant to Section 6.10, by action taken after the Restricted Stock is
issued, the Committee may, on such terms and conditions as it may determine to
be appropriate, remove any or all of the
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restrictions imposed by the terms of the Restricted Stock Agreement. Restricted
Stock may not be sold or encumbered until all restrictions are terminated or
expire.
6.7 Repurchase of Restricted Stock. The Committee shall provide in the
terms of each individual Restricted Stock Agreement that the Company shall have
the right to repurchase from the Restricted Stockholder the Restricted Stock
then subject to restrictions under the Restricted Stock Agreement immediately
upon a Termination of Employment or, if applicable, upon a Termination of
Consultancy between the Restricted Stockholder and the Company, at a cash price
per share equal to the price paid by the Restricted Stockholder for such
Restricted Stock; provided, however, that the Committee in its sole discretion
may provide that no such right of repurchase shall exist in the event of a
Termination of Employment following a "change of ownership or control" (within
the meaning of Treasury Regulation Section 1.162-27(e)(2)(v) or any successor
regulation thereto) of the Company or because of the Restricted Stockholder's
death or disability; provided, further, that, except with respect to shares of
Restricted Stock granted pursuant to Section 6.10 the Committee in its sole
discretion may provide that no such right of repurchase shall exist in the
event of a Termination of Employment or a Termination of Consultancy without
cause or following any change in control or ownership of the Company or because
of the Restricted Stockholder's retirement, or otherwise.
6.8 Escrow. The Secretary of the Company or such other escrow holder
as the Committee may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Restricted Stock Agreement with respect to the shares evidenced by such
certificate expire or shall have been removed.
6.9 Legend. In order to enforce the restrictions imposed upon shares
of Restricted Stock hereunder, the Committee shall cause a legend or legends to
be placed on certificates representing all shares of Restricted Stock that are
still subject to restrictions under Restricted Stock Agreements, which legend
or legends shall make appropriate reference to the conditions imposed thereby.
6.10 Provisions Applicable to Section 162(m) Participants.
(a) Notwithstanding anything in the Plan to the contrary, the
Committee may grant Restricted Stock to a Section 162(m) Participant the
restrictions with respect to which lapse upon the attainment of performance
goals for the Company which are related to one or more of the following
business criteria: (i) pre-tax income, (ii) operating income, (iii) cash flow,
(iv) earnings per share, (v) return on equity, (vi) return on invested capital
or assets, (vii) cost reductions or savings, (viii) funds from operations, (ix)
appreciation in the fair market value of Common Stock and (x) earnings before
any one or more of the following items: interest, taxes, depreciation or
amortization.
(b) To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with respect to
Restricted Stock which may be granted to one or more Section 162(m)
Participants, no later than ninety (90) days following the commencement of any
fiscal year in question or any other designated fiscal period or period of
service (or such other time as may be required or permitted by Section 162(m)
of the Code), the Committee shall, in writing, (i) designate one or more
Section 162(m) Participants, (ii) select the performance goal or goals
applicable to the fiscal year or other designated fiscal period or period of
service, (iii) establish the various targets and amounts of Restricted Stock
which may be earned for such fiscal year or other designated fiscal period or
period of service and (iv) specify the relationship between performance goals
and targets and the amounts of Restricted Stock to be earned by each Section
162(m) Participant for such fiscal year or other designated fiscal period or
period of service. Following the completion of each fiscal year or other
designated fiscal period or period of service, the Committee shall certify in
writing whether the applicable performance targets have been achieved for such
fiscal year or other
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designated fiscal period or period of service. In determining the amount earned
by a Section 162(m) Participant, the Committee shall have the right to reduce
(but not to increase) the amount payable at a given level of performance to
take into account additional factors that the Committee may deem relevant to
the assessment of individual or corporate performance for the fiscal year or
other designated fiscal period or period of service.
ARTICLE VII
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS,
DEFERRED STOCK, STOCK PAYMENTS
7.1 Eligibility. Subject to the Award Limit, any Employee or
consultant selected by the Committee pursuant to Sections 7.2, 7.3, 7.4 or 7.5
shall be eligible to be awarded Performance Awards, Dividend Equivalents,
awards of Deferred Stock, and/or Stock Payments.
7.2 Performance Awards. Any Employee or consultant selected by the
Committee may be granted one or more Performance Awards. The value of such
Performance Awards may be linked to the market value, book value, net profits
or other measure of the value of Common Stock or other specific performance
criteria determined appropriate by the Committee, in each case on a specified
date or dates or over any period or periods determined by the Committee, or may
be based upon the appreciation in the market value, book value, net profits or
other measure of the value of a specified number of shares of Common Stock over
a fixed period or periods determined by the Committee. In making such
determinations, the Committee shall consider (among such other factors as it
deems relevant in light of the specific type of award) the contributions,
responsibilities and other compensation of the particular Employee or
consultant.
7.3 Dividend Equivalents. Any Employee or consultant selected by the
Committee may be granted Dividend Equivalents based on the dividends declared
on Common Stock, to be credited as of dividend payment dates, during the period
between the date an Option, Stock Appreciation Right, Deferred Stock or
Performance Award is granted, and the date such Option, Stock Appreciation
Right, Deferred Stock or Performance Award is exercised, vests or expires, as
determined by the Committee. Such Dividend Equivalents shall be converted to
cash or additional shares of Common Stock by such formula and at such time and
subject to such limitations as may be determined by the Committee. With respect
to Dividend Equivalents granted with respect to Options intended to be
qualified performance-based compensation for purposes of Section 162(m) of the
Code, such Dividend Equivalents shall be payable regardless of whether such
Option is exercised.
7.4 Stock Payments. Any Employee or consultant selected by the
Committee may receive Stock Payments in the manner determined from time to time
by the Committee. The number of shares shall be determined by the Committee and
may be based upon the Fair Market Value, book value, net profits or other
measure of the value of Common Stock or other specific performance criteria
determined appropriate by the Committee, determined on the date such Stock
Payment is made or on any date thereafter.
7.5 Deferred Stock. Any Employee or consultant selected by the
Committee may be granted an award of Deferred Stock in the manner determined
from time to time by the Committee. The number of shares of Deferred Stock
shall be determined by the Committee and may be linked to the market value,
book value, net profits or other measure of the value of Common Stock or other
specific performance criteria determined to be appropriate by the Committee, in
each case on a specified date or dates or over any period or periods determined
by the Committee. Common Stock underlying a Deferred Stock award will not be
issued until the Deferred Stock award has vested, pursuant to a vesting
schedule or performance criteria set by the Committee. Unless otherwise
provided by the Committee, a Grantee of Deferred Stock shall have no rights as
a Company
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stockholder with respect to such Deferred Stock until such time as the award
has vested and the Common Stock underlying the award has been issued.
7.6 Performance Award Agreement, Dividend Equivalent Agreement,
Deferred Stock Agreement, Stock Payment Agreement. Each Performance Award,
Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be
evidenced by a written agreement, which shall be executed by the Grantee and an
authorized Officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.
7.7 Term. The term of a Performance Award, Dividend Equivalent, award
of Deferred Stock and/or Stock Payment shall be set by the Committee in its
sole discretion.
7.8 Exercise or Purchase Price. The Committee may establish the
exercise or purchase price of a Performance Award, shares of Deferred Stock, or
shares received as a Stock Payment; provided, however, that such price shall
not be less than the par value for a share of Common Stock, unless otherwise
permitted by applicable state law.
7.9 Exercise Upon Termination of Employment. A Performance Award,
Dividend Equivalent, award of Deferred Stock and/or Stock Payment is
exercisable or payable only while the Grantee is an Employee or consultant;
provided, however, that the Committee in its sole discretion may provide that
the Performance Award, Dividend Equivalent, award of Deferred Stock and/or
Stock Payment may be exercised or paid subsequent to a Termination of
Employment following a "change of control or ownership" (within the meaning of
Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the Company;
provided, further, that except with respect to Performance Awards granted
pursuant to Section 7.12, the Committee in its sole discretion may provide
that the Performance Awards may be exercised or paid following a Termination
of Employment or a Termination of Consultancy without cause, or following a
change in control of the Company, or because of the Grantee's retirement,
death or disability, or otherwise.
7.10 Payment on Exercise. Payment of the amount determined under
Section 7.1 or 7.2 above shall be in cash, in Common Stock or a combination of
both, as determined by the Committee. To the extent any payment under this
Article VII is effected in Common Stock, it shall be made subject to
satisfaction of all provisions of Section 5.3.
7.11 Consideration. In consideration of the granting of a Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment, the
Grantee shall agree, in a written agreement, to render faithful and efficient
services to the Company and its Subsidiaries. Nothing in this Plan or in any
agreement hereunder shall confer on any Grantee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at
any time for any reason whatsoever, with or without good cause.
7.12 Provisions Applicable to Section 162(m) Participants.
(a) Notwithstanding anything in the Plan to the contrary, the
Committee may grant any performance or incentive awards described in Article
VII to a Section 162(m) Participant that vest or become exercisable or payable
upon the attainment of performance goals for the Company which are related to
one or more of the following business criteria: (i) pre-tax income, (ii)
operating income, (iii) cash flow, (iv) earnings per share, (v) return on
equity, (vi) return on invested capital or assets, (vii) cost reductions or
savings, (viii) funds
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from operations, (ix) appreciation in the fair market value of Common Stock and
(x) earnings before any one or more of the following items: interest, taxes,
depreciation or amortization.
(b) To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with respect to
performance or incentive awards described in Article VII which may be granted
to one or more Section 162(m) Participants, no later than ninety (90) days
following the commencement of any fiscal year in question or any other
designated fiscal period or period of service (or such other time as may be
required or permitted by Section 162(m) of the Code), the Committee shall, in
writing, (i) designate one or more Section 162(m) Participants, (ii) select the
performance goal or goals applicable to the fiscal year or other designated
fiscal period or period of service, (iii) establish the various targets and
bonus amounts which may be earned for such fiscal year or other designated
fiscal period or period of service and (iv) specify the relationship between
performance goals and targets and the amounts to be earned by each Section
162(m) Participant for such fiscal year or other designated fiscal period or
period of service. Following the completion of each fiscal year or other
designated fiscal period or period of service, the Committee shall certify in
writing whether the applicable performance targets have been achieved for such
fiscal year or other designated fiscal period or period of service. In
determining the amount earned by a Section 162(m) Participant, the Committee
shall have the right to reduce (but not to increase) the amount payable at a
given level of performance to take into account additional factors that the
Committee may deem relevant to the assessment of individual or corporate
performance for the fiscal year or other designated fiscal period or period of
service.
ARTICLE VIII
STOCK APPRECIATION RIGHTS
8.1 Grant of Stock Appreciation Rights. A Stock Appreciation Right may
be granted to any Employee or consultant selected by the Committee. A Stock
Appreciation Right may be granted (i) in connection and simultaneously with the
grant of an Option, (ii) with respect to a previously granted Option, or (iii)
independent of an Option. A Stock Appreciation Right shall be subject to such
terms and conditions not inconsistent with this Plan as the Committee shall
impose and shall be evidenced by a written Stock Appreciation Right Agreement,
which shall be executed by the Grantee and an authorized officer of the
Company. The Committee, in its sole discretion, may determine whether a Stock
Appreciation Right is to qualify as performance-based compensation as described
in Section 162(m)(4)(C) of the Code and Stock Appreciation Right Agreements
evidencing Stock Appreciation Rights intended to so qualify shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code. Without limiting the generality of the foregoing,
the Committee may, in its sole discretion and on such terms as it deems
appropriate, require as a condition of the grant of a Stock Appreciation Right
to an Employee or consultant that the Employee or consultant surrender for
cancellation some or all of the unexercised Options, awards of Restricted Stock
or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments, or other rights which have been previously
granted to him under this Plan or otherwise. A Stock Appreciation Right, the
grant of which is conditioned upon such surrender, may have an exercise price
lower (or higher) than the exercise price of the surrendered Option or other
award, may cover the same (or a lesser or greater) number of shares as such
surrendered Option or other award, may contain such other terms as the
Committee deems appropriate, and shall be exercisable in accordance with its
terms, without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option or other award.
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8.2 Coupled Stock Appreciation Rights
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a
particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the number
of shares subject to the simultaneously or previously granted Option to which
it is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained
by subtracting the Option exercise price from the Fair Market Value of a share
of Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Committee may impose.
8.3 Independent Stock Appreciation Rights
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An ISAR
shall be exercisable in such installments as the Committee may determine. An
ISAR shall cover such number of shares of Common Stock as the Committee may
determine. The exercise price per share of Common Stock subject to each ISAR
shall be set by the Committee. An ISAR is exercisable only while the Grantee is
an Employee or consultant; provided that the Committee may determine that the
ISAR may be exercised subsequent to Termination of Employment or Termination of
Consultancy without cause, or following a change in control of the Company, or
because of the Grantee's retirement, death or disability, or otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to
exercise the ISAR pursuant to this Plan) to exercise all or a specified portion
of the ISAR (to the extent then exercisable pursuant to its terms) and to
receive from the Company an amount determined by multiplying the difference
obtained by subtracting the exercise price per share of the ISAR from the Fair
Market Value of a share of Common Stock on the date of exercise of the ISAR by
the number of shares of Common Stock with respect to which the ISAR shall have
been exercised, subject to any limitations the Committee may impose.
8.4 Payment and Limitations on Exercise
(a) Payment of the amount determined under Section 8.2(c) and 8.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as of
the date the Stock Appreciation Right is exercised) or a combination of both,
as determined by the Committee. To the extent such payment is effected in
Common Stock it shall be made subject to satisfaction of all provisions of
Section 5.3 above pertaining to Options.
(b) Grantees of Stock Appreciation Rights may be required to comply
with any timing or other restrictions with respect to the settlement or
exercise of a Stock Appreciation Right, including a window-period limitation,
as may be imposed in the sole discretion of the Board or Committee.
8.5 Consideration. In consideration of the granting of a Stock
Appreciation Right, the Grantee shall agree, in the written Stock Appreciation
Right Agreement, to render faithful and efficient services to the Company and
its Subsidiaries. Nothing in this Plan or in any Stock Appreciation Right
Agreement hereunder shall confer on any Grantee any right to continue in the
employ of, or as a consultant for, the Company
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or any Subsidiary or shall interfere with or restrict in any way the rights of
the Company and any Subsidiary, which are hereby expressly reserved, to
discharge any Grantee at any time for any reason whatsoever, with or without
good cause.
ARTICLE IX
ADMINISTRATION
9.1 Compensation Committee. Prior to the Company's initial
registration of Common Stock under Section 12 of the Exchange Act, the
Compensation Committee shall consist of the entire Board. Following such
registration, the Compensation Committee (or another committee of the Board
assuming the functions of the Committee under this Plan) shall administer the
Plan; provided, however, that unless and until such Committee consists solely
of two or more Independent Directors, each of whom is both a "non-employee
director" as defined by Rule 16b-3 and an "outside director" for purposes of
Section 162(m) of the Code, the Committee shall continue to consist of the
entire Board. Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee may be
filled by the Board.
9.2 Duties and Powers of Committee. It shall be the duty of the
Committee to conduct the general administration of this Plan in accordance with
its provisions. The Committee shall have the power to interpret this Plan and
the agreements pursuant to which Options, awards of Restricted Stock or
Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments are granted or awarded, and to adopt such rules
for the administration, interpretation, and application of this Plan as are
consistent therewith and to interpret, amend or revoke any such rules.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Options granted to Independent Directors. Any such grant or award
under this Plan need not be the same with respect to each Optionee, Grantee or
Restricted Stockholder. Any such interpretations and rules with respect to
Incentive Stock Options shall be consistent with the provisions of Section 422
of the Code. In its sole discretion, the Board may at any time and from time to
time exercise any and all rights and duties of the Committee under this Plan.
9.3 Majority Rule; Unanimous Written Consent. The Committee shall act
by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
9.4 Compensation; Professional Assistance; Good Faith Actions. Members
of the Committee shall receive such compensation, if any, for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or
other persons. The Committee, the Company and the Company's officers and
Directors shall be entitled to rely upon the advice, opinions or valuations of
any such persons. All actions taken and all interpretations and determinations
made by the Committee or the Board in good faith shall be final and binding
upon all Optionees, Grantees, Restricted Stockholders, the Company and all
other interested persons. No members of the Committee or Board shall be
personally liable for any action, determination or interpretation made in good
faith with respect to this Plan, Options, awards of Restricted Stock or
Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments, and all members of the Committee and the Board
shall be fully protected by the Company in respect of any such action,
determination or interpretation.
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ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Not Transferable.
(a) Except as expressly provided otherwise pursuant to a written
agreement between the Company and an Optionee, Grantee or Restricted
Stockholder, Options, Restricted Stock awards, Deferred Stock awards,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments under this Plan may not be sold, pledged, assigned, or transferred in
any manner other than by will or the laws of descent and distribution or
pursuant to a QDRO, unless and until such rights or awards have been exercised,
or the shares underlying such rights or awards have been issued, and all
restrictions applicable to such shares have lapsed. No Option, Restricted Stock
award, Deferred Stock award, Performance Award, Stock Appreciation Right,
Dividend Equivalent or Stock Payment or interest or right therein shall be
liable for the debts, contracts or engagements of the Optionee, Grantee or
Restricted Stockholder or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except
to the extent that such disposition is permitted by the preceding sentence.
(b) During the lifetime of the Optionee or Grantee, only he may
exercise an Option or other right or award (or any portion thereof) granted to
him under the Plan, unless it has been disposed of pursuant to a QDRO. After
the death of the Optionee or Grantee, any exercisable portion of an Option or
other right or award may, prior to the time when such portion becomes
unexercisable under the Plan or the applicable Stock Option Agreement or other
agreement, be exercised by his personal representative or by any person
empowered to do so under the deceased Optionee's or Grantee's will or under the
then applicable laws of descent and distribution.
10.2 Amendment, Suspension or Termination of this Plan. Except as
otherwise provided in this Section 10.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
Company's stockholders given within twelve months before or after the action by
the Board or the Committee, no action of the Board or the Committee may, except
as provided in Section 10.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan, and no action of
the Board or the Committee may be taken that would otherwise require
stockholder approval as a matter of applicable law, regulation or rule.
Furthermore, no modification of the Award Limit shall be effective prior to the
approval of the Company's stockholders. No amendment, suspension or termination
of this Plan shall, without the consent of the holder of Options, Restricted
Stock awards, Deferred Stock awards, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments, alter or impair any rights or
obligations under any Options, Restricted Stock awards, Deferred Stock awards,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments theretofore granted or awarded, unless the award itself otherwise
expressly so provides. No Options, Restricted Stock, Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments may be granted or awarded during any period of suspension or after
termination of this Plan, and in no event may any Incentive Stock Option be
granted under this Plan after the first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
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(b) The expiration of ten years from the date the Plan is approved by
the Company's stockholders under Section 10.4.
10.3 Changes in Common Stock or Assets of the Company, Acquisition or
Liquidation of the Company and Other Corporate Events.
(a) Subject to Section 10.3(e), in the event that the Committee (or
the Board, in the case of Options granted to Independent Directors) determines
that any dividend or other distribution (whether in the form of cash, Common
Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company (including, but not limited to,
a Sale of the Company), or exchange of Common Stock or other securities of the
Company, issuance of warrants or other rights to purchase Common Stock or other
securities of the Company, or other similar corporate transaction or event, in
the Committee's sole discretion (or in the case of Options granted to
Independent Directors, the Board's sole discretion), affects the Common Stock
such that an adjustment is determined by the Committee to be appropriate in
order to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan or with respect to an Option,
Restricted Stock award, Performance Award, Stock Appreciation Right, Dividend
Equivalent, Deferred Stock award or Stock Payment, then the Committee (or the
Board, in the case of Options granted to Independent Directors) shall, in such
manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be
granted under the Plan, or which may be granted as Restricted Stock or
Deferred Stock (including, but not limited to, adjustments of the
limitations in Section 2.1 on the maximum number and kind of shares which
may be issued and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents, or Stock Payments, and in
the number and kind of shares of outstanding Restricted Stock or Deferred
Stock, and
(iii) the grant or exercise price with respect to any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment.
(b) Subject to Section 10.3(e), in the event of any Sale of the
Company or other transaction or event described in Section 10.3(a) or any
unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Committee (or the Board, in the case of Options granted to
Independent Directors) in its sole discretion is hereby authorized to take any
one or more of the following actions whenever the Committee (or the Board, in
the case of Options granted to Independent Directors) determines that such
action is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan or
with respect to any option, right or other award under this Plan, to facilitate
such transactions or events or to give effect to such changes in laws,
regulations or principles:
(i) In its sole discretion, and on such terms and conditions as
it deems appropriate, the Committee (or the Board, in the case of Options
granted to Independent Directors) may provide, either by the terms of the
agreement or by action taken prior to the occurrence of such
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transaction or event and either automatically or upon the optionee's
request, for either the purchase of any such Option, Performance Award,
Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or any
Restricted Stock or Deferred Stock for an amount of cash equal to the
amount that could have been attained upon the exercise of such option,
right or award or realization of the optionee's rights had such option,
right or award been currently exercisable or payable or fully vested or the
replacement of such option, right or award with other rights or property
selected by the Committee (or the Board, in the case of Options granted to
Independent Directors) in its sole discretion;
(ii) In its sole discretion, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction or
event that it cannot vest, be exercised or become payable after such event;
(iii) In its sole discretion, and on such terms and conditions as
it deems appropriate, the Committee (or the Board, in the case of Options
granted to Independent Directors) may provide, either by the terms of such
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent,
or Stock Payment, or Restricted Stock or Deferred Stock or by action taken
prior to the occurrence of such transaction or event, that for a specified
period of time prior to such transaction or event, such option, right or
award shall be exercisable as to all shares covered thereby,
notwithstanding anything to the contrary in (i) Section 4.4 or (ii) the
provisions of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock;
(iv) In its sole discretion, and on such terms and conditions as
it deems appropriate, the Committee (or the Board, in the case of Options
granted to Independent Directors) may provide, either by the terms of such
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent,
or Stock Payment, or Restricted Stock or Deferred Stock or by action taken
prior to the occurrence of such transaction or event, that upon such event,
such option, right or award be assumed by the successor or survivor
corporation, or a parent or subsidiary thereof, or shall be substituted for
by similar options, rights or awards covering the stock of the successor or
survivor corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices; and
(v) In its sole discretion, and on such terms and conditions as
it deems appropriate, the Committee (or the Board, in the case of Options
granted to Independent Directors) may make adjustments in the number and
type of shares of Common Stock (or other securities or property) subject to
outstanding Options, Performance Awards, Stock Appreciation Rights,
Dividend Equivalents, or Stock Payments, and in the number and kind of
outstanding Restricted Stock or Deferred Stock and/or in the terms and
conditions of (including the grant or exercise price), and the criteria
included in, outstanding options, rights and awards and options, rights and
awards which may be granted in the future.
(vi) In its sole discretion, and on such terms and conditions as
it deems appropriate, the Committee may provide either by the terms of a
Restricted Stock award or Deferred Stock award or by action taken prior to
the occurrence of such event that, for a specified period of time prior to
such event, the restrictions imposed under a Restricted Stock Agreement or
a Deferred Stock Agreement upon some or all shares of Restricted Stock or
Deferred Stock may be terminated, and, in the case of Restricted Stock,
some or all shares of such Restricted Stock may cease to be subject to
repurchase under Section 6.6 or forfeiture under Section 6.5 after such
event;
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(c) Notwithstanding Sections 10.3(b), in the event of any Sale of the
Company, each outstanding Performance Award, Stock Appreciation Right, Dividend
Equivalent, Stock Payment, Restricted Stock, or Deferred Stock award shall,
immediately prior to the effective date of the Sale of the Company,
automatically become fully exercisable for all of the shares of Common Stock at
the time subject to such rights or fully vested, as applicable, and may be
exercised for any or all of those shares as fully-vested shares of Common
Stock. However, an outstanding right shall not so accelerate if and to the
extent: (i) such right is, in connection with the Sale of the Company, to
remain outstanding for securities of the Company following such transaction, to
be assumed by the successor or survivor corporation (or parent thereof) or to
be replaced with a comparable right with respect to shares of the capital stock
of the successor or survivor corporation (or parent thereof) or (ii) the
acceleration of exercisability of such right is subject to other limitations
imposed by the Committee at the time of grant. The determination of
comparability of rights under clause (i) above shall be made by the Committee,
and its determination shall be final, binding and conclusive.
(d) Subject to Sections 10.3(e) and 10.8, the Committee (or the Board,
in the case of Options granted to Independent Directors) may, in its sole
discretion, include such further provisions and limitations in any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock
Payment, or Restricted Stock or Deferred Stock agreement or certificate, as it
may deem equitable and in the best interests of the Company.
(e) With respect to Options, Stock Appreciation Rights and performance
or incentive awards described in Article VII which are granted to Section
162(m) Participants and are intended to qualify as performance-based
compensation under Section 162(m)(4)(C), no adjustment or action described in
this Section 10.3 or in any other provision of the Plan shall be authorized to
the extent that such adjustment or action would cause the Plan to violate
Section 422(b)(1) of the Code or would cause such option or stock appreciation
right to fail to so qualify under Section 162(m)(4)(C), as the case may be, or
any successor provisions thereto. Furthermore, no such adjustment or action
shall be authorized to the extent such adjustment or action would result in
short-swing profits liability under Section 16 or violate the exemptive
conditions of Rule 16b-3 unless the Committee (or the Board, in the case of
Options granted to Independent Directors) determines that the option or other
award is not to comply with such exemptive conditions. The number of shares of
Common Stock subject to any option, right or award shall always be rounded to
the next whole number.
10.4 Approval of Plan by Stockholders. This Plan has been approved by
the Company's stockholders as of June 18, 1997.
10.5 Tax Withholding. The Company shall be entitled to require payment
in cash or deduction from other compensation payable to each Optionee, Grantee
or Restricted Stockholder of any sums required by federal, state or local tax
law to be withheld with respect to the issuance, vesting, exercise or payment
of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment. The Committee (or the
Board, in the case of Options granted to Independent Directors) may in its sole
discretion and in satisfaction of the foregoing requirement allow such
Optionee, Grantee or Restricted Stockholder to elect to have the Company
withhold shares of Common Stock otherwise issuable under such Option or other
award (or allow the return of shares of Common Stock) having a Fair Market
Value equal to the sums required to be withheld.
10.6 Loans. The Committee may, in its sole discretion, extend one or
more loans to Employees in connection with the exercise or receipt of an
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment granted under this Plan, or the issuance of Restricted Stock or
Deferred Stock awarded under this Plan. The terms and conditions of any such
loan shall be set by the Committee.
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10.7 Forfeiture Provisions. Pursuant to its general authority to
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall have the right (to the extent consistent with the applicable
exemptive conditions of Rule 16b-3) to provide, in the terms of Options or
other awards made under the Plan, or to require the recipient to agree by
separate written instrument, that (i) any proceeds, gains or other economic
benefit actually or constructively received by the recipient upon any receipt
or exercise of the award, or upon the receipt or resale of any Common Stock
underlying such award, must be paid to the Company, and (ii) the award shall
terminate and any unexercised portion of such award (whether or not vested)
shall be forfeited, if (a) a Termination of Employment, Termination of
Consultancy or Termination of Directorship occurs prior to a specified date, or
within a specified time period following receipt or exercise of the award, or
(b) the recipient at any time, or during a specified time period, engages in
any activity in competition with the Company, or which is inimical, contrary or
harmful to the interests of the Company, as further defined by the Committee
(or the Board, as applicable).
10.8 Limitations Applicable to Section 16 Persons and
Performance-Based Compensation. Notwithstanding any other provision of this
Plan, this Plan, and any Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent or Stock Payment granted, or Restricted Stock or Deferred
Stock awarded, to any individual who is then subject to Section 16 of the
Exchange Act, shall be subject to any additional limitations set forth in any
applicable exemptive rule under Section 16 of the Exchange Act (including any
amendment to Rule 16b-3 of the Exchange Act) that are requirements for the
application of such exemptive rule. To the extent permitted by applicable law,
the Plan, Options, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents, Stock Payments, Restricted Stock and Deferred Stock granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to
such applicable exemptive rule. Furthermore, notwithstanding any other
provision of this Plan, any Option, Stock Appreciation Right or performance or
incentive award described in Article VII which is granted to a Section 162(m)
Participant and is intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall be subject to any
additional limitations set forth in Section 162(m) of the Code (including any
amendment to Section 162(m) of the Code) or any regulations or rulings issued
thereunder that are requirements for qualification as performance-based
compensation as described in Section 162(m)(4)(C) of the Code, and this Plan
shall be deemed amended to the extent necessary to conform to such
requirements.
10.9 Effect of Plan Upon Options and Compensation Plans. The adoption
of this Plan shall not affect any other compensation or incentive plans in
effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company (i) to establish any other forms of
incentives or compensation for Employees, Directors or Consultants of the
Company or any Subsidiary or (ii) to grant or assume options or other rights or
awards otherwise than under this Plan in connection with any proper corporate
purpose including but not by way of limitation, the grant or assumption of
options in connection with the acquisition by purchase, lease, merger,
consolidation or otherwise, of the business, stock or assets of any
corporation, partnership, limited liability company, firm or association.
10.10 Compliance with Laws. This Plan, the granting and vesting of
Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this
Plan and the issuance and delivery of shares of Common Stock and the payment of
money under this Plan or under Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments granted or Restricted Stock or
Deferred Stock awarded hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities law and federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection
therewith. Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the
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Company as the Company may deem necessary or desirable to assure compliance
with all applicable legal requirements. To the extent permitted by applicable
law, the Plan, Options, Restricted Stock awards, Deferred Stock awards,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments granted or awarded hereunder shall be deemed amended to the extent
necessary to conform to such laws, rules and regulations.
10.11 Titles. Titles are provided herein for convenience only and are
not to serve as a basis for interpretation or construction of this Plan.
10.12 Governing Law. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Delaware without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of Duane Reade Holding Corp. on June 18, 1997, and was approved by
the Company's stockholders on June 18, 1997.
Executed on this 18th day of June, 1997.
/s/ Hyman Needleman
-----------------------------------
Secretary
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NONQUALIFIED STOCK OPTION PLAN
DUANE READE HOLDING CORP.
1992 STOCK OPTION PLAN
ARTICLE I
PURPOSE OF PLAN
The 1992 Stock Option Plan (the "Plan") of Duane Reade Holding Corp., a
Delaware corporation (the "Company"), adopted by the Board of Directors of
the Company on October 12, 1992, for executive and other key employees of the
Company, is intended to advance the best interests of the Company by providing
those persons who have a substantial responsibility for the management and
growth of the Company and its Subsidiaries with additional incentives by
allowing them to acquire an ownership interest in the company and thereby
encouraging them to contribute to the success of the Company and its
Subsidiaries and to remain in their employ. The availability and offering of
stock options under the Plan also increases the Company's ability to attract
and retain individuals of exceptional managerial talent upon whom, in large
measure, the sustained progress, growth and profitability of the Company and
its Subsidiaries depends.
ARTICLE II
DEFINITIONS
For purposes of the Plan, except where the context clearly indicates
otherwise, the following terms shall have the meanings set forth below:
"Board" shall mean the Board of Directors of the Company.
"Cause" shall have the meaning set forth in Participant's Employment
Agreement with the Company or any of its Subsidiaries; provided if a
Participant has no Employment Agreement, "Cause" shall mean (i) a
Participant's theft or embezzlement, or attempted theft or embezzlement, of
money or property of the Company or any of its Subsidiaries, a Participant's
perpetration or attempted perpetration of fraud, or a Participant's
participation in a fraud or attempted fraud, on the Company or any of its
Subsidiaries or a Participant's unauthorized appropriation of, or a
Participant's attempt to misappropriate, any tangible or intangible assets or
property of the Company or any of its Subsidiaries, (ii) any act or acts of
disloyalty, misconduct or moral turpitude by a Participant injurious to the
interest, property, operations, business or reputation of the Company or any
of its Subsidiaries or a
<PAGE>
Participant's conviction of a crime the commission of which results in injury
to the Company or such Subsidiary or (iii) a Participant's inability to carry
out effectively his duties and obligations to the Company or any of its
Subsidiaries or to participate effectively and actively in the management of
the Company and its Subsidiaries, as determined in the reasonable judgment of
the Board.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and any
successor statute.
"Committee" shall mean the committee of the Board which may be designated
by the Board to administer the Plan.
"Common Stock" shall mean the Company's Common Stock, par value $.01 per
share.
"Independent Third Party" means any person who, immediately prior to the
contemplated transaction, does not own in excess of 5% of the Company's
Common Stock on a fully-diluted basis, who is not controlling, controlled by
or under common control with any such 5% owner of the Company's Common Stock
and who is not the spouse or descendent (by birth or adoption) of any such 5%
owner of the Company's Common Stock.
"Participant" shall mean any executive or other key employee of the Company
who has been selected to participate in the Plan by the Committee or the Board.
"Sale of the Company" means the sale of the Company to an Independent Third
Party or affiliated group of Independent Third Parties pursuant to which such
party or parties acquire (i) capital stock of the Company possessing the
voting power to elect a majority of the Company's board of directors (whether
by merger, consolidation or sale or transfer of the Company's capital stock)
or (ii) all or substantially all of the Company's assets determined on a
consolidated basis.
"Subsidiary" means any corporation, partnership, association or other
business entity of which (i) if a corporation, a majority of the total voting
power of shares of 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 the
Company or one or more of its Subsidiaries or a combination thereof, or (ii)
if a partnership, association or other business entity, a majority of the
partnership or other similar ownership interest thereof is at the time owned
or controlled, directly or indirectly, by the Company or one or more of its
Subsidiaries or a combination thereof. For purposes hereof, the Company
and/or one or more of its Subsidiaries shall be deemed to have a majority
ownership interest in a partnership, association or other business entity if
they shall be allocated a majority of partnership, association or
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<PAGE>
other business entity gains or losses or shall be or control the managing
director or general partner of such partnership, association or other business
entity.
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the Committee; provided, however, that
if for any reason the Committee shall not have been appointed by the Board,
all authority and duties of the Committee under the Plan shall be vested in
and exercised by the Board. Subject to the limitations of the Plan, the
Committee shall have the sole and complete authority to: (i) select
Participants, (ii) grant Options (as defined in Article IV below) to
Participants in such forms and amounts as it shall determine, (iii) impose
such limitations, restrictions and conditions upon such Options as it shall
deem appropriate, (iv) interpret the Plan and adopt, amend and rescind
administrative guidelines and other rules and regulations relating to the
Plan, (v) correct any defect or omission or reconcile any inconsistency in
the Plan or in any Option granted hereunder and (vi) make all other
determinations and take all other actions necessary or advisable for the
implementation and administration of the Plan. The Committee's determinations
on matters within its authority shall be conclusive and binding upon the
Participants, the Company and all other persons. All expenses associated with
the administration of the Plan shall be borne by the Company. The Committee
may, as approved by the Board and to the extent permissible by law, delegate
any of its authority hereunder to such persons as it deems appropriate.
ARTICLE IV
LIMITATION ON AGGREGATE SHARES
The number of shares of Common Stock with respect to which options may be
granted under the Plan (the "Options") and which may be issued upon the
exercise thereof shall not exceed, in the aggregate, 150,000 shares; provided,
however, that the type and the aggregate number of shares which may be subject
to Options shall be subject to adjustment in accordance with the provisions of
paragraph 6.8 below, and further provided that to the extent any Options
expire unexercised or are cancelled, terminated or forfeited in any manner
without the issuance of Common Stock thereunder, such shares shall again be
available under the Plan. The 150,000 shares of Common Stock available under
the Plan may be either authorized and unissued shares, treasury shares or a
combination thereof, as the Committee shall determine.
3
<PAGE>
ARTICLE V
AWARDS
5.1 Options. The Committee may grant Options to Participants in accordance
with this Article V.
5.2 Form of Option. Options granted under this Plan shall be nonqualified
stock options and are not intended to be "incentive stock options" within the
meaning of Section 422A of the Code or any successor provision.
5.3 Exercise Price. The option exercise price per share of Common Stock
shall be fixed by the Committee or, in the absence of the Committee, by the
Board.
5.4 Exercisability. Options shall be exercisable at such time or times as
the committee shall determine at or subsequent to grant.
5.5 Payment of Exercise Price. Options shall be exercised in whole or in
part by written notice to the Company (to the attention of the Company's
Secretary) accompanied by payment in full of the option exercise price.
Payment of the option exercise price shall be made in cash (including check,
bank draft or money order) or, in the discretion of the Committee, by delivery
of a promissory note (if in accordance with policies approved by the Board).
5.6 Terms of Options. The Committee shall determine the term of each Option,
which term shall in no event exceed ten years from the date of grant.
ARTICLE VI
GENERAL PROVISIONS
6.1 Conditions and Limitations on Exercise. Options may be made exercisable
in one or more installments, upon the happening of certain events, upon the
passage of a specified period of time, upon the fulfillment of certain
conditions and/or upon the achievement by the Company of certain performance
goals, as the Committee shall decide in each case when the Options are granted.
6.2 Sale of the Company. In the event of a sale of the Company, the
Committee may provide, in its discretion, that the Options shall become
immediately exercisable by any Participants who are employed by the Company at
the time of the Sale of the Company and that such Options shall terminate if
not exercised as of the date of the Sale of the Company or other prescribed
period of time.
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6.3 Written Agreement. Each Option granted hereunder to a Participant shall
be embodied in a written agreement (an "Option Agreement") which shall be
signed by the Participant and by the Chairman or the President of the Company
for and in the name and on behalf of the Company and shall be subject to the
terms and conditions prescribed herein (including, but not limited to,
(i) shall designate ("Designees") to repurchase from each Participant, and such
Participant's transferees, all shares of Common Stock issued or issuable to
such Participant on the exercise of an Option in the event of such
Participant's termination of employment, (ii) holdback and other registration
right restrictions in the event of a public registration of any equity
securities of the Company and (iii) any other terms and conditions which the
Committee shall deem necessary and desirable.
6.4 Listing, Registration and Compliance with Laws and Regulations. Options
shall be subject to the requirement that if at any time the Committee shall
determine, in its discretion, that the listing, registration or qualification
of the shares subject to the Options upon any securities exchange or under any
state or federal securities or other law or regulation, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a
condition to or in connection with the granting of the Options or the issuance
or purchase of shares thereunder, no Options may be granted or exercised, in
whole or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee. The holders of such Options will supply the
Company with such certificates, representations and information as the Company
shall request and shall otherwise cooperate with the Company in obtaining such
listing, registration, qualification, consent or approval. In the case of
officers and other persons subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended, the Committee may at any time impose any limitations
upon the exercise of an Option that, in the Committee's discretion, are
necessary or desirable in order to comply with such Section 16(b) and the rules
and regulations thereunder. If the Company, as part of an offering of
securities or otherwise, finds it desirable because of federal or state
regulatory requirements to reduce the period during which any Options may be
exercised, the Committee, may, in its discretion and without the Participant's
consent, so reduce such period on not less than 15 days' written notice to the
holders
thereof.
6.5 Nontransferability. Options may not be transferred other than by will
or the laws of descent and distribution and, during the lifetime of the
Participant, may be exercised only be such Participant (or his legal guardian
or legal representative). In the event of the death of a Participant,
exercise of Options granted hereunder shall be made only:
5
<PAGE>
(i) by the executor or administrator of the estate of the deceased
Participant or the person or persons to whom the deceased Participant's
rights under the Option shall pass by will or the laws of descent and
distribution; and
(ii) to the extent that the deceased Participant was entitled thereto at
the date of his death, unless otherwise provided by the Committee in such
Participant's Option Agreement.
6.6 Expiration of Options. Except as otherwise provided by the Committee
in the Option Agreement, any portion of a Participant's Option that was not
vested and exercisable on the date of the termination of such Participant's
employment shall expire and be forfeited as of such date; provided, however,
that: (i) if any Participant dies or becomes disabled, such Participant's
Option will expire 180 days after the date of his death or disability, and
(ii) if any Participant is discharged for any reason other than for Cause,
such Participant's Option will expire 30 days after the date of his discharge.
6.7 Withholding of Taxes. The Company shall be entitled, if necessary or
desirable, to withhold from any Participant from any amounts due and payable
by the Company to such Participant (or secure payment from such Participant
in lieu of withholding) the amount of any withholding or other tax due from
the Company with respect to any Option Shares issuable under the Plan, and
the Company may defer such issuance unless indemnified to its satisfaction.
6.8 Adjustments In the event of a reorganization, recapitalization, stock
dividend or stock split, or combination or other change in the shares of
Common Stock, the Board or the Committee may, in order to prevent the
diluation or enlargement of rights under outstanding Options, make such
adjustments in the number and type of shares authorized by the Plan, the
number and type of shares covered by outstanding Options and the exercise
prices specified therein as may be determined to be appropriate and equitable.
6.9 Rights of Participants. Nothing in the Plan shall interfere with or
limit in any way the right of the Company and its Subsidiaries to terminate any
Participant's employment at any time (with or without Cause), nor confer upon
any Participant any right to continue in the employ of the Company and its
Subsidiaries for any period of time or to continue his present (or any other)
rate of compensation and, except as otherwise provided under this Plan or by
the Committee in the Option Agreement, in the event of any Participant's
termination of employment (including, but not limited to, the termination of a
Participant's employment without Cause) any portion of such Participant's
Option that was not previously vested and exercisable will expire and be
forfeited as of the date of such termination. No employee shall have a right
to be selected
6
<PAGE>
as a Participant or, having been so selected, to be selected again as a
Participant.
6.10 Amendment, Suspension and Termination of Plan. The Board or the
Committee may suspend or terminate the Plan or any portion thereof at any time
and may amend it from time to time in such respects as the Board or the
Committee may deem advisable; provided, however, that no such amendment shall
be made without stockholder approval to the extent such approval is required
by law, agreement or the rules of any exchange upon which the Common Stock is
listed, and no such amendment, suspension or termination shall impair the
rights of Participants under outstanding Options without the consent of the
Participants affected thereby. No Options shall be granted hereunder after
the tenth anniversary of the adoption of the Plan.
6.11 Amendment, Modification and Cancellation of Outstanding Options. The
Committee may amend or modify any Option in any manner to the extent that the
Committee would have had the authority under the Plan initially to grant such
Option; provided that no such amendment or modification shall impair the
rights of any Participant under any Option without the consent of such
Participant. With the Participant's consent, the Committee may cancel any
Option and issue a new Option to such Participant.
6.12 Indemnification. In addition to such other rights of indemnification
as they may have as members of the Board or the Committee, the members of the
Committee shall be indemnified by the Company against all costs and expenses
reasonably incurred by them in connection with any action, suit or proceeding
to which they or any of them may be party by reason of any action taken or
failure to act under or in connection with the Plan or any Option granted
thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected
by the Company) or paid by them in satisfaction of a judgment in any such
action, suit or proceeding; provided, however, that any such Committee member
shall be entitled to the indemnification rights set forth in this paragraph
6.12 only if such member has acted in good faith and in a manner that such
member 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 that such conduct was unlawful, and further
provided that upon the institution of any such action, suit or proceeding a
Committee member shall give the Company written notice thereof and an
opportunity, at its own expense, to handle and defend the same before such
Committee member undertakes to handle and defend it on his own behalf.
* * * * *
7
<PAGE>
EXECUTION COPY
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated October 27, 1997, and effective as of June 18,
1997, is made by and among Duane Reade Holding Corporation, a Delaware
corporation (the "Company") and Anthony Cuti (the "Executive"). This
Agreement consists of the text hereof and each of the Exhibits attached hereto.
RECITALS:
A. It is the desire of the Company to assure itself of the management
services of the Executive by engaging him as the Chairman, President and Chief
Executive Officer of the Company.
B. The Executive desires to commit himself to serve the Company on the
terms herein provided.
NOW THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements set forth below, the parties hereto agree as follows:
1. Certain Definitions. Whenever the following terms are used in this
Agreement they shall have the meanings given below, unless the context clearly
requires otherwise. Certain terms not listed below are defined elsewhere in
this Agreement.
"Acceleration Period" is defined in Section 17(a)(v).
"Affiliate" with respect to any person shall mean any other person or
entity directly or indirectly controlling, controlled by or under common control
with, such person where "control" shall have the meaning given such term under
Rule 405 of the Securities Act of 1933, as amended.
"Base EBITDA Target" for any calendar year shall be as specified on
Exhibit A.
"Base Salary" is defined in Section 5(a).
"Beneficiary" shall mean the payee identified on the last page hereof.
"Board" shall mean the Board of Directors of the Company.
"Bonus" shall mean any Target Bonus and any Incentive Bonus.
<PAGE>
"Bring-Along Right" is defined in Section 11(a).
"Call Notice" is defined in Section 12(b).
"Call Right" is defined in Section 12(a).
"Cause" shall mean the termination of the Executive's employment by
the Company in the event of any of the following:
(i) a finding by the Board that the Executive has committed an act of
fraud or embezzlement against the Company or any of its Subsidiaries;
(ii) the conviction of the Executive of a crime (other than a
misdemeanor which does not involve dishonesty); or
(iii) any material willful breach by the Executive of this Agreement.
No act or failure to act on the part of the Executive shall be deemed "willful"
if it was due primarily to an error in judgment or negligence, but shall be
deemed "willful" only if done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that his action or omission was in the
best interest of the Company. Failure to meet performance standards or
objectives of the Company or the Board shall not constitute Cause for purposes
hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Stock" shall mean the $0.01 par value common stock of the
Company.
"Company Note" is described in Section 7.
"Confidential Information" is defined in Section 19(a).
"Continuation Period" is defined in Section 17(a)(ii).
"Current Option" is defined in Section 8(a).
"Dilutive Event" is defined in Section 8(d).
"Disability" shall mean the absence of the Executive from the
Executive's duties to the Company on a full-time basis for a total of sixteen
consecutive weeks or for an aggregate of more than six months in any
twenty-four month period as a result of incapacity due to mental or physical
illness which is determined to be total and permanent by a physician selected
by the
2
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Company and acceptable to the Executive or the Executive's legal representative
(such agreement as to acceptability not to be withheld unreasonably).
"Divested Percentage" shall mean the ratio of (i) the sum of the number
of shares of Common Stock proposed to be included in a Principal Transfer and
the net number of shares of Common Stock transferred (taking account of all
purchases, sales and other transfers) by DLJ and its Affiliates since the Start
Date to (ii) the number of shares of Common Stock held by DLJ and its Affiliates
as of the Start Date.
"DLJ" shall mean DLJ Merchant Banking Partners, II, L.P.
"DLJ Note" shall mean the promissory note in the principal amount of
not more than $1,000,000 executed by the Executive in favor of DLJ that
includes the terms set forth in Exhibit C.
"EBITDA" shall mean, for any period, the sum (without duplication) of
the amounts for such period of:
(i) "Consolidated EBIT" (as defined in the Credit Agreement dated as
of September 24, 1992 among Dabco Inc., Duane Reade Inc., various lending
institutions, and Bankers Trust Company, as Agent, as amended through the
Start Date);
(ii) depreciation expense; and
(iii) amortization expense,
in the case of each of clauses (ii) and (iii) above to the extent deducted in
determining Consolidated EBIT: but excluding any of the costs associated with
the acquisition of the Company by DLJ and excluding any extraordinary or
unusual expenses associated with any public offering of Company equity. EBITDA
for each calendar year will be determined by the Company's regular outside
auditors for such year no later than March 15 of the next following calendar
year.
"EBITDA Achievement Factor" for any given year shall mean the ratio of
the number of shares of Common Stock that become vested under the Performance
Option for such year pursuant to Sections 8(b)(i), (ii) and (iii) to 378,000.
"Employment Related Agreements" shall mean this Agreement, the DLJ
Note, the Company Note, the Non-Qualified Stock Option Agreement, the
Non-Qualified Performance Stock Option Agreement and the Non-Qualified
Super-Performance Stock Option Agreement.
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"Equity Value" of the Company as of any given date shall mean:
(i) if Common Stock is publicly traded, the product of the Fair Market
Value of a share of Common Stock as of such date and the number of shares
of Common Stock outstanding as of such date; or
(ii) if Common Stock is not then publicly traded, Equity Value will be
determined on the basis of an enterprise value equal to nine times EBITDA
as of the last day of the most recently completed calendar year.
"Fair Market Value" of a share of Common Stock as of any given date
shall be:
(i) if the Common Stock is publicly traded, (A) the average trading
price of a share of Common Stock on the principal exchange on which such
shares are then trading, if any, (or as reported on any composite index
which includes such principal exchange) during the thirty-day trading
period prior to the determination date, or if Common Stock was not traded
during such thirty-day period the price of the most recent trade prior to
the determination date in which DLJ was not a participant; or (B) if
Common Stock is not traded on an exchange, the mean between the closing
representative bid and asked prices for a share of Common Stock on the
trading day previous to the determination date as reported by NASDAQ or,
if NASDAQ is not then in existence, by its successor quotation system
during the thirty-day trading period prior to the determination date or if
Common Stock was not traded during such thirty-day period the price of the
most recent trade prior to the determination date in which DLJ was not a
participant; or
(ii) if Common Stock is not publicly traded, the Equity Value of the
Company divided by the number of shares outstanding as of the last day of
the most recently completed calendar year.
"Final Average Earnings" with respect to the Executive shall mean:
(i) if the duration of the Term of Employment is greater than or equal
to five years, (A) the Executive's Total Earning Amount for the five years
during the Term of Employment for which the sum of the Executive's Total
Earnings Amount is greatest divided by (B) five; or
(ii) if the duration of the Term of Employment is less than five
years, (A) the Executive's Total Earnings Amount for the Term of
Employment divided by (B) the number of years (including fractional years)
during the Term of Employment.
"Forgiveness" is defined in Section 17(a)(iv).
"Good Reason" shall mean the occurrence of the following:
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(i) a reduction without the Executive's written consent, in the
Executive's then current Base Salary, unless such reduction is generally
applicable to all executives of the Company;
(ii) removal, without his consent, of the Executive from the position
of President, Chief Executive Officer or Chairman of the Company or
assignment, without his consent, to the Executive of any duties materially
and adversely inconsistent with the Executive's position as President,
Chief Executive Officer or Chairman of the Company or any other action
which results in a material and adverse change in such status, offices,
titles or responsibilities;
(iii) the creation of any position within the Company equal to or
superior to that of the Executive or which does not report to the
Executive;
(iv) the failure of the Executive to be reelected as Chairman of the
Board;
(v) the relocation of the offices at which the Executive is
principally employed to a location which requires a commute which is more
than five miles longer than the commute from the Executive's current home
in Saddle River, New Jersey to 440 Ninth Avenue, New York New York, which
relocation is not approved by the Executive;
(vi) any material breach by the Company or DLJ of the Employment
Related Agreements: or
(vii) any voluntary resignation by the Executive for any reason or for
no stated reason (unless the Company shall then have a basis to terminate
the Executive for Cause) during the 30-day period beginning six months
following a Sale of the Company.
"Grant Date" with respect to each calendar year shall mean any date
within a reasonable time after the determination of EBITDA for such calendar
year, but in no event later than April 1 of the subsequent calendar year.
"Hurdle Equity Value" is defined in Section 8(c).
"Incentive Bonus" for any period shall be the amount payable to the
Executive pursuant to Section 5(c)(iii).
"Independent Third Party" shall mean any entity other than (i) the
Company, (ii) DLJ or (iii) any Affiliate or Subsidiary of either the Company or
DLJ.
"Initial Term" is defined in Section 2.
"Later Year" is defined in Section 8(b)(iv).
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"Management Team" is defined in Section 8(c).
"Maximum EBITDA Target" for any calendar year shall be as specified on
Exhibit A.
"Measurement Year" is defined in Section 8(b)(iv).
"Minimum EBITDA Target" for any calendar year shall be as specified on
Exhibit A.
"Non-Qualified Performance Stock Option Agreement" shall mean the
written agreement evidencing the grant of the Performance Option substantially
in the form set forth as Exhibit E hereto.
"Non-Oualified Stock Option Agreement" shall mean the written
agreement evidencing the grant of the Current Option substantially in the form
set forth as Exhibit D hereto.
"Non-Qualified Super-Performance Stock Option Agreement" shall mean
the written agreement evidencing the grant of the Super-Performance Option
substantially in the form set forth as Exhibit F hereto.
"Note Assumption Date" is defined in Section 7.
"Options" shall mean the Current Option the Performance Option and the
Super-Performance Options.
"Payment Disability" with respect to any payment provided for herein
shall mean either of the following: (i) the Company is prohibited by applicable
law from making such payment or (ii) such payment would constitute a breach of
or default or event of default under or is otherwise prohibited by the terms
of any loan agreement or other agreement or instrument to which the Company or
any of the Company's parent corporations or Subsidiaries, is a party.
"Performance Option" is defined in Section 8(b).
"Principal Transfer" is defined in Section 10(a).
"Pro Rata Bonus" is defined in Section 17(c)(ii).
"Put Notice" is defined in Section 13(b).
"Put Right" is defined in Section 13(a).
"Restricted Shares" is defined in Section 9(a).
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"Sale of the Company" shall mean the consummation of one of the
following events:
(i) any Independent Third Party is or becomes the Beneficial Owner (as
defined below), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the Company's
then outstanding securities. For purposes of this Agreement, the term
"Beneficial Owner" shall have the meaning given to such term in Rule
13d-3 under the Exchange Act;
(ii) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation (or other entity), other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; provided,
however, that a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no
person acquires more than 25% of the combined voting power of the
Company's then outstanding securities shall not constitute a Sale of the
Company; or
(iii) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets.
"SERP" is defined in Section 15(a).
"SERP Payment" is defined in Section 15(a).
"Start Date" shall mean June 18, 1997.
"Subsidiary" of any person shall mean any entity of which:
(i) if a corporation, a majority of the total voting power of shares
of 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 of determination owned or controlled, directly or indirectly,
collectively or individually, by such person or by one or more
Subsidiaries of such person, and
(ii) if a partnership, association, limited liability company or other
entity, a majority of the partnership, membership or other similar
ownership interest thereof is at the time of determination owned or
controlled, directly or indirectly, collectively or individually, by such
person or by one or more Subsidiaries of such person.
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For purposes of this Agreement each of the Company and its Subsidiaries and DLJ
and its Subsidiaries shall be deemed to own a majority ownership interest in a
partnership, association, limited liability company or other entity if the
Company and its Subsidiaries or DLJ and its Subsidiaries, respectively, are
allocated a majority of partnership, association, limited liability company or
other entity gains or losses or shall control the general partner or managing
member or managing director of such entity.
"Super-Performance Option" is defined in Section 8(c).
"Super-Performance Option Grant" is defined in Section 8(c).
"Tag-Along Notice" is defined in Section 10(c).
"Tag-Along Right" is defined in Section 10(a).
"Tag-Along Shares" are defined in Section 10(c).
"Target Bonus" for any period shall be the amount payable to the
Executive pursuant to Section 5(c)(i) or (ii).
"Termination Date" shall mean the last day of the Executive's
employment with the Company and its Subsidiaries.
"Term of Employment" is defined in Section 2.
"Total Earnings Amount" shall mean, for any period, the sum of the
amounts of Base Salary and Bonus actually paid to the Executive (or deferred by
him) for such period, but shall not include such items as stock grants or
Options or noncash compensation amounts received.
"Transfer" is defined in Section 9(a).
"Transfer Notice" is defined in Section 10(b).
"Vested Shares" as of any date of determination shall mean the shares
of Common Stock then held by the Executive and the shares of Common Stock that
at such time could be purchased by the Executive upon exercise of all
exercisable Options then held by the Executive.
"Vesting Date" with respect to each calendar year shall mean any date
within a reasonable time after the determination of EBITDA for such calendar
year, but in no event later than April 1 of the subsequent calendar year.
2. Employment.
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(a) The Company will employ the Executive and the Executive will enter
the employ of the Company, for the period set forth in this Section 2, in the
positions set forth in Section 3 and upon the other terms and conditions herein
provided. The initial term of employment under this Agreement (the "Initial
Term") will be for the period beginning on the Start Date and ending on the
third anniversary thereof, unless earlier terminated as provided in Section 16.
(b) After the Initial Term, if applicable, the employment term
hereunder will automatically be extended for successive one-year periods unless
either party gives written notice of nonrenewal to the other at least thirty
days prior to the then scheduled expiration of the employment term. The period
commencing on the Start date and ending on the Termination Date will be
referred to hereunder as the "Term of Employment" regardless of the reason
for termination of employment. The giving by the Company of a notice of
nonrenewal will be deemed to be a notice of termination under the provisions of
Section 16(g) hereof and shall be deemed to be a termination without Cause for
purposes of Section 17(a) unless otherwise indicated in such notice.
3. Position and Duties. During the Term of Employment, the Executive
will serve as the Chairman, President and Chief Executive Officer of the
Company and will have such duties, functions, responsibilities and authority as
are consistent with the Executive's position as the senior executive officer in
charge of the general management, business and affairs of the Company, subject
to the supervision of the Board.
4. Place of Performance. In connection with his employment during the
Term of Employment, the Executive will be based at the corporate headquarters
of the the Company currently located at 440 Ninth Avenue, New York, New York,
but subject to relocation at the mutual written agreement of the Executive and
the Board.
5. Compensation and Related Matters.
(a) Base Salary.
(i) The Executive will receive a base salary ("Base Salary"), payable
in accordance with the Company's payroll practice for senior executives,
at an initial rate in effect through December 31, 1997 of $425,000 per
annum. If EBITDA for calendar year 1997 equals or exceeds the Base EBITDA
Target for such year, the Executive's rate of Base Salary for the 1998
calendar year will be increased to $500,000, and otherwise will remain at
the prior level. If EBITDA for calendar year 1998 equals or exceeds the
Base EBITDA Target for such year, the Executive's rate of Base Salary for
the 1999 calendar year will be increased to $550,000, and otherwise will
remain at the prior level.
(ii) On July 1, 2001 and on the date following the last day of each
subsequent 18-month period beginning thereafter, the rate of Base Salary
for the 18-month period
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<PAGE>
beginning on such date will be not less than that in effect immediately
prior to such date and will be increased by the percentage increase in
the Consumer Price Index For All Items For All Urban Consumers respecting
New York, New York, as published by the United States Department of
Labor, Bureau of Labor Statistics for the 18-month period preceding such
date and may be further increased in the Board's discretion.
(b) Benefits. During the Term of Employment, the Executive will be
entitled to:
(i) such health, dental, life and disability insurance coverage and
other similar benefits as the Company provides to its senior executive
employees generally;
(ii) a maximum of four weeks of paid vacation per calendar year;
(iii) an automobile allowance of up to $850 per month, plus
reimbursement for expenses incurred by the Executive in connection with
the operation of such automobile; provided that the Company will report on
the Executive's IRS Form W-2 any portion of such allowance or expenses as
required pursuant to the Code and the regulations thereunder: and
(iv) to the extent that the Company's medical benefits and dental
benefits are less than those which the Executive received from his
previous employer immediately prior to March 25, 1996 (as determined on
the basis of evidence presented to the Board), the Executive shall be
entitled to comparable medical and dental benefits or (without
duplication) cash equal to the amount required for the Executive to
acquire additional benefits so that his Company-provided benefits and such
additional benefits are comparable to such prior benefits.
(c) Target Bonus and Incentive Bonus.
(i) If EBITDA for calendar year 1997 equals or exceeds the Base EBITDA
Target for such year, the Company will pay the Executive a Target Bonus
equal to $475,000.
(ii) If EBITDA for any calendar year beginning on or after January 1,
1998 equals or exceeds the Base EBITDA Target for such year, the Company
will pay the Executive a Target Bonus equal to the actual Base Salary paid
to the Executive during such calendar year. If EBITDA for any calendar
year beginning on or after January 1, 1998 exceeds 94% of the Base EBITDA
Target for such year but is less than 100% of such Base EBITDA Target, the
Company will pay the Executive a Target Bonus calculated by linear
interpolation from $0 at 94% of the Base EBITDA Target to the Base Salary
paid to the Executive during such calendar year at 100%. For any calendar
year
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<PAGE>
for which EBITDA is less than or equal to 94% of the Base EBITDA Target
for such calendar year, the Executive will not be entitled to a Target
Bonus.
(iii) If EBITDA for any calendar year beginning on or after January 1,
1997 equals or exceeds 110% of the Base EBITDA Target for such year, the
Company will pay the Executive, in addition to the Target Bonus, an
Incentive Bonus equal to the actual Target Bonus payable to the Executive
with respect to such calendar year. If EBITDA for any calendar year
beginning on or after January 1, 1997 is greater than 100% but less than
110% of the Base EBITDA Target for such year, the Company will pay the
Executive, in addition to the Target Bonus, an Incentive Bonus calculated
by linear interpolation from $0 at 100% of the Base EBITDA Target to the
actual Target Bonus payable to the Executive with respect to such calendar
year at 110%.
(iv) Any Target Bonus and any Incentive Bonus payable will be paid to
the Executive within a reasonable time after determination of EBITDA for
each calendar year, but in no event later than 120 days following the end
of such year.
(d) Expenses. The Company will promptly reimburse the Executive for
all reasonable travel and other business expenses incurred by the Executive in
the performance of his duties to the Company upon submission of proper
documentation therefor.
6. DLJ Note. For a period of three months following the later of (a)
October 27, 1997 and (b) the date this Agreement is executed by all parties,
the Executive will be entitled to borrow up to $1,000,000 in the aggregate
from DLJ which shall be evidenced by the DLJ Note. DLJ shall provide the
Executive with the principal amount of any such DLJ Note within five business
days after DLJs receipt of written notice from the Executive requesting such
DLJ Note and specifying the principal amount thereof.
7. Company Note. As soon as practicable after the Board and DLJ agree
that the Company may do so (the "Note Assumption Date"), the Company will
assume the DLJ Note and the Executive and the Company will amend the terms
thereof and substitute therefor the Company Note in accordance with the terms
included at Exhibit C hereto.
8. Equity Compensation.
(a) Current Option. On the Start Date, the Executive's stock options
with respect to the Common Stock of the Company will be converted into a stock
option to purchase 3,035,038 shares of Common Stock (the "Current Option") at
an exercise price of $0.0705 per share. The Current Option will be immediately
exercisable in full on the Start Date and will be subject to the terms of the
Non-Qualified Stock Option Agreement the form of which is attached hereto as
Exhibit D. The Current Option will remain exercisable until the tenth
anniversary of the Start Date. The Current Option shall not be forfeitable by
the Executive for any reason,
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<PAGE>
including, without limitation, in the event that he is terminated by the
Company for Cause or he resigns without Good Reason.
(b) Performance Option. The Company hereby grants the Executive an
option to purchase 2,362,500 shares of Common Stock pursuant to this Section
8(b) (the "Performance Option") at an exercise price of $ 1.00 per share. The
Performance Option will be subject to the terms and conditions of the
Non-Qualified Performance Stock Option Agreement the form of which is attached
hereto as Exhibit E. The Performance Option granted hereunder will vest on the
eighth anniversary of the date of grant unless such Performance Option vested
earlier in accordance with the following schedule:
(i) If EBITDA for any calendar year beginning on or after January 1,
1997 and prior to January 1, 2002 equals the Base EBITDA Target for such
year, 378,000 shares of Common Stock subject to the Performance Option
shall become vested on the Vesting Date for such year.
(ii) If EBITDA for any calendar year beginning on or after January 1,
1997 and prior to January 1, 2002 exceeds the Minimum EBITDA Target for
such year but is less than 100% of the Base EBITDA Target for such year,
the number of shares of Common Stock subject to the Performance Option
that shall become vested on the Vesting Date for such year shall be
calculated by linear interpolation from 283,500 shares of Common Stock
subject to the Performance Option at the Minimum EBITDA Target to 378,000
shares of Common Stock subject to the Performance Option at the Base
EBITDA Target for such year.
(iii) If EBITDA for any calendar year beginning on or after January 1,
1997 and prior to January 1, 2002 exceeds the Base EBITDA Target for such
year, the number of shares of Common Stock subject to the Performance
Option that shall become vested on the Vesting Date for such year shall be
calculated by linear interpolation from 378,000 shares of Common Stock
subject to the Performance Option at the Base EBITDA Target to 472,500
shares of Common Stock subject to the Performance Option at the Maximum
EBITDA Target for such year.
(iv) If EBITDA for any calendar year (the "Measurement Year") equals
or exceeds the Base EBITDA Target for any successive year (the "Later
Year"), then the following will apply:
(A) the Executive will immediately vest in 472,500 shares of
Common Stock subject to the Performance Option for the Measurement
Year;
(B) the vesting of the shares of Common Stock subject to the
Performance Option for each Later Year will be accelerated to the
Vesting Date for the Measurement Year based upon the EBITDA
performance for the
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Measurement Year and the formulas set forth in Section 8(b)(i) and
(iii) above; and
(C) any portion of the shares of Common Stock subject to the
Performance Option for each Later Year which does not vest under
clause (B) of this sentence may be earned based on the EBITDA results
for such Later Years in accordance with the formulas in Section
8(b)(i) and (iii) above (but reduced by the number of shares of
Common Stock subject to the Performance Option that vested for such
Later Years under clause (B) of this sentence).
(v) If a Sale of the Company occurs prior to December 31, 2001, the
Company will accelerate the vesting of shares of Common Stock subject to
the Performance Option as of the date of consummation of such Sale of the
Company. The number of shares of Common Stock subject to the Performance
Option that will become vested pursuant to this Section 8(b)(v) will equal
the aggregate number of shares of Common Stock subject to the Performance
Option that would have become vested under Section 8(b)(i) and (iii) for
each of the years beginning with the calendar year in which the Sale of
the Company occurs and ending on December 31, 2001 if the EBITDA
Achievement Factor in each of such years equaled the average EBITDA
Achievement Factor for the years ending prior to the date of the Sale of
the Company (including, for this purpose any year for which the Vesting
Date has already occurred in whole or in part by operation of Section
8(b)(iv) above). In the event that the average EBITDA Achievement Factor
for such years is less than 1.00, the number of shares of Common Stock
subject to the Performance Option to become vested hereunder will be
calculated as if the average EBITDA Achievement Factor for such years
equals 1.00.
Any vested portion of the Performance Option will remain exercisable
until the tenth anniversary of the Start Date except that the vested and
unvested portions of the Performance Option will be forfeited by the Executive
in the event that he is terminated by the Company for Cause or resigns from his
employment with the Company other than for Good Reason or if the Executive
provides the Company with notice of nonrenewal of this Agreement.
(c) Super-Performance Option. The Company hereby grants the Executive
an option to purchase 2,868,750 shares of Common Stock pursuant to this Section
8(c) (the "Super-Performance Option") at an exercise price of $1.00 per share.
The Super-Performance Option will vest according to the degree to which the
Company achieves the Hurdle Equity Value (the "Hurdle Equity Value") set forth
on Exhibit B; provided. however, that any unvested portion of the Performance
Option will vest on the eighth anniversary of the date of grant. In the event
that the Equity Value of the Company exceeds the Hurdle Equity Value for any
year from 1997 through 2001, the portion of the Super-Performance Option that
vests will be determined as follows:
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(i) On each Vesting Date, the number of shares of Common Stock subject
to the Super-Performance Options that shall vest shall equal the excess,
if any, of:
(A) the number of shares of Common Stock set forth on Exhibit B
opposite the dollar amount that is closest to, but not in excess of,
such Equity Value, over
(B) the aggregate number of Super-Performance Options that have
previously vested.
(ii) If a Sale of the Company occurs prior to December 31, 2001, and
the average EBITDA Achievement Factor for the years ending prior to the
date of such event equals or exceeds 1.2 (including, for this purpose, any
year for which the Vesting Date has already occurred in whole or in part
by operation of Section 8(b)(iv) above), the Company will accelerate the
vesting of Super-Performance Options so that as of the date of
consummation of such Sale of the Company all Super-Performance Options
that have not vested as of such date will then be vested.
The Super-Performance Option will remain exercisable until the tenth
anniversary of the date of grant except that the Super-Performance Option will
be forfeited by the Executive in the event that he is terminated by the Company
for Cause or resigns from his employment with the Company other than for Good
Reason or if the Executive provides the Company with notice of nonrenewal of
this Agreement. The Super-Performance Option will be subject to the terms and
conditions of a Non-Qualified Super-Performance Option Agreement (a
"Non-Qualified Super-Performance Option Agreement") the form of which is
attached hereto as Exhibit F.
(d) Acquisition of Additional Equity. In the event that DLJ invests
new equity in the Company or creates any instrument that may be dilutive to the
equity of the Company (a "Dilutive Event"), the Executive will be given an
opportunity to invest a sufficient additional amount in the Company to protect
his ownership share from dilution. If, at the time of such Dilutive Event.
EBITDA for the most recently completed calendar year equalled or exceeded the
Base EBITDA Target for such year, the Company may offer the Executive a loan
sufficient to pay for his additional ownership share in accordance with the
terms of the Company Note.
9. Executive's Rights to Transfer Shares of Common Stock.
(a) During Employment. During such time as the Executive may be
employed by the Company, or any successor thereto, or any Subsidiary or
Affiliate of any of such, the Executive will not sell, assign, transfer
(including, without limitation, transfer by merger), give, pledge or otherwise
dispose of (collectively, "Transfer") shares of Common Stock acquired by
exercise of Options (collectively with all shares of Common Stock acquired by
the Executive during the term of this Agreement, whether by purchase, exercise
of options or
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<PAGE>
otherwise, the "Restricted Shares") except in accordance with the terms of
Sections 10, 11 and 14 or with the written consent of the Board.
(b) After Employment. Subject to any restrictions imposed pursuant to
applicable underwriting agreements and applicable law, all restrictions on
Transfer of Restricted Shares contained herein and the provisions of Section
10, 11 and 14 will expire upon the 30th day following the Executive's
termination of employment with the Company for any reason other than
termination by the Company without Cause or a resignation by the Executive for
Good Reason. If the Executive's employment hereunder is terminated by the
Company without Cause or the Executive resigns for Good Reason, Sections 10, 11
and 14 will continue in effect.
10. Tag-Along Right.
(a) In General. In the event of any proposed transfer or sale or other
disposition of Common Stock by DLJ or any of its Affiliates (including in a
public offering) to any Independent Third Party of any percentage or fraction
of a percentage of the shares of Common Stock then held by such person or
persons (a "Principal Transfer"), the Executive will have the right (the
"Tag-Along Right") to include in such Principal Transfer (in replacement for
shares of Common Stock otherwise to be transferred in such Principal Transfer
by DLJ and its Affiliates) that number of shares of Common Stock determined in
accordance with the formula [(V+W)xD]-W where:
"D" equals one-half of the Divested Percentage;
"V" equals the number of Vested Shares then held by the Executive; and
"W" equals the number of Vested Shares previously transferred by the
Executive:
provided, however, that if the Divested Percentage exceeds 50%, the Executive
will be permitted to include any number of shares of Common Stock then held by
the Executive.
(b) Transfer Notice. The Company will, not less than ten nor more than
sixty days prior to each proposed Principal Transfer, notify the Executive in
writing of each such proposed Principal Transfer. Such notice (the "Transfer
Notice") will set forth: (i) the name of the transferor and the Divested
Percentage; (ii) the name and address of the proposed purchaser; (iii) the
proposed amount and form of consideration and the terms and conditions of
payment offered by such proposed purchaser; and (iv) that the proposed
purchaser has been informed of the Tag-Along Right provided for in this Section
10 and has agreed to purchase shares of Common Stock held by the Executive in
accordance with the terms hereof.
(c) Tag-Along Notice. The Tag-Along Right may be exercised by the
Executive by delivery of a written notice to the Company proposing to sell
shares of Common
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Stock on the terms set forth in the Transfer Notice (the "Tag-Along Notice")
within ten days following his receipt of the Transfer Notice. The Tag-Along
Notice will state the number of shares of Common Stock (the "Tag-Along Shares")
that the Executive proposes to include in such Transfer to the proposed
purchaser.
(d) Effect of Tag-Along Notice. Delivery of the Tag-Along Notice by
the Executive in accordance with Section 10(c) above will constitute a binding
agreement by the Executive to sell the Tag-Along Shares, on the terms and
conditions specified in the Transfer Notice, to the proposed purchaser or any
other purchaser or purchasers designated by DLJ and its Affiliates, who will
purchase the shares of Common Stock specified in the Transfer Notice.
(e) Taxation to the Executive. The Company and DLJ (and its
Affiliates) will attempt (but will not be required to use their best efforts)
to structure any Transfer pursuant to this Section 10 so as to minimize the
taxation of the Executive at the time of such Transfer. Any sale to an
Independent Third Party will be structured in a manner that will allow the
Executive sufficient time to exercise such portion of the Options then held by
the Executive so as to participate in such sale in the manner contemplated in
this Section 10.
11. Bring-Along Right.
(a) In General. With respect to any proposed Principal Transfer
involving the sale of all or substantially all of the Common Stock then
beneficially owned by DLJ and its Affiliates, DLJ and its Affiliates will have
the right (the "Bring-Along Right") to require that the Executive transfer in
the proposed Principal Transfer that percentage of the Vested Shares of Common
Stock then held by the Executive equal to the Divested Percentage.
(b) Payment. Any shares of Common Stock purchased from the Executive
pursuant to this Section 11 will be paid for with the same proportional
consideration, at the same price per share of Common Stock and upon the same
terms and conditions as such proposed Principal Transfer by DLJ and its
Affiliates.
(c) Bring-Along Notice. The Company will, not less than ten nor more
than sixty days prior to any such proposed Principal Transfer, notify the
Executive in writing of such proposed Principal Transfer. Such notice will set
forth: (i) the name and address of the proposed purchaser and the Divested
Percentage and (ii) the proposed amount and form of consideration and terms and
conditions of payment offered by such proposed purchaser.
12. Company Call Right.
(a) Beginning on the Termination Date and continuing for a period of
thirty days following the Executive's termination of employment with the
Company for any reason the Company shall have the right (the "Call Right") to
purchase all Restricted Shares and vested Options then held by the Executive as
follows:
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(i) The Company shall have a Call Right to purchase all
Restricted Shares at a price per Restricted Share equal to (x) the lesser
of the Fair Market Value as of the date of the Call Notice (as defined
below) and the cost to the Executive of acquiring each such share (e.g.,
the exercise price of an Option) in the event of a termination by the
Company for Cause or a resignation by the Executive without Good Reason;
and (y) the Fair Market Value as of the date of the Call Notice if the
termination or resignation of employment is for any reason not specified
in clause (x) above.
(ii) The Company shall have a Call Right to purchase the vested
portion of any Options at a price per share of Common Stock subject to
such Options equal to (x) the Fair Market Value of a share of Common Stock
as of the date of the Call Notice, less (y) the exercise price; provided.
however, that the parties hereto acknowledge and agree that in the event
that the Executive is terminated by the Company for Cause or resigns from
his employment with the Company without Good Reason, any vested and
unexercised portions of the Performance Option and Super-Performance
Option shall expire as of the opening of business on the Termination Date.
(b) The Company may exercise the Call Right by sending notice (the
"Call Notice") of such exercise to the Executive (or, in the event of the
Executive's death, to his representative). The Call Notice will specify the
price to be paid per Restricted Share and per exercisable Option. Within ten
days after the Call Notice has been received by the Executive (or his
representative), the Executive (or such representative) shall deliver all
Restricted Shares and exercisable Options owned or held by the Executive (or
his estate) to the Company and the Company shall pay to the Executive (or such
representative), as principal or agent, in cash or by certified check, the
applicable price per Restricted Share and per exercisable Option. If Restricted
Shares or exercisable Options are not delivered as scheduled, the Company will
cancel those Restricted Shares or exercisable Options and deposit the funds in
a non-interest-bearing account and make payment upon delivery; provided that
the Company may elect to use such payment as an offset to, or as payment to be
transferred to DLJ on, any Company Note or DLJ Note then outstanding, as
applicable.
(c) Notwithstanding anything in this Section 12 to the contrary, if
the repurchase of Restricted Shares or the cancellation of the Options would
constitute a Payment Disability, the Company shall deliver to the Executive a
note with a principal amount equal to the amount determined above, bearing
interest at the prime rate (which shall be the rate then in effect according to
Citibank, N.A.) plus 1%. Payment of principal and interest on such note shall
be made to the Executive in such manner so as not to cause a Payment
Disability, and such note plus accrued and unpaid interest thereon shall be
repaid in full as soon as reasonably possible after all Payment Disabilities
cease to exist; provided, however, that the Company shall pay the Executive
interest on the note annually to the extent that such payment does not cause a
Payment Disability.
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13. Executive's Put Right.
(a) Except as provided in Section 17(a)(vi), beginning on the
Termination Date and continuing for a period of thirty days following the
Executive's termination of employment with the Company for any reason other
than a termination of employment by the Company for Cause or a resignation by
the Executive without Good Reason (including, without limitation, as a result
of the Executive or the Company giving the other party hereto a notice of
non-renewal), the Executive, or his representative, will have the right (the
"Put Right") to require the Company to repurchase all, but not less than all,
Restricted Shares and vested Options then held by the Executive as follows:
(i) The Executive, or his representative, shall have a Put Right
to require the Company to purchase all Restricted Shares at a price per
Restricted Share equal to the Fair Market Value as of the date of the Put
Notice.
(ii) The Executive, or his representative, shall have a Put Right
to require the Company to purchase the vested portion of any Options at a
price per share of Common Stock subject to such Options equal to (x) the
Fair Market Value of a share of Common Stock as of the date of the Put
Notice, less (y) the exercise price.
(b) The Executive, or his representative, may exercise the Put Right
by sending notice (the "Put Notice") of such exercise to the Company. Within
thirty days after the Put Notice has been received by the Company, the
Executive, or his representative, shall deliver all Restricted Shares and
exercisable Options owned or held by Executive (or his estate) and the Company
shall pay to the Executive, or his representative, in cash or by certified
check, the applicable price per Restricted Share and per exercisable Option.
(c) Notwithstanding anything in this Section 13 to the contrary, if
the repurchase of Restricted Shares or the cancellation of the vested Options
would constitute a Payment Disability, the Company shall deliver to the
Executive, or his representative, a note with a principal amount equal to the
amount determined above, bearing interest at the prime rate (which shall be the
rate then in effect according to Citibank, N.A.) plus 1%. Payment of principal
and interest on such note shall be made to the Executive, or his
representative, in such manner so as not to cause a Payment Disability, and
such note plus accrued and unpaid interest thereon shall be repaid in full as
soon as reasonably possible after all Payment Disabilities cease to exist;
provided, however, that the Company shall pay the Executive interest on the
note annually to the extent that such payment does not cause a Payment
Disability.
14. Public Offerings.
(a) Following the first primary initial public offering of Common
Stock, and subject to any restrictions imposed pursuant to applicable
underwriting agreements and
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applicable law, the Executive will be permitted to Transfer in each calendar
year that number of shares of Common Stock determined in accordance with the
formula [(V+W)xP]-W where:
"P" equals 10%;
"V" equals the number of Vested Shares; and
"W" equals the number of Vested Shares previously transferred by the
Executive pursuant to Section 9, 10 or 14 hereof;
provided, however, that in no event will the Executive be permitted
to Transfer in any calendar month in excess of 1% of the number of shares of
Common Stock outstanding as of the first day of such month.
(b) In addition to any amounts transferred pursuant to Section 9(a)
above, following the first secondary public offering of Common Stock and
subject to any restrictions imposed pursuant to applicable underwriting
agreements and applicable law, the Executive will be permitted to Transfer in
each calendar year that number of shares of Common Stock determined in
accordance with the formula [(V+W)xP]-W as per Section 14(a) above except that
"P" shall equal 20%.
(c) Following the first public offering of shares of Common Stock, the
Company will, on one occasion, upon request of the Executive, register on Form
S-8 the shares of Common Stock that may be acquired upon exercise of the
outstanding and unexercised Options then held by him (both vested and unvested)
as of the date of the public offering. In addition, following the first public
offering of shares of Common Stock, the Company will, on one occasion, upon
request of the Executive, register on Form S-3 all Restricted Shares held by
him at the time such request is made.
15. Supplemental Executive Retirement Plan.
(a) The Company will establish a Supplemental Executive Retirement
Plan (the "SERP") which will provide the Executive (or in the event of the
Executive's earlier death, his Beneficiary) with a lump sum payment (the "SERP
Payment") equal to the Actuarial Present Value (as defined below) of an annual
retirement benefit, commencing as of the first day of the month following the
month in which the Executive attains (or, in the event of his death, would have
attained) age 65 and payable during his lifetime, of 1.33 percent of his Final
Average Earnings times the number of years of his Term of Employment.
(b) The SERP Payment will be payable upon the later to occur of (i)
the Executive's termination of employment for any reason other than termination
of employment for
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Cause or (ii) his attainment of age 65 (or in the case of the Executive's
earlier death, the date on which the Executive would have attained age 65).
(c) The Company will be under no obligation to set aside any funds
with respect to the benefit obligations accruing under the SERP; provided,
however, that the Company agrees that prior to or simultaneous with the first
occurrence, if any, of any of the following:
(i) any Sale of the Company,
(ii) the termination of the Executive's employment by the Company
without Cause, by the Executive for Good Reason, or by reason of the
Executive's death or Disability, or
(iii) the nonrenewal of this Agreement pursuant to notice of
nonrenewal by the Company,
the Company will establish an irrevocable grantor trust (the "Trust") pursuant
to a trust agreement and fully fund the SERP in an amount equal to the
Actuarial Present Value as of the date of such funding (the "Funded Amount"),
based on a Term of Employment which will be deemed to equal 20 years. The
amount of interest earned by the Funded Amount will be evaluated annually on or
before March 15. In the event that the Funded Amount has not earned interest
during the past year in an amount equal to or greater than the prevailing rate
for ten-year treasury bonds on the Start Date (the "Treasury Rate"), the
Company will deposit an additional amount into the grantor trust equal to (i)
the amount of interest the Funded Amount would have earned during the last
calendar year at the Treasury Rate, (ii) less the interest actually earned by
the Funded Amount during such period. The trust agreement will provide for a
return to the Company of all assets that remain in the trust after satisfaction
of all obligations of the SERP.
(d) For purposes of this Section 15, the "Actuarial Present Value"
will be determined by using:
(i) an investment increment compounded annually at the applicable
interest rate equal to the average annual interest rate on thirty-year
U.S. treasury securities, plus 1%, for the second month preceding the
date on which a lump sum distribution is made, as specified by the
Commissioner of Internal Revenue in the Internal Revenue Bulletin; and
(ii) a mortality rate that shall be determined according to the
mortality table which is prescribed by the Commissioner of Internal
Revenue for purposes of Section 417(e) of the Code, as published in the
Internal Revenue Bulletin.
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16. Termination. The Executive's employment hereunder may be
terminated by the the Company or the Executive, as applicable, without any
breach of this Agreement only under the following circumstances:
(a) Death. The Executive's employment hereunder will terminate
upon his death.
(b) Disability. If the Company determines in good faith that the
Disability of the Executive has occurred during the Term of Employment,
the Company may give the Executive written notice in accordance with
Section 16(g) of its intention to terminate the Executive's employment. In
such event, the Executive's employment with the Company will terminate
effective on the 30th day after receipt of such notice by the Executive,
provided that within the 30 days after such receipt, the Executive will
not have returned to full-time performance of his duties.
(c) Cause. The Company may terminate the Executive's employment
hereunder for Cause.
(d) Without Cause. The Company may terminate the Executive's
employment hereunder for Good Reason upon 30 days' written notice.
(f) Without Good Reason. The Executive may terminate his
employment hereunder without Good Reason upon 30 days' written notice.
(g) Notice of Termination. Any termination of the Executive's
employment hereunder by the Company (or by the Executive pursuant to
Section 16(e) or 16(f)) will be communicated by a notice of termination to
the Executive (or to the Company, as appropriate). For purposes of this
Agreement, a "notice of termination" will mean a written notice which (i)
indicates the specific termination provision in the Agreement relied upon,
(ii) sets forth in reasonable detail any facts and circumstances claimed
to provide a basis for termination of the Executive's employment under the
provision indicated and (iii) specifies the effective date of the
termination.
17. Severence Benefits.
(a) Without Cause, With Good Reason or by Reason of Notice from the
Company of Non-Renewal. If the Executive's employment is terminated by the
Company without Cause or by the Executive with Good Reason, or by reason of
notice from the Company of non-renewal, the Company shall provide the Executive
with the severance benefits described below:
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(i) Accrued Base Salary and Bonus. The Company will pay the Executive
his Base Salary through the Termination Date and any accrued but unpaid
Bonus payable to the Executive pursuant to Section 5(c) for the most
recently completed calendar year prior to the Termination Date. Amounts
payable under this Section 17(a)(i) will be paid at such time or times as
the Executive would have received such amounts had he not terminated
employment, or such earlier time as required by applicable law.
(ii) Continuation of Base Salary and Bonus. Subject to Section
17(a)(viii), the Company will pay the Executive, in installments in
accordance with the Company's standard payroll practices, for the
twenty-four-month period immediately following the Termination Date (the
"Continuation Period") an amount equal to the product of:
(A) the Executive's Base Salary in effect on the Termination Date
plus the Executive's Bonus for the most recently completed calendar
year preceding the Termination Date and
(B) two.
(iii) Benefits. The Company shall provide the Executive with
continuing health disability and life insurance benefits (at the levels in
effect immediately prior to the Termination Date) without cost to him
during the Continuation Period; provided that the Company's obligation to
continue such disability and life insurance coverage will cease at such
time as the Executive secures other employment and its obligation to
continue such health insurance benefits coverage will cease at such time
as the Executive secures other employment and is eligible for coverage
under another employer's comparable health insurance benefits plan or
program. All other benefits shall cease upon the Termination Date except
as specifically provided otherwise in this Agreement.
(iv) DLJ Note/Company Note.
(A) If EBITDA for the calendar year ended immediately prior to
the Termination Date equals or exceeds the Base EBITDA Target for
such year and as of the Termination Date, EBITDA for the current
calendar year is at least anticipated (as reasonably determined by
the Company's outside auditors) to equal or exceed the Base EBITDA
Target for such year, the Company will either reimburse the interest
accrued on the DLJ Note as of the Termination Date or forgive the
interest accrued on the Company Note as of such date (either, the
"Forgiveness"), as the case may be, and the Executive will not be
required to pay additional interest thereon. The Company will make an
additional payment to the Executive such that, on an after-tax basis,
he receives the benefit of the full amount of the Forgiveness.
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(B) The Company will have the right to reduce any amount payable
to the Executive pursuant to Section 17(a)(i) and (ii) by the
principal balance outstanding, if any, of the Company Note or the DLJ
Note as of the Termination Date, as an offset to, or as payment to be
transferred to DLJ on, such Company Note or DLJ Note, as applicable.
(v) Accelerated Vesting of Performance Option. On the Termination
Date, the Company will accelerate the vesting of that number of the number
of shares of Common Stock subject to the Performance Option (not then
vested) that would have become vested during the period beginning with the
calendar year in which occurs the Termination Date and ending on December
31, 2001 (the "Acceleration Period") if the EBITDA Achievement Factor in
each year during such period equalled the average EBITDA Achievement
Factor for the years ending prior to the Termination Date (including, for
this purpose, any year for which the Vesting Date has already occurred in
whole or in part by operation of Section 8(b)(iv) above). In the event
that the average EBITDA Achievement Factor for such years is less than
1.00, the number of shares of Common Stock subject to the Performance
Option for which vesting shall be accelerated hereunder will be calculated
as if the average EBITDA Achievement Factor equals 1.00.
(vi) Accelerated Vesting of Super-Performance Options. If the average
EBITDA Achievement Factor for the years ended prior to the Termination
Date is at least 1.2, then, after the Termination Date, the vesting of the
Super-Performance Options will accelerate according to terms that shall be
mutually agreed upon by the Board and the Executive. Any portion of the
Super-Performance Option that become vested on or after the Termination
Date will immediately become subject to the Call Right described in
Section 12 and the Put Right described in Section 13 for a period of
thirty days after the Vesting Date, after which such Super-Performance
Option shall be cancelled.
(vii) SERP. The Executive (or his Beneficiary) shall be entitled,
commencing upon attaining age 65 (or the Termination Date, if later), to
the SERP Payment determined pursuant to Section 15(a), based on his Final
Average Earnings as of the Termination Date and deeming the Term of
Employment for purposes of Section 15(a) to equal 20 years. The SERP
Payment specified in this Section 17(a)(vii) will be in full satisfaction
of all obligations under the SERP.
(viii) Extension of Continuation Period. If:
(A) the Termination Date is on or prior to the sixth anniversary
of the Start Date,
(B) the Termination Date is within the one-year period following
the date of a Sale of the Company,
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(C) EBITDA for the calendar year ended immediately prior to the
Termination Date equals or exceeds the Base EBITDA Target for such
year, and
(D) as of the Termination Date the business units which
constituted the Company prior to its sale are at least anticipated
(as reasonably determined by the Company's outside auditors) to
achieve the Base EBITDA Target for the year in which occurs the
Termination Date,
then the Continuation Period referred to in Section 17(a)(ii) shall be
extended to thirty-six months and the factor in Section 17(a)(ii)(B)
shall be three.
(b) For Cause or Without Good Reason. If the Executive's employment is
terminated by the Company for Cause or by the Executive without Good Reason,
the Company shall provide the Executive with the amounts described below:
(i) Accrued Base Salary and Bonus. The Company will pay the Executive
his Base Salary through the Termination Date at such time or times as the
Executive would have received such amounts had he not terminated
employment, or such earlier time as required by applicable law. The
Executive will not be entitled to any Bonus that is unpaid as of the
Termination Date.
(ii) Benefits. All benefits shall cease upon the Termination Date
except as specifically provided otherwise in this Agreement.
(iii) Termination of Options. All unexercised portions of the
Performance Option and Super-Performance Option shall expire as of the
opening of business on the Termination Date.
(iv) SERP.
(A) If the Executive is terminated for Cause, he will forfeit any
and all rights to the SERP Payment as of the Termination Date.
(B) If the Executive's termination of employment is at his
initiative without Good Reason (including, without limitation, by
reason of notice to the Company of the Executive's intention not to
renew this Agreement), the Executive (or his Beneficiary) will be
entitled to receive, commencing upon the later of the Termination
Date or the Executive's attainment of age 65 (or in the case of the
Executive's earlier death, the date as of which the Executive would
have attained age 65), the SERP Payment determined under the SERP
formula set forth in Section 15(a), based on his Final Average
Earnings as of the Termination Date.
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(c) Death or Disability. If the Executive's employment is terminated
by reason of his death or Disability:
(i) Accrued Base Salary and Bonus. The Company will pay the Executive
or his estate his accrued Base Salary through the Termination Date and any
accrued but unpaid Bonus payable to the Executive pursuant to Section 5(c)
for the most recently completed calendar year prior to the Termination
Date, at such time or times as the Executive would have received such
amounts had he not terminated employment, or such earlier time as required
by applicable law.
(ii) Pro Rata Bonus. The Company will pay the Executive or his estate
a pro rata portion of the Bonus, if any, that would have been payable to
the Executive with respect to the year in which occurs the Termination
Date (the "Pro Rata Bonus") equal to the product of:
(A) the Bonus that would have been payable pursuant to Section
5(c) for such year; and
(B) the ratio of the number of days elapsed prior to the
Termination Date in the calendar year in which such event occurs to
365. The Pro Rata Bonus, if any, will be paid at such time as the
Executive would have received the Bonus, if any, for such year had he
not terminated employment.
(iii) Benefits. All benefits shall cease upon the Termination Date
except as specifically provided otherwise in this Agreement.
(iv) Termination of Options. All exercisable Options shall remain
exercisable in accordance with the terms of the applicable Non-Qualified
Stock Option Agreement, Non-Qualified Performance Stock Option Agreement
and Non-Qualified Super-Performance Stock Option Agreement.
(v) SERP. The Executive (or his Beneficiary) will be entitled to the
SERP Payment, commencing on the date the Executive attains or would have
attained age 65 (or his Termination Date, if later) determined pursuant to
Section 15(a), based on the Executive's Final Average Earnings as of the
Termination Date and based on a Term of Employment, for purposes of
Section 15(a), equal to 20 years. The SERP Payment specified in this
Section 17(c)(v) will be in full satisfaction of all obligations under
the SERP.
18. Representations of the Executive and the Company.
(a) The Executive represents that he is under no contractual or other
legal constraint which would prevent him from executing this Agreement or
carrying out in full his
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responsibilities hereunder. The Executive indemnifies the Company from any
cost, loss, liability, damage or expense (including attorney's fees) which it
may incur by reason of any breach of the representation set forth in this
Section 18.
(b) The Company represents that it is not a party to any agreement,
including without limitation any stockholders agreement, the terms of which
would be violated by the Company's execution of this Agreement.
(c) DLJ represents that it is not a party to any agreement, including
without limitation any stockholders agreement, the terms of which would be
violated by DLJ's execution of this Agreement.
19. Non-Disclosure of Confidential Information.
(a) The Executive acknowledges that during his employment he will have
access to confidential or secret plans, programs, documents, agreements,
internal management reports, financial information or other material relating
to the business, services or activities of the Company, including, without
limitation, information with respect to the Company's operations, processes,
products, inventions, business practices, finances, principals, vendors,
suppliers, customers, potential customers, marketing methods, costs, prices,
contractual relationships, regulatory status, compensation paid to employees or
other terms of employment, and trade secrets, market reports, customer
investigations, customer lists and other similar information that is
proprietary information of the Company (collectively referred to as
"Confidential Information"). The Executive acknowledges that such Confidential
Information as is acquired and used by the Company is a special, valuable and
unique asset of the Company. In addition, all records, files and other
materials obtained by the Executive in the course of his employment with the
Company will remain the property of the Company.
(b) Except as required in the faithful performance of the Executive's
duties hereunder, the Executive shall, in perpetuity, maintain in confidence
and shall not directly, indirectly or otherwise use, disseminate, disclose or
publish, or use for his benefit or the benefit of any person, firm, corporation
or other entity any Confidential Information or deliver to any person, firm,
corporation or other entity any document, record, notebook, computer program or
similar repository of or containing any such Confidential Information;
provided, however, that no information otherwise in the public domain (other
than by an act of the Executive in violation hereof) shall be considered
Confidential Information. The parties hereby stipulate and agree that as
between them the foregoing matters are important, material and confidential
proprietary information and trade secrets, and affect the successful conduct of
the businesses of the Company (and any successor or assignee of the Company).
(c) Upon termination of the Executive's employment with the Company
for any reason, the Executive will promptly deliver to the Company all
correspondence, drawings, manuals, letters, notes, notebooks, reports, programs,
plans, proposals, financial documents, or
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any other documents concerning the Company's customers, business plans,
marketing strategies, products or processes which are Company property, or
which are non-public or which contain Confidential Information.
20. Non-Competition and Non-Solicitation.
(a) Subject to Section 20(b) below, in consideration of his employment
hereunder and in view of the confidential position to be held by the Executive
hereunder, during the Term of Employment and through the one-year period
commencing on the Termination Date, the Executive shall not, directly or
indirectly, be employed by, or act as a consultant or lender to or in
association with, or as a director, officer, employee, partner, owner, joint
venturer, member or otherwise of any person, firm, corporation, partnership,
limited liability company, association or other entity that engages in the same
business as, or competes with, any business actually conducted by the Company
or any of its Subsidiaries in any geographic area then served by the Company or
any of such Subsidiaries (other than beneficial ownership of up to 2% of the
outstanding voting stock of a publicly traded company that is or owns such a
competitor);
(b) In the event that the Executive is terminated by the Company
without Cause, resigns for Good Reason or ceases to be employed by the Company
be reason of notice of non-renewal by the Company, the Executive will cease to
be bound by this Section 20(a) on the Termination Date; provided, however, that
during the Continuation Period, the Executive shall not, directly or
indirectly, be employed by any person, firm, corporation, partnership, limited
liability company, association or other entity the principal business of which
is the operation or ownership of chain retail drug stores; provided further,
however, that the restriction on the Executive's employment by any such entity
shall apply only during the period in which DLJ owns a controlling interest in
the Company.
(c) In consideration of his employment hereunder and in view of the
confidential position to be held by the Executive hereunder, during the Term of
Employment and through the one-year period commencing on the Termination Date,
the Executive will not (i) induce or attempt to induce any employee of the
Company or any of its Subsidiaries to leave the employ of the Company or such
Subsidiary, or in any way interfere with the relationship between the Company
or any of its Subsidiaries and any employee thereof, (ii) hire directly or
indirectly any person who is then an employee of the Company or any of its
Subsidiaries, or (iii) induce or attempt to induce any customer, supplier,
licensee or other business relation of the Company or any of its Subsidiaries
to cease doing business with the Company or such Subsidiary, or in any way
interfere with the relationship between any such customer, supplier, licensee
or business relation and the Company or such Subsidiary; provided, however,
that the Executive will cease to be bound by this Section 20(c) on the
Termination Date if he is terminated without Cause, resigns for Good Reason or
ceases to be employed by the Company by reason of notice of non-renewal by the
Company.
(d) The Executive expressly agrees that the character, duration and
geographical scope of the provisions of this Section 20 are reasonable in light
of the circumstances as they exist on the date hereof. If any competent court
shall determine that the
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character, duration or geographical scope of such provisions is unreasonable,
then it is the intention and the agreement of the Executive and the Company
that this Agreement shall be construed by the court in such a manner as to
impose only those restrictions on the Executive's conduct that are reasonable
in the light of the circumstances and that are necessary to assure to the
Company the benefits of this Section 20.
21. Injunctive Relief. It is recognized and acknowledged by the
Executive that a breach of the covenants contained in Sections 19 and 20 will
cause irreparable damage to the Company and its goodwill, the exact amount of
which will be difficult or impossible to ascertain, and that the remedies at
law for any such breach will be inadequate. Accordingly, the Executive agrees
that in the event of a breach of any of the covenants contained in Sections 19
and 20, in addition to any other remedy which may be available at law or in
equity, the Company will be entitled to specific performance and injunctive
relief.
22. Nomination of Directors. Except for the directors of the Board who
are DLJ appointees the Executive and DLJ will mutually agree upon and jointly
nominate all members of the Board.
23. Assignment; Binding on Successors. This Agreement will be binding
upon and inure to the benefit of the Company, DLJ, the Executive and their
respective successors, assigns, personnel and legal representatives, executors,
administrators, heirs, distributees, devisees, and legatees, as applicable. The
Executive agrees that the Company and DLJ may assign their rights and
obligations under this Agreement to any successor-in-interest. The Executive
may assign his rights and obligations hereunder only with the express written
consent of the Company and DLJ except that the rights under this Agreement
shall inure to the benefit of the Executive's heirs or assigns in the event of
his death. Except as expressly provided in this Section 23, no party may assign
its rights and obligations hereunder, and any attempt to do so will be void.
24. Governing Law. This Agreement will be governed, construed,
interpreted and enforced in accordance with the substantive laws of the State
of New York.
25. Arbitration.
(a) Any controversy or claim arising out of or in relation to this
Agreement or the breach thereof or otherwise arising out of the Executive's
employment or the termination of such employment will, to the fullest extent
permitted by law, be settled by arbitration under the auspices of the American
Arbitration Association ("AAA") in New York, New York, in accordance with the
National Rules for the Resolution of Employment Disputes of the AAA, including,
but not limited to, the rules and procedures applicable to the selection of
arbitrators. Any decision rendered by the arbitrators will include specific
findings of fact and conclusions of law. All fees and expenses of the
arbitration (including, without limitation, each party's reasonable attorney's
fees and expenses) will be paid by the losing party or parties (with such
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parties being jointly and severally liable therefor) or, if no party is clearly
a losing party, then as may be determined by the arbitrators. Judgment upon the
award rendered by the arbitrators may be entered in any court specified below.
(b) Notwithstanding the foregoing, this provision will not preclude
either party from pursuing a court action for the sole purpose of obtaining a
temporary restraining order or a preliminary injunction in circumstances in
which such relief is appropriate, provided that any other relief will be
pursued through an arbitration proceeding pursuant to this Section. For
purposes of this Section 25(b), each party hereto irrevocably and
unconditionally:
(i) agrees that any suit, action or other legal proceeding arising out
of this Agreement may be brought in the United States District Court for
the Southern District of New York or, if such court does not have
jurisdiction or will not accept jurisdiction, in the Supreme Court of the
State of New York, New York County,
(ii) consents to the jurisdiction of any such court in any such suit,
action or proceeding, and
(iii) waives any objection which such party may have to the laying of
venue of any such suit, action or proceeding in any such court.
26. Validity. If any provision of this Agreement otherwise is deemed
to be invalid or unenforceable or is prohibited by the laws of the state or
jurisdiction where it is to be performed this Agreement shall be considered
divisible as to such provision, and such provision shall be inoperative in such
state or jurisdiction and shall not be part of the consideration moving from
any of the parties to any other. The invalidity or unenforceability of any
provision or provisions of this Agreement will not affect the validity or
enforceability of any other provision of this Agreement, which will remain in
full force and effect.
27. Notices. Any notice, request, claim, demand, document and other
communication hereunder to any party will be effective upon receipt (or refusal
of receipt) and will be in writing and delivered personally or sent by telex,
telecopy, or certified or registered mail, postage prepaid, as follows:
(a) If to DLJ or the Company, addressed to:
David Jaffe
Donaldson, Lufkin & Jenrette
277 Park Avenue
New York, NY 10172
29
<PAGE>
With a copy to:
Secretary of Duane Reade
Duane Reade
440 Ninth Avenue
New York, NY 10001
With a second copy to:
Jed W. Brickner, Esq.
Latham & Watkins
885 Third Avenue
Suite 1000
New York, NY 10022
(b) If to the Executive, to him at the address set forth below under
his signature
With a copy to:
Kenneth J. Laverriere, Esq.
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
or at such other address as any party will have specified by notice in
writing to the other parties.
28. No Mitigation. The Executive shall not be required to seek other
employment in order to mitigate or reduce the amounts payable to him pursuant
to this Agreement following his termination of employment.
29. Continuing Effect. Unless otherwise expressly provided herein, any
provision of this Agreement that would by its terms or natural import survive
the expiration of this Agreement or the termination of the Executive's
employment hereunder shall also survive. Notwithstanding the foregoing, the
parties hereto agree and intend that the provisions of Sections 17(a)(vi), 18,
19 and 20 shall survive the termination of this Agreement and the termination
of the Executive's employment hereunder.
30. Legal Fees. The Company will pay all reasonable legal fees not in
excess of $35,000 incurred by the Executive pursuant to the negotiation of the
Employment Related Agreements.
30
<PAGE>
31. Stockholder Approval. This Agreement shall be effective upon
submission to and approval by stockholders of the Company holding more than 75%
of the voting power of all outstanding Common Stock. In connection with such
submission and approval, the Company represents that it has provided each
stockholder with the disclosure required by Treasury Regulation Section
1.280G-1-Q&A 7(d).
32. Counterparts. This Agreement may be executed in several
counterparts, each of which will be deemed to be an original, but all of which
together will constitute one and the same Agreement.
33. Entire Agreement. As of the date of execution of this Agreement,
the Term Sheet dated as of June 18, 1997 among the Executive, the Company and
DLJ and the Employment Agreement dated March 25, 1996 by and among Duane Reade,
the Company and the Executive shall terminate and neither shall be of any
further force or effect. The terms of this Agreement and the other documents
contemplated hereby are intended by the parties to be the final expression of
their agreement with respect to the employment of the Executive by the Company
and may not be contradicted by evidence of any prior or contemporaneous
agreement. The parties further intend that this Agreement and the other
documents contemplated hereby will constitute the complete and exclusive
statement of its terms and that no extrinsic evidence whatsoever may be
introduced in any judicial, administrative, or other legal proceeding to vary
the terms of this Agreement; provided, however, that this Agreement will not
limit or replace any additional right or benefit that may be provided to the
Executive pursuant to any stockholders agreement that governs the rights of
holders of Common Stock; and provided further, that in the event of a conflict
between the terms of the Employment Agreement and any such stockholders
agreement the terms of the agreement that are least adverse to the Executive
shall govern.
34. Amendments, Waivers. This Agreement may not be modified, amended,
or terminated except by an instrument in writing, signed by the Executive and
the Chairman of the Board. By an instrument in writing similarly executed, the
Executive or the Company may waive compliance by the other party or parties
with any provision of this Agreement that such other party was or is obligated
to comply with or perform; provided, however, that such waiver will not operate
as a waiver of, or estoppel with respect to, any other or subsequent failure to
comply with or perform. No failure to exercise and no delay in exercising any
right, remedy, or power hereunder shall preclude any other or further exercise
of any other right, remedy, or power provided herein or by law or in equity.
[Signature page follows]
31
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
EXECUTIVE
/s/ Anthony Cuti
--------------------
Anthony Cuti
440 Ninth Avenue
New York, New York 10001
DUANE READE HOLDING
CORPORATION
By: /s/ David Jaffe
--------------------
Name:
Title:
DLJ MERCHANT BANKING
PARTNERS, II, L.P.
By: /s/ David Jaffe
--------------------
Name:
Title:
Executive's Beneficiary: Ilene Cuti
----------
Name
Spouse
----------
Relationship
Address:36 East Saddle River Road
Saddle River, NJ 07058
32
<PAGE>
EXHIBIT A
TARGET EBITDA
Base Minimum Maximum
Calendar Year EBITDA Target EBITDA Target EBITDA Target
- ------------- ------------- ------------- -------------
1997 $44,200,000 $42,200,000 $46,200,000
1998 $50,400,000 $47,400,000 $53,400,000
1999 $59,400,000 $55,400,000 $63,400,000
2000 $67,200,000 $63,200,000 $71,200,000
2001 $75,300,000 $71,300,000 $79,300,000
<PAGE>
EXHIBIT B
SUPER-PERFORMANCE OPTION
HURDLE EQUITY VALUES
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Hurdle Equity Value...... 55.1 218.5 317.7 407.8 507.5
Vested Shares of Common Stock Subject to the
Super-Performance Option
---------------------------------------------------------
Equity Value 1997 1998 1999 2000 2001
------------ ---- ---- ---- ---- ----
$90.0 0 0 0 0 0
$140.0 0 0 0 0 0
$155.1 1,912,500 0 0 0 0
$190.0 1,912,500 0 0 0 0
$218.5 1,912,500 0 0 0 0
$290.0 1,912,500 0 0 0 0
$315.0 2,103,750 2,103,750 0 0 0
$317.7 2,103,750 2,103,750 2,103,750 0 0
$340.0 2,295,000 2.295,000 2,295,000 0 0
$365.0 2,486,250 2,486,250 2,486,250 0 0
$390.0 2,677,500 2,677,500 2,677,500 0 0
$407.8 2,677,500 2,677,500 2,677,500 2,677,500 0
$415.0 2,868,750 2,868,750 2,868,750 2,868,750 0
$507.5 2,868,750 2,868,750 2,868,750 2,868,750 2,868,750
Over $507.5 2,868,750 2,868,750 2,868,750 2,868,750 2,868,750
<PAGE>
EXHIBIT C
TERMS OF NOTE
<PAGE>
TERMS OF THE NOTE
Capitalized terms that are not defined herein shall have the meanings
ascribed to them in the Employment Agreement to which these terms are attached
as Exhibit C (the "Employment Agreement").
DLJ Note The promissory note in the principal amount of not more than
$1,000,000 executed by the Executive in favor of DLJ.
Company
Note As soon as practicable after the Board and DLJ agree that
the Company may do so, the Company will assume the DLJ Note
and the Executive and the Company will amend the terms
thereof and substitute therefor the Company Note in
accordance with the terms included in the DLJ Note.
Loan For a period of three months following the later of (a)
October 27, 1997 and (b) the date the Employment Agreement
is executed by all parties, the Executive will be entitled
to borrow up to $ 1,000,000 in the aggregate from DLJ which
shall be evidenced by the DLJ Note. DLJ shall provide the
Executive with the principal amount of any such DLJ Note
within five business days after DLJ's receipt of written
notice from the Executive requesting such DLJ Note and
specifying the principal amount thereof.
Termination
without Cause/
Resignation
for Good Reason If EBITDA for the calendar year ended immediately prior to
the Termination Date equals or exceeds the Base EBITDA
Target for such year and as of the Termination Date, EBITDA
for the current calendar year is at least anticipated (as
reasonably determined by the Company's outside auditors) to
equal or exceed the Base EBITDA Target for such year, the
Company will either reimburse the interest accrued on the
DLJ Note as of the Termination Date or forgive the interest
accrued on the Company Note as of such date (either, the
"Forgiveness"), as the case may be and the Executive will
not be required to pay additional interest thereon. The
Company will make an additional payment to the Executive
such that, on an after-tax basis, he receives the benefit
of the full amount of the Forgiveness. The Company will have
the right to reduce any amount payable to the Executive
pursuant to Section 17(a)(i) and (ii) of the Employment
Agreement by the principal balance outstanding, if any,
<PAGE>
2
of the Company Note or the DLJ Note as of the Termination
Date, as an offset to, or as payment to be transferred to
DLJ on, such Company Note or DLJ Note, as applicable.
Repayment The Executive shall repay the aggregate unpaid principal
amount and interest amount of the Loan in five equal annual
installments, with the first payment due thirty days
following any date as of which the Executive has the ability
to exchange for cash payment (whether or not the Executive
actually chooses to receive such cash payment) any of the
collateral for the Note.
Interest Interest on the unpaid principal amount of the Note from the
date of this Note until this Note shall be paid in full at a
rate per annum equal at all times to the Federal Mid-Term
Rate in effect within thirty days after the payment by the
Company to the Executive of any Target Bonus or Incentive
Bonus as described in Section 5(c) of the Employment
Agreement.
Grant of Security As collateral, the Executive shall assign as security
interest to DLJ in the Current Option, together with all
shares, dividends, cash, instruments and other property
from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of
such Current Option, including, without limitation, the
shares issued upon exercise of such Option and all additional
options of the issuer of the Current Option that the
Executive may acquire and all shares, dividends, cash,
instruments and other property from time to time received,
receivable or otherwise distributed in respect of or in
exchange for any or all of such options; the Non-Qualified
Current Option Agreement, Non-Qualified Performance Option
Agreement and the Non-Qualified Super Performance Option
Agreement and all rights of the Executive under or pursuant
to the such agreements; the rights of Executive under the
Employment Agreement to receive proceeds of any severance
with respect to the Employment Agreement; and all proceeds of
any and all of the foregoing collateral.
<PAGE>
EXHIBIT D
FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT
<PAGE>
NON-QUALIFIED STOCK OPTION AGREEMENT
October 27, 1997
Mr. Anthony Cuti
36 East Saddle River Road
Saddle River, NJ 07458
Re: Duane Reade Holding Corporation (the "Company")
Grant of a Non-Qualified Stock Option
Dear Mr. Cuti:
The grant of the stock option (an "Option") described herein
is effective as of June 17, 1997 (the "Effective Date"). This option agreement
(the "Agreement") supersedes and replaces the prior non-qualified stock option
agreement between you and the Company dated March 25, 1996.
1. Definitions. For the purposes of this Agreement, the following
terms shall have the meanings set forth below. Capitalized terms that are not
otherwise defined below or in the body of this Agreement shall have the
meanings assigned to such terms in the Employment Agreement between you and the
Company dated October 27, 1997.
"Common Stock" shall mean the Company's Common Stock, par value $.01
per share, or, in the event that the outstanding Common Stock is hereafter
changed into or exchanged for different stock or securities of the Company,
such other stock or securities.
"Company" shall mean Duane Reade Holding Corporation, a Delaware
corporation, its successors and assigns.
"Employment Agreement" means the Employment Agreement, dated as of
October 27, 1997, by and between you and the Company.
"Option Price", with respect to any exercise of the Option pursuant to
the terms of this Agreement, means the number of Option Shares being acquired
multiplied by the Exercise Price.
<PAGE>
2
"Public Sale" means any sale to the public pursuant to an offering
registered under the Securities Act or to the public through a broker, dealer
or market maker pursuant to the provisions of Rule 144 adopted under the
Securities Act (or any similar provision then in force).
"Securities Act" shall mean the Securities Act of 1933, as amended,
and any successor statute.
2. Terms of the Option. The Option is to purchase 3,035,038 shares of
Common Stock (the "Option Shares") at a price per share of $0.0705 (the
"Exercise Price"). The Option is not intended to be an "incentive stock option"
within the meaning of Section 422 of the Code.
3. Exercisability/Vesting. The Option is fully vested and exercisable
at the time of grant.
4. Expiration of Option. (a) General. The Option will remain
exercisable until the tenth anniversary of the date of grant.
(b) No Early Expiration upon Termination of Employment. The Option
shall not be forfeitable by you for any reason, including, without limitation,
in the event that your employment with the Company terminates for any reason.
5. Procedure for Exercise. You may exercise all or any portion of the
Option at any time and from time to time prior to its expiration, by delivering
written notice to the Company (to the attention of the Company's Secretary) and
your written acknowledgment that you have read and have been afforded an
opportunity to ask questions of management of the Company regarding all
financial and other information provided to you regarding the Company, together
with payment of the Option Price. As a condition to any exercise of the Option,
you will permit the Company to deliver to you all financial and other
information regarding the Company it believes necessary to enable you to make
an informed investment decision, and you will make all customary investment
representations which the Company requires.
6. Payment and Other Conditions. Prior to the issuance of any stock
certificates evidencing the Option Shares in respect to which the Option shall
have been exercised, you shall have paid to the Company the aggregate Option
Price for all Option Shares for which the Option is then exercised either (a)
in cash (including check, bank draft or money order) or, in the discretion of
the Board, by delivery of a promissory note (if in accordance with policies
approved by the Board) or in shares of Common Stock already owned by you or any
combination of cash and shares of Common Stock or (b) through a "cashless
<PAGE>
3
exercise" whereby the Company shall retain a number of Option Shares for which
the Option shall have been exercised with a Fair Market Value equal to the
Option Price and shall issue to you certificates representing the remaining
Option Shares. In addition, the Company shall withhold from such exercise the
number of Option Shares necessary to equal the federal, state and local taxes,
if any, required to be withheld or paid by the Company as a result of such
exercise.
7. Issuance of Stock Certificates; Pledge of Shares Acquired. Subject
to the terms of the Security Agreement (which is part of the Form of Note
included at Exhibit C of the Employment Agreement), upon receipt of payment and
satisfaction of the conditions pursuant to Section 6 above, the Company shall
issue to you a certificate or certificates for the number of shares of Common
Stock in respect of which the Option shall have been exercised. Such
certificates shall contain one or more legends indicating any then applicable
transfer restrictions or limitations applicable to the shares. The Company will
bear all expenses in connection with the preparation, issuance and delivery of
the stock certificates.
8. Securities Laws Restrictions and Other Restrictions on Transfer of
Option Shares. You represent that when you exercise the Option you will be
purchasing Option Shares for your own account and not on behalf of others. You
understand and acknowledge that federal and state securities laws govern and
restrict your right to offer, sell or otherwise dispose of any Option Shares
unless your offer, sale or other disposition thereof is registered under the
Securities Act and state securities laws or, in the opinion of the Company's
counsel, such offer, sale or other disposition is exempt from registration or
qualification thereunder. You further understand that the certificates for any
Option Shares you purchase will bear such legends as the Company deems
necessary or desirable in connection with the Securities Act or other rules,
regulations or laws.
9. Non-Transferability of Option. Except as provided in the Form of
Note and the accompanying documents attached to the Employment Agreement as
Exhibit C, the Option is personal to you and is not transferable by you other
than by will or the laws of descent and distribution, provided that all such
transferees shall be bound by this Agreement. During your lifetime only, you
(or your guardian or legal representative) may exercise the Option. In the
event of your death, the Option may be exercised only (i) by the executor or
administrator of your estate or the person or persons to whom your rights under
the Option shall pass by will or the laws of descent and distribution and (ii)
to the extent that you were entitled hereunder at the date of your death.
10. Rights of Participants. Nothing in this Agreement shall interfere
with or limit in any way the right of the Company to terminate your employment
according to the terms of the Employment Agreement, nor confer upon you any
right to continue in the employ
<PAGE>
4
of the Company for any period of time or to continue your present (or any
other) rate of compensation.
11. Withholding of Taxes. The Company shall be entitled, if necessary
or desirable, to withhold from any amounts due and payable by the Company to
you (or secure payment from you in lieu of withholding) the amount of any
withholding or other tax due from the Company with respect to any Option Shares
issuable hereunder, and the Company may defer such issuance unless indemnified
by you to its satisfaction.
12. Adjustments. In the event of a reorganization, recapitalization,
stock dividend or stock split, or combination or other change in the shares of
Common Stock, you and the Board shall, in order to prevent the dilution or
enlargement of rights under the Option, agree to make such adjustments in the
number and type of shares covered by the Option and the Exercise Price
specified herein as may be determined to be appropriate and equitable. In the
event the Company issues any Common Stock or any warrants, options or other
rights to acquire Common Stock or any securities convertible into Common Stock,
you shall be entitled to purchase your pro rata share of such securities at the
same price and on the same terms as the Company offers to other investors in
order to maintain your then fully diluted percentage ownership of Common Stock.
13. Certain Rights and Obligations Under the Employment Agreement. (a)
Tag-Along Right and Bring-Along Right. The Option is subject to the Tag-Along
Right described in Section 10 of the Employment Agreement and the Bring-Along
Right described in Section 11 of the Employment Agreement and your rights and
obligations with respect to such Tag-Along Right and Bring-Along Right are
governed by Section 10 and Section 11 of the Employment Agreement,
respectively.
(b) Call and Put Rights. The Option is subject to the Call Right
described in Section 12 of the Employment Agreement and the Put Right described
in Section 13 of the Employment Agreement and your rights and obligations with
respect to such Call Right and Put Right are governed by Section 12 and Section
13 of the Employment Agreement, respectively.
14. Amendment. Except as otherwise provided herein, any provision of
this Agreement may be amended or waived only with the prior written consent of
you and the Company.
15. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall constitute an original, but all of
which taken together shall constitute one and the same Agreement.
<PAGE>
5
16. Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
17. Governing Law. The corporate law of the State of Delaware will
govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity and
interpretation of this Agreement and the exhibits hereto will be governed by
the internal law, and not the law of conflicts, of the State of New York.
* * * *
Your execution of this Agreement in the space below signifies your
understanding and acceptance of the terms included in this Agreement.
Very truly yours,
DUANE READE HOLDING CORPORATION
By: /s/ David L. Jaffe
---------------------------
The undersigned hereby acknowledges having read this Agreement and
hereby agrees to be bound by all provisions set forth herein.
Dated as of: ANTHONY CUTI
October 27, 1997 /s/ Anthony Cuti
----------------------------
<PAGE>
EXHIBIT E
FORM OF NON-QUALIFIED PERFORMANCE STOCK OPTION AGREEMENT
<PAGE>
NON-QUALIFIED PERFORMANCE STOCK OPTION AGREEMENT
October 27, 1997
Mr. Anthony Cuti
36 East Saddle River Road
Saddle River, NJ 07458
Re: Duane Reade Holding Corporation (the "Company")
Grant of a Non-Qualified Performance Stock Option
Dear Mr. Cuti:
Effective as of June 17, 1997 (the "Effective Date"), you are hereby
granted the Performance Stock Option (the "Performance Option") described
herein.
1. Definitions. For the purposes of this Option Agreement (the
"Agreement"), the following terms shall have the meanings set forth below.
Capitalized terms that are not otherwise defined below or in the body of this
Agreement shall have the meanings assigned to such terms in the Employment
Agreement between you and the Company dated October 27, 1997.
"Common Stock" shall mean the Company's Common Stock, par value $.01
per share, or, in the event that the outstanding Common Stock is hereafter
changed into or exchanged for different stock or securities of the Company,
such other stock or securities.
"Company" shall mean Duane Reade Holding Corporation, a Delaware
corporation, its successors and assigns.
"Employment Agreement" means the Employment Agreement, dated as of
October 27, 1997, by and between you and the Company.
"Option Price" means, with respect to any Option Shares, the number of
Option Shares being acquired multiplied by the Exercise Price.
"Public Sale" means any sale to the public pursuant to an offering
registered under the Securities Act or to the public through a broker, dealer
or market maker pursuant to the provisions of Rule 144 adopted under the
Securities Act (or any similar provision then in force).
<PAGE>
2
"Securities Act" shall mean the Securities Act of 1933, as amended,
and any successor statute.
2. Terms of the Performance Option. The Performance Option is for the
purchase of 2,362,500 shares of Common Stock (the "Option Shares") at a price
per share of $1.00 (the "Exercise Price"). The Performance Option is not
intended to be an "incentive stock option" within the meaning of section 422 of
the Code.
3. Exercisability/Vesting. The Performance Option granted hereunder
will vest and become exercisable in accordance with the terms and conditions
set forth in Sections 8(b) and 17(a)(v) of the Employment Agreement.
4. Expiration of the Performance Option. (a) General. The Performance
Option will remain exercisable until the tenth anniversary of the Effective
Date in accordance with the terms of this Agreement.
(b) Termination of Employment. (i) If your employment is terminated by
the Company for Cause or by you without Good Reason, all unexercised Option
Shares shall expire as of the opening of business on the Termination Date.
(ii) If your employment with the Company is terminated for any reason,
other than the reasons set forth in Section 4(a) above, all exercisable Option
Shares shall remain exercisable until the tenth anniversary of the Effective
Date.
5. Procedure for Exercise. You may exercise all or any portion of the
Performance Option at any time and from time to time prior to its expiration by
delivering written notice to the Company (to the attention of the Company's
Secretary) and your written acknowledgment that you have read and have been
afforded an opportunity to ask questions of management of the Company regarding
all financial and other information provided to you regarding the Company,
together with payment of the Option Price. As a condition to any exercise of
the Performance Option, you will permit the Company to deliver to you all
financial and other information regarding the Company it believes necessary to
enable you to make an informed investment decision, and you will make all
customary investment representations which the Company requires.
6. Payment and Other Conditions. Prior to the issuance of any stock
certificates evidencing the shares of Common Stock in respect to which the
Performance Option shall have been exercised, you shall have paid to the
Company the aggregate Option Price for all Option Shares for which the
Performance Option is then exercised either (a) in cash (including check, bank
draft or money order) or, in the discretion of the Board, by delivery of a
promissory note (if in accordance with policies approved by the Board) or in
<PAGE>
3
shares of Common Stock already owned by you or any combination of cash and
shares of Common Stock or (b) through a "cashless exercise" whereby the Company
shall retain a number of Option Shares for which the Performance Option shall
have been exercised the Fair Market Value of which is equal to the Option Price
and shall issue to you certificates representing the remaining shares of Common
Stock. In addition, the Company shall withhold from such exercise the number of
shares of Common Stock necessary to equal the federal, state and local taxes,
if any, required to be withheld or paid by the Company as a result of such
exercise.
7. Issuance of Stock Certificates; Pledge of Shares Acquired. Subject
to the terms of the Security Agreement (which is part of the Form of Note
included at Exhibit C of the Employment Agreement), upon receipt of payment and
satisfaction of the conditions pursuant to Section 6 above, the Company shall
issue to you a certificate or certificates for the number of Option Shares in
respect of which the Performance Option shall have been exercised. Such
certificates shall contain one or more legends indicating any then applicable
transfer restrictions or limitations applicable to the shares. The Company will
bear all expenses in connection with the preparation, issuance and delivery of
the stock certificates.
8. Securities Laws Restrictions and Other Restrictions on Transfer of
Option Shares. You represent that when you exercise the Performance Option you
will be purchasing Option Shares for your own account and not on behalf of
others. You understand and acknowledge that federal and state securities laws
govern and restrict your right to offer, sell or otherwise dispose of any
Option Shares unless your offer, sale or other disposition thereof is
registered under the Securities Act and state securities laws or, in the
opinion of the Company's counsel, such offer, sale or other disposition is
exempt from registration or qualification thereunder. You further understand
that the certificates for any Option Shares you purchase will bear such legends
as the Company deems necessary or desirable in connection with the Securities
Act or other rules, regulations or laws.
9. Non-Transferability of the Performance Option. Except as provided
in the Form of Note and the accompanying documents attached to the Employment
Agreement as Exhibit C, the Performance Option is personal to you and is not
transferable by you other than by will or the laws of descent and distribution,
provided that all such transferees shall be bound by this Agreement. During
your lifetime only, you (or your guardian or legal representative) may exercise
the Performance Option. In the event of your death, the Performance Option may
be exercised only (i) by the executor or administrator of your estate or the
person or persons to whom your rights under the Performance Option shall pass
by will or the laws of descent and distribution and (ii) to the extent that you
were entitled hereunder at the date of your death.
<PAGE>
4
8. Rights of Participants. Nothing in this Agreement shall interfere
with or limit in any way the right of the Company to terminate your employment
according to the terms of the Employment Agreement, nor confer upon you any
right to continue in the employ of the Company for any period of time or to
continue your present (or any other) rate of compensation.
9. Withholding of Taxes. The Company shall be entitled, if necessary
or desirable, to withhold from any amounts due and payable by the Company to
you (or secure payment from you in lieu of withholding) the amount of any
withholding or other tax due from the Company with respect to any Option Shares
issuable hereunder, and the Company may defer such issuance unless indemnified
by you to its satisfaction.
10. Adjustments. In the event of a reorganization, recapitalization,
stock dividend or stock split, or combination or other change in the shares of
Common Stock, you and the Board shall, in order to prevent the dilution or
enlargement of rights under the Performance Option, agree to make such
adjustments in the number and type of shares covered by the Performance
Option and the Exercise Price specified herein as may be determined to be
appropriate and equitable. In the event the Company issues any Common Stock or
any warrants, options or other rights to acquire Common Stock or any securities
convertible into Common Stock, you shall be entitled to purchase your pro rata
share of such securities at the same price and on the same terms as the Company
offers to other investors in order to maintain your then fully diluted
percentage ownership of Common Stock.
11. Certain Rights and Obligations Under the Employment Agreement. (a)
Tag-Along Right and Bring-Along Right. The Performance Option is subject
to the Tag-Along Right described in Section 10 of the Employment Agreement and
the Bring-Along Right described in Section 11 of the Employment Agreement and
your rights and obligations with respect to such Tag-Along Right and
Bring-Along Right are governed by Section 10 and Section 11 of the Employment
Agreement, respectively.
(b) Call and Put Rights. The Performance Option is subject to
the Call Right described in Section 12 of the Employment Agreement and the Put
Right described in Section 13 of the Employment Agreement and your rights and
obligations with respect to such Call Right and Put Right are governed by
Section 12 and Section 13 of the Employment Agreement, respectively.
12. Amendment. Except as otherwise provided herein, any provision of
this Agreement may be amended or waived only with the prior written consent of
you and the Company.
<PAGE>
5
13. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall constitute an original, but all of
which taken together shall constitute one and the same Agreement.
14. Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
15. Governing Law. The corporate law of the State of Delaware will
govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity and
interpretation of this Agreement and the exhibits hereto will be governed by
the internal law, and not the law of conflicts, of the State of New York.
* * * *
Your execution of this Agreement in the space below signifies your
understanding and acceptance of the terms included in this Agreement.
Very truly yours,
DUANE READE HOLDING CORPORATION
By: /s/ David L. Jaffe
---------------------------
Title:
The undersigned hereby acknowledges having read this Agreement and
hereby agrees to be bound by all provisions set forth herein.
Dated as of: ANTHONY CUTI
October 27,1997 /s/ Anthony Cuti
-------------------------------
<PAGE>
EXHIBIT F
FORM OF NON-QUALIFIED SUPER-PERFORMANCE STOCK OPTION AGREEMENT
<PAGE>
NON-QUALIFIED SUPER-PERFORMANCE STOCK OPTION AGREEMENT
October 27, 1997
Mr. Anthony Cuti
36 East Saddle River Road
Saddle River, NJ 07458
Re: Duane Reade Holding Corporation (the "Company")
Grant of a Non-Qualified Super-Performance Stock Option
Dear Mr. Cuti:
Effective as of June 17, 1997 (the "Effective Date"), you are hereby
granted the Super-Performance Stock Option (the "Super-Performance Option")
described herein.
1. Definitions. For the purposes of this Option Agreement (the
"Agreement"), the following terms shall have the meanings set forth below.
Capitalized terms that are not otherwise defined below or in the body of this
Agreement shall have the meanings assigned to such terms in the Employment
Agreement between you and the Company dated October 27, 1997.
"Common Stock" shall mean the Company's Common Stock, par value $.01
per share, or, in the event that the outstanding Common Stock is hereafter
changed into or exchanged for different stock or securities of the Company,
such other stock or securities.
"Company" shall mean Duane Reade Holding Corporation, a Delaware
corporation, its successors and assigns.
"Employment Agreement" means the Employment Agreement, dated as of
November 24, 1997, by and among you, DLJ and the Company.
"Option Price", with respect to any exercise of the Super-Performance
Option pursuant to the terms of this Agreement, means the number of Option
Shares being acquired multiplied by the Exercise Price.
"Public Sale" means any sale to the public pursuant to an offering
registered under the Securities Act or to the public through a broker, dealer
or market maker pursuant to the provisions of Rule 144 adopted under the
Securities Act (or any similar provision then in force).
<PAGE>
2
"Securities Act" shall mean the Securities Act of 1933, as amended,
and any successor statute.
2. Terms of the Super-Performance Option. The Super-Performance Option
is for the purchase of 2,868,750 shares of Common Stock (the "Option Shares")
at a price per share of $1.00 (the "Exercise Price"). The Super-Performance
Option is not intended to be an "incentive stock option" within the meaning of
Section 422 of the Code.
3. Exercisability/Vesting. The Super-Performance Option granted
hereunder will vest and become exercisable in accordance with the terms and
conditions set forth in Sections 8(c) and 17(a)(vi) of the Employment Agreement.
4. Expiration of the Super-Performance Option. (a) General. Subject to
Section 4(b) below, the Super-Performance Option will remain exercisable until
the tenth anniversary of the Effective Date in accordance with the terms of
this Agreement.
(b) Termination of Employment. (i) If your employment is terminated by
the Company for Cause or by you without Good Reason, any unexercised portion
of the Super-Performance Option shall expire as of the opening of business on
the Termination Date.
(ii) If your employment with the Company is terminated for any reason,
other than the reasons set forth in Section 4(a) above, the Super-Performance
Option shall continue to vest according to the terms of this Agreement and
shall remain exercisable until the tenth anniversary of the Effective Date.
5. Procedure for Exercise. You may exercise all or any vested portion
of the Super-Performance Option at any time and from time to time prior to its
expiration, by delivering written notice to the Company (to the attention of
the Company's Secretary) and your written acknowledgment that you have read
and have been afforded an opportunity to ask questions of management of the
Company regarding all financial and other information provided to you
regarding the Company, together with payment of the Option Price. As a
condition to any exercise of the Super-Performance Option, you will permit the
Company to deliver to you all financial and other information regarding the
Company it believes necessary to enable you to make an informed investment
decision, and you will make all customary investment representations which the
Company requires.
6. Payment and Other Conditions. Prior to the issuance of any stock
certificates evidencing the shares of Common Stock in respect to which the
Super-Performance Option shall have been exercised, you shall have paid to the
Company the aggregate Option Price for all Option Shares for which the
Super-Performance Option is then exercised either (a) in cash (including check,
bank draft or money order) or, in the discretion of the Board, by
<PAGE>
3
delivery of a promissory note (if in accordance with policies approved by the
Board) or in shares of Common Stock already owned by you or any combination of
cash and shares of Common Stock or (b) through a "cashless exercise" whereby
the Company shall retain a number of Option Shares for which the
Super-Performance Option shall have been exercised the Fair Market Value of
which is equal to the Option Price and shall issue to you certificates
representing the remaining shares of Common Stock. In addition, the Company
shall withhold from such exercise the number of shares of Common Stock
necessary to equal the federal, state and local taxes, if any, required to be
withheld or paid by the Company as a result of such exercise.
7. Issuance of Stock Certificates; Pledge of Shares Acquired. Subject
to the terms of the Security Agreement (which is part of the Form of Note
included at Exhibit C of the Employment Agreement), upon receipt of payment and
satisfaction of the conditions pursuant to Section 6 above, the Company shall
issue to you a certificate or certificates for the number of Option Shares in
respect of which the Super-Performance Option shall have been exercised. Such
certificates shall contain one or more legends indicating any then applicable
transfer restrictions or limitations applicable to the shares. The Company will
bear all expenses in connection with the preparation, issuance and delivery of
the stock certificates.
8. Securities Laws Restrictions and Other Restrictions on Transfer of
Option Shares. You represent that when you exercise the Super-Performance
Option you will be purchasing Option Shares for your own account and not on
behalf of others. You understand and acknowledge that federal and state
securities laws govern and restrict your right to offer, sell or otherwise
dispose of any Option Shares unless your offer, sale or other disposition
thereof is registered under the Securities Act and state securities laws, or
in the opinion of the Company's counsel, such offer, sale or other disposition
is exempt from registration or qualification thereunder. You further understand
that the certificates for any Option Shares you purchase will bear such legends
as the Company deems necessary or desirable in connection with the Securities
Act or other rules, regulations or laws.
9. Non-Transferability of the Super-Performance Option. Except as
provided in the Form of Note and the accompanying documents attached to the
Employment Agreement as Exhibit C, the Super-Performance Option is personal to
you and is not transferable by you other than by will or the laws of descent
and distribution, provided that all such transferees shall be bound by this
Agreement. During your lifetime only, you (or your guardian or legal
representative) may exercise the Super-Performance Option. In the event of your
death, the Super-Performance Option may be exercised only (i) by the executor
or administrator of your estate or the person or persons to whom your rights
under the Super-Performance Option shall pass by will or the laws of descent
and distribution and (ii) to the extent that you were entitled hereunder at
the date of your death.
<PAGE>
4
8. Rights of Participants. Nothing in this Agreement shall interfere
with or limit in any way the right of the Company to terminate your employment
according to the terms of the Employment Agreement, nor confer upon you any
right to continue in the employ of the Company for any period of time or to
continue your present (or any other) rate of compensation.
9. Withholding of Taxes. The Company shall be entitled, if necessary
or desirable, to withhold from any amounts due and payable by the Company to
you (or secure payment from you in lieu of withholding) the amount of any
withholding or other tax due from the Company with respect to any Option Shares
issuable hereunder, and the Company may defer such issuance unless indemnified
by you to its satisfaction.
10. Adjustments. In the event of a reorganization, recapitalization,
stock dividend or stock split, or combination or other change in the shares of
Common Stock, you and the Board shall, in order to prevent the dilution or
enlargement of rights under the Super-Performance Option, agree to make such
adjustments in the number and type of shares covered by the Super-Performance
Option and the Exercise Price specified herein as may be determined to be
appropriate and equitable. In the event the Company issues any Common Stock or
any warrants, options or other rights to acquire Common Stock or any securities
convertible into Common Stock, you shall be entitled to purchase your pro rata
share of such securities at the same price and on the same terms as the Company
offers to other investors in order to maintain your then fully diluted
percentage ownership of Common Stock.
11. Certain Rights and Obligations Under the Employment Agreement. (a)
Tag-Along Right and Bring-Along Right. The Super-Performance Option is subject
to the Tag-Along Right described in Section 10 of the Employment Agreement and
the Bring-Along Right described in Section 11 of the Employment Agreement and
your rights and obligations with respect to such Tag-Along Right and
Bring-Along Right are governed by Section 10 and Section 11 of the Employment
Agreement, respectively.
(b) Call and Put Rights. The Super-Performance Option is subject to
the Call Right described in Section 12 of the Employment Agreement and the Put
Right described in Section 13 of the Employment Agreement and your rights and
obligations with respect to such Call Right and Put Right are governed by
Section 12 and Section 13 of the Employment Agreement, respectively.
12. Amendment. Except as otherwise provided herein, any provision of
this Agreement may be amended or waived only with the prior written consent of
you and the Company.
<PAGE>
5
13. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall constitute an original, but all of
which taken together shall constitute one and the same Agreement.
14. Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
15. Governing Law. The corporate law of the State of Delaware will
govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity and
interpretation of this Agreement and the exhibits hereto will be governed by
the internal law, and not the law of conflicts, of the State of New York.
* * * *
Your execution of this Agreement in the space below signifies your
understanding and acceptance of the terms included in this Agreement.
Very truly yours,
DUANE READE HOLDING CORPORATION
By: /s/ David L. Jaffe
---------------------------
Its:
The undersigned hereby acknowledges having read this Agreement and
hereby agrees to be bound by all provisions set forth herein.
Dated as of: ANTHONY CUTI
October 27,1997 /s/ Anthony Cuti
-------------------------------
<PAGE>
AGREEMENT
AGREEMENT (this "Agreement") is made as of February 22, 1993, by and
between Duane Reade Holding Corp., a Delaware corporation (the "Company"), and
Gary Charboneau ("Executive").
The Company and Executive desire to enter into an agreement pursuant to
which (i) Executive's salary and bonus will be established and (ii) Executive
will purchase, and the Company will sell, 2,777.775 shares of the Company's
Class P Common Stock, par value $.01 per share (the "Class P Common") and
25,000 shares of the Company's Common Stock, par value $.01 per share (the
"Common," and, together with the Class P Common, the "Common Stock"). All of
such shares of Common Stock and all shares of Common Stock hereafter acquired
by Executive are referred to herein as "Executive Stock". Certain capitalized
terms used herein are defined in Section 9 below.
The parties hereto agree as follows:
PROVISIONS RELATING TO SALARY, BONUS AND CERTAIN BENEFITS
1. Base Salary. During each year Executive is employed by Duane Reade, a
New York general partnership ("Duane Reade"), Executive shall serve as Duane
Reade's Senior Vice President Sales and Merchandising and shall have a base
salary of $220,000 per annum or such higher rate as the general partners may
designate from time to time (the "Base Salary"), which salary shall be payable
in regular installments in accordance with Duane Reade's general payroll
practices.
2. Bonus. For each complete fiscal year (each, a "Fiscal Year") for which
Executive is employed by Duane Reade, Executive shall be entitled to receive
a bonus (the "Bonus") within 90 days after the end of each such Fiscal Year
based upon Duane Reade's EBIT for each such Fiscal Year. For purposes of this
paragraph "EBIT" shall mean, consolidated earnings of the Company and its
Subsidiaries before interest, taxes and amortization and before extraordinary
gains and losses, calculated in accordance with generally accepted accounting
principles and determined from Holding's annual financial statements audited by
an independent "big six" accounting firm. For purposes of this paragraph 2,
"EBIT" shall mean, consolidated earnings of Holding and its Subsidiaries before
interest, taxes and amortization and before extraordinary gains and losses,
calculated through the month end closest to the termination date in accordance
with generally accepted accounting principles. For each Fiscal Year, the Bonus
shall be calculated as follows:
<PAGE>
(i) if EBIT is less than or equal to the EDIT Floor, the Bonus shall be
zero;
(ii) if EDIT is greater than the EBIT Floor but less than the EBIT
Target, the Bonus shall be equal to (x) the quotient of (I) the amount by
which EDIT exceeds the EDIT Floor, divided by (11) the amount by which the
EDIT Target exceeds the EBIT Floor, multiplied by (y) the amount (the
"Target Amount") equal to the product of (A) Executive's Base Salary for
such Fiscal Year less $20,000, multiplied by (B) 50%; and
(iii) if EDIT is equal to the EDIT Target, the Bonus shall be the Target
Amount.
(b) With respect to all Bonuses payable to Executive under paragraph 2(a)
above, up to twenty percent (20%) of the gross amount of any such Bonus may
be withheld from each such Bonus by Duane Reade to reduce the amount then
outstanding under the Executive Note (as defined below).
(c) For purposes of calculating the Bonus under paragraph 2(b) above,
"EDIT Floor," and "EDIT Target" shall mean the amounts set forth in the
following table:
<TABLE>
<CAPTION>
FISCAL YEAR EDIT FLOOR EDIT TARGET
- ------------- ------------- -------------
<S> <C> <C>
1993 $28,500,000 $29,200,000
1994 29,800,000 32,400,000
1995 32,100,000 37,100,000
1996 34,900,000 43,300,000
1997 38,000,000 50,300,000
</TABLE>
3. Other Benefits. In addition to the Base Salary and the Bonuses payable'
to Executive pursuant to paragraphs 1 and 2 above, for so long as Executive is
employed by the Company, Executive shall be entitled to the following
benefits:
(i) a bonus in the amount of $40,000, payable upon Executive's relocation
to the New York metropolitan area; Executive agrees that such amount is
sufficient to reimburse Executive for all moving and relocation expenses
to be incurred by Executive in connection with such relocation, including,
without limitation, all expenses incurred by Executive in connection with
the sale of his current home and the purchase of a new home (including
attorneys' fees and brokers' commissions);
(ii) reimbursement of housing expenses incurred by Executive through
September 30, 1993 if Executive pursues one of the following three
alternatives: (a) use of the Company's Manhattan apartment, (b) rental of
an alternative apartment in the New York metropolitan area acceptable to
the Company, or (c) use of Executive's Connecticut house after termination
of
2
<PAGE>
the current lease with respect to such house (the Company agreeing to pay
the costs of termination of such lease which are approved in writing by the
Company).
(iii) reimbursement of up to $40,000 for the current value of all stock
options and bonuses forfeited by Executive in connection with the
termination of Executive's employment with Melville Corp. ("Melville");
provided that Executive shall use reasonable efforts to cause Melville to
pay the full amount which Executive would have been entitled to receive
pursuant to such stock options and bonus programs had Executive remained in
the employ of Melville through the end of Melville's current fiscal year.
(iv) reimbursement of all reasonable expenses incurred by Executive which
are related to Duane Reade's business, including, without limitation,
charges incurred in connection with the use of a car phone.
4. No Employment Agreement. Nothing in this Agreement shall (i) interfere
with or limit in any way your right or the right of Duane Reade to terminate
your employment at any time, (ii) confer upon you any right to continue, or
confer upon Duane Reade any right to cause you to continue, in the employ of
Duane Reade for any period of time, or (iii) confer upon you any right to
receive any payment (including, without limitation, the Base Salary and the
Bonus) on or after the termination of your employment with Duane Reade, except
for payment of your Base Salary through the termination date.
PROVISIONS RELATING TO EXECUTIVE STOCK
1. Purchase and Sale of Executive Stock.
(a) As soon after the execution of this Agreement that Executive is able to
make the cash payment required under this Section 1(a) (but not later than 90
days after the date hereof), the Company will offer to sell to Executive, and
Executive will purchase from the Company, 2,777.775 shares of Class P Common
at a price of $162.00 per share and 25,000 shares of Common at a price of
$2.00 per share; provided that the obligations of the Company to offer and sell
the Class P Common and the Common to Executive, and the obligations of the
Executive to purchase the Class P Common and the Common from the Company,
pursuant to this Section 1(a) shall terminate in event Executive ceases to be
employed by the Company and its Subsidiaries prior to the time such
transactions are consummated. Upon the consummation of such transactions, the
Company will deliver to Executive a copy of, and a receipt for, the
certificate representing such Class P Common and such Common, and Executive
will deliver to the Company (i) cash in the amount of $250,000 and (ii) a
promissory note in the form of Exhibit A attached hereto in the aggregate
principal amount of $250,000 (the "Executive Note"). Executive's obligations
under the Executive
3
<PAGE>
Note will be secured by a pledge of all of the shares of Executive Stock to
the Company and in connection therewith Executive shall enter into a pledge
agreement in the form of Exhibit B attached hereto.
(b) Within 30 days after Executive purchases any Executive Stock from the
Company, Executive will make an effective election with the Internal Revenue
Service under Section 83(b) of the Internal Revenue Code and the regulations
promulgated thereunder in the form of Exhibit C attached hereto.
(c) In connection with the purchase and sale of the Executive Stock
hereunder, Executive represents and warrants to the Company that:
(i) The Executive Stock to be acquired by Executive pursuant to this
Agreement will be acquired for Executive's own account and not with a view
to, or intention of, distribution thereof in violation of the 1933 Act, or
any applicable state securities laws, and the Executive Stock will not be
disposed of in contravention of the 1933 Act or any applicable state
securities laws.
(ii) Executive is an executive officer of the Company, is sophisticated in
financial matters and is able to evaluate the risks and benefits of the
investment in the Executive Stock.
(iii) Executive is able to bear the economic risk of his investment in the
Executive Stock for an indefinite period of time because the Executive
Stock has not been registered under the 1933 Act and, therefore, cannot be
sold unless subsequently registered under the 1933 Act or an exemption
from such registration is available.
(iv) Executive has had an opportunity to ask questions and receive answers
concerning the terms and conditions of the offering of Executive Stock and
has had full access to such other information concerning the Company and
its Subsidiaries as he has requested.
(v) This Agreement constitutes the legal, valid and binding obligation of
Executive, enforceable in accordance with its terms, and the execution,
delivery and performance of this Agreement by Executive does not and will
not conflict with, violate or cause a breach of any agreement, contract or
instrument to which Executive is a party or any judgment, order or decree
to which Executive is subject.
(d) As an inducement to the Company to issue the Executive Stock to
Executive, as a condition thereto, Executive
4
<PAGE>
acknowledges and agrees that neither the issuance of the Executive Stock to
Executive nor any provision contained herein shall entitle Executive to remain
in the employment of the Company and its Subsidiaries or affect the right of
the Company to terminate Executive's employment at any time for any reason.
2. Repurchase Option.
(a) In the event Executive ceases to be employed by the Company and its
Subsidiaries, the Executive Stock (whether held by Executive or one or more of
Executive's transferees) will be subject to repurchase by the Company and the
Investors pursuant to the terms and conditions set forth in this paragraph 2
(the "Repurchase Option").
(b) If Executive's employment is terminated by the Company with Cause or as
a result of Executive's resignation, the purchase price for each share of
Executive Stock will be the lower of Executive's Original Cost of such share
and the Fair Market Value of such share. If Executive's employment is
terminated for any other reason, the purchase price for each share of Executive
Stock will be the Fair Market Value of such share.
(c) The Company's board of directors (the "Board") may elect to purchase all
or any portion of the Executive Stock by delivering written notice (the
"Repurchase Notice") to the holder or holders of the Executive Stock within
90 days after the date of Executive's termination. The Repurchase Notice will
set forth the number of shares of Executive Stock to be acquired from each
holder, the aggregate consideration to be paid for such shares and the time and
place for the closing of the transaction. The number of shares to be
repurchased by the Company shall first be satisfied to the extent possible from
the shares of Executive Stock held by Executive at the time of delivery of the
Repurchase Notice. If the number of shares of Executive Stock then held by
Executive is less than the total number of shares of Executive Stock the
Company has elected to purchase, the Company shall purchase the remaining
shares elected to be purchased from the other holder(s) of Executive Stock
under this Agreement, pro rata according to the number of shares of Executive
Stock held by such other holder(s) at the time of delivery of such Repurchase
Notice (determined as nearly as practicable to the nearest share). The number
of shares of Executive Stock to be repurchased hereunder will be allocated
among Executive and the other holders of Executive Stock (if any) pro rata
according to the number of shares of Executive Stock to be purchased from such
persons.
(d) If for any reason the Company does not elect to purchase all of the
Executive Stock pursuant to the Repurchase Option, the Investors shall be
entitled to exercise the Repurchase
5
<PAGE>
Option for the shares of Executive Stock the Company has not elected to
purchase (the "Available Shares"). As soon as practicable after the Company
has determined that there will be Available Shares, but in any event within
45 days after the date of Executive's termination, the Company shall give
written notice (the "Option Notice") to the Investors setting forth the number
of Available Shares and the purchase price for the Available Shares. The
Investors may elect to purchase any or all of the Available Shares by giving
written notice to the Company within 30 days after the Option Notice has been
given by the Company. If the Investors elect to purchase an aggregate number
of shares greater than the number of Available Shares, the Available Shares
shall be allocated among the Investors based upon the number of shares of
Common Stock owned by each Investor on a fully-diluted basis. As soon as
practicable, and in any event within ten days after the expiration of the
30-day period set forth above, the Company shall notify each holder of
Executive Stock as to the number of shares being purchased from such holder
by the Investors (the "Supplemental Repurchase Notice"). At the time the
Company delivers the Supplemental Repurchase Notice to the holder(s) of
Executive Stock, the Company shall also deliver written notice to each
Investor setting forth the number of shares such Investor is entitled to
purchase, the aggregate purchase price and the time and place of the closing
of the transaction.
(e) The closing of the purchase of the Executive Stock pursuant to the
Repurchase Option shall take place on the date designated by the Company in
the Repurchase Notice or Supplemental Repurchase Notice, which date shall not
be more than 60 days nor less than five days after the delivery of the later
of either such notice to be delivered. The Company and/or the Investors will
pay for the Executive Stock to be purchased pursuant to the Repurchase Option
by delivery of, in the case of each Investor, a check or wire transfer of funds
and, in the case of the Company, (i) a check or wire transfer of funds, (ii) a
subordinated note or notes payable in up to, three equal annual installments
beginning on the first anniversary of the closing of such purchase and bearing
interest (payable quarterly) at a rate per annum equal to the prime rate
announced from time to time by Bankers Trust Company or (iii) both (i) and
(ii), in the aggregate amount of the purchase price for such shares; provided
that if Executive Stock is being repurchased by the Company under this
paragraph 2 in connection with a termination of Executive's employment due to
Executive's death or disability or other incapacity (as determined by the
general partners in their good faith judgment), the Company shall, if
permitted under the loan agreements and indentures to which the Company or any
of its Subsidiaries are subject, make such repurchase with a check or wire
transfer of funds; provided further that in all other instances in which
Executive Stock is being repurchased by the Company under this paragraph 2,
the Company
6
<PAGE>
shall, if permitted under the loan agreements and indentures to which the
Company or any of its Subsidiaries are subject, use reasonable efforts to make
all such repurchases with a check or wire transfer of funds. If the payment of
any amounts due under any note issued by the Company pursuant to this
paragraph 2(e) is prohibited under any loan agreement or indenture to which the
Company or any of its Subsidiaries is subject, such amounts shall be paid at
the earliest time permitted; provided that all notes issued to management of
the Company and its Subsidiaries in connection with the repurchase of the
Company's stock held by such persons shall be repaid on a pro rata basis. In
addition, the Company may pay the purchase price for such shares by crediting
any bona fide debts owed by Executive to. the Company or any of its
Subsidiaries, including, without limitation Executive's obligations, if any,
under the Executive Note. The purchasers of Executive Stock hereunder will be
entitled to receive customary representations and warranties from the sellers
regarding such sale and to require all sellers' signatures be guaranteed.
(f) The right of the Company and the Investors to repurchase shares of
Executive Stock pursuant to this paragraph 2 shall terminate upon the first to
occur of (i) the Sale of the Company or (ii) the later of (A) the consummation
by the Company of a Public Offering and (B) February 22, 1998.
(g) Notwithstanding anything to the contrary contained in this Agreement,
all repurchases of Executive Stock by the Company shall be subject to
applicable restrictions contained in the Delaware General Corporation Law and
in the Company's and its Subsidiaries debt and equity financing agreements. If
any such restrictions prohibit the repurchase of Executive Stock hereunder
which the Company is otherwise entitled or required to make, the Company may
make such repurchases as soon as it is permitted to do so under such
restrictions.
3. Restrictions on Transfer.
(a) Transfer of Executive Stock. Executive shall not sell, transfer, assign,
pledge or otherwise dispose of (whether with or without consideration and
whether voluntarily or involuntarily or by operation of law) any interest in
any shares of Executive Stock (a "Transfer"), except (i) pursuant to the
provisions of paragraph 2 above or an agreement between Executive and the
Investors, dated as of February 22, 1993, (ii) pursuant to a Sale of the
Company, (iii) pursuant to applicable laws of descent and distribution or
(iv) among Executive's family group; provided that the restrictions contained
herein will continue to be applicable to the Executive Stock after any
transfer pursuant to items (iii) and (iv) above and the transferees of such
Executive Stock shall agree in writing to be bound by the provisions of this
7
<PAGE>
Agreement. Executive's "family group" means Executive's spouse and descendants
(whether natural or adopted) and any trust solely for the benefit of Executive
and/or Executive's spouse and/or descendants. The restrictions set forth in
this paragraph 3(a) shall terminate upon the first to occur of (i) the Sale of
the Company or (ii) the later of (A) the consummation by the Company of a
Public Offering and (B) February 22, 1998.
4. Additional Restrictions on Transfer.
(a) The certificates representing the Executive Stock will bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED
AS OF FEBRUARY 22, 1993, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED
BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET
FORTH IN AN EXECUTIVE STOCK AGREEMENT BETWEEN THE COMPANY AND GARY
CHARDONEAU DATED AS OF FEBRUARY 22, 1993. A COPY OF SUCH AGREEMENT MAY
BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF
BUSINESS WITHOUT CHARGE."
(b) No holder of Executive Stock may sell, transfer or dispose of any
Executive Stock (except pursuant to an effective registration statement under
the 1933 Act) without first delivering to the Company an opinion of counsel
(reasonably acceptable in form and substance to the Company) that neither
registration nor qualification under the 1933 Act and applicable state
securities laws is required in connection with such transfer.
(c) Each holder of Executive Stock agrees not to effect any public sale or
distribution of any Executive Stock or other equity securities of the Company,
or any securities convertible into or exchangeable or exercisable for any of
the Company's equity securities, during the seven days prior to and the 180
days after the effectiveness of any underwritten public offering, except as
part of such underwritten public offering or if otherwise permitted by the
Company.
8
<PAGE>
5. Sale of the Company.
(a) If the Board and the holders of a majority of the Company's Common
Stock approve a Sale of the Company (the "Approved Sale"), the holders of
Executive Stock will consent to and raise no objections against the Approved
Sale of the Company, and if the Approved Sale of the Company is structured as
a sale of stock, the holders of Executive Stock will agree to sell their
shares of Executive Stock on the terms and conditions approved by the Board
and the holders of a majority of the Company's Common Stock. The holders of
Executive Stock will take all necessary and desirable actions in connection
with the consummation of the Approved Sale of the Company.
(b) The obligations of the holders of Executive Stock with respect to the
Approved Sale of the Company are subject to the satisfaction of the following
conditions: (i) upon the consummation of the Approved Sale, all of the
holders of Common, on the one hand, and Class P Common, on the other hand1
will receive the same form and amount of consideration per share, or if any
holders of Common or Class P Common are given an option as to the form and
amount of consideration to be received, all holders of Common or Class P
Common, as the case may be, will be given the same option; and (ii) all
holders of then currently exercisable rights to acquire shares of Common or
Class P Common will be given an opportunity to either (A) exercise such
rights prior to the consummation of the Approved Sale and participate in such
sale as holders of Common or Class P Common or (B) upon the consummation of
the Approved Sale, receive in exchange for such rights consideration equal to
the amount determined by multiplying (1) the same amount of consideration per
share received by the holders of shares of such class of capital stock in
connection with the Approved Sale less the exercise price per share of such
rights to acquire such stock by (2) the number of shares of stock represented
by such rights.
(c) If the Company or the holders of the Company's securities enter into
any negotiation or transaction for which Rule 506 (or any similar rule then
in effect) promulgated by the Securities Exchange Commission may be available
with respect to such negotiation or transaction (including a merger,
consolidation or other reorganization), the holders of Executive Stock will,
at the request of the Company, appoint a purchaser representative (as such
term is defined in Rule 501) reasonably acceptable to the Company. If any
holder of Executive Stock appoints a purchaser representative designated by
the Company, the Company will pay the fees of such purchaser representative,
but if any holder of Executive Stock declines to appoint the purchaser
representative designated by the Company such holder will appoint another
purchaser representative (reasonably acceptable to the Company),
9
<PAGE>
and such holder will be responsible for the fees of the purchaser
representative so appointed.
(d) Executive and the other holders of Executive Stock (if any) will bear
their pro-rata share (based upon the number of shares sold) of the costs of
any sale of Executive Stock pursuant to an Approved Sale to the extent such
costs are incurred for the benefit of all holders of Common Stock and are
not' otherwise paid by the Company or the acquiring party. Costs incurred by
Executive and the other holders of Executive Stock on their own behalf will
not be considered costs of the transaction hereunder.
(e) The provisions of this paragraph 5 will terminate upon the completion
of a Qualified Public Offering.
6. Voting Agreement. So long as the Investors hold any shares of Common
Stock, each holder of Executive Stock will vote all of his shares of
Executive Stock (and, in the event such holder is entitled to vote any of the
Company's other securities for the election of directors, such holder will
vote all such securities) and take all other necessary actions (whether in
such holder's capacity as a stockholder, director or officer of the Company),
and the Company will take all necessary or desirable actions as are requested
by Tyler Capital Fund, L.P. ("Tyler"), in order to cause all representatives
designated by Tyler to be elected as members of the Company's Board. In
addition, each holder will not vote his shares of Executive Stock (or such
other securities) in connection with the removal of any of Tyler's designees
of as a director unless and until Tyler directs such holder how to vote on
such removal. The provisions of this paragraph 6 will terminate upon the
first to occur of a Qualified Public Offering and the tenth anniversary of
this Agreement.
7. Initial Public Offering. In the event that the Board and Tyler approves
a Public Offering, the holders of Executive Stock will take all necessary or
desirable actions in connection with the consummation of the Public Offering.
In the event that such Public Offering is an underwritten offering and the
managing underwriters advise the Company in writing that in their opinion the
Common Stock structure will adversely affect the marketability of the
offering, the holders of Executive Stock will vote for and consent to a
recapitalization, reorganization and/or exchange of the Common Stock into
securities the managing underwriters, the Board and Tyler find acceptable and
will take all necessary or desirable actions in connection with the
consummation of such recapitalization, reorganization, exchange or other
transaction; provided that the resulting securities provide each holder of
Executive Stock with the same relative economic interest as such holder had
prior to such recapitalization, reorganization and/or exchange and is
consistent with the rights and preferences
10
<PAGE>
set forth in the Company's Certificate of Incorporation as in effect
immediately prior to such Public Offering.
8. Preemptive Rights.
(a) Except for (i) the issuance of Common Stock pursuant to a Public
Offering, (ii) the issuance of Common Stock or any securities containing
options or rights to acquire shares of Common Stock (the "Option Shares") to
the Company's or its Subsidiaries' management, (iii) the issuance of Common
Stock in connection with the acquisition (by merger, consolidation, purchase,
reorganization or otherwise) of a company, assets or a business or (iv) the
issuance of Common Stock as a dividend on the outstanding Common Stock, if
the Company authorizes the issuance or sale of any shares of any class of
Common Stock or any securities containing options or rights to acquire any
shares of Common Stock to any of the Investors or any Affiliate of any of the
Investors or any other holder of at least 5% of the outstanding Common Stock
on a fully diluted basis (calculated prior to such issuance), the Company
shall first offer to sell to Executive a portion of such stock or securities
equal to the quotient determined by dividing (1) the number of shares of such
class of Common Stock held by Executive by (2) the sum of the total number of
shares of such class of Common Stock then outstanding plus the number of
Option Shares of such class of Common Stock in respect of any options or
rights referred to in 8(a) (ii) above. Executive shall be entitled to
purchase the same class of such stock or securities at the same price and on
the same terms as such stock or securities are to be offered to any other
Persons. For purposes of this paragraph 8, the Class P Common and the
Company's Class P Non-Voting Common Stock, par value $.01 per share, shall be
deemed to be in the same class and the Common and Company's Non-Voting Common
Stock, par value $.01 per share, shall be deemed to be in the same class.
(b) In order to exercise the purchase rights hereunder, Executive must
within 20 days after receipt of written notice from the Company describing in
reasonable detail the stock or securities being offered, the purchase price
thereof, the payment terms and Executive's percentage allotment delivery a
written notice to the Company describing its election hereunder.
(c) Upon the expiration of the 20-day period described above, the Company
shall be entitled to sell such stock or securities which Executive has not
elected to purchase during the 90 days following such expiration on terms and
conditions no more favorable to the purchasers thereof than those offered to
Executive. Any stock or securities offered or sold by the Company after such
90-day period must be reoffered to Executive pursuant to the terms of this
paragraph 8.
11
<PAGE>
9. Definitions.
"Affiliate" means any Person directly or indirectly, controlling or
controlled by or under direct or indirect common control with such specified
Person.
"Cause" shall mean (i) the conviction of a felony or the commission of any
other act involving willful malfeasance in connection with Executive's
employment having an adverse effect on Duane Reade or any of its
Subsidiaries, (ii) substantial refusal by Executive to perform the duties
required by Duane Reade's Chief Executive Officer, or (iii) gross negligence
or willful misconduct by Executive with respect to Duane Reade or any of its
Subsidiaries having the effect of materially injuring the reputation of Duane
Reade or any of its Subsidiaries or materially injuring any customer,
supplier, employee or other business relationships of Duane Reade or any of
its Subsidiaries.
"Executive Stock" will continue to be Executive Stock in the hands of any
holder other than Executive (except for the Company and the Investors and
except for transferees in a Public Sale), and except as otherwise provided
herein, each such other holder of Executive Stock will succeed to all rights
and obligations attributable to Executive as a holder of Executive Stock
hereunder. Executive Stock will also include shares of the Company's capital
stock issued with respect to Executive Stock by way of a stock split, stock
dividend or other recapitalization. Notwithstanding the foregoing, all shares
of Executive Stock shall remain Executive Stock after any transfer thereof.
"Fair Market Value" of each share of Executive Stock means the average of
the closing prices of the sales of the Company's common stock on all
securities exchanges on which the Common may at the time be listed, or, if
there have been no sales on any such exchange on any day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if on any day the Company's common stock is not so listed, the
average of the representative bid and asked prices quoted in the NASDAQ
System as of 4:00 P.M., New York time, or, if on any day the Company's common
stock is not quoted in the NASDAQ System, the average of the highest bid and
lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day as of which the Fair Market Value is being determined
and the 20 consecutive business days prior to such day. If at any time the
Company's common stock is not listed on any securities exchange or quoted in
the NASDAQ System or the overthe-counter market, the Fair Market Value of
each share of Executive Stock will be the fair value of the applicable class
of
12
<PAGE>
Common Stock mutually agreed upon the Executive and the Board. If Executive
and the Board are unable to agree upon the fair value, then Executive and the
Board will split the cost of a mutually acceptable business appraiser whose
determination of such value as of such date will be binding.
"Independent Third Party" means any person who, immediately prior to the
contemplated transaction, does not own in excess of 5% of the Company's
Common Stock on a fully-diluted basis, who is not controlling, controlled by
or under common control with any such 5% owner of the Company's Common Stock
and who is not the spouse or descendent (by birth or adoption) of any such 5%
owner of the Company's Common Stock.
"Investors" means Tyler, Tyler Massachusetts, L.P., Tyler International,
L.P. - II, DCIP Associates, and BCIP Trust Associates, L.P.
"1933 Act" means the Securities Act of 1933, as amended from time to time.
"Original Cost" means $2.00 with respect to each share of Common purchased
hereunder and $162.00 with respect to each share of Class P Common purchased
hereunder (in each case as proportionately adjusted for all subsequent stock
splits, stock dividends and other recapitalizations).
"Person" means an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
"Public Offering" means a public offering of the Company's common stock
registered under the 1933 Act.
"Public Sale" means any sale pursuant to Public Offering or any sale to
the public pursuant to Rule 144 promulgated under the 1933 Act effected
through a broker, dealer or market maker.
"Oualified Public Offering" means the sale, in an underwritten public
offering registered under the 1933 Act, of shares of the Company's Common
Stock having an aggregate offering value of at least $25 million and a per
share price of at least twenty-five (25) times the Original Cost of the
Common.
"Sale of the Company" means the sale of the Company to an Independent
Third Party or affiliated group of Independent Third Parties pursuant to
which such party or parties acquire (i) capital stock of the Company
possessing the voting power to elect a majority of the Company's board of
directors (whether by merger, consolidation or sale or transfer of the
Company's capital stock)
13
<PAGE>
or (ii) all or substantially all of the Company's assets determined on a
consolidated basis.
"Subsidiaries" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a
corporation, a majority of the total voting power of shares of 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 that Person or one or more of the
other Subsidiaries of that Person or a combination thereof, or (ii) if a
partnership, association or other business entity, a majority of the
partnership or other similar ownership interest thereof is at the time owned
or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
partnership, association or other business entity if such Person or Persons
shall be allocated a majority of partnership, association or other business
entity gains or losses or shall be or control the managing director or
general partner of such partnership, association or other business entity.
10. Notices. Any notice provided for in this Agreement must be in writing'
and must be either personally delivered, mailed by first class mail (postage
prepaid and return receipt requested) or sent by reputable overnight courier
service (charges prepaid) to the recipient at the address below indicated:
To the Company:
Duane Reade Holding Corp.
49-29 30th Place
Long Island City, New York
Attention: Bruce Weitz
With a copy to:
Kirkland & Ellis
200 East Randolph
Chicago, Illinois 60601
Attention: Karl E. Lutz, P.C.
Jeffrey C. Hammes
To Executive:
Gary Charnobeau
-------------------
-------------------
To the Investors:
14
<PAGE>
Bain Capital
Two Copley Place
Boston, Massachusetts 02116
Attention: Adam Kirsch
With a copy to:
Kirkland & Ellis
200 East Randolph
Chicago, Illinois 60601
Attention: Karl E. Lutz, P.C.
Jeffrey C. Hammes
or such other address or to the attention of such other person as the
recipient party shall have specified by prior written notice to the sending
party. Any notice under this Agreement will be deemed to have been given when
so delivered or sent or, if mailed, five days after deposit in the U.S. mail.
11. General Provisions.
(a) Transfers in Violation of Agreement. Any Transfer or attempted
Transfer of any Executive Stock in violation of any provision of this
Agreement shall be void, and the Company shall not record such Transfer on
its books or treat any purported transferee of such Executive Stock as the
owner of such stock for any purpose.
(b) Severability. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, those documents expressly referred
to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any
way.
(d) Counterparts. This Agreement may be executed in separate counterparts,
each of which is deemed to be an original
15
<PAGE>
and all of which taken together constitute one and the same agreement.
(e) Successors and Assians. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by
Executive, the Company, the Investors and their respective successors and
assigns (including subsequent holders of Executive Stock); provided that the
rights and -obligations of Executive under this Agreement shall not be
assignable except in connection with a permitted transfer of Executive Stock
hereunder.
(f) Choice of Law. The corporate law of the State of Delaware will govern
all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity and
interpretation of this Agreement and the exhibits hereto will be governed by
the internal law, and not the law of conflicts, of the State of New York.
(g) Remedies. Each of the parties to this Agreement (including the
Investors) will be entitled to enforce its rights under this Agreement
specifically, to recover damages and costs (including reasonable attorney's
fees) caused by any breach of any provision of this Agreement and to exercise
all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach
of the provisions of this Agreement and that any party may in its sole
discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(h) Amendment and Waiver. The provisions of this Agreement may be amended
and waived only with the prior written consent of the Company, Executive and
the holders of a majority of the Common Stock (on a fully-diluted basis) then
held by all Investors.
(i) Absence of Conflicting Agreements. Executive hereby warrants and
covenants that his employment by the Company and his ownership of the
Executive Stock does not result in a breach of the terms, conditions or
provisions of any agreement to which Executive is subject.
(j) Business Days. If any time period for giving notice or taking action
hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's chief executive office is located, the time
period shall be automatically
16
<PAGE>
extended to the business day immediately following such Saturday, Sunday or
holiday.
* * * * *
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
DUANE READE HOLDING CORP.
/s/ Bruce Weitz
-------------------------
By: Bruce Weitz
Its: President and Chief
Executive Officer
/s/ Gary Charboneau
-------------------------
Gary Charboneau
18
<PAGE>
AMENDMENT NO. 1 TO AGREEMENT
THIS AMENDMENT is made as of June 28, 1993, by and between Duane Reade
Holding Corp., a Delaware corporation (the "Company"), and Gary Charboneau
("Executive").
WHEREAS, the Company and Executive are parties to an Agreement, dated
February 22, 1993 (the "Agreement"); and
WHEREAS, the Company and Executive desire to amend the Agreement as set
forth herein;
NOW, THEREFORE, the Parties agree as follows:
1. Amendments.
(a) Section 2 of the Agreement shall be amended to add clause (iv) as
follows:
"(iv) if EDIT is greater than the EDIT Target, the Bonus shall be the
Target Amount [] an amount equal to (x) the quotient of (I) the amount by
which EDIT exceeds the EDIT Target, divided by (Il) the amount by which
the EDIT Ceiling exceeds the EDIT Target, multiplied by (y) the Target
Amount."
(b) Section 2(c) shall be amended (i) to add "EDIT Ceiling" between the
words "EDIT Floor," and "and", and (ii) to add the following column:
"EDIT CEILING
------------
$34,100,000
40,900,000
49,100,000
58,900,000
70,700,000"
2. Counterparts. This Amendment may be executed in separate counterparts
each of which shall be an original and all of which taken together shall
constitute one and the same agreement.
<PAGE>
3. Governing Law. All questions concerning construction solidity and
interpretation of this Amendment shall be governed by and construed in
accordance with the internal law, and not the laws of conflicts, of Delaware.
* * * * * * * * * *
DUANE READE HOLDING CORP.
/s/ Bruce Weitz
----------------------------
By: Bruce Weitz
Its: Chief Executive Officer
EXECUTIVE
/s/ Gary Charboneau
----------------------------
Gary Charboneau
2
<PAGE>
AGREEMENT
AGREEMENT (this "Agreement") is made as of April 10, 1995, by and
between Duane Reade Holding Corp., a Delaware corporation (the "Company"), and
Jerry M. Ray ("Executive")
The Company and Executive desire to enter into an agreement pursuant
to which (i) Executive's salary and bonus will be established and (ii)
Executive will purchase, and the Company will sell, 555.556 shares of the
Company's Class P Common Stock, par value $.01 per share (the "Class P Common")
and 5,000 shares of the Company's Common Stock, par value $.01 per share (the
"Common" and together with the Class P Common, the "Common Stock") . All of
such shares of Common Stock and all shares of Common Stock hereafter acquired
by Executive are referred to herein as "Executive Stock." Certain capitalized
terms used herein are defined in Section 9 below.
The parties hereto agree as follows:
PROVISIONS RELATING TO SALARY AND BONUS
1. Base Salary. During each year Executive is employed by Duane Reade,
a New York general partnership ("Duane Reade"), Executive shall serve as Duane
Reade's Vice President - Pharmacy Services and shall have a base salary of
$150,000 per annum or such higher rate as the Board of Directors of the Company
(the "Board") may designate from time to time (the "Base Salary"), which salary
shall be payable in regular installments in accordance with Duane Reade's
general payroll practices.
2. Bonus. (a) For each complete fiscal year (each, a "Fiscal Year")
for which Executive is employed by Duane Reade, Executive shall be entitled to
receive a bonus (the "Bonus") within 90 days after the end of each such Fiscal
Year based upon Duane Reade's EBIT for each such Fiscal Year; provided,
however, Executive shall be entitled to a pro rata portion of the Bonus for
Fiscal Year 1995 based on the number of days between the date hereof and the
end of Fiscal Year 1995. For purposes of this paragraph "EBIT" shall mean,
consolidated earnings of the Company and its Subsidiaries before interest,
taxes and amortization and before extraordinary gains and losses, calculated in
accordance with generally accepted accounting principles and determined from
the Company's annual financial statements audited by an independent "big six"
accounting firm. For each Fiscal Year, the Bonus shall be calculated as
follows:
(i) if EBIT is less than or equal to the EBIT Floor, the Bonus shall
be zero;
<PAGE>
(ii) if EBIT is greater than the EBIT Floor but less than the EBIT
Target, the Bonus shall be equal to (x) the quotient of (I) the amount by
which EBIT exceeds the EBIT Floor, divided by (II) the amount by which the
EBIT Target exceeds the EBIT Floor, multiplied by (y) 35% of Executive's
Base Salary (the "Target Amount") for such Fiscal Year;
(iii) if EBIT is equal to the EBIT Target, the Bonus shall be the
Target Amount; and
(iv) if EBIT is greater than the EBIT Target, the Bonus shall be the
Target Amount plus an amount equal to (x) the quotient of (I) the amount by
which EBIT exceeds the EBIT Target, divided by (II) the amount by which the
EBIT Ceiling exceeds the EBIT Target, multiplied by (y) the Target Amount.
(b) With respect to all Bonuses payable to Executive under paragraph
2(a) above, up to one hundred percent (100%) of such Bonus net of taxes
attributable to such Bonus (the "Net Bonus"), may be withheld from each such
Bonus by Duane Reade to reduce the amount then outstanding under the Executive
Note (as defined below), provided that the amount so withheld in any year shall
not exceed thirty-three percent (33%) of the aggregate principal amount of the
Executive Note (the "Yearly Withholding Cap") . In addition, if (i) the Net
Bonus for any given year exceeds the Yearly Withholding Cap, and (ii) the
Underwithheld Amount (as defined below) at such time is greater than zero, then
up to one hundred percent (100%) of the amount by which the Net Bonus for such
year exceeds the Yearly Withholding Cap may be withheld by Duane Reade to
reduce the Underwithheld Amount.
(c) For purposes of calculating the Bonus under paragraph 2(a) above,
"EBIT Floor," "EBIT Ceiling" and "EBIT Target" shall mean the amounts set forth
in the following table:
FISCAL YEAR EBIT FLOOR EBIT TARGET EBIT CEILING
----------- ---------- ----------- ------------
1995 32,100,000 37,100,000 49,100,000
1996 34,900,000 43,300,000 58,900,000
1997 38,000,000 50,300,000 70,700,000
3. No Employment Agreement. Nothing in this Agreement shall (i)
interfere with or limit in any way Executive's right or the right of Duane
Reade to terminate Executive's employment at any time, (ii) confer upon
Executive any right to continue, or confer upon Duane Reade any right to cause
Executive to continue, in the employ of Duane Reade for any period of time, or
(iii) confer upon Executive any right to receive any payment (including,
without limitation, the Base Salary and the Bonus) on or after the
- 2 -
<PAGE>
termination of Executive's employment with Duane Reade, except for payment of
Executive's Base Salary through the termination date.
PROVISIONS RELATING TO EXECUTIVE STOCK
1. Purchase and Sale of Executive Stock.
(a) Upon execution of this Agreement, Executive will purchase, and the
Company will sell, 555.556 shares of Class P Common at a price of $162.00 per
share and 5,000 shares of Common at a price of $2.00 per share. The Company
will deliver to Executive copies of, and a receipt for, the certificates
representing such Class P Common and such Common, and Executive will deliver to
the Company a total of $100,000 in payment for the shares, consisting of (i)
$25,000 in cash and (ii) a promissory note in the form of Exhibit A attached
hereto in the aggregate principal amount of $75,000 (the "Executive Note").
Executive's obligations under the Executive Note will be secured by a pledge of
all of the shares of Executive Stock to the Company and in connection therewith
Executive shall enter into a pledge agreement in the form of Exhibit B attached
hereto.
(b) Within 30 days after Executive purchases any Executive Stock from
the Company, Executive will make an effective election with the Internal
Revenue Service under Section 83(b) of the Internal Revenue Code and the
regulations promulgated thereunder in the form of Exhibit C attached hereto.
(c) In connection with the purchase and sale of the Executive Stock
hereunder, Executive represents and warrants to the Company that:
(i) The Executive Stock to be acquired by Executive pursuant to this
Agreement will be acquired for Executive's own account and not with a view
to, or intention of, distribution thereof in violation of the 1933 Act, or
any applicable state securities laws, and the Executive Stock will not be
disposed of in contravention of the 1933 Act or any applicable state
securities laws.
(ii) Executive is sophisticated in financial matters and is able to
evaluate the risks and benefits of the investment in the Executive Stock.
(iii) Executive is able to bear the economic risk of investment in the
Executive Stock for an indefinite period of time because the Executive
Stock has not been registered under the 1933 Act and, therefore, cannot be
sold unless subsequently registered under the 1933 Act or an exemption
- 3 -
<PAGE>
from such registration is available.
(iv) Executive has had an opportunity to ask questions and receive
answers concerning the terms and conditions of the offering of Executive
Stock and has had full access to such other information concerning the
Company and its Subsidiaries as he has requested.
(v) This Agreement constitutes the legal, valid and binding obligation
of Executive, enforceable in accordance with its terms, and the execution,
delivery and performance of this Agreement by Executive does not and will
not conflict with, violate or cause a breach of any agreement, contract or
instrument to which Executive is a party or any judgment, order or decree
to which Executive is subject.
(d) As an inducement to the Company to issue the Executive Stock to
Executive, as a condition thereto, Executive acknowledges and agrees that
neither the issuance of the Executive Stock to Executive nor any provision
contained herein shall entitle Executive to remain in the employment of the
Company and its Subsidiaries or affect the right of the Company to terminate
Executive's employment at any time for any reason.
2. Repurchase Option.
(a) In the event Executive ceases to be employed by the Company and
its Subsidiaries, the Executive Stock (whether held by Executive or one or more
of Executive's transferees) will be subject to repurchase by the Company and
the Investors pursuant to the terms and conditions set forth in this paragraph
2 (the "Repurchase Option")
(b) If Executive's employment is terminated by the Company with Cause
or as a result of Executive's resignation, the purchase price for each share of
Executive Stock will be the lower of Executive's Original Cost of such share
and the Fair Market Value of such share. If Executive's employment is
terminated for any other reason, the purchase price for each share of Executive
Stock will be the Fair Market Value of such share.
(c) The Company may elect to purchase all or any portion of the
Executive Stock by delivering written notice (the "Repurchase Notice") to the
holder or holders of the Executive Stock within 90 days after the date of
Executive's termination. The Repurchase Notice will set forth the number of
shares of Executive Stock to be acquired from each holder, the aggregate
consideration to be paid for such shares and the time and place for the closing
of the transaction. The number of shares to be repur-
- 4 -
<PAGE>
chased by the Company shall first be satisfied to the extent possible from the
shares of Executive Stock held by Executive at the time of delivery of the
Repurchase Notice. If the number of shares of Executive Stock then held by
Executive is less than the total number of shares of Executive Stock the
Company has elected to purchase, the Company shall purchase the remaining
shares elected to be purchased from the other holder(s) of Executive Stock
under this Agreement, pro rata according to the number of shares of Executive
Stock held by such other holder(s) at the time of delivery of such Repurchase
Notice (determined as nearly as practicable to the nearest share). The number
of shares of Executive Stock to be repurchased hereunder will be allocated
among Executive and the other holders of Executive Stock (if any) pro rata
according to the number of shares of Executive Stock to be purchased from such
persons.
(d) If for any reason the Company does not elect to purchase all of
the Executive Stock pursuant to the Repurchase Option, the Investors shall be
entitled to exercise the Repurchase Option for the shares of Executive Stock
the Company has not elected to purchase (the "Available Shares"). As soon as
practicable after the Company has determined that there will be Available
Shares, but in any event within 45 days after the date of Executive's
termination, the Company shall give written notice (the "Option Notice") to the
Investors setting forth the number of Available Shares and the purchase price
for the Available Shares. The Investors may elect to purchase any or all of the
Available Shares by giving written notice to the Company within 30 days after
the Option Notice has been given by the Company. If the Investors elect to
purchase an aggregate number of shares greater than the number of Available
Shares, the Available Shares shall be allocated among the Investors based upon
the number of shares of Common Stock owned by each Investor on a fully diluted
basis. As soon as practicable, and in any event within ten days after the
expiration of the 30-day period set forth above, the Company shall notify each
holder of Executive Stock as to the number of shares being purchased from such
holder by the Investors (the "Supplemental Repurchase Notice"). At the time
the Company delivers the Supplemental Repurchase Notice to the holder(s) of
Executive Stock, the Company shall also deliver written notice to each Investor
setting forth the number of shares such Investor is entitled to purchase, the
aggregate purchase price and the time and place of the closing of the
transaction.
(e) The closing of the purchase of the Executive Stock pursuant to the
Repurchase Option shall take place on the date designated by the Company in the
Repurchase Notice or Supplemental Repurchase Notice, which date shall not be
more than 60 days nor less than five days after the delivery of the later of
either such
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<PAGE>
notice to be delivered. The Company and/or the Investors will pay for the
Executive Stock to be purchased pursuant to the Repurchase Option by delivery
of, in the case of each Investor, a check or wire transfer of funds and, in the
case of the Company, (i) a check or wire transfer of funds, (ii) a subordinated
note or notes payable in up to, three equal annual installments beginning on
the first anniversary of the closing of such purchase and bearing interest
(payable quarterly) at a rate per annum equal to the prime rate announced from
time to time by Bankers Trust Company or (iii) both (i) and (ii), in the
aggregate amount of the purchase price for such shares; provided that if
Executive Stock is being repurchased by the Company under this paragraph 2 in
connection with a termination of Executive's employment due to Executive's
death or disability or other incapacity (as determined by the Board in good
faith), the Company shall, if permitted under the loan agreements and
indentures to which the Company or any of its Subsidiaries are subject, make
such repurchase with a check or wire transfer of funds; provided further that
in all other instances in which Executive Stock is being repurchased by the
Company under this paragraph 2, the Company shall, if permitted under the loan
agreements and indentures to which the Company or any of its Subsidiaries are
subject, use reasonable efforts to make such repurchases with a check or wire
transfer of funds. If the payment of any amounts due under any note issued by
the Company pursuant to this paragraph 2(e) is prohibited under any loan
agreement or indenture to which the Company or any of its Subsidiaries is
subject, such amounts shall be paid at the earliest time permitted; provided
that all notes issued to management of the Company and its Subsidiaries in
connection with the repurchase of the Company's stock held by such persons
shall be repaid on a pro rata basis. In addition, the Company may pay the
purchase price for such shares by crediting any bona fide debts owed by
Executive to the Company or any of its Subsidiaries, including, without
limitation, Executive's obligations, if any, under the Executive Note. The
purchasers of Executive Stock hereunder will be entitled to receive customary
representations and warranties from the sellers regarding such sale and to
require that all sellers' signatures be guaranteed.
(f) The right of the Company and the Investors to repurchase shares of
Executive Stock pursuant to this paragraph 2 shall terminate upon the first to
occur of (i) the Sale of the Company or (ii) the later of (A) the consummation
by the Company of a Public Offering and (B) the fifth anniversary of the date
hereof.
(g) Notwithstanding anything to the contrary contained in this
Agreement, all repurchases of Executive Stock by the Company shall be subject
to applicable restrictions contained in the Delaware General Corporation Law
and in the Company's and its Subsidiaries debt and equity financing agreements.
If any such
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<PAGE>
restrictions prohibit the repurchase of Executive Stock hereunder which the
Company is otherwise entitled or required to make, the Company may make such
repurchases as soon as it is permitted to do so under such restrictions.
3. Restrictions on Transfer.
(a) Transfer of Executive Stock. Executive shall not sell, transfer,
assign, pledge or otherwise dispose of (whether with or without consideration
and whether voluntarily or involuntarily or by operation of law) any interest
in any shares of Executive Stock (a "Transfer"), except (i) pursuant to the
provisions of paragraph 2 above or an agreement between Executive and the
Investors, dated as of the date hereof, (ii) pursuant to a Sale of the Company,
(iii) pursuant to applicable laws of descent and distribution or (iv) among
Executive's family group; provided that the restrictions contained herein will
continue to be applicable to the Executive Stock after any transfer pursuant to
items (iii) and (iv) above and the transferees of such Executive Stock shall
agree in writing to be bound by the provisions of this Agreement. Executive's
"family group" means Executive's spouse and descendants (whether natural or
adopted) and any trust solely for the benefit of Executive and/or Executive's
spouse and/or descendants. The restrictions set forth in this paragraph 3(a)
shall terminate upon the first to occur of (i) the Sale of the Company or (ii)
the later of (A) the consummation by the Company of a Public Offering and (B)
the fifth anniversary of the date hereof.
4. Additional Restrictions on Transfer.
(a) The certificates representing the Executive Stock will bear the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED
AS OF MARCH __, 1995 HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN
EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY
THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET
FORTH IN AN EXECUTIVE STOCK AGREEMENT BETWEEN THE COMPANY AND THE
INITIAL HOLDER HEREOF DATED AS OF MARCH __, 1995. A COPY OF SUCH
AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE
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COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
(b) No holder of Executive Stock may sell, transfer or dispose of any
Executive Stock (except pursuant to an effective registration statement under
the 1933 Act) without first delivering to the Company an opinion of counsel
(reasonably acceptable in form and substance to the Company) that neither
registration nor qualification under the 1933 Act and applicable state
securities laws is required in connection with such transfer.
(c) Each holder of Executive Stock agrees not to effect any public
sale or distribution of any Executive Stock or other equity securities of the
Company, or any securities convertible into or exchangeable or exercisable for
any of the Company's equity securities, during the seven days prior to and the
180 days after the effectiveness of any underwritten public offering, except as
part of such underwritten public offering or if otherwise permitted by the
Company.
5. Sale of the Comnany.
(a) If the Board and the holders of a majority of the Company's Common
Stock approve a Sale of the Company (the "Approved Sale"), the holders of
Executive Stock will consent to and raise no objections against the Approved
Sale of the Company, and if the Approved Sale of the Company is structured as a
sale of stock, the holders of Executive Stock will agree to sell their shares
of Executive Stock on the terms and conditions approved by the Board and
the holders of a majority of the Company's Common Stock. The holders of
Executive Stock will take all necessary and desirable actions in connection
with the consummation of the Approved Sale of the Company.
(b) The obligations of the holders of Executive Stock with respect to
the Approved Sale of the Company are subject to the satisfaction of the
following conditions: (i) upon the consummation of the Approved Sale, all of
the holders of Common, on the one hand, and Class P Common, on the other hand,
will receive the same form and amount of consideration per share, or if any
holders of Common or Class P Common are given an option as to the form and
amount of consideration to be received, all holders of Common or Class P
Common, as the case may be, will be given the same option; and (ii) all holders
of then currently exercisable rights to acquire shares of Common or Class P
Common will be given an opportunity to either (A) exercise such rights prior to
the consummation of the Approved Sale and participate in such sale as holders
of Common or Class P Common or (B) upon the consummation of the Approved Sale,
receive in exchange for such rights consideration
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<PAGE>
equal to the amount determined by multiplying (1) the same amount of
consideration per share received by the holders of shares of such class of
capital stock in connection with the Approved Sale less the exercise price per
share of such rights to acquire such stock by (2) the number of shares of stock
represented by such rights.
(c) If the Company or the holders of the Company's securities enter
into any negotiation or transaction for which Rule 506 (or any similar rule
then in effect) promulgated by the Securities Exchange Commission may be
available with respect to such negotiation or transaction (including a merger,
consolidation or other reorganization), the holders of Executive Stock will, at
the request of the Company, appoint a purchaser representative (as such term is
defined in Rule 501) reasonably acceptable to the Company. If any holder of
Executive Stock appoints a purchaser representative designated by the Company,
the Company will pay the fees of such purchaser representative, but if any
holder of Executive Stock declines to appoint the purchaser representative
designated by the Company such holder will appoint another purchaser
representative (reasonably acceptable to the Company), and such holder will be
responsible for the fees of the purchaser representative so appointed.
(d) Executive and the other holders of Executive Stock (if any) will
bear their pro-rata share (based upon the number of shares sold) of the costs
of any sale of Executive Stock pursuant to an Approved Sale to the extent such
costs are incurred for the benefit of all holders of Common Stock and are not
otherwise paid by the Company or the acquiring party. Costs incurred by
Executive and the other holders of Executive Stock on their own behalf will not
be considered costs of the transaction hereunder.
(e) The provisions of this paragraph 5 will terminate upon the
completion of a Qualified Public Offering.
6. Voting Agreement. So long as the Investors hold any shares of
Common Stock, each holder of Executive Stock will vote all of his shares of
Executive Stock (and, in the event such holder is entitled to vote any of the
Company's other securities for the election of directors, such holder will vote
all such securities) and take all other necessary actions (whether in such
holder's capacity as a stockholder, director or officer of the Company), and
the Company will take all necessary or desirable actions as are requested by
Tyler Capital Fund, L.P. ("Tyler"), in order to cause all representatives
designated by Tyler to be elected as members of the Company's Board. In
addition, no holder will vote his or her shares of Executive Stock (or such
other securities) in connection with the removal of any of Tyler's designees as
a director unless
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and until Tyler directs such holder how to vote on such removal. The provisions
of this paragraph 6 will terminate upon the first to occur of a Qualified
Public Offering and the tenth anniversary of the date hereof.
7. Initial Public Offering. In the event that the Board and Tyler
approves a Public Offering, the holders of Executive Stock will take all
necessary or desirable actions in connection with the consummation of the
Public Offering. In the event that such Public Offering is an underwritten
offering and the managing underwriters advise the Company in writing that in
their opinion the Common Stock structure will adversely affect the
marketability of the offering, the holders of Executive Stock will vote for and
consent to a recapitalization, reorganization and/or exchange of the Common
Stock into securities the managing underwriters, the Board and Tyler find
acceptable and will take all necessary or desirable actions in connection with
the consummation of such recapitalization, reorganization, exchange or other
transaction; provided that the resulting securities provide each holder of
Executive Stock with the same relative economic interest as such holder had
prior to such recapitalization, reorganization and/or exchange and is
consistent with the rights and preferences set forth in the Company's
Certificate of Incorporation as in effect immediately prior to such
recapitalization, reorganization, exchange or other transaction.
8. Preemptive Rights.
(a) Except for (i) the issuance of Common Stock pursuant to a Public
Offering, (ii) the issuance of Common Stock or any securities containing
options or rights to acquire shares of Common Stock (the "Option Shares") to
the Company's or its Subsidiaries' management, (iii) the issuance of Common
Stock in connection with the acquisition (by merger, consolidation, purchase,
reorganization or otherwise) of a company, assets or a business or (iv) the
issuance of Common Stock as a dividend on the outstanding Common Stock, if the
Company authorizes the issuance or sale of any shares of any class of Common
Stock or any securities containing options or rights to acquire any shares of
Common Stock to any of the Investors or any Affiliate of any of the Investors
or any other holder of at least 5% of the outstanding Common Stock on a fully
diluted basis (calculated prior to such issuance), the Company shall first
offer to sell to Executive a portion of such stock or securities equal to the
quotient determined by dividing (1) the number of shares of such class of
Common Stock held by Executive by (2) the sum of the total number of shares of
such class of Common Stock then outstanding plus the number of Option Shares of
such class of Common Stock in respect of any options or rights referred to in
8(a)(ii) above. Executive shall be entitled to purchase the
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same class of such stock or securities at the same price and on the same terms
as such stock or securities are to be offered to any other Persons. For
purposes of this paragraph 8, the Class P Common and the Company's Class P
Non-Voting Common Stock, par value $.01 per share, shall be deemed to be in the
same class and the Common and Company's Non-Voting Common Stock, par value $.01
per share, shall be deemed to be in the same class.
(b) In order to exercise the purchase rights hereunder, Executive must
within 20 days after receipt of written notice from the Company describing in
reasonable detail the stock or securities being offered, the purchase price
thereof, the payment terms and Executive's percentage allotment, deliver a
written notice to the Company describing his election hereunder.
(c) Upon the expiration of the 20-day period described above, the
Company shall be entitled to sell such stock or securities which Executive has
not elected to purchase during the 90 days following such expiration on terms
and conditions no more favorable to the purchasers thereof than those offered
to Executive. Any stock or securities offered or sold by the Company after such
90-day period must be reoffered to Executive pursuant to the terms of this
paragraph 8.
9. Definitions.
"Affiliate" means any Person, directly or indirectly, controlling,
controlled by or under common control with such specified Person.
"Cause" shall mean (i) the conviction of a felony or the commission of
any other act involving willful malfeasance in connection with Executive's
employment having an adverse effect on Duane Reade or any of its Subsidiaries,
(ii) substantial refusal by Executive to perform the duties required by Duane
Reade's Chief Executive Officer, or (iii) gross negligence or willful
misconduct by Executive with respect to Duane Reade or any of its Subsidiaries
having the effect of materially injuring the reputation of Duane Reade or any
of its Subsidiaries or materially injuring any customer, supplier, employee or
other business relationships of Duane Reade or any of its Subsidiaries.
"Deficit" means, for any given year, the amount by which the Yearly
Withholding Cap exceeds the amount which is actually withheld by Duane Reade,
pursuant to Section 2(b) of the Provisions Relating to Salary and Bonus hereof,
from the Bonus for such year.
"Executive Stock" will continue to be Executive Stock in the hands of
any holder other than Executive (except for the
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<PAGE>
Company and the Investors and except for transferees in a Public Sale), and
except as otherwise provided herein, each such other holder of Executive Stock
will succeed to all rights and obligations attributable to Executive as a
holder of Executive Stock hereunder. Executive Stock will also include shares
of the Company's capital stock issued with respect to Executive Stock by way of
a stock split, stock dividend or other recapitalization.
"Fair Market Value" of each share of Common means the average of the
closing prices of the sales of the Common on all securities exchanges on which
the Common may at the time be listed, or, if there have been no sales on any
such exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day the
Common is not so listed, the average of the representative bid and asked prices
quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if on any day
the Common is not quoted in the NASDAQ System, the average of the highest bid
and lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day as of which the Fair Market Value is being determined and
the 20 consecutive business days prior to such day. If at any time the Common
is not listed on any securities exchange or quoted in the NASDAQ System or the
over-the-counter market, the Fair Market Value of the Common will be the fair
value of the Common mutually agreed upon by the Executive and the Board. Fair
Market Value of each share of Class P Common will be the fair value of the
Class P Common mutually agreed upon by the Executive and the Board. If
Executive and the Board are unable to agree upon the fair value, then Executive
and the Board will split the cost of a mutually acceptable business appraiser
whose determination of such value as of such date will be binding.
"Independent Third Party" means any person who, immediately prior to
the contemplated transaction, does not own in excess of 5% of the Company's
Common Stock on a fully diluted basis, who is not controlling, controlled by or
under common control with any such 5% owner and who is not the spouse or
descendent (by birth or adoption) of any such 5% owner.
"Investors" means Tyler, Tyler Massachusetts, L.P.,
Tyler-International, L.P. - II, BCIP Associates, and BCIP Trust Associates, L.P.
"1933 Act" means the Securities Act of 1933, as amended from time to
time.
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<PAGE>
"Original Cost" means $2.00 with respect to each share of Common
purchased hereunder and $162.00 with respect to each share of Class P Common
purchased hereunder (in each case as proportionately adjusted for all
subsequent stock splits, stock dividends and other recapitalizations).
"Person" means an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
"Public Offering" means a public offering of the Company's common
stock registered under the 1933 Act.
"Public Sale" means any sale pursuant to a Public Offering or any sale
to the public pursuant to Rule 144 promulgated under the 1933 Act effected
through a broker, dealer or market maker.
"Qualified Public Offering" means the sale, in an underwritten public
offering registered under the 1933 Act, of shares of the Company's Common Stock
having an aggregate offering value of at least $25 million and a per share
price of at least twenty-five (25) times the Original Cost of the Common
(without adjustment for any stock split, stock dividend or recapitalization
declared or effected in connection with such Qualified Public Offering).
"Sale of the Company" means the sale of the Company to an Independent
Third Party or affiliated group of Independent Third Parties pursuant to which
such party or parties acquire (i) capital stock of the Company possessing the
voting power to elect a majority of the Company's board of directors (whether
by merger, consolidation or sale or transfer of the Company's capital stock) or
(ii) all or substantially all of the Company's assets determined on a
consolidated basis.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, association or other business entity of which (i) if a
corporation, a majority of the total voting power of shares of 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 that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a partnership,
association or other business entity, a majority of the partnership or other
similar ownership interest thereof is at the time owned or controlled, directly
or indirectly, by any Person or one or more Subsidiaries of that Person or a
combination thereof. For purposes hereof, a Person or Persons shall be deemed
to have a majority
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<PAGE>
ownership interest in a partnership, association or other business entity if
such Person or Persons shall be allocated a majority of partnership,
association or other business entity gains or losses or shall be or control the
managing director or general partner of such partnership, association or other
business entity.
"Underwithheld Amount" means, at any time, the sum of the Deficits for
all prior years; provided that the Deficit for any given year shall not include
any amounts which have been actually withheld by Duane Reade, pursuant to
Section 2(b) of the Provisions Relating to Salary and Bonus hereof, prior to
the time of determination of the Underwithheld Amount.
10. Notices. Any notice provided for in this Agreement must be in
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
To the Company:
Duane Reade Holding Corp.
49-29 30th Place
Long Island City, New York 11101
Attention: Bruce Weitz
With a copy to:
Kirkland & Ellis
200 East Randolph
Chicago, Illinois 60601
Attention: Karl E. Lutz, P.C.
Jeffrey C. Hammes
To Executive:
Jerry M. Ray
25 Hawks Ridge Road
Danville, VA 24540
To the Investors:
Bain Capital
Two Copley Place
Boston, Massachusetts 02116
Attention: Adam Kirsch
With a copy to:
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Kirkland & Ellis
200 East Randolph
Chicago, Illinois 60601
Attention: Karl E. Lutz, P.C.
Jeffrey C. Hammes
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
11. General Provisions.
(a) Transfers in Violation of Agreement. Any Transfer or attempted
Transfer of any Executive Stock in violation of any provision of this Agreement
shall be void, and the Company shall not record such Transfer on its books or
treat any purported transferee of such Executive Stock as the owner of such
stock for any purpose.
(b) Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Complete Agreement. This Agreement, those documents expressly
referred to herein and other documents of even date herewith embody the
complete agreement and understanding among the parties and supersede and
preempt any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof
in any way.
(d) Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(e) Successors and Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by
Executive, the Company, the Investors and their respective successors and
assigns (including subsequent
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<PAGE>
holders of Executive Stock); provided that the rights and obligations of
Executive under this Agreement shall not be assignable except in connection
with a permitted transfer of Executive Stock hereunder.
(f) Choice of Law. The corporate law of the State of Delaware will
govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity and
interpretation of this Agreement and the exhibits hereto will be governed by
the internal law, and not the law of conflicts, of the State of New York.
(g) Remedies. Each of the parties to this Agreement (including the
Investors) will be entitled to enforce its rights under this Agreement
specifically, to recover damages and costs (including reasonable attorney's
fees) caused by any breach of any provision of this Agreement and to exercise
all other rights existing in its favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
(h) Amendment and Waiver. The provisions of this Agreement may be
amended and waived only with the prior written consent of the Company,
Executive and the holders of a majority of the Common Stock (on a fully diluted
basis) then held by all Investors.
(i) Absence of Conflicting Agreements. Executive hereby warrants and
covenants that his employment by the Company and his ownership of the Executive
Stock does not result in a breach of the terms, conditions or provisions of any
agreement to which Executive is subject.
(j) Business Days. If any time period for giving notice or taking
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's chief executive office is located, the time period
shall be automatically extended to the business day immediately following such
Saturday, Sunday or holiday.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
DUANE READE HOLDING CORP.
/s/ Bruce Weitz
--------------------------------------
By: Bruce Weitz
Its: President and Chief Executive
Officer
/s/ Jerry M. Ray
--------------------------------------
Jerry M. Ray
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EXHIBIT A
PROMISSORY NOTE
$75,000.00 March __, 1995
For value received, Jerry M. Ray ("Executive") promises to pay to the
order of Duane Reade Holding Corp., a Delaware corporation (the "Company"), or
its successors or assigns, at such place as designated in writing by the holder
hereof, the aggregate principal sum of Seventy Five Thousand Dollars
($75,000.00). This Note was issued pursuant to and is subject to the terms of
the Agreement, dated as of March __, 1995 (the "Agreement"), between the
Company and Executive.
Interest will accrue on the outstanding principal amount of this Note
at a rate equal to the lesser of (i) 6% per annum or (ii) the highest rate
permitted by applicable law, and shall be payable at such time as the principal
amount of this Note becomes due and payable.
The principal amount of this Note shall be payable in three annual
installments of $25,000 on April 1, 1996, April 1, 1997 and April 1, 1998 (each
a "Payment Date"), with the entire unpaid principal amount together with all
accrued and unpaid interest being due and payable on April 1, 1998 (the
"Maturity Date"). Each installment payable hereunder may be offset by the
Company against any Bonus (as defined in the Agreement) net of taxes
attributable to such bonus then payable to Executive; provided that if the
installment amount then due exceeds the amount of such bonus, the amount of
such excess together with accrued interest thereon will be payable on the
earlier of (a) the next subsequent Payment Date and (b) the Maturity Date.
The amounts due under this Note are secured by a pledge of shares of
the Company's Common Stock, par value $.0l per share, and shares of the
Company's Class P Common Stock, par value $.01 per share. The payment of the
principal amount of and interest on this Note is subject to certain offset
rights under the Agreement. Notwithstanding anything in this Note to the
contrary, if on any Payment Date other than the Maturity Date, the exercise of
such offset rights by the Company does not result in a payment in full of the
installment then due under this Note, the unpaid portion of such installment
shall be due and payable on the next succeeding Payment Date.
<PAGE>
In the event Executive fails to pay any amounts due hereunder when
due, Executive shall pay to the holder hereof, in addition to such amounts
due, all costs of collection, including reasonable attorneys fees.
Executive, or his successors and assigns, hereby waives diligence,
presentment, protest and demand and notice of protest, demand, dishonor and
nonpayment of this Note, and expressly agrees that this Note, or any payment
hereunder, may be extended from time to time and that the holder hereof may
accept security for this Note or release security for this Note, all without in
any way affecting the liability of Executive hereunder.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CHOICE OF LAW PROVISIONS
THEREOF).
------------------------------
JERRY M. RAY
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EXHIBIT B
EXECUTIVE STOCK PLEDGE AGREEMENT
THIS EXECUTIVE STOCK PLEDGE AGREEMENT is made as of March __, 1995,
between Jerry M. Ray ("Pledgor"), and Duane Reade Holding Corp., a Delaware
corporation (the "Company").
The Company and Pledgor are parties to an Agreement, dated the date
hereof, pursuant to which Pledgor purchased 555.556 shares of the Company's
Class P Common Stock, par value $.01 per share, and 5,000 shares of the
Company's Common Stock, par value $.01 per share (the "Pledged Shares"), for an
aggregate purchase price of $100,000.00. The Company has allowed Pledgor to
purchase the Pledged Shares by delivery to the Company of a promissory note in
the aggregate principal amount of $75,000.00 (the "Note") and payment of
$25,000 in cash. This Pledge Agreement provides the terms and conditions upon
which the Note is secured by a pledge to the Company of the Pledged Shares.
NOW, THEREFORE, Pledgor and the Company hereby agree as follows:
1. Pledge. Pledgor hereby pledges to the Company, and grants to the
Company a security interest in, the Pledged Shares as security for the prompt
and complete payment when due of the unpaid principal of and interest on the
Note.
2. Delivery of Pledged Shares. Upon the execution of this Pledge
Agreement, Pledgor shall deliver to the Company the certificates representing
the Pledged Shares, together with duly executed forms of assignment sufficient
to transfer title thereto to the Company.
3. Voting Rights; Cash Dividends. Notwithstanding anything to the
contrary contained herein, during the term of this Pledge Agreement until such
time as there exists a default in the payment of principal or interest on the
Note or any other default under the Note, Pledgor shall be entitled to all
voting rights with respect to the Pledged Shares and shall be entitled to
receive all cash dividends paid in respect of the Pledged Shares. Upon the
occurrence of and during the continuance of any such default, the Company shall
retain all such cash dividends payable on the Pledged Shares as additional
security hereunder.
4. Stock Dividends; Distributions, etc. If, while this Pledge Agreement
is in effect, Pledgor becomes entitled to receive or receives any securities or
other property (other than cash dividends as provided in Section 3) in addition
to, in substitution of, or in exchange for any of the Pledged Shares (whether
as a
<PAGE>
distribution in connection with any recapitalization, reorganization or
reclassification, a stock dividend or otherwise), Pledgor shall accept such
securities or other property on behalf of and for the benefit of the Company as
additional security for Pledgor's obligations under the Note and shall promptly
deliver such additional securities or other property to the Company together
with duly executed forms of assignment, and such additional securities or other
property shall be deemed to be part of the Pledged Shares hereunder.
5. Default. If Pledgor defaults in the payment of the principal or
interest under the Note as it becomes due (whether upon demand, acceleration or
otherwise) or any other event of default under the Note occurs (including the
bankruptcy or insolvency of Pledgor), the Company may exercise any and all the
rights, powers and remedies of any owner of the Pledged Shares (including the
right to vote the shares and receive dividends and distributions with respect
to such shares) and shall have and may exercise without demand any and all the
rights and remedies granted to a secured party upon default under the Uniform
Commercial Code of New York or otherwise available to the Company under
applicable law. Without limiting the foregoing, the Company is authorized to
sell, assign and deliver at its discretion, from time to time, all or any part
of the Pledged Shares at any private sale or public auction, on not less than
ten days written notice to Pledgor, at such price or prices and upon such terms
as the Company may deem advisable. Pledgor shall have no right to redeem the
Pledged Shares after any such sale or assignment. At any such sale or auction,
the Company may bid for, and become the purchaser of, the whole or any part of
the Pledged Shares offered for sale. In case of any such sale, after deducting
the costs, attorneys' fees and other expenses of sale and delivery, the
remaining proceeds of such sale shall be applied to the principal of and
accrued interest on the Note; provided, however, that after payment in full of
the indebtedness evidenced by the Note, the balance of the proceeds of sale
then remaining shall be paid to Pledgor and Pledgor shall be entitled to the
return of any of the Pledged Shares remaining in the hands of the Company.
Pledgor shall be liable for any deficiency if the remaining proceeds are
insufficient to pay the indebtedness under the Note in full, including the fees
of any attorneys employed by the Company to collect such deficiency.
6. Costs and Attorneys' Fees. All costs and expenses, including
reasonable attorneys' fees, incurred in exercising any right, power or remedy
conferred by this Pledge Agreement or in the enforcement thereof, shall become
part of the indebtedness secured hereunder and shall be paid by Pledgor or
repaid from the proceeds of the sale of the Pledged Shares hereunder.
- 2 -
<PAGE>
7. Pavment of Indebtedness and Release of Pledged Shares. Upon payment
in full of the indebtedness evidenced by the Note, the Company shall surrender
the Pledged Shares to Pledgor together with all forms of assignment.
S. Further Assurances. Pledgor agrees that at any time and from time
to time upon the written request of the Company, Pledgor will execute and
deliver such further documents and do such further acts and things as the
Company may reasonably request in order to effect the purposes of this Pledge
Agreement.
9. Severability. Any provision of this Pledge Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10. No Waiver; Cumulative Remedies. The Company shall not by any act,
delay, omission or otherwise be deemed to have waived any of its rights or
remedies hereunder, and no waiver shall be valid unless in writing, signed by
the Company, and then only to the extent therein set forth. A waiver by the
Company of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which the Company would otherwise
have on any future occasion. No failure to exercise nor any delay in exercising
on the part of the Company, any right, power or privilege hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided are
cumulative and may be exercised singly or concurrently, and are not exclusive
of any rights or remedies provided by law.
11. Waivers, Amendments; Applicable Law. None of the terms or
provisions of this Pledge Agreement may be waived, altered, modified or amended
except by an instrument in writing, duly executed by the parties hereto. This
Agreement and all obligations of the Pledgor hereunder shall together with the
rights and remedies of the Company hereunder, inure to the benefit of the
Company and its successors and assigns. THIS PLEDGE AGREEMENT SHALL BE GOVERNED
BY, AND BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
(WITHOUT REGARD TO THE CHOICE OF LAW PROVISIONS THEREOF).
* * * * *
- 3 -
<PAGE>
IN WITNESS WHEREOF, this Pledge Agreement has been executed as of the
date first above written.
----------------------------------
JERRY M. RAY
DUANE READE HOLDING CORP.
By:
------------------------------
Name: Bruce Weitz
Title: President and Chief
Executive Officer
- 4 -
<PAGE>
EXHIBIT C
ELECTION TO INCLUDE STOCK IN GROSS
INCOME PURSUANT TO SECTION 83(b) OF THE
INTERNAL REVENUE CODE
The undersigned purchased shares of Common Stock, par value $.01 per
share and shares of Class P Common Stock, par value $.01 per share
(collectively the "Shares"), of Duane Reade Holding Corp. (the "Company") on
March __, 1995. Under certain circumstances, the Company has the right to
repurchase the Shares at cost from the undersigned (or from the holder of the
Shares, if different from the undersigned) should the undersigned cease to be
employed by the Company and its subsidiaries. Hence, the Shares are subject to
a substantial risk of forfeiture and are non-transferable. The undersigned
desires to make an election to have the Shares taxed under the provision of
Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"),
at the time he purchased the Shares.
Therefore, pursuant to Code Section 83(b) and Treasury Regulation
Section 1.83-2 promulgated thereunder, the undersigned hereby makes an
election, with respect to the Shares, to report as taxable income for calendar
year 1995 the excess (if any) of the Shares' fair market value on March __, 1995
over purchase price thereof.
The following information is supplied in accordance with Treasury
Regulation Section 1.83-2(e):
1. The name, address and social security number of the undersigned:
Jerry M. Ray
25 Hawks Ridge Road
Danville, VA 24540
Social Security Number: ___________
2. A description of the property with respect to which the election is
being made: 555.556 shares of the Company's Class P Common Stock, par value
$.01 per share (the "Class P Common"), and 5,000 shares of the Company's Common
Stock, par value $.0l per share (the "Common")
<PAGE>
3. The date on which the property was transferred: March __, 1995. The
taxable year for which such election is made: calendar 1995.
4. The restrictions to which the property is subject: If the
undersigned's employment with the Company is terminated at any time by the
Company with Cause or by the undersigned's resignation, the Shares will be
subject to repurchase by the Company at the lower of Original Cost or Fair
Market Value ("Cause," "Original Cost" and "Fair Market Value" having the
meanings given such terms in the Agreement, dated as of March __, 1995, by and
between the undersigned and the Company).
5. The fair market value on March , 1995, of the property with respect
to which the election is being made, determined without regard to any lapse
restrictions: $2.00 per share of Common and $162.00 per share of Class P
Common.
6. The amount paid for such property: $2.00 per share of Common and
$162.00 per share of Class P Common.
A copy of this election has been furnished to the Secretary of the
Company pursuant to Treasury Regulations Section 1.83-2(e)(7).
Dated: , 1995
-------------- ------------------------------
JERRY M. RAY
<PAGE>
[DUANE READE LOGO]
Barry Weston
President & Chief Operating Officer
October 9, 1996
Mr. Joseph Lacko
34 Sherwood Road
Edison, New Jersey 08820
Dear Joe:
Further to our discussion earlier today, I am most pleased to offer you a
position on the Duane Reade management team as Vice President of Management
Information Systems on the terms set forth below, all of which will take
effect immediately upon your start date:
Base Salary: $150,000 per annum.
Bonus: Target of 35% of annual base salary on a possible scale
of 0% to 70% of base salary, such percentage to be
determined based upon achievement of corporate financial
and personal objectives (bonus eligibility for 1996 will
be determined on a pro rata basis based upon the portion
of the year in which you are employed by Duane Reade;
however, you will receive a guaranteed bonus of at least
$25,000 for 1996 in lieu of the bonus which you would
likely have received from you current employer).
Options: You will be granted options (the "Options") to purchase
5,000 shares of the Company's common stock at an
exercise price of $2.00 per share.
<PAGE>
2
Vesting: Your options will vest (i) ratably over a five
year period (20% in year one; 20% in year two, etc.),
and (ii) in full in the event of the consummation of a
sale of the Company.
Guaranteed IPO Option Valuation: In the event that the
Company consummates an initial public offering (an
"IPO") of its common stock, as of the date of such IPO,
your Options shall have a guaranteed minimum valuation
of $100,000. In the event that the actual market
valuation of your Options at such date is less than
$100,000, the Company (at its option) shall award you
sufficient additional options or make a cash payment to
you in order to make up for any shortfall in the market
valuation of your Options below $100,000.
Severance: Payment: In the event that your employment is terminated
without cause, you will receive as a severance payment
the full amount of your base salary for the year in
which you are terminated without cause.
Guaranteed Termination Option Valuation:
In the event that you are terminated without cause, as
of the date of such termination, your Options shall be
repurchased by the Company for $100,000.
Transportation: The Company agrees to provide you with transportation
by car between its offices in Long Island City and
Penn Station in Manhattan until the Company moves its
main offices to Manhattan or some other
<PAGE>
3
location equidistant from your current home in Edison,
New Jersey.
Vacation: 3 weeks vacation will be granted at minimum, until the
vacation policy dictates additional weeks are applicable
annually.
Medical Coverage: Coverage will start immediately upon employment.
Otherwise the Company will pay for COBRA until coverage
is in place.
As used herein, "cause" means: (i) your willful and repeated failure to
comply with the lawful directives of the Company, (ii) your gross negligence
or willful misconduct in the performance of your duties for the Company or
any act of dishonesty or fraud with respect to the Company; or (iii) your
commission of an act (including but not limited to a felony or a crime
involving moral turpitude) causing material harm to the standing and
reputation of the Company.
Joe, each of the members of our senior management group who have had the
opportunity to meet with you are truly pleased and excited at the prospect of
your joining our team in the next several weeks. I am especially looking
forward to working with you in addressing the many challenges and
opportunities which face our business in the future. Please feel free to call
me at (718) 391-4909 (office) or (203) 968-9094 with any questions. Please
indicate your acceptance of our offer by signing below. After you have done
so, please give me a call before faxing a copy to me.
Very truly yours,
DUANE READE
By: /s/ Barry D. Weston
-----------------------------
Barry D. Weston
President and Chief Operating
Officer
Agreed and Accepted, as of
October 10, 1996, by:
/s/ Joseph S. Lacko
- ------------------------
Joseph S. Lacko
<PAGE>
[DUANE READE LOGO]
Anthony J. Cuti
Chairman & Chief Executive Officer
February 12, 1997
William J. Tennant
274 Gramercy Place
Glen Rock, NJ 07452
Dear Bill:
The purpose of this letter is to extend an employment offer to you on behalf
of Duane Reade Corp. More specifically, outlined below are the particulars
regarding this offer:
<TABLE>
<CAPTION>
<S> <C>
Position: Senior Vice President/Chief Financial Officer.
Base Salary: $175,000 per annum.
Bonus: Based on achievement of the Duane Reade
Financial plan, an amount equal to 35% of
your base salary will be your incentive bonus
at 100% target achievement. There will be
a proportional increment or decrement as
outlined in our incentive plan based on
an under or over achievement of the company's
target.
Options: 20,000 shares of common stock at a strike of
$25. 20% of the shares will vest at the end
of each anniversary of your employment with
Duane Reade.
Severance: 12 months base salary if you are terminated
without cause.
</TABLE>
As I indicated to you in our meeting, I am quite excited about you joining
our team. I believe you will be a significant contributor to our rapidly
growing chain in need of your experience and guidance.
Please indicate your acceptance by signing below and faxing a copy back to me
at 718-937-3024.
Sincerely,
Acknowledged and agreed
on 16th February 1997
By: /s/ Bill Tennant
----------------
Bill Tennant
<PAGE>
AGREEMENT made this 22nd day of November, 1996, retroactive to and
effective as of the 1st day of September, 1996, by and between DUANE READE, A
NEW YORK PARTNERSHIP, whose place of business is located at 49-29 30th Place,
Long Island City, New York 11101; hereinafter designated as the "Employer"; and
DRUG, CHEMICAL, COSMETIC, PLASTICS AND AFFILIATED INDUSTRIES WAREHOUSE
EMPLOYEES LOCAL 815, AFFILIATED WITH THE INTERNATIONAL BROTHERHOOD OF
TEAMSTERS; whose office is located at 467 Sylvan Avenue, Englewood Cliffs, New
Jersey 07632; hereinafter designated as the "UNION".
IN CONSIDERATION of the premises and of the mutual and reciprocal
promises herein made and obligations herein assumed, as more fully hereinafter
set forth, the parties agree as follows:
FIRST: The Employer recognizes the Union as the sole collective
bargaining agent for all employees in its employ, excluding office employees,
executives, supervisors, armed guards and warehouse managers. Whenever the word
"employees" is used in this Agreement, it shall be deemed to refer to all
employees except for those specifically excluded above, regardless of whether
or not they are members of the Union.
<PAGE>
-2-
All employees shall, as a condition of continued employment, become
and remain members of the Union in good standing after they have completed
thirty days of employment or thirty days after execution of this Agreement,
whichever is later, provided, however, that no employee shall be removed from
his employment under this Article so long as he continues to tender uniform
dues and his initiation fee to the Union after such thirty-day period. Any
employee who fails to maintain his membership to the extent of not paying
uniform dues and his initiation fee after such thirty-day period, shall be
discharged by the Employer immediately upon notification from the Union in
person or in writing. All new employees shall be on a trial period of thirty
calendar days during which time they may be discharged without recourse to the
grievance procedure.
SECOND: The Employer shall deduct uniform membership dues and
initiation fees from the wages paid to each employee. The Employer shall make
such deductions from the first payroll in each month and transmit all such
funds deducted no later than the tenth day of each month. All funds deducted
from the wages paid to employees for the payment of such dues and initiation
fees shall be held in trust by the Employer and shall be considered at all
times the property of the Union, provided, however, that prior to making such
deductions the Employer has received from each employee on whose
<PAGE>
-3-
account such deductions are made, a written assignment, which shall not be
irrevocable for a period of more than one year or beyond the termination date
of the Agreement, whichever occurs sooner, and which may contain a clause that
such assignment shall be automatically renewed for additional periods of one
year, unless the employee shall terminate such assignment in writing within
thirty days prior to any expiration date thereof.
THREE: The Employer shall have the right to establish two work shifts;
Monday through Friday and Tuesday through Saturday.
The regular work week for all employees on a Monday - Friday work
shift shall consist of five days, Monday through Friday, and no more than eight
hours per day and no more than forty hours per week. Work performed beyond
eight hours in any day, or forty hours in any week, or on Saturday, shall be
paid for at the overtime rate of one and one-half times the employees' regular
hourly rate. Work performed on Sunday shall be paid for at the premium rate of
two times the employees' regular hourly rate.
The regular work week for all employees on a Tuesday - Saturday work
shift shall consist of five days, Tuesday through Saturday, and no more than
eight
<PAGE>
-4-
hours per day and no more than forty hours per week. Work performed beyond
eight hours in any day, or forty hours in any week, or on Monday, shall be paid
for at the overtime rate of one and one-half times the employees' regular
hourly rate. Work performed on Sunday shall be paid for at the premium rate of
two times the employees' regular hourly rate.
Employees shall work a reasonable amount of overtime.
FOURTH: No employee, whatever the performance, shall be discharged,
suspended, laid off or furloughed except for good and sufficient cause. In the
event an employee is proven to have committed an act amounting to dishonesty or
criminal negligence, the Employer may summarily discharge such employee.
Layoffs and recalls from layoffs shall be made in accordance with seniority and
ability to perform the available work.
FIFTH: The Employer agrees that authorized representatives of the
Union shall be permitted to enter the Employer's place of business at any time
for the adjustment of disputes, grievances or any other matters that may
require their presence.
<PAGE>
-5-
SIXTH: Should any dispute arise concerning the application,
interpretation, effect, purpose or breach of any term or condition of this
Agreement or in the event that there shall exist any claim, demand, dispute or
controversy between the parties hereto, including but not limited to a demand
or dispute arising out of a proposed addition, deletion or modification of this
Agreement, the parties hereto shall first attempt to settle and adjust such
dispute, claim, demand or controversy by negotiation. In the event that said
dispute, claim, demand or controversy shall not be completely settled and
adjusted, the parties agree that either of them may submit the question,
including any damages that have been suffered, to arbitration before an
arbitrator designated by the New York State Board of Mediation, the American
Arbitration Association or the Federal Mediation and Conciliation Service in
accordance with their rules. The arbitrator so designated shall conduct a
hearing in such manner as he shall consider proper and shall serve as sole
arbitrator of the dispute between the parties. The arbitrator shall have the
right to conduct an ex parte hearing in the event of the failure of either
party to be present at the time and place designated for the arbitration, and
shall have the power to render a decision based on the testimony before him at
such hearing. The decision of the arbitrator shall be final and binding upon
both parties and may be entered as a final decree
<PAGE>
-6-
or judgment in the Supreme Court of the State of New York or in a court of
appropriate jurisdiction in any state where such decision shall be rendered.
The costs of arbitration, including the arbitrator's fee, shall be borne
equally by the Employer and the Union. It is the intent of the parties hereto
that all disputes between them, both within and outside of the Agreement, shall
be submitted to arbitration and that no defense to prevent the holding of the
arbitration shall be permitted. Service of any document or notice referred to
above, or service of any notice required by law in connection with arbitration
proceedings, may be made by registered or certified mail.
SEVENTH: (A) It is hereby agreed by and between the respective parties
that effective as of September 1, 1996 (being a continuation of contributions
previously made), the Employer shall contribute to the Vacation Fringe Benefit
Fund the sum of Five and Two-Fifths Per Cent (5.4%) of the Employer's total,
gross, straight-time payroll expense for each employee covered by the Agreement
regardless of whether or not any such employee is a member of the Union and
regardless of the number of hours worked during the week. Such payments shall
be made weekly for the last preceding payroll week. A list containing the names
and straight-time, weekly earnings of each employee in the bargaining unit
shall accompany each such payment. The Employer's payroll records, social
<PAGE>
-7-
security records and other pertinent data shall be open for inspection and
audit by the Fund upon demand. Such payments shall be made directly to the
Vacation Fringe Benefit Fund and shall be held subject to the provisions of a
trust indenture dated February 17, 1971 and any amendments, changes or
additions thereto.
The Fund shall be managed and administered by a board of trustees
equally representative of the employers and the Union. In the event the
Employer and the Union trustees deadlock on the administration of the Fund,
they shall agree on an impartial umpire to decide such dispute; or in the event
of their failure to agree within a reasonable length of time, an impartial
umpire shall, on petition of either trustee, be appointed by the District Court
of the United States for the district where the Fund has its principal office.
The trustees shall make provisions for an annual audit of the Fund. A statement
of the results shall be available for inspection by interested persons at the
principal office of the Fund and at such other places as may be designated by
the trustees.
The Fund shall be used for the purpose of providing annual and
supplementary vacation benefits, jury duty reimbursement and for such approved
similar and related purposes and benefits, and for the payment of the
<PAGE>
-8-
reasonable administrative expenses of the Fund, as the trustees may determine.
By executing this Agreement, the Employer hereby authorizes the Trustees of the
Vacation Fringe Benefit Fund, on its behalf, as its express agent, and in its
name and stead, to remit to the appropriate Federal taxing authorities, the
Employer's share of any FICA taxes owed by the Employer as a result of vacation
and/or fringe benefit payments made by the Fund to employees of the Employer,
together with the employee's share of any such taxes, and, where applicable to
remit to the appropriate State taxing authorities the disability taxes owed as
a result of such payments. Similarly, by executing this Agreement, the Employer
hereby authorizes the Trustees of the Fund on its behalf, as its express agent
and in its name and stead, to issue to the appropriate governmental agencies
and to its employees receiving vacation and/or fringe benefit payments through
the Fund, Federal, State and City earnings statements showing gross wages, FICA
tax withheld, FICA wages, State income tax withheld and local tax withheld as a
result of such vacation and/or fringe benefit payments by the Fund. The
Trustees of the Fund shall have no obligation to report wages earned by the
Employer's employees, except such wages as are transmitted to the Employer's
employees by the Fund.
All monies paid to the Fund shall be used and disbursed by the
trustees pursuant to the
<PAGE>
-9-
terms, conditions and provisions of the trust indenture or any amendments,
changes or additions thereto; and the rules, regulations and resolutions
adopted thereunder. Neither the Union, nor any member of the Union individually
or collectively; nor any International Union; nor any body with which the Union
may be affiliated; nor any participating Employer individually or collectively,
nor any combination thereof; nor any association, corporation, group, entity,
person or trust; nor any successor or assign thereof either directly or
indirectly, shall have any right, title, interest or claim in or to the Fund or
any part thereof, nor to any accounting, supervision or control thereof, of
whatsoever kind or nature.
All monies, contributions, property, assets of the Fund and those
hereafter acquired and the ownership, control and the administration of the
Fund shall irrevocably, inseparably and forever remain vested exclusively in
the trustees of the Fund. No employee of any participating employer; nor any
employee of the Union; nor any person claiming by, through or under such
employee, either directly or indirectly, shall have any right, title, interest
or claim in or to the Fund or to any part thereof; nor to any accounting,
supervision or control thereof, of whatsoever kind or nature; nor any claim
against the Union, participating employers or the trustees, or to the
contributions of his or her Employer to the
<PAGE>
- 10 -
Fund or any assets or monies held by the Fund except such benefits as are
provided for by the Fund and/or by the rules and regulations from time to time
established and promulgated by the trustees in accordance with the powers
granted by the trust indenture as the same may be amended or modified from time
to time. The discretion of the trustees as to the administration, use and
disbursement of the Fund shall be final and conclusive.
All payments shall be due and payable on the first day of each week,
for the preceding week. The foregoing notwithstanding, however, if the Employer
fails to make all payments required hereunder, on or before the tenth day of
the month for the preceding month, then the Trustees may require, and the
Employer agrees to pay, interest on any unpaid balance at the applicable rate
as permitted by law. In addition, the Employer specifically agrees that it
shall be liable for all auditing expenses, collection costs and legal fees
incurred by the Union or by the Trustees of the Fund for the collection of such
payments.
Conditioned upon the Employer's timely payment in full to the Fund of
all of its obligations as specified herein, no further liability whatsoever
shall attach hereunder to the Employer; and no claim can, shall
<PAGE>
- 11 -
or may be made by any employee against the Employer based upon the terms hereof
for any reason whatsoever.
(B) The amount of vacation to which an employee is entitled shall be
determined as of July 1 of each year:
Less than six months
of employment as of None
July 1
Six months but less than
one year of employment One week (40 hours)
as of July 1
One year but less than
seven years of employment Two weeks (80 hours)
as of July 1
Seven years but less than
twenty years of employment Three weeks (120 hours)
as of July 1
Twenty or more years of
employment as of July 1 Four weeks (160 hours)
In determining eligibility for vacation leaves, all computations shall
be based upon each employee's total length of employment with the Employer. No
deductions shall be made from an employee's accumulated service except for
periods of nonemployment by the Employer. Such deductions shall be made in
accordance with the provisions of the trust indenture, and/or resolutions
adopted by the trustees.
<PAGE>
- 12 -
Full power and authority will be lodged in the trustees of the
Vacation Fringe Benefit Fund to determine the extent of service credits to be
allocated to each employee as well as the rules and regulations pursuant to
which employees will be paid for any earned vacation pay.
In accordance with the rules and regulations of the Fund and at such
intervals as they determine appropriate, the trustees of the Fund shall
transmit to each employee on whose behalf contributions have been made to such
Fund, an amount equal to the sum of such employee's vacation leave entitlement
multiplied by such employee's regular straight-time, hourly rate of pay as of
the date of such employee's vacation leave. This sum will be diminished by the
amount of any vacation payments made by the Fund to such employee during the
preceding vacation year (i.e. the period from. July 1 of the preceding year
through June 30 of the current year).
Part-time employees shall receive vacation leave and vacation pay on a
pro rata basis.
EIGHTH: All employees shall receive pay for the following holidays,
whether or not they are scheduled to work on such holidays:
<PAGE>
- 13 -
New Year's Day Labor Day
Martin Luther King's Birthday Thanksgiving Day
Presidents' Day One-half day before Christmas Day
Good Friday Christmas Day
Memorial Day One-half day before New Year's Day
Independence Day Employee's Birthday
Work performed on any such holidays shall be paid for at one and
one-half times the employees' regular rate of pay, in addition to the holiday
pay.
NINTH: All good conditions, customs and privileges enjoyed by the
employees prior to the execution of this Agreement shall continue in full force
and effect without suspension or interruption as though they were actually
enumerated herein. The Employer shall not sell his establishment, or any part
thereof without 60 days' advance notice in writing to the Union, nor shall he
remove, terminate, discontinue, rent or lease any part thereof, without
providing similar advance notice. In no event shall such transaction be
consummated except on the basis that the purchaser or lessee shall assume this
Agreement and all of its terms and conditions and shall continue to recognize
the Union as the collective bargaining representative for all employees
formerly covered by
<PAGE>
- 14 -
this Agreement. In addition, the seller or renter, as well as the purchaser or
lessor, shall be responsible for all financial liabilities under this Agreement
up to and including the date of this transaction.
TENTH: The Union may elect or select shop stewards from among the
employees, who shall receive top seniority; and such shop stewards shall have
the authority to report grievances and violations of the contract to the Union.
No shop steward shall have the right to call any strike, stoppage or cessation
of work; and the sole duty and liability of the Union, in the event that a shop
steward so transcends his authority, shall be limited to ordering the employees
to return to work after written notice from the Employer. The shop steward
shall have the right during working hours to discuss grievances or perform such
other duties as the Union may require of him.
ELEVENTH: It is hereby agreed by and between the respective parties
that, commencing with the week ending September 6, 1996 (being a continuation
of contributions previously made), the Employer shall pay to the Allied Welfare
Fund the sum of Fifty-Four ($54.00) Dollars, and commencing with the week
ending September 5, 1997, the sum of Fifty-Nine ($59.00) Dollars, and
commencing with the week ending
<PAGE>
- 15 -
September 4, 1998, the sum of Sixty-Six ($66.00) Dollars, and commencing with
the week ending March 5, 1999, the sum of Sixty-Nine ($69.00) Dollars each and
every week for each employee who is employed within the bargaining unit,
commencing with the first day of employment of such employee, regardless of
whether such employee is a member of the Union and regardless of the number of
hours worked during the week. The Employer shall submit to the Fund a list of
the employees for whom such payments are made. Vacations, holidays and sick
leave with pay shall be deemed time worked. The Employer's payroll records,
social security records or other pertinent data shall be open for inspection
and audit by the Fund upon demand. Such payments shall be made directly to the
Allied Welfare Fund and shall be held subject to the provisions of a trust
indenture effective January 26, 1954 and any amendments, changes or additions
thereto. The Fund shall be managed and administered by a board of trustees
equally representative of the employers and the Union. In the event the
Employer and the Union trustees deadlock on the administration of the Fund,
they shall agree on an impartial umpire to decide such dispute; or in the event
of their failure to agree within a reasonable length of time, an impartial
umpire shall, on petition of either trustee, be appointed by the District Court
of the United States for the district where the Fund has its principal office.
The trustees shall make provisions for an annual audit of the Fund. A
<PAGE>
- 16 -
statement of the results shall be available for inspection by interested
persons at the principal office of the Fund and at such other places as may be
designated by the trustees.
Such contributions shall be used for the purpose of providing
insurance, Major Medical insurance, welfare and similar benefits for employees
employed by the Employer, employees employed by all other employers similarly
situated, their families, and the payment of reasonable administrative expenses
of the Fund; and shall, in addition, be used and disbursed by the trustees
pursuant to the terms, conditions and provisions of the trust indenture or any
amendments, changes or additions thereto; and the rules, regulations and
resolutions adopted thereunder. Neither the Union, nor any member of the Union
individually or collectively; nor any International Union, nor any body with
which the Union may be affiliated; nor any participating employer individually
or collectively; nor any combination thereof; nor any association, corporation,
group, entity, person or trust; nor any successor or assign thereof, either
directly or indirectly, shall have any right, title, interest or claim in or to
the Fund or any part thereof; nor to any accounting, supervision or control
thereof, of whatsoever kind or nature. All monies, contributions, property,
assets of the Fund and those hereafter acquired; and the ownership control and
the administration of
<PAGE>
- 17 -
the Fund shall irrevocably, inseparably and forever remain vested exclusively
in the trustees of the Fund. No employee of any participating employer; nor any
employee of the Union; nor any person claiming by, through or under such
employee, either directly or indirectly, shall have any right, title, interest
or claim in or to the Fund or to any part thereof; nor to any accounting,
supervision or control thereof of whatsoever kind or nature; nor any claim
against the Union, participating employers, or the trustees, or to the
contributions of his or her employer to the Fund or any assets or monies held
by the Fund except such benefits as are provided for by the plan and/or by the
rules and regulations from time to time established and promulgated by the
trustees in accordance with the powers granted by the trust indenture, as the
same may be amended or modified from time to time. The discretion of the
trustees as to the administration, use and disbursement of the Fund shall be
final and conclusive.
All payments shall be due and payable on the first day of each month,
for the preceding month. If the Employer fails to make a payment or payments
required hereunder, on or before the tenth day of the succeeding month, then
the Trustees may require, and the Employer agrees to pay, interest on any
unpaid balance at the applicable rate as permitted by law. In addition, the
Employer specifically agrees
<PAGE>
- 18 -
that it shall be liable for all auditing expenses, collection costs and legal
fees incurred by the Union or by the Trustees of the Fund for the collection of
such payments.
From and out of the contributions made to the Allied Welfare Fund as
specified above, Eight Dollars per employee per week shall be unconditionally
and irrevocably allocated and paid to the Union Mutual Medical Fund subject to
the provisions of a trust indenture effective September 6, 1978 and any
amendments, changes or additions thereto, for the benefit of retired employees
of the Employer and retired employees of all other employers similarly situated
and their families who are receiving pension benefits from the Union Mutual
Fund, and those employees of the Employer and of all other employers similarly
situated whose pension benefits from the Union Mutual Fund have been vested and
who, in either case, are and remain members in good standing of the Union
Mutual Benefit Association. All sums contributed to the Union Mutual Medical
Fund and the affairs of said Fund shall be managed and administered by a Board
of Trustees equally representative of the employers and the participants. All
of the foregoing conditions and provisions applicable to the Allied Welfare
Fund shall be equally applicable to the Union Mutual Medical Fund.
<PAGE>
- 19 -
TWELFTH: It is hereby agreed by and between the respective parties
that, commencing with the effective date of this Agreement (being a
continuation of contributions previously made), the Employer shall pay to the
Union Mutual Fund the sum of Twenty-Four Dollars each and every week for each
employee who is employed within the bargaining unit commencing with the first
day of employment of such employee, regardless of whether such employee is a
member of the Union and regardless of the number of hours worked during the
week; and the Employer shall submit to the Fund a list of the employees for
whom such payments are made. Vacations, holidays and sick leave with pay shall
be deemed time worked. The Employer's payroll records, social security records
and other pertinent data shall be open for inspection and audit by the Fund
upon demand. Such payments shall be made directly to the Union Mutual Fund and
held subject to the provisions of a trust indenture effective November 1, 1955
and any amendments, changes or additions thereto. The Fund shall be managed and
administered by a board of trustees equally representative of the employers and
the Union. In the event the Employer and the Union trustees deadlock on the
administration of the Fund, the two shall agree on an impartial umpire to
decide such dispute; or in the event of their failure to agree within a
reasonable length of time, an impartial umpire shall, on petition of either
trustee, be appointed by the District Court of the United States
<PAGE>
- 20 -
for the district where the Fund has its principal office. The trustees shall
make provisions for an annual audit of the Fund, a statement of the result of
which shall be available for inspection by interested persons at the principal
office of the Fund and at such other places as may be designated by the
trustees.
The Fund shall be used for the purpose of providing pensions and/or
annuities and similar benefits for employees employed by the Employer,
employees employed by all other employers similarly situated, the payment of
reasonable administrative expenses of the Fund and shall, in addition, be used
and disbursed by the trustees pursuant to the terms, conditions and provisions
of the trust indenture, or any amendments, changes or additions thereto; and
the rules, regulations and resolutions adopted thereunder. Neither the Union,
nor any member of the Union individually or collectively; nor any International
Union; nor any body with which the Union may be affiliated; nor any
participating employer individually or collectively; nor any combination
thereof; nor any association, corporation, group, entity, person or trust; nor
any successor or assign thereof either directly or indirectly, shall have any
right, title, interest or claim in or to the Fund, or any part thereof; nor to
any accounting, supervision or control thereof of whatsoever kind or nature. It
is understood
<PAGE>
- 21 -
and agreed that the Employer and all other employers similarly situated may
have a continuing financial obligation pursuant to the provisions of the
Employee Retirement Income security Act of 1974, in the event of termination or
partial termination of the Fund. All monies, contributions, property, assets of
the Fund and those hereafter acquired; and the ownership, control and the
administration of the Fund shall irrevocably, inseparably and forever remain
vested exclusively in the trustees of the Fund. No employee of any
participating employer; nor any employee of the Union; nor any person claiming
by, through or under such employee, either directly or indirectly, shall have
any right, title, interest or claim in or to the Fund or any part thereof; nor
to any accounting, supervision or control thereof of whatsoever kind or nature;
nor any claim against the Union, participating employers or the trustees; nor
to the contributions of his or her employer to the Fund; nor to any assets or
monies held by the Fund except such benefits as are provided by the plan and/or
by the rules and regulations from time to time established and promulgated by
the trustees in accordance with the powers granted by the trust indenture, as
the same may be amended or modified from time to time. The discretion of the
trustees as to the administration, use and disbursement of the Trust Fund shall
be final and conclusive.
<PAGE>
- 22 -
All payments shall be due and payable on the first day of each month,
for the preceding month. If the Employer fails to make a payment or payments
required hereunder, on or before the tenth day of the succeeding month, then
the Trustees may require, and the Employer agrees to pay, interest on any
unpaid balance at the applicable rate as permitted by law. In addition, the
Employer specifically agrees that it shall be liable for all auditing expenses,
collection costs and legal fees incurred by the Union or by the Trustees of the
Fund for the collection of such payments.
THIRTEENTH: Effective September 1, 1996, each employee shall receive a
general wage increase amounting to Three (3%) Per Cent of such employee's wage
rate immediately prior thereto.
Effective January 1, 1997, each employee shall receive a general wage
increase amounting to Two (2%) Per Cent of such employee's wage rate
immediately prior thereto.
Effective September 1, 1997, each employee shall receive a general
wage increase amounting to Five (5%) Per Cent of such employee's wage rate
immediately prior thereto.
<PAGE>
- 23 -
Effective September 1, 1998, each employee shall receive a general
wage increase amounting to Five (5%) Per Cent of such employee's wage rate
immediately prior thereto.
After thirty days of employment, all newly hired employees shall
receive a wage increase of Five Dollars per week ($.125 per hour).
FOURTEENTH: All employees shall receive a paid fifteen-minute rest
period during the afternoon of each work day.
FIFTEENTH: Should the Employer fail to meet promptly the financial
obligations under the terms of this Agreement or breach any term or condition
thereof, such shall be considered a material breach of this Agreement, and the
Union reserves the right thereafter to demand that the Employer post cash
security or a bond in a reasonable sum, and may institute additional
appropriate measures, to assure the faithful performance of this Agreement. The
Union will at all times retain the right to proceed to arbitration in
accordance with the provisions of Article Sixth hereof.
<PAGE>
- 24 -
During the term of this agreement the Union agrees that there shall be
no strikes, work stoppages or slowdowns by the employees. The Employer agrees
that during the term of this agreement it will not lock out any of its
employees.
SIXTEENTH: This Agreement and all of the conditions and terms thereof
shall be binding upon the Employer, and shall also be binding upon and govern
the working conditions and terms of employment in any new or future acquired
establishment that the Employer shall acquire, conduct or maintain during the
term of this Agreement. The Employer will not move his plant or any part
thereof more than twenty-five (25) miles from its present location without the
consent of the Union, which consent shall not be unreasonably withheld.
SEVENTEENTH: On September 1, 1999, and at the expiration of each
annual period thereafter during the term of this Agreement, the Union shall
have the right to reopen the Agreement in order to renegotiate wages and other
benefits for all employees. Should the parties fail to agree, any issue in
dispute shall be submitted to arbitration in accordance with the procedure set
forth in Article Sixth herein. The right to reopen shall not be waived by
failure to give notice under this
<PAGE>
- 25 -
clause and any agreement reached upon such reopening, no matter when had, shall
be retroactive to the anniversary date of the Agreement.
EIGHTEENTH: This contract shall not take effect until it is approved
and executed by an authorized officer of the Union. No term, condition or
provision of this Agreement may be modified or changed except in writing signed
by both parties.
NINETEENTH: If any provision of this Agreement cannot be put into
effect or operation, or can be only partially effective or operative because of
applicable Executive Orders, regulations or legislation dealing with wage and
price stabilization, then such provision shall become effective and operative
at such time and in such amounts or to such extent and for such periods,
prospectively or retroactively, as will be permitted by applicable Executive
Orders, legislation or regulations. Alternatively, at the time that such
provision is prevented from becoming effective or operative in whole or part,
the Union shall have the option of declaring such provision void in whole or
part, and negotiating with the Employer concerning alternative benefits. Such
benefits must cost the Employer substantially the same amount or a lesser
amount than the benefits which they will replace.
<PAGE>
- 26 -
TWENTIETH: All employees who have completed six months of employment
shall be entitled to receive five (5) days of paid sick leave during each
contract year and shall be reimbursed on the anniversary date of this Agreement
for all unused sick leave. Employees shall receive a day's wages at their then
current daily rate of pay for each day of sick leave pay.
Employees shall not be required to provide a doctor's note or other
substantiating evidence in order to be eligible to receive sick leave pay,
provided, however, that employees shall call the Company as early as possible
on the first day of any illness to advise the Company concerning the absence
and its anticipated length; provided further that in the event the Employer
feels that an employee is abusing the sick leave referred to above, it shall
have the right to request a doctor's note.
TWENTY-FIRST: This Agreement shall become effective from the 1st day
of September, 1996, and shall remain effective and binding upon the parties
hereto, their heirs, successors, assignees and trustees in bankruptcy for a
period of three years up to and including August 31, 1999, and shall
automatically continue thereafter for annual periods. Should either party
desire to terminate this Agreement, notice
<PAGE>
- 27 -
thereof shall be given by registered or certified mail to the other at least
sixty days prior to each expiration date. However, either party may notify the
other in writing at least thirty days prior to the renewal date of the desire
to renegotiate or alter any of the clauses of this Agreement, and in such
event, the Agreement shall be deemed automatically extended, and such reopening
shall be had under the provisions of Article Seventeenth herein; and any
changes, amendments, additions or alterations agreed upon as the result of each
renegotiation or ordered by any arbitrator upon such renegotiation, shall
become effective and be retroactive to the annual termination date of this
Agreement.
IN WITNESS WHEREOF, the parties have hereunto set their hands this 22nd
day of November, 1996.
DRUG, CHEMICAL, COSMETIC, PLASTICS
AND AFFILIATED INDUSTRIES WAREHOUSE
EMPLOYEES LOCAL 815, AFFILIATED
WITH THE INTERNATIONAL BROTHERHOOD
OF TEAMSTERS
By: /s/ Larry Plotnick
-----------------------------------
Larry Plotnick, President
DUANE READE, A NEW YORK PARTNERSHIP
By: /s/ Authorized Signatory President
----------------------------------------------
Employer Title
<PAGE>
[LOCAL UNION NO. 815 LETTERHEAD]
September 1, 1996
Duane Reade, A New York Partnership
49-29 30th Place
Long Island City, New York 11101
Gentlemen:
This is to confirm our understanding that your contributions to the Vacation
Fringe Benefit Fund consist of two components. The first component (vacation
component) is to be contributed in the amount of Four and Four-fifths Per Cent
(4.4%) of your gross, straight-time payroll expense for bargaining-unit
employees and is intended to cover the cost of vacation payments made in
accordance with the terms of the collective bargaining agreement, including
disability taxes and the Employer's and employees' share of FICA taxes.
The second component (fringe component) in the amount of One Per Cent (1%) of
your gross, straight-time, payroll expense for bargaining-unit employees is
intended to cover the cost of supplementary vacation benefits, jury duty
reimbursement and other approved similar and related purposes and benefits, as
the trustees may determine.
Your vacation component contributions will be subject to an annual audit and
review. In the event that your vacation component contributions, including
disability taxes and the Employer's and employees' share of FICA taxes, are
less than the annual vacation payments made by the Fund in accordance with the
terms of the collective bargaining agreement, you will be required to remit the
balance immediately. Furthermore, by signing this letter, you specifically
agree to adjust your vacation component contribution rate, upon notification
from the Union that such adjusted contribution rate is necessary to avoid
future deficits. In the event that your vacation component contributions exceed
the vacation payments made by the Fund in accordance with the terms of the
collective bargaining agreement, including disability taxes and the Employer's
and employees' share of FICA taxes, the balance will be refunded to you on or
before January 30th of the succeeding calendar year.
<PAGE>
If the foregoing conforms with your understanding, please sign below where
indicated.
ACCEPTED AND APPROVED:
Drug, Chemical, Cosmetic, Plastics
and Affiliated Industries Warehouse
Employees Local 815, Affiliated with
the International Brotherhood of
Teamsters
By: /s/ Ben Camadeco
---------------------------------------------
Ben Camadeco, Secretary-Treasurer/CEO
ACCEPTED AND APPROVED:
Duane Reade, A New York Partnership
By: /s/ Authorized Signatory President
-----------------------------------------
Employer Title
<PAGE>
AGREEMENT made this 16 day of July, 1992, effective as of the 1st day
of September, 1992; by and between DUANE READE, A NEW YORK PARTNERSHIP, whose
principal office is located at 49-29 30th Place, Long Island City, New York,
hereinafter designated as the "EMPLOYER" and ALLIED TRADES COUNCIL; whose
office is located at 467 Sylvan Avenue, Englewood Cliffs, New Jersey;
hereinafter designated as the "UNION".
IN CONSIDERATION of the premises and of the mutual and reciprocal
promises herein made and obligations herein assumed, as more fully hereinafter
set forth, the parties agree as follows:
FIRST: The Employer recognizes the Union as the sole collective
bargaining agent for all employees in its employ, excluding executives, office
employees, supervisors and armed guards. Whenever the word "employees" is used
in this Agreement, it shall be deemed to refer to all employees except for
those specifically excluded above, regardless of whether or not they are
members of the Union.
All employees shall, as a condition of continued employment, become
and remain members of the Union in good standing after they have completed
thirty days of employment or thirty days after execution of this Agreement,
whichever is later, provided, however, that no employee shall be removed from
his employment under this Article so long as he continues to tender uniform
dues and his initiation fee to the Union after such thirty-day period. Any
employee who fails to maintain his membership to the extent of not paying
uniform dues and his initiation fee after such thirty-day period, shall be
discharged by the Employer immediately upon
<PAGE>
- 2 -
notification from the Union in person or in writing. All new employees shall be
on a trial period of thirty calendar days during which time they may be
discharged without recourse to the grievance procedure.
SECOND: The Employer agrees that authorized representatives of the
Union shall be permitted to enter the Employer's place of business at any
time for the adjustment of disputes, grievances or any other matters that may
require their presence.
THIRD: The regular work week for all employees shall consist of
any five days, and no more than eight hours per day and no more than forty
hours per week. Except in the case of Pharmacists, who are considered to be
professional employees, work performed beyond eight hours in any day, or forty
hours in any week, shall be paid for at the overtime rate of one and one-half
times the employees' regular hourly rate. All employees shall be expected to
work a reasonable amount of overtime, including Saturdays and Sundays, provided
however, that they shall be given reasonable advance notice when overtime work
is requested. Pharmacists shall be paid for all hours worked at their
straight-time hourly rate of pay.
FOURTH: The Employer shall deduct uniform membership dues and
initiation fees from the wages paid to each employee. The Employer shall make
such deductions from the first payroll in each month and transmit all such
funds deducted no later than the tenth day of each month. All funds deducted
from the wages paid to employees for the payment of such dues and initiation
fees shall be held in trust by the Employer and shall be considered at all time
the property of the Union, provided, however, that
<PAGE>
- 3 -
prior to making such deductions the Employer has received from each employee on
whose account such deductions are made, a written assignment, which shall not
be irrevocable for a period of more than one year or beyond the termination
date of this Agreement, whichever occurs sooner, and which may contain a clause
that such assignment shall be automatically renewed for additional periods of
one year, unless the employee shall terminate such assignment in writing within
thirty days prior to any expiration date thereof.
FIFTH: No employee, whatever the performance, shall be discharged,
suspended, laid off or furloughed except for good and sufficient cause. In the
event an employee is proven to have committed an act amounting to dishonesty or
criminal negligence, the Employer may summarily discharge such employee.
Layoffs and recalls from layoffs shall be made in accordance with seniority.
SIXTH: Should any dispute arise concerning the application,
interpretation, effect, purpose or breach of any term or condition of this
Agreement, or in the event that there shall exist any claim, demand, dispute or
controversy between the parties hereto, including but not limited to a demand
or dispute arising out of a proposed addition, deletion or modification of this
Agreement, the parties hereto shall first attempt to settle and adjust such
dispute, claim, demand or controversy by negotiation. In the event that said
dispute, claim, demand or controversy shall not be completely settled and
adjusted, the parties agree that either of them may submit the question,
including any damages that have been suffered, to arbitration before an
arbitrator designated by the New York State Board of Mediation, the American
Arbitration
<PAGE>
- 4 -
Association, or the Federal Mediation & Conciliation Service in accordance
with their rules. The arbitrator so designated shall conduct a hearing in such
manner as he shall consider proper, and shall serve as sole arbitrator of the
dispute between the parties. The arbitrator shall have the right to conduct an
ex parte hearing in the event of the failure of either party to be present at
the time and place designated for the arbitration, and shall have the power to
render a decision based on the testimony before him at such hearing. The
decision of the arbitrator shall be final and binding upon both parties and may
be entered as a final decree or judgment in the Supreme Court of the State of
New York or in a court of appropriate jurisdiction in any state where such
decision shall be rendered. The costs of arbitration, including the
arbitrator's fee, shall be borne equally by the Employer and the Union. It is
the intent of the parties hereto that no defense to prevent the holding of the
arbitration shall be permitted. Service of any document or notice referred to
in the above paragraph, or service of any notice required by law in connection
with the arbitration proceeding, may be made by registered or certified mail.
SEVENTH: (A) It is hereby agreed by and between the respective
parties that effective as of September 1, 1992 (being a continuation of
contributions previously made) the Employer shall contribute to the Vacation
Fringe Benefit Fund the sum of Four Per Cent of the Employer's total, gross,
straight-time payroll expense for each employee covered by the Agreement
regardless of whether or not any such employee is a member of the Union and
regardless of the number of hours worked
<PAGE>
- 5 -
during the week. Such payments shall be made weekly for the last preceding
payroll week. A list containing the names and straight-time, weekly earnings of
each employee in the bargaining unit shall accompany each such payment. The
Employer's payroll records, social security records and other pertinent data
shall be open for inspection and audit by the Fund upon demand. Such payments
shall be made directly to the Vacation Fringe Benefit Fund and shall be held
subject to the provisions of a trust indenture dated February 17, 1971 and any
amendments, changes or additions thereto.
The Fund shall be managed and administered by a board of trustees
equally representative of the employers and the Union. In the event the
Employer and the Union trustees deadlock on the administration of the Fund,
they shall agree on an impartial umpire to decide such dispute; or in the event
of the failure to agree within a reasonable length of time, an impartial umpire
shall, on petition of either trustee, be appointed by the District Court of the
United States for the district where the Fund has its principal office. The
trustees shall make provisions for an annual audit of the Fund. A statement of
the results shall be available for inspection by interested persons at the
principal office of the Fund and at such other places as may be designated by
the trustees.
The Fund shall be used for the purpose of providing annual and
supplementary vacation benefits, jury duty reimbursement and for such approved
similar and related purposes and benefits, and for the payment of the
reasonable administrative expenses of the Fund, as the trustees may determine.
By executing this
<PAGE>
- 6 -
Agreement, the Employer hereby authorizes the Trustees of the Vacation Fringe
Benefit Fund, on its behalf, as its express agent, and in its name and stead,
to remit to the appropriate Federal taxing authorities, the Employer's share of
any FICA owed by the Employer as a result of vacation and/or fringe benefit
payments made by the Fund to employees of the Employer, together with the
employee's share of any such taxes, and, where applicable to remit to the
appropriate State taxing authorities the disability taxes owed as a result of
such payments. Similarly, by executing this Agreement, the Employer hereby
authorizes the Trustees of the Fund on its behalf, as its express agent and in
its name and stead, to issue to the appropriate governmental agencies and to
its employees receiving vacation and/or fringe benefit payments through the
Fund, Federal, State and City earnings statements showing gross wages, FICA tax
withheld, FICA wages, State income tax withheld and local tax withheld as a
result of such vacation and/or fringe benefit payments by the Fund. The
Trustees of the Fund shall have no obligation to report wages earned by the
Employer's employees, except such wages as are transmitted to the Employer's
employees by the Fund.
All monies paid to the Fund shall be used and distributed by the
trustees pursuant to the terms, conditions and provisions of the trust
indenture or any amendments, changes or additions thereto; and the rules,
regulations and resolutions adopted thereunder. Neither the Union, nor any
member of the Union individually or collectively; nor any International Union;
nor any body with which the Union may be affiliated; nor any participating
Employer individually or collectively, nor any combination thereof; nor any
association, corporation, group, entity, person or trust; nor any successor or
assign
<PAGE>
- 7 -
thereof either directly or indirectly, shall have any right, title, interest or
claim in or to the fund or any part thereof, nor to any accounting, supervision
or control thereof, of whatsoever kind or nature.
All monies, contributions, property, assets of the Fund and those
hereafter acquired and the ownership, control and the administration of the
Fund shall irrevocably, inseparably and forever remain vested exclusively in
the trustees of the Fund. No employee of any participating employer; nor any
employee of the Union; nor any person claiming by, through or under such
employee, either directly or indirectly, shall have any right, title, interest
or claim in or to the Fund or to any part thereof; nor to any accounting,
supervision or control thereof, of whatsoever kind or nature; nor any claim
against the Union, participating employers or the trustees, or to the
contributions of his or her Employer to the Fund or any assets or monies held
by the Fund except such benefits as are provided for by the Fund and/or by the
rules and regulations from time to time established and promulgated by the
trustees in accordance with the powers granted by the trust indenture as the
same may be amended or modified from time to time. The discretion of the
trustees as to the administration, use and disbursement of the Fund shall be
final and conclusive.
All payments shall be due and payable on the first day of each week,
for the preceding week. The foregoing notwithstanding, however, if the Employer
fails to make all payments required hereunder, on or before the tenth day of
the month for the preceding month, then the Trustees may require, and the
Employer agrees to pay, interest on any unpaid balance at the
<PAGE>
- 8 -
applicable rate as permitted by law. In addition, the Employer specifically
agrees that it shall be liable for all auditing expenses, collection costs and
legal fees incurred by the Union or by the Trustees of the Fund for the
collection of such payments.
Conditioned upon the Employer's timely payment in full to the Fund of
all of its obligations as specified herein, no further liability whatsoever
shall attach hereunder to the Employer; and no claim can, shall or may be made
by any employee against the Employer based upon the terms hereof for any reason
whatsoever.
(B) The amount of vacation to which an employee is entitled shall be
determined as of July 1 of each year:
Less than six months
of employment None
Six months but less than
one year of employment One week (40 hours)
One year but less than
seven years of employment Two weeks (80 hours)
Seven years but less than
twenty years of employment Three weeks (120 hours)
Twenty or more years of
employment Four weeks (160 hours)
<PAGE>
- 9 -
In determining eligibility for vacation leaves, all computations shall
be based upon each employee's total length of employment with the Employer. No
deductions shall be made from an employee's accumulated service except for
periods of nonemployment by the Employer. Such deduction shall be made in
accordance with the provisions of the trust indenture, and/or resolutions
adopted by the trustees.
Full power and authority will be lodged in the trustees of the
Vacation Fringe Benefit Fund to determine the extent of service credits to be
allocated to each employee as well as the rules and regulations pursuant to
which employees will be paid for any earned vacation pay.
In accordance with the rules and regulations of the Fund and at such
intervals as they determine appropriate, the trustees of the Fund shall
transmit to each employee on whose behalf contributions have been made to such
Fund, an amount equal to the sum of such employee's vacation leave entitlement
multiplied by such employee's vacation regular straight-time, hourly rate of
pay as of the date of such employee's vacation leave. This sum will be
diminished by the amount of any vacation payments made by the Fund to such
employee during the preceding vacation year (i.e. the period from July 1 of the
preceding year through June 30 of the current year).
Part-time employees shall receive vacation leave and vacation pay
on a pro rata basis.
<PAGE>
- 10 -
EIGHTH: All employees shall receive pay for the following nine
holidays each year regardless of whether or not they are scheduled to work
on any such holidays:
New Year's Day Yom Kippur
President's Day Thanksgiving Day
Memorial Day Christmas Day
July 4th (Independence Day) One Personal Day
Labor Day
Should the Employer elect to remain open on the Yom Kippur holiday,
employees shall be expected to work on such holiday and shall receive a paid
personal holiday in lieu thereof. Personal holidays shall be scheduled by each
affected employee at least 48 hours in advance.
NINTH: This contract shall not take effect until it is approved and
executed by an authorized officer of the Union. No term, condition or provision
of this Agreement may be modified or changed except in writing signed by both
parties.
TENTH: Should the Employer fail to meet promptly the financial
obligations under the terms of this agreement or breach any term or condition
thereof, such shall be considered a material breach of this Agreement, and the
Union reserves the right thereafter to demand that the Employer post cash
security or a bond in a reasonable sum, and may institute additional
appropriate measures, including economic sanctions and/or cessation of work to
assure the faithful performance of this Agreement. The Union shall at all times
retain the right to proceed to
<PAGE>
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arbitration in accordance with the provisions of Article Sixth hereof.
ELEVENTH: All good conditions, customs and privileges enjoyed by the
employees prior to the execution of this Agreement shall continue in full force
and effect without suspension or interruption as though they were actually
enumerated herein. The Employer shall not sell his establishment, or any part
thereof without 60 days' advance notice in writing to the Union, nor shall he
remove, terminate, discontinue, rent or lease any part thereof, without
providing similar advance notice. In no event shall such transaction be
consummated except on the basis that the purchaser or lessee shall assume this
Agreement and all of its terms and conditions and shall continue to recognize
the Union as the collective bargaining representative for all employees
formerly covered by this Agreement. In addition, the seller or renter, as well
as the purchaser or lessor, shall be responsible for all financial liabilities
under this Agreement up to and including the date of this transaction.
TWELFTH: The Union may elect or select shop stewards from among the
employees, who shall receive top seniority; and such shop stewards shall have
the authority to report grievance and violations of the contract to the Union.
No shop steward shall have the right to call any strike, stoppage or cessation
of work; and the sole duty and liability of the Union, in the event that a shop
steward so transcends his authority, shall be limited to ordering the employees
to return to work after written notice from the Employer. The shop steward
shall have the right during working hours to discuss grievances or perform such
other duties as the Union may require of him.
<PAGE>
- 12 -
THIRTEENTH: It is hereby agreed by and between the respective parties
that, commencing with the week ending September 4, 1992 (being a continuation
of contributions previously made), the Employer shall pay to the Allied Welfare
Fund the sum of Thirty-Five Dollars, each and every week for each employee who
is employed within the bargaining unit, commencing with the first day of
employment of such employee, regardless of whether such employee is a member of
the Union and regardless of the number of hours worked during the week. The
Employer shall submit to the Fund a list of the employees for whom such
payments are made. Vacations, holidays and sick leave with pay shall be deemed
time worked. The Employer's payroll records, social security records or other
pertinent data shall be open for inspection and audit by the Fund upon demand.
Such payments shall be made directly to the Allied Welfare Fund and shall be
held subject to the provisions of a trust indenture effective January 26, 1954
and any amendments, changes or additions thereto. The Fund shall be managed and
administered by a board of trustees equally representative of the employers and
the Union. In the event the Employer and the Union trustees deadlock on the
administration of the Fund, they shall agree on an impartial umpire to decide
such dispute; or in the event of their failure to agree within a reasonable
length of time, an impartial umpire shall, on petition of either trustee, be
appointed by the District Court of the United States for the district where the
Fund has its principal office. The trustees shall make provisions for an annual
audit of the Fund. A statement of the results shall be available for inspection
by interested persons at the principal office of the Fund and at such other
places as may be designated by the trustees.
<PAGE>
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Such contributions shall be used for the purpose of providing
insurance, welfare, and similar benefits for employees employed by the
Employer, employees employed by all other employers similarly situated, their
families, and the payment of reasonable administrative expenses of the Fund;
and shall, in addition, be used and disbursed by the trustees pursuant to the
terms, conditions and provisions of the trust indenture or any amendments,
changes or additions thereto; and the rule, regulations and resolutions adopted
thereunder. Commencing with the week ending March 3, 1989, such contributions
shall be used for the purpose of providing Major Medical insurance and similar
benefits for all employees of the Employer and their families. Neither the
Union, nor any member of the Union individually or collectively; nor any
International Union, nor any body with which the Union may be affiliated; nor
any participating employer individually or collectively; nor any combination
thereof; nor any association, corporation, group, entity, person or trust; nor
any successor or assign thereof, either directly or indirectly, shall have any
right, title, interest or claim in or to the Fund or any part thereof; nor to
any accounting, supervision or control thereof, of whatsoever kind or nature.
All monies, contributions, property, assets of the Fund and those hereafter
acquired; and the ownership and control and the administration of the Fund
shall irrevocably, inseparably and forever remain vested exclusively in the
trustees of the Fund. No employee of any participating employer; nor any
employee of the Union; nor any person claiming by, through or under such
employee, either directly or indirectly, shall have any right, title, interest
or claim in or to the Fund or to any part thereof; nor to any accounting,
supervision or control thereof of whatsoever kind or nature; nor any claim
against the Union,
<PAGE>
- 14 -
participating employers, or the trustees, or to the contributions of his or her
employer to the Fund or any assets or monies held by the Fund except such
benefits as are provided for by the plan and/or by the rules and regulations
from time to time established and promulgated by the trustees in accordance
with the powers granted by the trust indenture, as the same may be amended or
modified from time to time. The discretion of the trustees as to the
administration, use and disbursement of the Fund shall be final and conclusive.
All payments shall be due and payable on the first day of each month,
for the preceding month. If the Employer fails to make a payment or payments
required hereunder, on or before the tenth day of the succeeding month, then
the Trustees may require, and the Employer agrees to pay, interest on any
unpaid balance at the applicable rate as permitted by law. In addition, the
Employer specifically agrees that it shall be liable for all auditing expenses,
collection costs and legal fees incurred by the Union or by the Trustees of the
Fund for the collection of such payments. From and out of the contributions
made to the Allied Welfare Fund as specified above, Eight Dollars per employee
per week shall be unconditionally and irrevocably allocated and paid to the
Union Mutual Medical Fund subject to the provisions of a trust indenture
effective September 6, 1978 and any amendments, changes or additions thereto,
for the benefit of retired employees of the Employer and retired employees of
all other employers similarly situated and their families who are receiving
pension benefits from the Union Mutual Fund, and those employers of the
Employer and of all other employers similarly situated whose pension benefits
from the Union Mutual Fund have been vested and who, in either case,
<PAGE>
- 15 -
are and remain members in good standing of the Union Mutual Benefit
Association. All sums contributed to the Union Mutual Medical Fund and the
affairs of said Fund shall be managed and administered by a Board of Trustees
equally representative of the employers and the participants. All of the
foregoing conditions and provisions applicable to the Allied Welfare Fund shall
be equally applicable to the Union Mutual Medical Fund.
The Employer is party to a collective bargaining agreement with Local
815, affiliated with the International Brotherhood of Teamsters (hereinafter
referred to as "Local 815"), covering certain warehouse employees of the
Employer. This agreement, which will expire on or about August 31, 1993,
requires the Employer to make contributions to the Allied Welfare Fund on
behalf of the employees covered thereunder. Should the Employer negotiate a
collective bargaining agreement with Local 815 to succeed the agreement which
expires on August 31, 1993, and should such succeeding agreement contain one or
more modifications in the amount of the Employer's contribution to the Allied
Welfare Fund for the employees covered thereunder, it is agreed by and between
the parties hereto that each such modification in the amount of Employer's
contribution to the Allied Welfare Fund shall apply as well to each employee of
the Employer covered hereby. Each such modification in the amount of Employer's
contribution to the Allied Welfare Fund shall become effective hereunder, on
the same date or dates as each such modification becomes effective pursuant to
the terms of the Employer's successor collective bargaining agreement with
Local 815. In such event, this agreement shall be deemed to be amended and
modified only as to the
<PAGE>
- 16 -
effective date and amount of the employer's contribution to the Allied Welfare
Fund for the employees covered hereunder.
FOURTEENTH: It is hereby agreed by and between the respective parties
that, commencing with the effective date of this Agreement, the Employer shall
pay to the Union Mutual Fund the sum of Twenty-Four Dollars each and every week
for each employee who is employed within the bargaining unit commencing with
the first day of employment of such employee, regardless of whether such
employee is a member of the Union and regardless of the number of hours worked
during the week; and the Employer shall submit to the Fund a list of the
employees for whom such payments are made. Vacations, holidays and sick leave
with pay shall be deemed time worked. The Employer's payroll records, social
security records and other pertinent data shall be open for inspection and
audit by the Fund upon demand. Such payments shall be made directly to the
Union Mutual Fund and held subject to the provisions of a trust indenture
effective November 1, 1955 and any amendments, changes or additions thereto.
The Fund shall be managed and administered by a board of trustees equally
representative of the employers and the Union. In the event the Employer and
the Union trustees deadlock on the administration of the Fund, the two shall
agree on an impartial umpire to decide such dispute; or in the event of their
failure to agree within a reasonable length of time, an impartial umpire shall,
on petition of either trustee, be appointed by the District Court of the United
States for the district where the Fund has its principal office. The trustees
shall make provisions for an annual audit of the Fund, a statement of the
result of which shall be available for inspection by interested persons at the
principal office of the Fund and at such other places as may be designated by
the trustees.
<PAGE>
- 17 -
The Fund shall be used for the purpose of providing pensions and/or
annuities and similar benefits for employees employed by the Employer,
employees employed by all other employers similarly situated, the payment of
reasonable administrative expenses of the Fund and shall, in addition, be used
and disbursed by the trustees pursuant to the terms, conditions and provisions
of the trust indenture, or any amendments, changes or additions thereto; and
the rules, regulations and resolution adopted thereunder. Neither the Union,
nor any member of the Union individually or collectively; nor any International
Union; nor any body with which the Union may be affiliated; nor any
participating employer individually or collectively; nor any combination
thereof; nor any association, corporation, group, entity, person or trust; nor
any successor or assign thereof either directly or indirectly, shall have any
right, title, interest or claim in or to the Fund, or any part thereof; nor to
any accounting, supervision or control thereof of whatsoever kind or nature. It
is understood and agreed that the Employer and all other employees similarly
situated may have a continuing financial obligation pursuant to the provisions
of the Employee Retirement Income Security Act of 1974, in the event of
termination or partial termination of the Fund. All monies, contributions,
property, assets of the Fund and those hereafter acquired; and the ownership,
control and the administration of the Fund shall irrevocably, inseparably and
forever remain vested exclusively in the trustees of the Fund. No employee of
any participating employer; nor any employee of the Union; nor any person
claiming by, through or under such employee, either directly or indirectly,
shall have any right, title, interest or claim in or to the Fund or any part
thereof; nor to any accounting, supervision or control thereof of whatsoever
kind or nature; nor any claim
<PAGE>
- 18 -
against the Union, participating employers or the trustees; nor to the
contributions of his or her employer to the Fund; nor to any assets or monies
held by the Fund except such benefits as are provided by the plan and/or by the
rules and regulations from time to time established and promulgated by the
trustees in accordance with the powers granted by the trust indenture, as the
same may be amended or modified from time to time. The discretion of the
trustees as to the administration, use and disbursement of the Trust Fund shall
be final and conclusive.
All payments shall be due and payable on the first day of each month,
for the preceding month. If the Employer fails to make a payment or payments
required hereunder, on or before the tenth day of the succeeding month, then
the Trustees may require, and the Employer agrees to pay, interest on any
unpaid balance at the applicable rate as permitted by law. In addition, the
Employer specifically agrees that it shall be liable for all auditing expenses,
collection costs and legal fees incurred by the Union or by the Trustees of the
Fund for the collection of such payments.
FIFTEENTH: The adjusted wage schedule attached hereto is
incorporated herein and made a part hereof.
SIXTEENTH: All employees who have been employed for six months or
longer shall be entitled to receive five (5) days of paid sick leave during
each contract year. Employees shall receive a day's wages at their then current
daily rate of pay for each day of sick leave utilized.
<PAGE>
- 19 -
Employees shall not be required to provide a doctor's note or other
substantiating evidence in order to be eligible to receive sick leave pay,
provided, however, that employees shall call the Company as early as possible
on the first day of any illness to advise the Company concerning the absence
and its anticipated length.
SEVENTEENTH: This Agreement shall become effective as of the 1st day
of September, 1992, and shall remain operative and binding upon the parties
hereto, their heirs, successors, assignees, administrators and trustees in
bankruptcy for a period up to and including the 31st day of August, 1995, and
shall automatically continue thereafter for similar periods and may be
terminated by one's giving the other ninety days' notice by registered mail
prior to each expiration period of such intention to terminate this Agreement.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals this 16 day of July, 1992.
ALLIED TRADES COUNCIL DUANE READE, A NEW YORK
PARTNERSHIP
By: /s/ Luke McCabe By: /s/ Hyman Needelman
----------------------- ---------------------------
Luke McCabe, President Employer Vice President
<PAGE>
- 20 -
DUANE READE CORPORATION
ADJUSTED WAGE SCHEDULE
Effective March 1, 1993, all pharmacists shall receive a general wage
increase of Twenty-Five Dollars per week ($.625 per hour).
Effective September 1, 1994, pharmacists shall receive a general wage
increase of Twenty-Five Dollars per week ($.625 per hour).
Effective September 1, 1992, all employees other than pharmacists
shall receive a general wage increase of Ten Dollars per week ($.25 per hour).
Effective September 1, 1993, all pharmacists shall receive a general
wage increase of Ten Dollars per week ($.25 per hour).
Effective September 1, 1994, all employees other than pharmacists
shall receive a general wage increase of Ten Dollars per week ($.25 per hour).
<PAGE>
MEMORANDUM OF AGREEMENT made this 22nd day of September, 1995, by and between
Duane Reade, a New York Partnership, (hereinafter referred to as the
"Employer") and Allied Trades Council (hereinafter referred to as the "Union").
WHEREAS the Employer and the Union are party to an agreement dated July 16,
1992, covering the period from September 1, 1992, through August 31, 1995,
which by its terms was extended for an additional period of three years, up to
and including August 31, 1998, and thereafter as therein provided; and
WHEREAS the parties have negotiated concerning modifications requested by each
of them in the terms of such agreement; it is:
AGREED that the collective bargaining agreement shall be modified only in the
following respects:
1. Effective as of and retroactive to September 1, 1995, all
pharmacists shall receive a general wage increase of $35.00 per week.
2. Effective as of March 1, 1997, all pharmacists shall receive a
general wage increase of $35.00 per week.
3. On or about October 12, 1997, each employee, other than
pharmacists, who was on the Employer's payroll on September 1, 1995, shall
receive a bonus amounting to 7.5% of such employee's straight-time earnings
(including the overnight differential, where applicable), during such part of
the calendar year commencing September 1, 1994 and ending August 31, 1995, as
was worked by each such employee.
4. Effective September 1, 1996, each Assistant Manager shall receive a
general wage increase of $10.00 per week.
5. Effective September 1, 1996, each employee other than pharmacists
and Assistant Managers shall receive a general wage increase or $10.00 per
week.
6. Effective September 1, 1997, each employee other than Pharmacists
shall receive a general wage increase of $10.00 per week.
7. The Employer's contributions to the Allied Welfare Fund (currently
being made at the rate of $45.00 per employee per week), shall increase by
$4.00 per employee per week, commencing with the week ending January 6, 1996,
and by an additional $5.00 per employee per week, commencing with the week
ending September 6, 1996, and by an additional $5.00 per employee per week,
commencing with the week ending September 5, 1997.
<PAGE>
8. The regular work week for all employees except Pharmacists shall
consist of forty hours per week, distributed among five working days. Overtime
shall be paid at the rate of time and one-half after forty hours of work.
Employees may voluntarily agree to work weeks of less than forty hours.
9. All other terms and conditions of the Agreement dated July 16,
1992, shall remain in full force and effect.
IN WITNESS WHEREOF the parties have set their hands this 22nd day of September,
1995.
DUANE READE, A NEW YORK PARTNERSHIP
By: /s/ Authorized Signatory
___________________________________
ALLIED TRADES COUNCIL
By: /s/ Luke McCabe
___________________________________
<PAGE>
[Rapid RxEMIT (Register Mark) Letterhead]
March 10, 1997
Mr. Jerry Ray
Senior Vice President
Duane Reade, Inc.
49-29 30th Place
Long Island City, NY 11101
Rapid RxEMIT (Register Mark) RECEIVABLES PURCHASE AGREEMENT
AGREEMENT, by and between DUANE READE, INC., a corporation
with principal executive offices at 49-29 30th PLACE, LONG ISLAND CITY, NY
11101 (the "Seller"), and PHARMACY FUND RECEIVABLES, INC., a New York
corporation with offices at 680 Fifth Avenue, New York, NY 10019 ("PFR").
The Seller, in the ordinary course of its pharmacy business, generates
third party prescription receivables resulting from the sale of pharmaceutical
products to customers covered by third party insurance or payment plans;
The Pharmacy Fund, Inc. ("PFI"), the parent company of PFR, has
developed and implemented its RAPID RxEMIT (Register Mark) Program (the "RR
PROGRAM") pursuant to which PFR purchases certain third party prescription
receivables and electronically remits payment for such receivables on the next
business day; and
The Seller desires to subscribe for the RR Program and sell to PFR
certain receivables, on the terms and conditions of this Agreement.
NOW THEREFORE, the parties agree as follows:
ARTICLE I
AGREEMENT TO PURCHASE AND SELL
1.1 Agreement to Purchase : Rights and Obligations.
(a) Purchase Obligation. The Seller shall sell to PFR, and PFR shall
purchase from the Seller, all third party prescription accounts receivable
including, without limitation, any contract rights, general intangibles,
accounts, chattel paper, amounts due and to become due thereunder and all
rights, powers and privileges arising thereunder or related thereto and all
proceeds and products of any of the foregoing ("Receivables") that (i) are
generated pursuant to agreements ("Provider Agreements"), in form and substance
satisfactory to PFR, between the Seller and an insurer, a plan sponsor, an
administrator, a governmental program such as Medicaid, or their agents, who
satisfies PFR's approval policies (an "Approved Payor"); (ii) have been
adjudicated and approved electronically as a claim payable in accordance with
all then currently applicable National Council for Prescription Drug Program
standards; and (iii) are free and clear of any liens, claims, offsets and
encumbrances of any kind and nature ("Liens"). Each receivable that meets the
foregoing requirements and is purchased by PFR is referred to herein as a
"Purchased Receivable".
(b) Assumption of Risk. With respect to the Purchased Receivables, PFR
shall assume the risk of nonpayment without recourse to the Seller; provided,
however, that in the event (i) any Purchased Receivable is subsequently
rejected by an Approved Payor pursuant to the terms of the applicable Provider
Agreement as a result of the Approved Payor's good faith allegation of the
Seller's error,
<PAGE>
wrongful conduct or failure to perform under the terms of such Provider
Agreement, (ii) a Receivable is purchased after the termination of this
Agreement pursuant to Section 1.2 hereof, (iii) a Receivable is purchased in
respect of which there shall have occurred a breach of any obligation,
covenant, representation or warranty of Seller hereunder or (iv) any
governmental Approved Payor for any reason rejects or adjusts to a lesser
amount any of its Purchased Receivables and, accordingly, the representations
and warranties of Seller to PFR under the Agreement are breached, such
Purchased Receivable (an "Adjusted Receivable") shall be with full recourse to
the Seller.
(c) Collections by PFR. In the event that PFR receives payment from an
Approved Payor on account of any Receivables other than the Purchased
Receivables, PFR shall promptly remit such payment to the Seller. The Seller
hereby appoints PFR as its agent and attorney-in-fact for the purpose of
authorizing PFR to receive and remit such payments on the Seller's behalf.
(d) Records and Data. To the extent permitted under all applicable
laws, the Seller hereby agrees to transfer and assign to PFR all of its right,
title and interest in and to the records and data relating to the transaction
which gives rise to a Purchased Receivable. All such records and data will be
segregated from those relating to other receivables of the Seller, and the
computer files and physical documentation relating to the Receivables shall
bear an indication reflecting that the Receivables have been sold to PFR, or
such third party as PFR shall direct, and Seller agrees to so indicate. Seller
further agrees to deliver to Envoy and PDX a notice authorizing Envoy and PDX
to make available to PFR, simultaneously with the electronic processing of
claims by Envoy as the switch, copies of all such claims submitted by Seller
and all responses from processors and others to such claims. PFR acknowledges
that this may bring it into possession of sensitive patient data which Seller
maintains in confidence as part of its patient/pharmacist relationship. PFR
agrees to take particular care in maintaining the confidentiality of this
sensitive patient data and not to disclose it to any third party or use it for
any purpose that is detrimental to Seller or to its patient/pharmacist
relationship. It is acknowledged and agreed that PFR may use or sell
statistical data derived from the Seller's use of the PR Program hereunder
without directly or indirectly identifying the Seller or its customers. Prior
to any sale by PFR of statistical data derived from the Seller's use of the RR
program, PFR, as courtesy, shall notify the Seller that PFR intends to make
such a sale. PFR shall not permit any of its affiliates to, enter into the
pharmacy business in competition with Seller.
1.2 Term. This Agreement shall commence on the date of the first
purchase by PFR of Receivables hereunder (the "Effective Date") and continue
for a period of three (3) years, unless sooner terminated in accordance with
the terms hereof. This Agreement shall automatically renew for successive one
(1) year terms unless either the Seller or PFR notifies the other of its
intention not to renew this Agreement not less than sixty (60) days prior to
the expiration of the initial term or any renewal term. Notwithstanding the
foregoing, this Agreement may be terminated immediately by either party in the
event of (i) a material breach hereof by either party, (ii) a failure of any
material covenant, representation or warranty of the other party set forth
herein, (iii) the insolvency of, or the institution of proceedings by or
against, the other party under any federal or state bankruptcy or insolvency
law, (iv) an assignment by the other party for the benefit of all or
substantially all of its creditors or (v) the cessation of business operations
by the other party. Upon termination of this Agreement, both parties shall be
relieved of further obligations hereunder, except those set forth in Sections
1.1(d), 3.5, 6.3, 6.4, and 6.15 which shall survive termination hereof.
1.3 Purchase Price. PFR shall pay to the Seller for any Purchased
Receivables an amount (the "Purchase Price") equal to the approved claim
payable amount of such Receivables discounted by 1.35% (the "Discount Rate").
The Discount Rate represents the only charge for your participation in the RR
Program.
1.4 Service Agreement. The Seller agrees that it shall process all of
its PFR-bound third party payor prescription claims though Envoy as the switch.
PFR acknowledges that the Seller uses PDX pharmacy software for the electronic
processing of claims, and PFR shall bear the responsibility for, and expense of
any modifications to the RR Program or to the Seller's systems which are
necessary to enable Seller to transmit,and PFR or Envoy and PDX to receive, any
claims or other information required to be transmitted by Seller hereunder.
Seller shall continue to process its claim using PDX software through
<PAGE>
Envoy as the switch unless and until PFR at its expense causes a modification
in the Seller's system and switching contract to enable National Data
Corporation ("NDC") to serve as the switch. At that time, Seller agrees it
shall process all of its PFR-bound third party payor prescription claims
through NDC as the switch and shall enter into a Service Agreement with NDC or
such other entity designated by PFR (the "Service Agreement"), provided that
the terms and conditions of the Service Agreement are no less favorable to the
Seller than the terms and conditions of the Seller's agreement with Envoy.
During the term of this Agreement, the Seller agrees that it shall not modify
or terminate the Service Agreement without prior written notice to PFR.
1.5 Notice to Approved Payors. The Seller agrees that, promptly upon
execution of this Agreement, it shall deliver to all Approved Payors a Notice
or Notices of the sale of its Purchased Receivables to PFR in the forms
provided to Seller PFR.
1.6 Conditions to Purchase. PFR shall have no obligation to purchase
any Receivables unless all representations and warranties made by the Seller
herein shall be true and correct on the date of purchase as if made on such
date and all covenants and agreements of the Seller hereunder shall have been
performed and complied with.
1.7 Changes of Approved Payors. Seller reserves the right, in its
discretion, from time to time upon notice to PFR, to withdraw Approved Payors
from this Agreement. Seller may also, in its sole discretion, add Approved
Payors to this Agreement upon notice to PFR. PFR reserves the right, in its
sole discretion, from time to time upon notice to the Seller, to withdraw
Approved Payors from this Agreement which fail to continue to meet the criteria
set forth in Section 1.1(a)(i) hereof.
ARTICLE II
PURCHASE PROCEDURES
2.1 General. Until 12:00 Midnight Eastern time, on each day, PFR shall
purchase Receivables as such Receivables have been adjudicated and approved for
payment as a claim payable during the preceding twenty-four (24) hours. Each
sale of a Receivable hereunder shall transfer ownership of such Receivable to
PFR effective as of the close of business on such day, and PFR shall have all
rights against the Approved Payor of an unpaid seller with respect to such
Purchased Receivable. With respect to Purchased Receivables from a governmental
Approved Payor, to the extent that such governmental Approved Payor does not
recognize the transfer of ownership of its Purchased Receivables to PFR, PFR
shall have no rights against such governmental Approved Payor, and the Seller
shall, as PFR's agent and on PFR's behalf, exercise its best efforts to
vigorously and diligently pursue all rights of an unpaid seller against
governmental Approved Payor.
2.2 Purchase Documents. On the date of the first purchase by PFR of
Receivables hereunder and thereafter, the Seller shall deliver to PFR such
documents confirming transfer of title to the Purchased Receivables as PFR may
request.
2.3 Payment. PFR shall pay the Purchase Price for the Purchased
Receivables, less the amount of any Adjusted Receivables (adjusted to reflect
the applicable Discount Rate) and any third party deductions, via ACH transfer
to the account designated by the Seller on the next banking day after the date
of purchase of the Purchased Receivables.
2.4 Reconciliation by Seller. After 6:00 A.M. Eastern time of each
day, the Seller shall have the right electronically to review all transactions
between PFR and the Seller that occurred during the preceding day in accordance
with the data file transmission agreed to between PFR and Seller and to dispute
any amounts with which it does not in good faith agree.
ARTICLE III
PROTECTION OF PFR
3.1 True Sale; Security Interest. The purchases of Receivables
contemplated by this Agreement are intended by the parties to be "true sales"
of such Receivables. If for any reason, notwithstanding the parties' intent,
the purchases of Receivables hereunder shall be construed as anything other
than a true
<PAGE>
sale, Seller shall have been deemed to grant to PFR, as of the date of this
Agreement, a first priority security interest in the Purchased Receivables now
existing or hereafter arising.
3.2 Further Assurances. The Seller from time to time do and perform
any and all acts and execute any and all documents necessary to perfect and
protect PFR's interest in the Purchased Receivables and all collections with
respect thereto against all persons or entities whomsoever, including, without
limitation, a financing statement or statements with respect to the Purchased
Receivables meeting the requirements of applicable state law in such manner and
in such jurisdictions as are necessary to perfect and protect the interests of
PFR created hereby under the applicable Uniform Commercial Code against all
creditors of, and purchasers from, the Seller.
3.3 Power to Act; Power of Attorney. PFR shall have the right to do
all acts and things as it deems necessary to protect its interest in the
Purchased Receivables and perform its duties hereunder. In furtherance of this
power, during the term of this Agreement, the Seller hereby grants to PFR an
irrevocable power of attorney, with full power of substitution, coupled with an
interest, to execute and file any and all documents in the name of the Seller
or in PFR's own name necessary to perfect and protect PFR's interest in the
Purchased Receivables.
3.4 Performance of Undertakings under the Purchased Receivables. The
Seller shall at all times observe and perform, or cause to be observed and
performed, all obligations and undertakings to the Approved Payors arising in
connection with each Purchased Receivable or the related Provider Agreement and
will not take any action or cause or permit any action to be taken to impair
the rights of PFR in its interest in the Purchased Receivables. With respect to
Purchased Receivables from a governmental Approved Payor, the Seller agrees to
receive all payments from such governmental Approved Payor in trust for PFR. To
the extent not prohibited by applicable law or by the applicable Provider
Agreement, the Seller agrees to direct such governmental Approved Payor to make
payment on all of its Purchased Receivables to the Seller to a lock box or a
limited purpose demand deposit account at a financial institution designated by
PFR, which may be the same lock box or limited purpose demand deposit account
used for other pharmacies. The Seller's interest in any payments received in
the lock box or limited purpose demand deposit account are limited solely to
those related to Seller's Purchased Receivables. The Seller further agrees to
direct such financial institution (a) to transfer the funds in the lock box or
limited purpose demand deposit account on a daily basis to an account
designated by PFR and (b) to notify PFR of any change in such direction. In the
event that the Seller wishes to revoke or modify such direction, it shall give
PFR and such financial institution forty eight (48) hours prior written notice
of such desire. To the extent that any governmental Approved Payor is unwilling
to make payment to the Seller as directed by the Seller, the Seller shall
promptly remit any payments, remittance advices and related documents received
on account of such governmental Approved Payor's Purchased Receivables to PFR.
If the Seller fails to remit payment promptly, such Purchased Receivables shall
become Adjusted Receivables, and PFR shall have the rights with respect to such
Adjusted Receivables as are specified in Sections 1.1(b) and the Seller
acknowledges that such payments, remittance advices and related documents are
being received by Seller in trust for PFR and as its agent. If Seller fails to
turn over all such payments to PFR promptly, PFR shall have the right to set
off the amount of such payments against any other payments PFR owes to Seller
or to any other pharmacy under common ownership or Management; to terminate
this Agreement, to bring a civil action against Seller or anyone who
participated in the wrongful withholding or misappropriation of PFR's funds
for, among other things, conversion, and to recover compensatory damages,
punitive damages, interest, costs (including attorneys' fees) and
disbursements; to file a complaint with the appropriate pharmacy and
pharmacists licensing authorities; to notify the appropriate credit agencies;
and to file a criminal complaint against Seller and anyone who participated in
the wrongful withholding or misappropriation of PFR's funds.
3.5 Collections by the Seller. In the event that the Seller receives
payment on account of any Purchased Receivable which is not an Adjusted
Receivable, the Seller shall promptly remit such payment, remittance advice and
related documents to PFR. The Seller acknowledges that such payments are being
received by Seller in trust for PFR and as its agent. If Seller fails to turn
over all such payments to PFR in the most expedient manner, PFR shall have the
right to set off the amount of such payments against any other payments PFR
owes to Seller or to any other pharmacy under common ownership or Management;
to terminate this Agreement, to bring a civil action against Seller or anyone
who
<PAGE>
participated in the wrongful withholding or misappropriation of PFR's funds
for, among other things, conversion, and to recover compensatory damages,
punitive damages, interest, costs (including attorneys' fees) and
disbursements; to file a complaint with the appropriate pharmacy and
pharmacists licensing authorities; to notify the appropriate credit agencies;
and to file a criminal complaint against Seller and anyone who participated in
the wrongful withholding or misappropriation of PFR's funds.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 Representations and Warranties of the Parties. Each party hereto
hereby represents and warrants to the other party that:
(a) Organization. It is an entity duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation or
formation and has all requisite power and authority to carry on its business as
now being conducted.
(b) Authority. It has full power and authority to execute and deliver
this Agreement and the agreements referred to herein and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and such other agreements and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by such party, have been duly and validly executed and delivered by
such party and constitute the valid and legally binding agreements of such
party, enforceable against it in accordance with their respective terms.
(c) No Conflict. The execution and delivery of this Agreement and the
agreements referred to herein do not, and the consummation of the transactions
contemplated hereby and thereby will not, as the case may be, conflict with or
violate, result in a breach or default under or result in the creation of a
Lien on, (i) any law, regulation, court order, judgment or decree applicable to
such party, (ii) such party's corporate or partnership governance documents,
(iii) any of the properties or assets of such party or (iv) any contract,
permit, license or franchise to which such party or any of its properties or
assets is bound or affected.
4.2 Representations and Warranties of the Seller. The Seller hereby
represents and warrants to PFR that:
(a) It has, and will have, good and marketable title to the Purchased
Receivables, free and clear of any Liens.
(b) It has not transferred or subjected, and will not transfer or
subject, to a Lien any of the Purchased Receivables, other than the sale of
such receivables to PFR in accordance with the terms of this Agreement.
(c) The Provider Agreements have been, and will be, duly authorized,
executed and delivered by the parties thereto, are, and will be, the legal,
valid and binding obligations of the parties thereto, are, and will be, in full
force and effect and are, and will be, enforceable against the parties thereto
in accordance with their terms, and there are, and will be, no defaults
existing or threatened thereunder.
(d) The Purchased Receivables are, and will be, bona fide, have been
and will be, created in accordance with the terms and conditions of the
Provider Agreements and represent, and will represent, the legal, valid and
binding payment obligations of the Approved Payor.
(e) The right of PFR (or its designee) to receive all payments due and
payable and to become due and payable with respect to the Purchased Receivables
shall be absolute and unconditional and shall continue without deduction,
setoff, counterclaim or recoupment for any reason whatsoever.
The foregoing representations and warranties shall not (i) constitute
a representation or warranty by Seller as to the present or continuing
creditworthiness of any Approved Payor or as to whether any governmental
Approved Payor has appropriated or will appropriate funds sufficient to make
payment on any Purchased Receivable or (ii) be deemed to be breached as a
result of (x) the imposition of an automatic stay or the discharge of the
obligation to pay a Purchased Receivable in a bankruptcy
<PAGE>
proceeding involving any Approved Payor or (y) any similar event in any
conservatorship, receivership, moratorium, or other type of insolvency
proceeding involving any Approved Payor.
ARTICLE V
COVENANTS OF THE SELLER
5.1 Affirmative Covenants. The Seller covenants that it will:
(a) Promptly notify PFR of the results of any audits or other action
taken or to be taken by an Approved Payor pursuant to the applicable Provider
Agreement.
(b) Preserve and maintain its corporate or partnership existence,
rights, franchises and privileges in the jurisdiction of its incorporation or
formation.
(c) Give PFR prior written notice of any relocation of its principal
executive offices and will at all times maintain its principal executive
offices within a jurisdiction in the United States in which Article Nine of the
Uniform Commercial Code (1972 or later revision) is in effect.
(d) Promptly notify PFR of the occurrence of any event which would
give rise to PFR's right to terminate this Agreement immediately or any
material adverse change in the business operations or condition (financial or
otherwise) of the Seller.
(e) Promptly send to PFR by certified mail, return receipt requested,
a copy of all notices it sends to, or receives from, an Approved Payor pursuant
to the Provider Agreements.
5.2 Negative Covenants of the Seller. The Seller covenants that it
will not, without the prior written consent of PFR:
(a) Rescind or cancel any Purchased Receivable or Provider Agreement
or modify any of the material terms or provisions of the Provider Agreement
relating to the Purchased Receivables;
(b) Change its name, identity or legal structure in any manner which
could make any financing statement or continuation statement filed in
connection with this Agreement or the transactions contemplated hereby
seriously misleading within the meaning of the applicable provisions of the
Uniform Commercial Code; or
(c) Sell, negotiate or place any Lien on any of the Purchased
Receivables except as contemplated by this Agreement.
(d) Modify or terminate the terms of any Purchased Receivable or,
without prior written notice to PFR, modify or terminate any Provider
Agreement. Any attempted modification or termination without such consent or
notice, as the case may be, shall be void and of no force and effect.
ARTICLE VI
MISCELLANEOUS
6.1 Intent. The parties hereto acknowledge that this Agreement is, and
is intended to be, a contract to extend financial accommodations to the Seller
within the meaning of Section 365(e)(2)(B) of the United States Bankruptcy Code
or any amended or successor provision thereof or any amended or successor code.
6.2 Interpretation and Construction. The section headings contained in
this Agreement are for reference purposes only. Terms not otherwise defined
herein which are defined in the Uniform Commercial Code as in effect in the
State of New York on the date hereof shall have the respective meanings
ascribed to such terms therein unless the context otherwise clearly requires.
<PAGE>
6.3 INDEMNIFICATION.
(a) The Seller shall indemnify, defend and save harmless PFR, its
directors, officers, shareholders, employees, representatives and each person
or entity who controls PFR (collectively, the "Indemnities") from and against
any and all losses, claims, damages, liabilities, costs and expenses (including
attorneys' fees), excluding, however, any indirect, consequential, exemplary,
special, incidental or punitive damages, which the Indemnities may incur or
which may be asserted against the Indemnities by any person or entity arising
out of or relating to (i) any misrepresentation or breach of a warranty,
covenant or agreement of the Seller made hereunder or in any document executed
in connection herewith or the transactions contemplated hereby, (ii) any action
taken or failed to be taken by the Seller with respect to a Purchased
Receivable or any of the Seller's obligations hereunder, (iii) any obligation
or liability of the Seller to any Approved Payor under any Provider Agreement
other than relating to a Purchased Receivable or (iv) any action taken or
caused to be taken by the Seller which impairs PFR's interest in the Purchased
Receivables.
(b) PFR shall indemnify, defend and save harmless the Seller, its
directors, officers, shareholders, employees, representatives and each person
or entity who controls the Seller (collectively, the "Indemnities") from and
against any and all losses, claims, damages, liabilities, costs and expenses
(including attorneys' fees), subject to Section 6.4 below, which the
Indemnities may incur or which may be asserted against the Indemnities by any
person or entity arising out of or relating to (i) misrepresentation or breach
of warranty, covenant or agreement of PFR made hereunder or in any document
executed in connection herewith or the transactions contemplated hereby, or
(ii) any transaction executed pursuant to a lock box agreement the Seller has
entered into at PFR's request.
6.4 Limitation of Liability. PFR SHALL HAVE NO LIABILITY TO THE SELLER
FOR INDIRECT, CONSEQUENTIAL, EXEMPLARY, SPECIAL, INCIDENTAL OR PUNITIVE DAMAGES
EVEN IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES WITH RESPECT TO
ITS OBLIGATIONS UNDER THIS AGREEMENT, THE PURCHASE DOCUMENTS AND THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY. IN ANY EVENT, THE LIABILITY OF
PFR TO THE SELLER FOR ANY REASON AND UPON ANY CAUSE OF ACTION SHALL BE LIMITED
TO GENERAL MONEY DAMAGES IN AN AMOUNT NOT TO EXCEED THE GREATER OF $1,000,000
AND THE AMOUNT OF THE UNPAID PURCHASED RECEIVABLES. THIS LIMITATION APPLIES TO
ALL CAUSES OF ACTION IN THE AGGREGATE, INCLUDING, WITHOUT LIMITATION, BREACH OF
CONTRACT, BREACH OF WARRANTY, NEGLIGENCE, STRICT LIABILITY, MISREPRESENTATION
AND OTHER TORTS.
6.5 Disclaimer of Warranties. PFR MAKES NO REPRESENTATIONS OR
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE RR
PROGRAM.
6.6 Notices. All notices and other communications (collectively
"notices") under this Agreement shall be in writing and shall be sent by
prepaid first-class mail, telex or facsimile with confirmation in writing
mailed by first-class mail to applicable party at the address stated on the
first page of this Agreement or to such other address as either party advises
the other party. Notices shall be deemed given when sent.
6.7 Severability. The provisions of this Agreement are intended to be
severable. If any provision of this Agreement shall be held invalid or
unenforceable in whole or in part in any jurisdiction, such provision shall, as
to such jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without in any manner affecting the validity or enforceability
of such provision in any other jurisdiction or the remaining provisions hereof
in any jurisdiction.
6.8 Governing Law. This Agreement shall be governed by the laws of the
State of New York without giving effect to its conflict of laws rules. All
disputes arising hereunder shall be adjudicated in
<PAGE>
the appropriate federal or state courts located in the City and County of New
York, and the parties hereby consent to the jurisdiction of such courts and
waive any objection to such jurisdiction or venue.
6.9 Entire Agreement; Amendments. This Agreement and accompanying
letter of even date herewith sets forth the entire understanding of the parties
relating to the subject matter hereof, supersedes all prior understandings and
agreements, whether written or oral, between the parties and may be amended
only by written agreement signed by both parties.
6.10 Survival. All representations, warranties, agreements and
covenants of the Seller and PFR contained herein or made in connection herewith
or in connection with any Purchased Receivables shall survive the making
thereof and the termination of the purchase obligation hereunder.
6.11 Counterparts. This Agreement may be executed in counterparts each
of which shall be deemed an original, but all of which shall constitute one and
the same instrument.
6.12 No Implied Covenants. This is an arms-length transaction and
relationship. Other than specific rights, duties and obligations expressly
stated in this Agreement, there shall exist no implied or otherwise unstated
covenants, rights or obligations by or against either party. The parties
expressly disclaim the existence of any implied covenant of good faith and/or
fair dealing.
6.13 Force Majeure. PFR shall not be liable for failure to provide the
RR Program if such failure is due to any cause or condition beyond its
reasonable control. Such cause or conditions shall include, but shall not be
limited to, acts of God or the public enemy, acts of the Government in either
its sovereign or contractual capacity, fires, floods, epidemics, quarantine
restrictions, strikes, shortages of labor or materials, freight embargoes,
unusually sever weather, electrical power failures or other similar causes
beyond PFR's control.
6.14 Waiver and Remedies. No provision of this Agreement shall be
deemed waived by either party unless such waiver is in writing and signed by
the party against whom enforcement is sought. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
6.15 Expenses. In the event that it becomes necessary for PFR to
enforce its rights under this Agreement in any legal action, Seller agrees to
reimburse PFR for all costs and expenses, including reasonable attorney's fees,
as a result of such legal action.
6.16 Assignment. PFR shall have the right to assign this Agreement and
its rights, obligations or duties hereunder to an affiliate of PFR or to a
trust or other vehicle established for the purpose of financing the purchase of
the Purchased Receivables.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
PHARMACY FUND RECEIVABLES, INC.
By: /s/ Fred B. Tarter
-------------------------------
Fred B. Tarter
Chairman
By: /s/ William J. Tennart
-------------------------------
William J. Tennart
Senior Vice President, CFO
Duane Reade, Inc.
49-29 30th Place
Long Island City, NY 11101
<PAGE>
[Rapid RxEmit(Register Mark) Letterhead]
- ------------------------------------------------------------------------------
THIS AGREEMENT dated March 28th, 1997 shall supplement, amend and
modify the agreement dated March 10, 1997 (the "Purchase Agreement"), by and
between Duane Reade, Inc., a corporation with principal executive offices at
49-29 30th Place, Long Island City, NY 11101 ("DR Inc.") and Pharmacy Fund
Receivables, Inc., a New York corporation with offices at 680 Fifth Avenue, New
York, NY ("PFR").
The parties desire to clarify that the "Seller" for purposes of this
Agreement and the Purchase Agreement shall be deemed to be Duane Reade, a New
York general partnership (the "Seller") comprised of two general partners, DR
Inc. and Daboco Inc.
The Seller desires to sell, and PFR desires to buy, certain of
Seller's third party prescription receivables (the "Additional Receivables")
not covered by the Purchase Agreement.
The parties desire to amend the termination provision in the Purchase
Agreement.
NOW THEREFORE, the parties agree as follows:
1. Substitution of Duane Reade for Duane Reade, Inc. Duane Reade, a New York
general partnership shall constitute the "Seller" for purposes of this
Agreement and the Purchase Agreement.
2. Agreement to Purchase Additional Receivables.
a. On March 31, 1997, the Seller shall send to PFR a data file in a
format subject to PFR's specifications for all of the Seller's outstanding
third party prescription accounts receivable with a date of fill from and
including March 2, 1997 through and including March 30, 1997. The Seller shall
sell to PFR, and PFR shall purchase from the Seller, all of the foregoing third
party prescription accounts receivable for which the Seller has not received
complete or partial payment, including, without limitation, any contract
rights, general intangibles, accounts, chattel paper, amounts due and to become
due thereunder and all rights, powers and privileges arising thereunder or
related thereto and all proceeds and products of any of the foregoing
("Receivables") which meet the requirements of Section 1.1(a)(i)(ii) and (iii)
of the Purchase Agreement. Each Receivable that meets these requirements and is
purchased by PFR is referred herein as an "Additional Purchased Receivable".
PFR shall pay the Purchase Price for the Additional Purchased Receivables via
wire transfer to the account designated by the Seller on the next banking day
after PFR processes the data file from the Seller.
b. Commencing on March 31, 1997 and continuing until the Seller's PDX
software is modified to route data files directly to PFR completely bypassing
the Seller, the Seller shall send to PFR in a format subject to PFR's
specifications, the Seller's daily
<PAGE>
generated third party prescription accounts receivable. The Seller shall sell
to PFR, and PFR shall purchase from the Seller, all of the foregoing third
party prescription accounts receivable including, without limitation, any
contract rights, general intangibles, accounts, chattel paper, amounts due and
to become due thereunder and all rights, powers and privileges arising
thereunder or related thereto and all proceeds and products of any of the
foregoing ("Receivables") which meet the requirements of Section 1.1(a)(i)(ii)
and (iii) of the Purchase Agreement. Each Receivable that meets these
requirements and is purchased by PFR is referred to herein as an "Additional
Purchased Receivable". PFR shall pay the Purchase Price for the Additional
Purchased Receivables via ACH transfer to the account designated by the Seller
on the next banking day after PFR processes the data file from the Seller.
c. With respect to all Additional Purchased Receivables, PFR shall
assume the risk of nonpayment without recourse to the Seller; subject to the
exceptions contained in Section 1.1(b) of the Purchase Agreement. In addition
to the foregoing PFR, in the event that an Additional Receivable is purchased
in respect of which there shall have occurred a breach of any obligation,
covenant, representation or warranty of the Seller hereunder, such Additional
Purchased Receivable shall be with full recourse to the Seller. PFR shall have
the right to set off the amount of the Purchase Price for any such Additional
Purchased Receivable against any other payments PFR owes or will in the future
owe to the Seller.
d. All references in the Purchase Agreement to Purchased Receivables
shall be deemed to also refer to Additional Purchased Receivables, except where
doing so would be contrary to the terms contained herein.
e. In addition to the representations and warranties in the Purchase
Agreement, the Seller further represents and warrants as to Additional
Purchased Receivables that:
(i) The data files which the Seller provides to PFR to evidence an
adjudicated and approved Additional Receivable shall be bona fide and accurate.
(ii) The data files which the Seller provides to PFR shall include
all reversals.
(iii) The Seller shall not have received partial or full payment
from an Approved Payor for an Additional Purchased Receivable prior to selling
the Additional Receivable to PFR.
f. The Seller agrees that commencing on March 31, 1997 the Seller
shall immediately forward to PFR all payments and remittance advices unopened
the Seller receives from Approved Payors. If any payment is for a receivable
which was not purchased by PFR, PFR shall remit that payment to the Seller via
ACH transfer.
-2-
<PAGE>
3. Termination. In addition to the termination provisions contained in Section
1.2 of the Purchase Agreement, each party shall have the right to terminate the
Purchase Agreement as amended hereby without cause upon sixty (60) days notice
to the other party. However, as a condition precedent to termination, the
terminating party shall pay the other Party an amount equal to the difference
between $300,000.00 and the product of $273.9726 multiplied by the number of
days which have elapsed from the date of the first purchase of a receivable by
PFR and the date of termination. In the event of termination without cause,
neither party shall make or cause to be made any defamatory or disparaging
statement about the other party or take any action which materially damages the
business reputation of the other party. The parties shall in any statement
issued relating to the termination attribute the termination to a mutually
agreeable business decision. In the event of termination with or without cause
neither party shall disclose or cause to be disclosed the terms of the Purchase
Agreement or any information it has acquired about the business practices and
finances of the other party to any third party.
IN WITNESS WHEREOF, the parties have duly executed this Agreement
which shall supplement, amend and modify the Purchase as of the date first
above written.
PHARMACY FUND RECEIVABLES, INC.
By: /s/ Authorized Signatory
--------------------------
Title: President
--------------------------
DUANE READE
By: DABOCO INC.
Its: General Partner
By: /s/ William J. Tennart
--------------------------
Title: Sr. V.P.
--------------------------
-3-
<PAGE>
EXECUTION COPY
STOCKHOLDERS AND REGISTRATION RIGHTS AGREEMENT
THIS AGREEMENT is made as of June 18, 1997, by and among
Duane Reade Holding Corp., a Delaware corporation (the "Company"), the Persons
listed on Schedule A attached hereto (the "DLJ Stockholders") and BCIP
Associates, BCIP Trust Associates, L.P., Tyler Capital Fund, L.P., Tyler
International, L.P.-II, Tyler Massachusetts, L.P., Bankers Trust New York
Corporation, Conac & Co., Muico & Co., Roton & Co., USL Capital Corporation,
Bruce Weitz, Jeffrey C. Hammes, Karl Lutz, Pearlman Family Partners, Thomas
Stemberg and The Marion Trust (collectively, the "Continuing Stockholders").
The DLJ Stockholders and the Continuing Stockholders are collectively referred
to herein as the "Stockholders" and individually as a "Stockholder." Unless
otherwise provided in this Agreement, capitalized terms used herein are defined
in paragraph 8 hereof.
The Recapitalization Agreement dated as of May 30, 1997 (the
"Recapitalization Agreement") among (i) the Company, (ii) DLJ Merchant Banking
(as defined herein) and (iii) the Continuing Stockholders sets forth the terms
and conditions under which DLJ Merchant Banking will purchase certain shares of
the various classes of the Company's currently outstanding common stock (the
"Outstanding Common") from the Continuing Stockholders (other than Bruce Weitz,
who will retain all of his Outstanding Common). In addition, pursuant to the
Recapitalization Agreement, among other things, (i) the Continuing Stockholders
will retain certain of their shares of Outstanding Common (the "Retained
Common") (it being understood that Bruce Weitz shall retain all of his
Outstanding Common) and (ii) all of the outstanding shares of Outstanding
Common, including without limitation the Retained Common, will be reclassified
into shares of Class B Common Stock, $.01 par value per share, of the Company
(the "Common Stock").
The Company and the Stockholders desire to enter into this
Agreement to, among other things: (i) establish the composition of the
Company's Board of Directors (the "Board"), (ii) assure continuity in the
management and ownership of the Company, (iii) terminate the Stockholder
Agreement dated September 25, 1992 by and between Duane Reade Holding Corp. and
certain other parties set forth therein (the "1992 Stockholders Agreement),
(iv) terminate the Registration Agreement dated September 25, 1992 by and
between Duane Reade Holding Corp. and certain other parties set forth therein
(the "1992 Registration Agreement"), (v) limit the manner and terms by which
the Stockholders' Common Stock may be transferred and (vi) provide the
registration rights set forth herein.
NOW, THEREFORE, in consideration of the mutual
covenants contained herein and other good and valuable
<PAGE>
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties to this Agreement hereby agree as follows:
1. Board of Directors.
(a) From and after the Closing (as defined in the
Recapitalization Agreement) and until the provisions of this paragraph 1 cease
to be effective, each Stockholder shall vote all of its Stockholder Shares (as
defined in paragraph 8 hereof) and any other voting securities of the Company
over which such Stockholder has voting control and shall take all other
necessary or desirable actions within such Stockholder's control (whether in
such Stockholder's capacity as a stockholder, director, member of a board
committee or officer of the Company or otherwise, and including, without
limitation, attendance at meetings in person or by proxy for purposes of
obtaining a quorum, execution of written consents in lieu of meetings and
approval of amendments and/or restatements of the Company's Certificate of
Incorporation or bylaws), and the Company shall take all necessary and
desirable actions within its control (including, without limitation, calling
special board, stockholder meetings and approval of amendments and/or
restatements of the Company's Certificate of Incorporation or bylaws), so that:
(i) the authorized number of directors on the Board
shall be established by the DLJ Representative;
(ii) all representatives designated by the DLJ
Representative shall be elected to the Board;
(iii) the composition of the board of directors of each
of the Company's subsidiaries (a "Sub Board") shall be the same as
that of the Board;
(iv) any committees of the Board or a Sub Board shall
be created only upon the approval of all members of the Board and the
composition of each such committee (if any) shall be proportionately
equivalent to that of the Board;
(v) the removal from the Board or a Sub Board (with or
without cause) of any representative designated hereunder by the DLJ
Representative (including under (ii) above) shall be at the DLJ
Representative's written request, but only upon such written request
and under no other circumstances; and
(vi) in the event that any representative designated
hereunder by the DLJ Representative (including, without limitation,
under (ii) above) for any reason ceases to serve as a member of the
Board or a Sub Board during his or her term of office, the resulting
vacancy on the Board or the Sub Board shall be filled by a
representative designated by the DLJ Representative, as provided
hereunder.
2
<PAGE>
(b) The Company shall pay the reasonable out-of-pocket
expenses incurred by each director in connection with attending the meetings of
the Board, any Sub Board and any committee thereof.
(c) If the DLJ Representative fails to designate a
representative to fill a directorship pursuant to the terms of this paragraph
1, the election of a person to such directorship shall be accomplished in
accordance with the Company's bylaws and applicable law.
2. Irrevocable Proxy: Conflicting Agreements.
(a) In order to secure each Stockholder's obligation to vote
its Stockholder Shares and other voting securities of the Company in accordance
with the provisions of paragraph 1 hereof, each Stockholder hereby appoints the
DLJ Representative as its true and lawful proxy and attorney-in-fact, with full
power of substitution, to vote all of such Stockholder's Stockholder Shares and
other voting securities of the Company for the election and/or removal of
directors and all such other matters as expressly provided for in paragraph 1.
The DLJ Representative may exercise the irrevocable proxy granted to it
hereunder at any time any Stockholder fails to comply with the provisions of
this Agreement. The proxies and powers granted by each Stockholder pursuant to
this paragraph 2 are coupled with an interest and are given to secure the
performance of the Stockholders' obligations under this Agreement. Such proxies
and powers will be irrevocable until the termination of this Agreement and will
survive the death, incompetency and disability of each Stockholder and the
holders of each of its respective Stockholder Shares.
(b) Each Stockholder represents that such Stockholder has not
granted and is not a party to any proxy, voting trust or other agreement which
is inconsistent with or conflicts with the provisions of this Agreement, and no
holder of Stockholder Shares shall grant any proxy or become party to any
voting trust or other agreement which is inconsistent with or conflicts with
the provisions of this Agreement.
2A. Each Stockholder hereby agrees and consents that upon the
execution of this Agreement, each of the 1992 Stockholder Agreement and the
1992 Registration Rights Agreement is hereby terminated and of no further force
and effect.
3. Restrictions on Transfer of Stockholder Shares.
(a) Transfer of Stockholder Shares. No Stockholder shall
sell, transfer, assign, pledge or otherwise dispose of (a "Transfer") any
interest in any Stockholder Shares, except as set forth below in this Section
3. Notwithstanding the foregoing, no Continuing Stockholder shall sell,
transfer, assign, pledge or otherwise dispose of any interest in any
Stockholder Shares to a
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Competitor without the prior written consent of the DLJ Stockholders.
(b) Intentionally omitted.
(c) First Offer Rights. With respect to any Transfer of
Stockholder Shares by any holders of Stockholder Shares other than the DLJ
Stockholders: if any Stockholder (the "Offering Stockholder") proposes to
transfer any of the Stockholder Shares owned by such Stockholder, then the
Offering Stockholder shall deliver a notice (the "Offer Notice") to the
Company, the DLJ Stockholders and the other Continuing Stockholders setting
forth in reasonable detail the number and class of such Stockholder Shares such
Offering Stockholder proposes to transfer (the "Offered Shares") and the
proposed terms and conditions of the Transfer, which shall be in the form of a
sale of Offered Shares solely for cash (payable at closing or in specified
installments). The Company may elect to purchase any or all of the Stockholder
Shares owned by Offering Stockholder specified in the Offer Notice, at the
price and on the terms specified therein, by delivering written notice of such
election to the Offering Stockholder, the DLJ Stockholders and the Continuing
Stockholders as soon as practicable but in any event within 15 days after the
delivery of the Offer Notice. If the Company does not elect to purchase all of
the Offered Shares within such 15- day period, the DLJ Stockholders may elect
to purchase any or all of the remaining Offered Shares at the price and on the
terms specified in the Offer Notice by delivering written notice of such
election to the Company, the Offering Stockholder and the other Continuing
Stockholders as soon as practicable but in any event within 25 days after
delivery of the Offer Notice. If neither the Company nor the DLJ Stockholders
elect to purchase in the aggregate all of the Offered Shares within such 25-day
period, each Continuing Stockholder may elect to purchase its Pro Rata Share
(as defined below) of the remaining Offered Shares at the price and on the
terms specified in the Offer Notice by delivering written notice of such
election to the Company, the Offering Stockholder, the DLJ Stockholders and the
other Continuing Stockholders as soon as practicable but in any event within 35
days after delivery of the Sale Notice. Any Offered Shares not elected to be
purchased by the end of such 35-day period shall be re-offered for a five day
period by the Offering Stockholder on a pro rata basis to the Continuing
Stockholders who have elected to purchase their Pro Rata Share. If the Company,
the DLJ Stockholders and/or any Continuing Stockholder have elected to purchase
all of the Offered Shares from Offering Stockholder, the transfer of such
shares shall be consummated as soon as practicable after the delivery of the
election notices, but in any event within 50 days after the delivery of the
Offer Notice. To the extent that the Company, the DLJ Stockholders and the
Continuing Stockholders have not elected to purchase all of the Offered Shares
within 40 days after delivery of the Offer Notice, the Offering Stockholder
will not be required to sell any of the Offered Shares to the Company, the DLJ
Stockholders or the
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Continuing Stockholders. In such event, the Offering Stockholder may, within 60
days after the delivery of the Offer Notice, transfer the Offered Shares to any
third party or parties at a price equal to the price per share specified in the
Offer Notice and on other terms no more favorable to the transferee than
offered to the Company, the DLJ Stockholders and the Continuing Stockholders in
the Offer Notice. "Pro Rata Share" with respect to any Continuing Stockholder
shall be an amount equal to the ratio of the number of Stockholder Shares owned
by such Person of the same class of stock as the Offered Shares to the total
number of Stockholder Shares owned by all the Continuing Stockholders of the
same class of stock as the Offered Shares; provided that the provisions of this
Section 3(c) shall not apply to Exempt Transfers (as defined below).
(d) Participation Rights. Each Continuing Stockholder may
elect to participate in a contemplated Transfer of Offered Shares by DLJ
Stockholders by delivering written notice to the DLJ Stockholders within 20
days after delivery of the Sale Notice. If any Continuing Stockholder has
elected to participate in such Transfer, such Continuing Stockholder shall be
entitled to sell in the contemplated Transfer a number of Stockholder Shares
owned by such Continuing Stockholder equal to the product of (i) the quotient
determined by dividing the percentage of all Stockholder Shares owned by such
Continuing Stockholder by the aggregate percentage of all Stockholder Shares
owned by the DLJ Stockholders and the Continuing Stockholders electing to
participate in such sale and (ii) the number of Offered Shares. The sale by all
Continuing Stockholders electing to participate in such sale will be on the
same terms as the sale by the DLJ Stockholders and at sale prices equal the
same price per share as paid to the DLJ Stockholders for the Offered Shares
sold by the DLJ Stockholders.
For example, if the Sale Notice contemplated a sale of 100 Offered
Shares by the DLJ Stockholders, and if the DLJ Stockholders at such
time owns 30% of all Stockholder Shares and if one other Continuing
Stockholder elects to participate and owns 20% of all Stockholder
Shares, the DLJ Stockholders would be entitled to sell 60 shares ((30%
/ 50%) X 100 shares) and such Continuing Stockholder would be entitled
to sell 40 shares ((20% / 50%) x 100 shares).
The DLJ Stockholders shall use reasonable best efforts to obtain the agreement
of the prospective transferee(s) to the participation of the Continuing
Stockholders in any contemplated Transfer, and the DLJ Stockholders shall not
Transfer any of its Stockholder Shares to the prospective transferee(s) if the
prospective transferee(s) declines to allow the participation of the Continuing
Stockholders.
(e) Permitted Transfers. The restrictions contained in this
paragraph 3 shall not apply with respect to (i) any
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Transfer of Stockholder Shares by any Stockholder pursuant to applicable laws
of descent and distribution or among such Stockholder's immediate family, (ii)
a Transfer of Stockholder Shares by any Stockholder among its Affiliates, (iii)
a Public Sale, (iv) a Transfer of Stockholder Shares by the DLJ Stockholders to
a Permitted DLJ Transferee and (v) any Transfer in connection with the sale of
Stockholder Shares to any employee of the Company or any of its Subsidiaries.
In addition, the restrictions contained in this paragraph 3 (other than
subparagraph 3(d)) shall not apply with respect to an Approved Sale pursuant to
paragraph 4 below. Any transfer permitted by this Section 3(e) is referred to
herein as an "Exempt Transfer."
(f) Termination of Restrictions. The restrictions set forth
in this paragraph 3 shall continue with respect to each Stockholder Share until
the earlier of (i) the date on which such Stockholder Share has been
transferred in a Public Sale or (ii) the consummation of a Sale of the Company.
(g) Acknowledgement. The parties hereto acknowledge that this
paragraph 3 is not intended as a prohibition on sale of Stockholder Shares but
instead only dictates the manner upon which a sale of Stockholder Shares may be
made.
4. Sale of the Company.
(a) If the Board and the holders of a majority of the
Stockholder Shares held by the DLJ Stockholders approve a Sale of the Company
(an "Approved Sale"), each Stockholder shall vote for, consent to and raise no
objections against such Approved Sale. If the Approved Sale is structured as a
(i) merger or consolidation, each Stockholder shall waive any dissenters
rights, appraisal rights or similar rights in connection with such merger or
consolidation or (ii) sale of stock, each Stockholder shall agree to sell all
of his Stockholder Shares and rights to acquire shares of Common Stock on the
terms and conditions approved by the Board and the holders of a majority of
Stockholder Shares held by the DLJ Stockholders. Each Stockholder shall take
all necessary or desirable actions in connection with the consummation of the
Approved Sale and the distribution of the aggregate consideration from such
Approved Sale as requested by the Company.
(b) The obligations of the Stockholders with respect to the
Approved Sale are subject to the satisfaction of the following conditions: (i)
upon the consummation of the Approved Sale, each Stockholder shall receive in
exchange for the shares of Common Stock held by such Stockholder the same
portion of the aggregate consideration from such Approved Sale that such
Stockholder would have received if such aggregate consideration had been
distributed by the Company in complete liquidation pursuant to the rights and
preferences set forth in the Certificate of Incorporation as in effect
immediately prior to such Approved Sale; (ii) if any holders of a class of
Common
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Stock are given an option as to the form and amount of consideration to be
received, each holder of such class of Common Stock shall be given the same
option; (iii) each holder of then currently exercisable rights to acquire
shares of a class of Common Stock shall be given an opportunity to either (A)
exercise such rights or options prior to the consultation of the Approved Sale
and participate in such sale as holders of such class of Common Stock or (B)
upon the consummation of the Approved Sale, receive in exchange for such rights
or options consideration equal to the amount determined by multiplying (1) the
same amount of consideration per share of a class of Common Stock received by
holders of such class of Common Stock in connection with the Approved Sale less
the exercise price per share of such class of Common Stock of such rights or
options to acquire such class of Common Stock by (2) the number of shares of
such class of Common Stock represented by such rights or options; and (iv)
neither the Company nor any Stockholder shall receive any consideration in any
form other than as purchase price for the assets or stock being sold pursuant
to such Approved Sale.
5. Public Offering. In the event that the Board and the
holders of a majority of the Stockholder Shares held by the DLJ Stockholders
approve an initial public offering and sale of Common Stock (a "Public
Offering") pursuant to a registration statement filed under the Securities Act,
the Stockholders shall take all necessary or desirable actions in connection
with the consummation of the Public Offering. In the event that such Public
Offering is an underwritten offering and the managing underwriters advise the
Company in writing that in their opinion the Common Stock structure shall
adversely affect the marketability of the offering, each Stockholder shall
consent to and vote for a recapitalization, reorganization and/or exchange of
the Common Stock into securities that the managing underwriters, the Board and
holders of a majority of the Stockholder Shares held by the DLJ Stockholders
find acceptable and shall take all necessary or desirable actions in connection
with the consummation of the recapitalization, reorganization and/or exchange;
provided that (a) the resulting securities reflect and are consistent with the
rights and preferences set forth in the Certificate of Incorporation as in
effect immediately prior to such Public Offering, (b) such recapitalization,
reorganization and/or exchange does not adversely effect a Stockholder or group
of Stockholders in a manner different than the other Stockholders and (c) at
the request of a holder, the Company shall offer such holder non-voting
securities in lieu of voting securities.
6. Legend. In addition to any legend that may be required
under applicable securities laws or otherwise, each certificate evidencing
Stockholder Shares and each certificate issued in exchange for or upon the
transfer of any Stockholder Shares (if such shares remain Stockholder Shares as
defined herein after such transfer) shall be stamped or otherwise imprinted
with a legend in substantially the following form:
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"The securities represented by this certificate are subject
to a Stockholders and Registration Rights Agreement dated as
of_________, 1997, among the issuer of such securities (the
"Company") and certain of the Company's stockholders. A copy
of such Stockholders and Registration Rights Agreement will
be furnished without charge by the Company to the holder
hereof upon written request."
The Company shall imprint such legend on certificates evidencing Stockholder
Shares outstanding prior to the date hereof. The legend set forth above shall
be removed from the certificates evidencing any shares which cease to be
Stockholder Shares.
7. Transfer. Prior to transferring any Stockholder Shares
(other than in a Public Sale) to any person or entity, the Transferring
Stockholder shall cause the prospective transferee to execute and deliver to
the Company and the other Stockholders a counterpart of this Agreement;
provided that employees of the Company or any of its Subsidiaries who purchase
any Stockholder Shares from the DLJ Stockholders shall not be obligated to
execute and deliver to the Company and the other Stockholders a counterpart to
this Agreement.
7A. Financial Information. The Company agrees that it will
deliver to each Stockholder annual financial statements and quarterly financial
information to the extent that the Company does not otherwise deliver such
financial statements and information to such Stockholder pursuant to the
indenture relating to the Company's 15% Senior Subordinated Zero Coupon Notes
due 2004.
8. Definitions.
"Affiliate" means any Person directly or indirectly,
controlling or controlled by or under direct or indirect common control with
such specified Person. For this purpose, "control" shall mean 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.
"Bain Group" means BCIP Associates, BCIP Trust Associates,
L.P., Tyler Capital Fund, L.P., Tyler International, L.P.-II, Tyler
Massachusetts, L.P., Jeffrey C. Hammes, Karl Lutz, Pearlman Family Partners,
Thomas Stemberg and The Marion Trust.
"Business Day" means any day excluding Saturday, Sunday and
any day which shall be in the City of New York a legal holiday or a day on
which banking institutions are authorized by law or other governmental actions
to close.
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"Certificate of Incorporation" means the Company's
certificate of incorporation in effect at the time as of which any
determination is being made.
"Common Stock" means the Class B Common Stock, par value $.01
per share of the Company.
"Competitor" means any Person engaged, directly or
indirectly, in any business or any line of business similar to the business or
lines of business of the Company or any of its Subsidiaries as now conducted or
as presently proposed to be conducted; provided that no Permitted DLJ
Transferree shall be deemed to be a Competitor for any purpose under this
Agreement.
"Continuing Registrable Securities" means (i) any shares of
Common Stock retained by the Continuing Stockholders pursuant to the
Recapitalization Agreement, including, without limitation, any shares of Common
Stock received upon the reclassification of the Company's Outstanding Common in
accordance with the terms of the Recapitalization Agreement, (ii) any equity
securities issued or issuable directly or indirectly with respect to the
securities referred to in clause (i) by way of stock dividend or stock split or
in connection with a combination of shares, recapitalization, reclassification,
merger, consolidation or other reorganization and (iii) any other shares of
Common Stock held by Persons holding securities described in clauses (i) or
(ii) above. As to any particular shares constituting Continuing Registrable
Securities, such shares will cease to be Continuing Registrable Securities when
they have been (x) effectively registered under the Securities Act and disposed
of in accordance with the registration statement covering them, or (y) sold to
the public through a broker dealer or market maker pursuant to Rule 144 under
the Securities Act. For purposes of this Agreement, a Person will be deemed to
be a holder of Continuing Registrable Securities whenever such Person has the
right to acquire directly or indirectly such Continuing Registrable Securities
(upon conversion, exchange or exercise in connection with a transfer of
securities or otherwise, but disregarding any restrictions or limitations upon
the exercise of such right), whether or not such acquisition has actually been
effected.
"DLJ " means the DLJ Representative, DLJMB Partners II-A,
L.P., DLJMB Funding II, Inc., DLJ Diversified Partners, L.P., DLJ Diversified
Partners-A, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners II, C.V., DLJ EAB
Partners, L.P., UK Investment Plan 1997 Partners and DLJ Millennium Partners,
L.P.
"DLJ Registrable Securities" means (i) any shares of Common
Stock acquired by or issued to the DLJ Stockholders pursuant to the
Recapitalization Agreement, (ii) any equity securities issued or issuable
directly or indirectly with respect to the securities referred to in clause(i)
by way of stock dividend or stock split or in connection with a combination of
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shares, recapitalization, reclassification, merger, consolidation or other
reorganization and (iii) any other shares of Common Stock held by Persons
holding securities described in clause (i) or (ii) above. As to any particular
shares constituting DLJ Registrable Securities, such shares will cease to be
DLJ Registrable Securities when they have been (x) effectively registered under
the Securities Act and disposed of in accordance with the registration
statement covering them, or (y) sold to the public through a broker, dealer or
market maker pursuant to Rule 144 under the Securities Act. For purposes of
this Agreement, a Person will be deemed to be a holder of DLJ Registrable
Securities whenever such Person has the right to acquire directly or indirectly
such DLJ Registrable Securities (upon conversion, exchange or exercise in
connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected.
"DLJ Representative" means DLJ Merchant Banking
Partners II, L.P.
"Independent Third Party" means any person who, immediately
prior to the contemplated transaction is not an Affiliate.
"Permitted DLJ Transferree" means with respect to any DLJ
Stockholder, (i) any general or limited partner of such DLJ Stockholder (a "DLJ
Partner"), (ii) any corporation, partnership or other entity which is an
Affiliate of such DLJ Stockholder or of any DLJ Partner (collectively, the "DLJ
Affiliates"), (iii) any managing director, general partner, director, limited
partner, officer or employee of (a) such DLJ Stockholder, (b) such DLJ Partner
or (c) any DLJ Affiliate of such DLJ Partner or a DLJ Affiliate, or the heirs,
executors, administrators, testamentary trustees, legatees or beneficiaries of
any of the foregoing Persons referred to in this clause (iii) (collectively,
"DLJ Associates"), (iv) any trust, the beneficiaries of which, or a
corporation, limited liability company or partnership, the stockholders,
members or general or limited partners of which, include only such DLJ
Stockholder, DLJ Affiliates, DLJ Associates, their spouses or their lineal
descendants and (v) a voting trustee for one or more DLJ Stockholders, DLJ
Affiliates or DLJ Associates.
"Person" means an individual, a partnership, a joint venture,
a corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
"Public Sale" means any sale of Stockholder Shares to the
public pursuant to an offering registered under the Securities Act or to the
public through a broker, dealer or market maker pursuant to the provisions of
Rule 144 adopted under the Securities Act.
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"Qualified Public Offering" means the sale or sales in an
underwritten public offering or offerings registered under the Securities Act
of shares of the Company's Common Stock where the Company has received net
proceeds of at least $40 million (measured as of any date of issuance).
"Registrable Securities" means collectively the DLJ
Registrable Securities and the Continuing Registrable Securities.
"Rule 144" means Rule 144 promulgated under the Securities
Act, as amended from time to time, or any similar rule then in effect.
"Sale of the Company" means the sale of the Company to an
Independent Third Party or group of Independent Third Parties pursuant to which
such party or parties acquire (i) capital stock of the Company possessing the
voting power under normal circumstances to elect a majority of the Company's
board of directors (whether by merger, consolidation or sale or transfer of the
Company's capital stock or otherwise) or (ii) all or substantially all of the
Company's assets determined on a consolidated basis.
"Securities Act" means the Securities Act of 1933, as amended
from time to time, or any similar federal law then in force.
"Securities and Exchange Commission" includes any
governmental body or agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act
of 1934, as amended from time to time, or any similar federal law then in
force.
"Stockholder Shares" means (i) any Common Stock purchased or
otherwise acquired by any Stockholder, including, without limitation, any
Common Stock received by any Stockholder in connection with any
reclassification or conversion of such Common Stock, and (ii) any equity
securities issued or issuable directly or indirectly with respect to the Common
Stock referred to in clause (i) above by way of stock dividend or stock split
or in connection with a combination of shares, recapitalization,
reclassification, merger, consolidation or other reorganization. As to any
particular shares constituting Stockholder Shares, such shares will cease to be
Stockholder Shares when they have been (x) effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them or (y) sold to the public through a broker, dealer or market
maker pursuant to Rule 144 under the Securities Act.
"Subsidiary" means, with respect to any Person, any
corporation, partnership, association or other business entity of which (i) if
a corporation, at least a majority of the total voting power of shares of stock
entitled (without regard to the
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occurrence of any contingency) to vote in the election of directors is at the
time owned or controlled, directly or indirectly, by that Person or one or more
of the other Subsidiaries of that Person or a combination thereof, or (ii) if a
partnership, association or other business entity, at least a majority of the
partnership or other similar ownership interest thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more Subsidiaries
of that Person or a combination thereof. For purposes hereof, a Person or
Persons shall be deemed to have at least a majority ownership interest in a
partnership, association or other business entity if such Person or Persons
shall be allocated at least a majority of partnership, association or other
business entity gains or losses or shall be or control the managing director or
general partner of such partnership, association or other business entity.
9. Demand Registrations.
(a) Requests for Registration. At any time after the one year
anniversary date of the date on which the Company registered and sold any of
its common equity securities pursuant to a registration statement filed and
declared effective under the Securities Act (an "Initial Public Offering"),
subject to 9(b) and 9(c) below:
(i) the holders of a majority of the Continuing
Registrable Securities may request registration
under the Securities Act of all or part of their
Registrable Securities (a "Continuing Demand
Registration"). The holders of a majority of the
Continuing Registrable Securities may request one
Continuing Demand Registration; and
(ii) the holders of a majority of the DLJ Registrable
Securities will be entitled to request a unlimited
number of Demand Registrations (each, a "DLJ Demand
Registration," and together with the "Continuing
Demand Registration," a "Demand
Registration").
A request for a Demand Registration pursuant to this Section
9(a) shall specify the approximate number of Registrable Securities requested
to be registered, the anticipated per share price range for such offering and
the intended method of distribution thereof. Within ten days after receipt of
any such request, the Company will give written notice of such requested
registration to all other holders of Registrable Securities and will include in
such registration all Registrable Securities with respect to which the Company
has received written requests for inclusion therein within 15 days after the
receipt of the Company's notice. A Demand Registration pursuant to this Section
9(a) will not count as a Demand Registration until it has become effective
under the Securities Act (unless such Demand
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Registration has not become effective due to the fault of the holders
requesting such registration) and has remained effective for a period of at
least 90 days (or such shorter time in which the Registrable Securities
requested to be included in such registration are registered and sold).
(b) Priority on Demand Registration. (i) If a Continuing
Demand Registration is an underwritten offering and the managing underwriters
advise the Company in writing that in their opinion the number of Registrable
Securities and, if permitted hereunder, other securities requested to be
included in such offering exceeds the number of Registrable Securities and
other securities, if any, which can be sold therein without adversely affecting
the marketability of the offering, then the Company will include in such
registration (1) first, the Continuing Registrable Securities requested to be
included in such registration, (2) second, the DLJ Registrable Securities
requested to be included in such registration and any equity securities offered
by the Company, pro rata among the holders of DLJ Registrable Securities and
the Company, on the basis of the number of shares owned by each such holder of
DLJ Registrable Securities, and, in the case of the Company, on the basis to
the number of shares proposed to be offered by the Company, and (3) third,
other securities requested to be included in such registration and (ii) if a
DLJ Demand Registration is an underwritten offering and the managing
underwriters advise the Company in writing that in their opinion the number of
Registrable Securities and, if permitted hereunder, other securities requested
to be included in such offering exceeds the number of Registrable Securities
and other securities, if any, which can be sold therein without adversely
affecting the marketability of the offering then (A) if the holders of the
Continuing Registrable Securities were offered the opportunity to include all
such Continuing Registrable Securities in an Initial Public Offering
(including, without limitation, any offer to include such Continuing
Registrable Securities pursuant to Section 10A), then the Company will include
in such registration (1) first, any DLJ Registrable Securities that DLJ
Merchant Banking proposes to sell, (2) second, the other Registrable Securities
requested to be included in such registration and any equity securities offered
by the Company, pro rata among the holders of such Registrable Securities and
the Company, on the basis of the number of shares owned by each such holder,
and, in the case of the Company, on the basis to the number of shares proposed
to be offered by the Company, and (3) third, other securities requested to be
included in such registration and (B) if the holders of the Continuing
Registrable Securities were not offered the opportunity to include all such
Continuing Registrable Securities in an Initial Public Offering, then the
Company will include in such registration (1) first, any Continuing Registrable
Securities requested to be included in such registration by the Continuing
Stockholders, (2) second, any other Registrable Securities requested to be
included in such registration and any equity securities offered by the Company,
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pro rata among the holders of such Registrable Securities and the Company, on
the basis of the number of shares owned by each such holder, and, in the case
of the Company, on the basis to the number of shares proposed to be offered by
the Company, and (iii) third, other securities requested to be included in such
registration .
(c) Restrictions on Demand Registrations. The Company may
postpone for up to six months the filing or the effectiveness of a registration
statement for a Demand Registration if the Company determines that such Demand
Registration would reasonably be expected to have an adverse effect on any
proposal or plan by the Company or any of its Subsidiaries to engage in any
acquisition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or similar transaction; provided that in
such event, the holders of Registrable Securities initially requesting such
Demand Registration will be entitled to withdraw such request and, if such
request is withdrawn, such Demand Registration will not count as the one
permitted Demand Registration hereunder.
(d) Selection of Underwriters. The Company shall select
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") as the investment
banker and manager to administer any underwritten offering pursuant to this
Section 9, or in the event that DLJ declines to serve the investment banker and
manager in connection with such underwritten offering, the Company shall have
the right to select another investment banker(s) and manager(s) (the
"Alternative Selection"), which Alternative Selection shall be subject to the
approval of the holders of a majority of the Registrable Securities owned by
the Bain Group, which approval shall not be unreasonably withheld.
10. Piggyback Registrations.
(a) Right to Piggyback. At any time after the consummation of
an Initial Public Offering, whenever the Company proposes to register any of
its equity securities under the Securities Act (other than pursuant to a Demand
Registration) and the registration form to be used may be used for the
registration of Registrable Securities (a "Piggyback Registration"), the
Company will give prompt written notice to all holders of Registrable
Securities of its intention to effect such a registration and, subject to
clause (b) below, will include in such registration all Registrable Securities
with respect to which the Company has received written requests for inclusion
therein within 15 days after the receipt of the Company's notice.
Notwithstanding anything contained elsewhere herein, the provisions of this
Section 10 shall not be applicable to any Demand Registration pursuant to
Section 9 hereof.
(b) Priority on Piggyback Registrations. If a Piggyback
Registration is an underwritten registration on behalf of the Company, and the
managing underwriters advise the Company
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in writing that in their opinion the number of securities requested to be
included in such registration exceeds the number which can be sold in such
offering without adversely affecting the marketability of the offering, then
(i) if the holders of the Continuing Registrable Securities were offered the
opportunity to include all such Continuing Registrable Securities in an Initial
Public Offering (including, without limitation, any offer to include such
Continuing Registrable Securities pursuant to Section 10A), then the Company
will include in such registration (A) first, any securities the Company
proposes to sell, (B) second, the Registrable Securities requested to be
included in such registration, pro rata among the holders of such Registrable
Securities on the basis of the number of shares owned by each such holder, and
(C) third, other securities requested to be included in such registration and
(ii) if the holders of the Continuing Registrable Securities were not offered
the opportunity to include all such Continuing Registrable Securities in an
Initial Public Offering, then the Company will include in such registration (A)
first, any securities the Company proposes to sell, (B) second, all Continuing
Registrable Securities requested to be included in such registration, (C)
third, all DLJ Registrable Securities requested to be included in such
registration, and (D) fourth, all other securities requested to be included in
such registration.
(c) Selection of Underwriters. The Company shall select
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") as the investment
banker and manager to administer any underwritten offering pursuant to this
Section 10, or in the event that DLJ declines to serve the investment banker
and manager in connection with such underwritten offering, the Company shall
have the right to select another investment banker(s) and manager(s) (the
"Alternative Selection"), which Alternative Selection shall be subject to the
approval of the holders of a majority of the Registrable Securities owned by
the Bain Group, which approval shall not be unreasonably withheld.
10A. Participation in Initial Public Offering.
(d) In the event that the Company proposes to register any
DLJ Registrable Securities, any shares of Common Stock owned by the management
of the Company (the "Management Shares") or any other Stockholder Shares in
connection with an Initial Public Offering (the "IPO Registration") and the
registration form to be used may be used for the registration of Registrable
Securities, the Company will give prompt written notice to all holders of
Continuing Registrable Securities of its intention to effect such a
registration and, subject to the next sentence, will include in such
registration all Continuing Registrable Securities with respect to which the
Company has received written requests for inclusion therein within 15 days
after the receipt of the Company's notice; provided that if the IPO
Registration is an underwritten registration on behalf of the Company, and the
managing underwriters advise the Company in writing that in their
15
<PAGE>
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering without adversely
affecting the marketability of the offering, then the Company will include in
such registration (i) first, any securities the Company proposes to sell, (ii)
second, the Continuing Registrable Securities, the DLJ Registrable Securities
and any Management Shares requested to be included in such registration, pro
rata among the holders of such Continuing Registrable Securities, DLJ
Registrable Securities and Management Shares on the basis of the number of
shares owned by each such holder of Continuing Registrable Securities, DLJ
Registrable Securities, and Management Shares, respectively and (iii) third,
all other securities requested to be included in such registration; provided
further that, in the event that any agreement (a "Management Agreement") with
respect to the number of Management Shares that may be registered in an Initial
Public Offering may be construed to conflict with the provisions of this
Section 10A(d), the terms of the Management Agreement shall govern.
11. Holdback Agreement
Each holder of Registrable Securities agrees not to effect
any public sale or distribution (including sales pursuant to Rule 144) of
equity securities of the Company and not to effect any such public sale or
distribution of any securities convertible into or exchangeable or exercisable
for such securities, in each case, during the period which begins seven days
prior to the Effective Date (as defined below) and continuing through the
180-day period beginning on the effective date (the "Effective Date") (such
period, the "Holdback Period") of any registration statement under the
Securities Act (except as part of such registration) with respect to the sale
of common equity securities, unless the underwriters managing the registered
public offering otherwise agree; provided that upon any public sale or
distribution that occurs after the consummation of a Qualified Public Offering,
the Holdback Period shall extend from the period which begins seven days prior
to the Effective Date and continues through the 90-day period beginning on the
Effective Date (each such period, a "90-day Holdback Period"); provided,
further that during each such 90-day Holdback Period, each holder of
Registrable Securities that owns less than 5% of the total amount of common
equity securities then outstanding shall be permitted to sell an amount of
Registrable Securities that is no greater than the greater of (i) one percent
of the shares of common equity securities outstanding as shown by the most
recent report or statement published by the Company and (ii) the average weekly
reported volume of trading in such common equity securities on all national
securities exchanges and/or reported through the automated quotation system of
a registered securities association during the four calendar weeks immediately
preceding the proposed date of sale of such common equity securities.
16
<PAGE>
12. Registration Procedures. Whenever the holders of
Registrable Securities have requested that any Registrable Securities be
registered pursuant to this Agreement, the Company will use its reasonable best
efforts to effect the registration and the sale of such Registrable Securities
in accordance with the intended method of disposition thereof (including the
registration of Registrable Securities held by a holder of Registrable
Securities requesting registration as to which the Company has received
reasonable assurances that only Registrable Securities will be distributed to
the public), and pursuant thereto the Company will as expeditiously as
possible:
(a) prepare and file with the Securities and Exchange
Commission a registration statement on any form for which the Company then
qualifies and which form shall be available for the sale of the Registrable
Securities to be registered thereunder in accordance with the intended method
of distribution thereof, with respect to such Registrable Securities and use
its reasonable best efforts to cause such registration statement to become
effective;
(b) prepare and file with the Securities and Exchange
Commission such amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) notify each holder of Registrable Securities being so
registered and counsel for such holders promptly and, if requested by such
holder or such holder's counsel, confirm such advice in writing promptly (i)
when a registration statement has become effective with respect to such
Registrable Securities and when any post-effective amendments and supplements
thereto become effective, (ii) of any request by the Securities and Exchange
Commission or any state securities authority for post-effective amendments and
supplements to any such registration statement and prospectus or for additional
information after the registration statement has become effective, (iii) of the
issuance by the Securities and Exchange Commission or any state securities
authority of any stop order suspending the effectiveness of any such
registration statement or the initiation of any proceedings for that purpose,
(iv) if, between the effective date of any such registration statement and the
closing of any sale of Registrable Securities covered thereby, the
representations and warranties of the Company contained in any underwriting
agreement, securities sales agreement or other similar agreement, if any,
relating to such offering cease to be true and correct in all material
respects, (v) of the receipt by the Company of any notification with respect to
the suspension of the qualification of any such Registrable Securities for sale
in any jurisdiction or the initiation or threatening of any proceeding for such
purpose, (vi) of the happening of any event or the discovery of any facts
during the period such registration statement is effective which
17
<PAGE>
makes any statement made in such registration statement or the related
prospectus untrue in any material respect or which requires the making of any
changes in such registration statement or prospectus in order to make the
statements therein not misleading and (vii) of any determination by the Company
that a post-effective amendment to a registration statement would be
appropriate;
(d) furnish to each seller of Registrable Securities such
number of copies of such registration statement, each amendment and supplement
thereto, the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(e) use its reasonable best efforts to register or qualify
such Registrable Securities under such other securities or blue sky laws of
such jurisdictions as any seller reasonably requests and do any and all other
acts and things which may be reasonably necessary to enable such seller to
consummate the disposition in such jurisdictions of the Registrable Securities
owned by such seller (provided that the Company will not be required to (i)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph, (ii) subject itself
to taxation in any such jurisdiction or (iii) consent to general service of
process in any such jurisdiction);
(f) use its reasonable best efforts to cause all such
Registrable Securities to be listed on each securities exchange on which
similar securities issued by the Company are then listed and, if not so listed,
to be listed on the NASD automated quotation system;
(g) provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement;
(h) enter into such customary agreements (including
underwriting agreements in customary form) and take all such other actions as
the underwriters reasonably request in order to expedite or facilitate the
disposition of such Registrable Securities (including, without limitation,
effecting a stock split or a combination of shares);
(i) make available for inspection by any seller of
Registrable Securities, any underwriter participating in any disposition
pursuant to such registration statement and any attorney, accountant or other
agent retained by any such seller or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, and cause
the Company's officers, directors, employees and independent accountants to
supply all information reasonably requested by any
18
<PAGE>
such seller, underwriter, attorney, accountant or agent in connection with
such registration statement;
(j) otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the Securities and Exchange Commission,
and make available to its security holders, as soon as reasonably practicable,
an earnings statement covering the period of at least twelve months beginning
with the first day of the Company's first full calendar quarter after the
effective date of the registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder;
(k) in the event of the issuance of any stop order suspending
the effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order;
(l) use its reasonable best efforts to obtain a cold comfort
letter from the Company's independent public accountants in customary form and
covering such matters of the type customarily covered by cold comfort letters
as the holders of a majority of the Registrable Securities being sold
reasonably request (provided that such Registrable Securities constitute at
least 10% of the securities covered by such registration statement);
(m) upon the occurrence of any event or the discovery of any
facts, each as contemplated by Section 12(c)(vi) hereof, use its best efforts
to prepare a supplement or post-effective amendment to a registration statement
or the related prospectus or any document incorporated therein by reference or
file any other required document so that, as thereafter delivered to the
purchasers of the Registrable Securities, such prospectus will not contain at
the time of such delivery 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. The Company
agrees to notify each holder of Registrable Securities covered by such
registration statement to suspend use of the prospectus as promptly as
practicable after the occurrence of such an event, and each such holder hereby
agrees to suspend use of the prospectus until the Company has amended or
supplemented the prospectus to correct such misstatement or omission. At such
time as such public disclosure is otherwise made or the Company determines that
such disclosure is not necessary, in each case to correct any misstatement of a
material fact or to include any omitted material fact, the Company agrees
promptly to notify each such holder of such determination and to furnish each
such holder such numbers of copies of the prospectus, as amended or
supplemented, as such holder may reasonably request; and
19
<PAGE>
(n) each holder of Registrable Securities agrees that, upon
receipt of any notice from the Company of the happening of any event or the
discovery of any facts, each of the kind described in Section 12(c)(ii)-(vi)
hereof, each holder of Registrable Securities covered by such registration
statement will forthwith discontinue disposition of Registrable Securities
pursuant to such registration statement until such holder's receipt of the
copies of the supplemented or amended prospectus contemplated by Section 12(m)
hereof.
13. Registration Expenses.
All expenses of the Company incident to performance of or
compliance with this Agreement, including without limitation: (i) all
Securities and Exchange Commission and National Association of Securities
Dealers, Inc. registration and filing fees, if any (including, without
limitation, the fees and expenses of any "qualified independent underwriter"),
(ii) all fees and expenses incurred in connection with compliance with state
securities, blue sky or other securities laws (including reasonable fees and
disbursements of counsel for any underwriters or Stockholders in connection
with state securities, blue sky or other securities qualification of any of the
Registrable Securities), (iii) all expenses of any Persons in preparing or
assisting in preparing, word processing, printing and distributing any
registration statement, any prospectus, any amendments or supplements thereto,
certificates representing the Registrable Securities and other documents
relating to the performance of and compliance with this Agreement, (iv) all
rating agency fees, if any, (v) the fees and disbursements of counsel for the
Company and including the fees and expenses of preparing and distributing any
underwriting or securities sales agreement, (vi) in connection with each Demand
Registration, the Company will reimburse the holders of Registrable Securities
covered by such registration for the reasonable fees and disbursements of one
counsel chosen by the holders of a majority of the Registrable Securities
initially requesting such registration, (vii) all application and filing fees
in connection with listing the Registrable Securities on a national securities
exchange or an automated quotation system, if any, (viii) the reasonable fees
and expenses of the independent public accountants of the Company, including
the expenses of any special audits or "cold comfort" letters required by or
incident to such performance and compliance, and (ix) the reasonable fees and
expenses of an escrow agent or custodian, if any, but excluding underwriting
discounts and commissions and transfer taxes, if any, relating to the sale or
disposition of Registrable Securities by a Stockholder, shall be borne by the
Company.
14. Indemnification.
(a) The Company agrees to indemnify and hold harmless (i) each holder
of Registrable Securities and (ii) each person, if
20
<PAGE>
any, who controls (within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act) any such holder of Registrable Securities (any of the persons
referred to in this clause (ii) being hereinafter referred to as a "controlling
person") and (iii) the respective officers, directors, partners, employees,
representatives and agents of any such holder of Registrable Securities or any
controlling person (any person referred to in clause (i), (ii) or (iii) may
hereinafter be referred to as an "Indemnified Holder"), to the fullest extent
lawful, from and against any and all losses, claims, damages, liabilities,
judgments, actions and expenses (including without limitation and as incurred,
reimbursement of all reasonable costs of investigating, preparing, pursuing or
defending any claim or action, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, including the reasonable
fees and expenses of counsel to any Indemnified Holder) directly or indirectly
caused by, related to, based upon, arising out of or in connection with any
untrue statement or alleged untrue statement of a material fact contained in
any registration statement, preliminary prospectus or prospectus (or any
amendment or supplement thereto), 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, except insofar as such losses, claims,
damages, liabilities or expenses are caused by an untrue statement or omission
or alleged untrue statement or omission of a material fact that is made in
reliance upon and in conformity with information relating to any of the holders
of Registrable Securities furnished in writing to the Company by any of such
holders of Registrable Securities expressly for use therein. The Company also
agrees to reimburse each Indemnified Person for any and all fees and expenses
(including, without limitation, the fees and expenses of counsel) as they are
incurred in connection with enforcing such Indemnified Person's rights under
this Agreement.
In case any action or proceeding (including any governmental
or regulatory investigation or proceeding) shall be brought or asserted against
any of the Indemnified Holders with respect to which indemnity may be sought
against the Company, such Indemnified Holder (or the Indemnified Holder
controlled by such controlling person) shall promptly notify the Company in
writing (provided, that the failure to give such notice shall not relieve the
Company of its obligations pursuant to this Agreement unless such failure
materially prejudices the Company). Such Indemnified Holder shall have the
right to employ its own counsel in any such action and the fees and expenses of
such counsel shall be paid, as incurred, by the Company (regardless of whether
it is ultimately determined that an Indemnified Holder is not entitled to
indemnification hereunder). The Company shall not, in connection with any one
such action or proceeding or separate but substantially similar or related
actions or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys (in addition to any
21
<PAGE>
local counsel) at any time for such Indemnified Holders, which firm shall be
designated by the holders of Registrable Securities. The Company shall be
liable for any settlement of any such action or proceeding effected with the
Company's prior written consent, which consent shall not be withheld
unreasonably, and the Company agrees to indemnify and hold harmless each
Indemnified Holder from and against any loss, claim, damage, liability or
expense by reason of any settlement of any action effected with the written
consent of the Company. The Company shall not, without the prior written
consent of each Indemnified Holder, settle or compromise or consent to the
entry of judgment in or otherwise seek to terminate any pending or threatened
action, claim, litigation or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not any Indemnified Holder is
a party thereto), unless such settlement, compromise, consent or termination
includes an unconditional release of each Indemnified Holder from all liability
arising out of such action, claim, litigation or proceeding.
(b) Each holder of Registrable Securities agrees, severally
and not jointly, to indemnify and hold harmless the Company and its directors,
officers, and any person controlling (within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act) the Company, and its officers,
directors, partners, employees, representatives and agents of each such person,
to the same extent as the foregoing indemnity from the Company to each of the
Indemnified Holders, but only with respect to claims and actions based on
information relating to such holder of Registrable Securities furnished in
writing by such holder of Registrable Securities expressly for use in any
registration statement. In case any action or proceeding shall be brought
against the Company or its directors or officers or any such controlling person
in respect of which indemnity may be sought against a holder of Registrable
Securities, such holder of Registrable Securities shall have the rights and
duties given the Company, and the Company, such directors or officers or such
controlling person shall have the rights and duties given to each holder of
Registrable Securities by the preceding paragraph. In no event shall any holder
of Registrable Securities be liable or responsible for any amount in excess of
the amount by which the total received by such holder with respect to its sale
of Registrable Securities pursuant to a registration statement exceeds the sum
of (i) the amount paid by such holder for such Registrable Securities plus (ii)
the amount of any damages which such holder has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission of a material fact.
(c) If the indemnification provided for in this Section 14 is
unavailable to an indemnified party under Section 14(a) or Section 14(b) hereof
(other than by reason of exceptions provided in those Sections) in respect of
any losses, claims, damages, liabilities or expenses referred to therein, then
each
22
<PAGE>
applicable 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 or expenses in such
proportion as is appropriate to reflect the relative benefits received by the
Company, on the one hand, and the holders of Registrable Securities, on the
other hand, from their sale of Registrable Securities or if such allocation is
not permitted by applicable law, the relative fault of the Company, on the one
hand, and of the Indemnified Holder, on the other hand, in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative fault of the Company, on the one hand, and of the
Indemnified Holder, 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 by the Indemnified Holder and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The amount paid or payable by
a party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in the second paragraph of Section 14(a), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim.
The Company and each holder of Registrable Securities agree
that it would not be just and equitable if contribution pursuant to this
Section 14(c) were determined by pro rata allocation (even if the holders of
Registrable Securities were treated as one entity for such purpose) 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 expenses referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 14, no holder of Registrable
Securities or its related Indemnified Holders shall be required to contribute,
in the aggregate, any amount in excess of the amount by which the total
received by such holder with respect to the sale of its Registrable Securities
pursuant to a registration statement exceeds the sum of (A) the amount paid by
such holder for such Registrable Securities plus (B) the amount of any damages
which such holder has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission of a material fact.
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. The obligations
23
<PAGE>
of the holders of Registrable Securities to contribute pursuant to this Section
14(c) are several in proportion to the respective principal amount of
Securities held by each of such holders hereunder and not joint.
15. Participation in Underwritten Registrations. No Person
may participate in any registration hereunder which is underwritten unless such
Person (a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (b) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements.
16. Transferee. Upon request of any holder of Registrable
Securities, the Company shall promptly supply to such holder or its prospective
transferee all information required to be delivered in connection with a
transfer pursuant to Rule 144A of the Securities Act.
17. Transfers in Violation of Agreement. Any Transfer or
attempted Transfer of any Stockholder Shares in violation of any provision of
this Agreement shall be void, and the Company shall not record such Transfer on
its books or treat any purported transferee of such Stockholder Shares as the
owner of such shares for any purpose.
18. Termination. Notwithstanding any provisions to the
contrary contained herein, upon the consummation of a Qualified Public
Offering, Sections 1, 2, 3, 4, 5, 7 and 17 of this Agreement will terminate and
be of no further force and
effect.
19. Amendment and Waiver. Except as otherwise provided
herein, no modification, amendment or waiver of any provision of this Agreement
shall be effective against the Company or the Stockholders unless such
modification, amendment or waiver is approved in writing by the Company and the
holders of at least all of the Stockholder Shares owned by each of (a) the DLJ
Stockholders and (b) Bain Group; provided that this Agreement may be amended or
modified to clarify any ambiguity or error upon the written consent of the
holders of a majority of the Stockholder Shares; provided further that with
respect to any modification, amendment or waiver affecting the rights of any
class of stock held by any Stockholder, such modification, amendment or waiver
shall affect all of the shares held by all of the holders of such class of
stock in the same manner. The failure of any party to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of such party thereafter to enforce
each and every provision of this Agreement in accordance with its terms;
provided that no modification, amendment or waiver of this Agreement shall be
effective against
24
<PAGE>
the Company or any Stockholder if such modification, amendment or waiver of any
provision of this Agreement would cause the Company or any such Stockholder, as
the case may be, to be in violation of any federal or state law or regulation.
20. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability shall
not affect any other provision or any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
21. Entire Agreement. Except as otherwise expressly set forth
herein, this document embodies the complete agreement and understanding among
the parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understandings, agreements or representations by or among
the parties, written or oral, which may have related to the subject matter
hereof in any way.
22. Successors and Assigns. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be
enforceable by the Company and its successors and assigns and the Stockholders
and any subsequent holders of Stockholder Shares and the respective successors
and assigns of each of them, so long as they hold Stockholder Shares.
23. Counterparts. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
24. Remedies. The Company and the Stockholders shall be
entitled to enforce their rights under this Agreement specifically to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights existing in their favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that the Company and any Stockholder may
in its sole discretion apply to any court of law or equity of competent
jurisdiction for specific performance and/or injunctive relief (without posting
a bond or other security) in order to enforce or prevent any violation of the
provisions of this Agreement.
25. Notices. Any notice provided for in this Agreement shall
be in writing and shall be either personally delivered or when received by
confirmed telecopy or mailed first class mail (postage prepaid) or sent by
reputable overnight
25
<PAGE>
courier service (charges prepaid) to the Company at the address set forth below
and to any other recipient at the address indicated on the schedules hereto and
to any subsequent holder of Stockholder Shares subject to this Agreement at
such address as indicated by the Company's records, or at such address or to
the attention of such other person as the recipient party has specified by
prior written notice to the sending party. Notices will be deemed to have been
given hereunder when delivered personally, when received by confirmed telecopy,
three days after deposit in the U.S. mail and one day after deposit with a
reputable overnight courier service. The Company's address is:
Duane Reade Holding Corp.
c/o DLJ Merchant Banking Partners II, L.P.
277 Park Avenue
New York, New York 10172
Attention: David Jaffe
26. Governing Law. All questions concerning the construction,
validity and interpretation of this Agreement and the exhibits and schedules
hereto shall be governed by and construed in accordance with the domestic laws
of the State of Delaware, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of Delaware or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
27. Descriptive Headings. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of
this Agreement.
* * * * *
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year first above written.
DUANE READE HOLDING CORP.
By /s/ Anthony Cuti
------------------------------
Name:
Title:
DLJMB FUNDING II, INC.
By /s/ David Jaffe
------------------------------
Name: David Jaffe
Title: Authorized Person
DLJ MERCHANT BANKING PARTNERS II,
L.P.
By: DLJ Merchant Banking II,
Inc.
Managing General Partner
By /s/ David Jaffe
------------------------------
Name: David Jaffe
Title: Authorized Person
DLJ DIVERSIFIED PARTNERS, L.P.
By: DLJ Diversified Partners,
Inc.
By /s/ David Jaffe
------------------------------
Name: David Jaffe
Title: Authorized Person
<PAGE>
Additional Signature Page to Stockholders and
Registration Rights Agreement
DLJ FIRST ESC L.L.C.
By: DLJ LBO Plans
Management Corporation
As Manager
By /s/ David Jaffe
------------------------------
Name: David Jaffe
Title: Authorized Person
DLJ OFFSHORE PARTNERS, II, C.V.
By: DLJ Merchant Banking
II, Inc.
Managing General
Partner
By /s/ David Jaffe
------------------------------
Name: David Jaffe
Title: Authorized Person
DLJ EAB PARTNERS, L.P.
By: DLJ Merchant Banking
II, Inc.
By /s/ David Jaffe
------------------------------
Name: David Jaffe
Title: Authorized Person
UK INVESTMENT PLAN 1997 PARTNERS
By: Donaldson, Lufkin &
Jenrette, Inc.
By /s/ David Jaffe
------------------------------
Name: David Jaffe
Title: Authorized Person
<PAGE>
Additional Signature Page to Stockholders and
Registration Rights Agreement
DLJ MERCHANT BANKING PARTNERS II-A,
L.P.
By /s/ David Jaffe
------------------------------
Name: David Jaffe
Title: Authorized Person
DLJ DIVERSIFIED PARTNERS-A, L.P.
By /s/ David Jaffe
------------------------------
Name: David Jaffe
Title: Authorized Person
DLJ MILLENIUM PARTNERS, L.P.
By /s/ David Jaffe
------------------------------
Name: David Jaffe
Title: Authorized Person
<PAGE>
Additional Signature Page to Stockholders and Registration Rights Agreement
BANKERS TRUST NEW YORK CORPORATION
By /s/ Joseph Wood
-----------------------------------
Name: Joseph Wood
Title: Sr. Managing Director
CONAC & CO.
As registered holder for
Continental Assurance Company on
behalf of its separate account,
Continental Assurance Company
Pension Investment Fund
Conac & Co.
Signature Guaranteed
By The First National Bank of Chicago
-----------------------------------
By: Blakley
--------------------------------
Authorized Signature
MUICO & CO.
As registered holder for Putnam
High Yield Trust
By /s/ Paul M. O'Neil
-----------------------------------
Name: Paul M. O'Neil
Title: Vice President
PAINEWEBBER MANAGED INVESTMENT TRUST ON
BEHALF OF PAINEWEBBER HIGH INCOME FUND(1)
By /s/ Emil Polito
-----------------------------------
Name: Emil Polito
Title: Vice President
- -------------------
(1) Limitation of Trustee, Officer and Shareholder Liability. PaineWebber High
Income Fund is a series of a Massachusetts business trust (the "Trust"). The
parties to this Stockholders and Registration Rights Agreement hereby
acknowledge that this Agreement and the agreements, documents and instruments
executed in connection herewith (collectively, the "Documents") relate solely
to the undersigned and not to any other series of the Trust. The parties hereto
hereby agree that, in seeking to enforce any of its rights under any of the
Documents, they will look solely to the undersigned, and not to any other
series of the Trust, and that all such other series shall have no liabilities
or obligations under the Documents. Additionally, notice is hereby given that
the Documents are executed on behalf of the trustees of the Trust as trustees
and not individually and that the obligations of the Documents are not binding
upon any of the trustees, officers or shareholders of the Trust individually,
but are binding only upon the assets and property of the undersigned.
<PAGE>
Additional Signature Page to Stockholders and Registration Rights Agreement
USL CAPITAL CORPORATION
By /s/ Peter Sherry, Jr.
------------------------------
Name: Peter Sherry, Jr.
Title: Vice President, General
Counsel & Secretary
<PAGE>
Additional Signature Page to Stockholders and Registration Rights Agreement
PEARLMAN FAMILY PARTNERS
By: /s/ Kenneth Pearlman
-----------------------------------
Name:
Its: GENERAL PARTNER
By: /s/ Karl E. Lutz
-----------------------------------
KARL E. LUTZ
By: /s/ Jeffery C. Hammes
-----------------------------------
JEFFREY C. HAMMES
By: /s/ Thomas Stemberg
-----------------------------------
THOMAS STEMBERG
THE MARION TRUST
By: /s/ Patricia H. Holzwarth, AVP
-----------------------------------
Name: Patricia H. Holzwarth
Its: Assistant Vice President
<PAGE>
Additional Signature Page to Stockholders and Registration Rights Agreement
/s/ Bruce L. Weitz
-----------------------------------
Bruce L. Weitz
<PAGE>
BCIP ASSOCIATES
By: /s/ Adam Kirsch
--------------------------------
Name: Adam Kirsch
Title: General Partner
BCIP TRUST ASSOCIATES. L.P.
By: /s/ Adam Kirsch
--------------------------------
Name: Adam Kirsch
Title: General Partner
TYLER CAPITAL FUND L.P.
By: Bain Venture Capital,
a California limited partnership
Its General Partner
By: /s/ Adam Kirsch
--------------------------------
Name: Adam Kirsch
Title: General Partner
TYLER INTERNATIONAL, L.P.-II
By: Bain Venture Capital,
a California limited partnership
Its General Partner
By: /s/ Adam Kirsch
--------------------------------
Name: Adam Kirsch
Title: General Partner
TYLER MASSACHUSETTS, L.P.
By: Bain Venture Capital,
a California limited partnership
Its General Partner
By: /s/ Adam Kirsch
--------------------------------
Name: Adam Kirsch
Title: General Partner
<PAGE>
SCHEDULE A
DLJ Merchant Banking Partners II, L.P.
277 Park Avenue
New York, New York 10172
DLJ Offshore Partners II, C.V.
c/o DLJ Offshore Management N.V.
John B. Gorsiraweg 14
Willemstad, Curacao
Netherlands, Antilles
DLJ Diversified Partners, L.P.
277 Park Avenue
New York, New York 10172
DLJMB Funding II, Inc.
277 Park Avenue
New York, New York 10172
UK Investment Plan 1997 Partners
2121 Avenue of the Stars
Fox Plaza, Suite 3000
Los Angeles, California 90067
DLJ Merchant Banking Partners II-A, L.P.
277 Park Avenue
New York, New York 10172
DLJ Diversified Partners-A, L.P.
277 Park Avenue
New York, New York 10172
DLJ Millenium Partners, L.P.
277 Park Avenue
New York, New York 10172
DLJ First ESC LLC
c/o DLJ LBO Plans Management Corporation
277 Park Avenue
New York, New York 10172
DLJ EAB Partners, L.P.
c/o DLJ Merchant Banking II, Inc.
277 Park Avenue
New York, New York 10172
<PAGE>
DUANE READE HOLDING CORP. EXHIBIT 11.1
EARNINGS PER SHARE
<TABLE>
<CAPTION>
MONTHS SHARES WEIGHTED WEIGHTED AVERAGE NET NET LOSS
OUTSTANDING OUTSTANDING SHARES SHARES LOSS PER SHARE
------------- ------------- ------------ ---------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
52 WEEKS ENDED DECEMBER 31, 1994
- --------------------------------
Balance at 1/2/94....................... 12 10,154,041 121,848,492 10,154,041
Issuance of Common Stock................ 8 10,173 81,384 6,782
1996/1997 Cheap Stock (A)............... 12 472,113 5,665,356 472,113
---------------
10,632,936 (16,438,000) (1.55)
---------------
52 WEEKS ENDED DECEMBER 30, 1995
- --------------------------------
Balance at 1/1/95....................... 3 10,164,214 30,492,642 2,541,054
After repurchase of certain shares ..... 9 10,143,873 91,294,857 7,607,905
Issuance of Common Stock................ 8.5 40,692 345,882 28,824
1996/1997 Cheap Stock(A)................ 12 472,113 5,665,356 472,113
---------------
10,649,895 (18,058,000) (1.70)
---------------
52 WEEKS ENDED DECEMBER 28, 1996
- --------------------------------
Balance at 12/31/95..................... 3 10,184,565 30,553,695 2,546,141
After repurhcase of certain shares ..... 3 10,103,185 30,309,555 2,525,796
After repurchase of certain shares ..... 6 10,062,497 60,374,982 5,031,249
1996/1997 Cheap Stock (A)............... 12 472,113 5,665,356 472,113
---------------
10,575,299 (17,854,000) (1.69)
---------------
39 WEEKS ENDED SEPTEMBER 28, 1996
- ---------------------------------
Balance at 12/31/95..................... 3 10,184,565 30,553,695 3,394,855
After repurchase of certain shares ..... 3 10,103,185 30,309,555 3,367,728
After repurchase of certain shares ..... 3 10,062,497 30,187,491 3,354,166
1996/1997 Cheap Stock(A)................ 9 472,113 4,249,017 472,113
---------------
10,588,862 (12,485,000) (1.18)
---------------
39 WEEKS ENDED SEPTEMBER 27, 1997
- ---------------------------------
Balance at 12/28/96..................... 9 10,062,497 90,562,473 10,062,497
Issuance of Common Stock................ 3 195,335 586,005 65,112
1996/1997 Cheap Stock (A)............... 9 472,113 4,249,017 472,113
---------------
10,599,722 (14,165,000) (1.34)
---------------
</TABLE>
(A) COMPUTED USING THE TREASURY STOCK METHOD AND AN ASSUMED OFFERING PRICE OF
$15 PER SHARE.
<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.
PRICE WATERHOUSE LLP
- --------------------
New York, New York
January 14, 1998
<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>
<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>
