-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SJ8kWYTbJx7JTif0LhtkJtBlA/1yCSeBIQBlc9OFISrlm3eG60vdCNynTFkmJNfP 3MI8PqMcByArHiauU0WURA== 0000950136-98-000581.txt : 19980331 0000950136-98-000581.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950136-98-000581 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971227 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUANE READE INC CENTRAL INDEX KEY: 0000895364 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 043164702 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13843 FILM NUMBER: 98578710 BUSINESS ADDRESS: STREET 1: 440 NINTH AVE CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2122735700 MAIL ADDRESS: STREET 1: 440 NINTH AVE STREET 2: 440 NINTH AVE CITY: NEW YORK STATE: NY ZIP: 10001 FORMER COMPANY: FORMER CONFORMED NAME: DUANE READE HOLDING CORP DATE OF NAME CHANGE: 19940328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DUANE READE CENTRAL INDEX KEY: 0000895366 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 112731721 STATE OF INCORPORATION: NY FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-55886 FILM NUMBER: 98578711 BUSINESS ADDRESS: STREET 1: 440 9TH AVE CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2122735700 MAIL ADDRESS: STREET 1: 440 9TH AVE CITY: NEW YORK STATE: NY ZIP: 10001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRI I INC CENTRAL INDEX KEY: 0001052796 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 043166107 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-43313-01 FILM NUMBER: 98578712 BUSINESS ADDRESS: STREET 1: 440 9TH AVE CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2122735700 MAIL ADDRESS: STREET 1: 440 9TH AVE CITY: NEW YORK STATE: NY ZIP: 10001 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. ----------------------------- FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the fiscal year ended December 27, 1997. Commission file number 333-41239 ----------------------------- DUANE READE INC. (Exact name of registrant as specified in its charter) DELAWARE 04-3164702 -------- ---------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) DRI I Inc.* Delaware 04-3166107 Duane Reade* New York 11-2731721 *Guarantors with respect to the Company's 9 1/4% Senior Subordinated Notes due 2008 440 Ninth Avenue New York, New York 10001 -------------------- ----- (Address of principal executive offices) (Zip Code) (212) 273-5700 (Registrant's telephone number, including area code) ----------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED -------------------------------- -------------------------------- Common Stock, $.01 par value per share New York Stock Exchange, Inc. 9 1/4% Senior Subordinated Notes due 2008 None. ----------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ]No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The only class of voting securities of Duane Reade Inc. is its Common Stock, par value $.01 per share (the "Common Stock"). On March 23, 1998, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $224.8 million. ----------------------------- The number of shares of the Common Stock outstanding as of March 23, 1998: 16,960,577 ---------- DOCUMENTS INCORPORATED BY REFERENCE Certain exhibits as listed on the Exhibit Index and filed with registrant's registration statements on Form S-1 (Nos. 333-41239 and 333-43313) under the Securities Act of 1933, as amended, are incorporated by reference into Part IV of this Form 10-K. INDEX Page PART I ITEM 1 Business........................................................4 ITEM 2. Properties......................................................12 ITEM 3. Legal Proceedings...............................................13 ITEM 4. Submission of Matters to a Vote of Security Holders.............13 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................14 ITEM 6. Selected Financial Data.........................................15 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................17 ITEM 8. Financial Statements and Supplementary Data.....................25 ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.............................46 PART III ITEM 10. Directors and Executive Officers of the Registrant..............47 ITEM 11. Executive Compensation..........................................49 ITEM 12. Security Ownership of Certain Beneficial Owners and Management..56 ITEM 13. Certain Relationships and Related Transactions..................58 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................61 SIGNATURES.................................................................64 -3- PART I ITEM 1. BUSINESS. GENERAL Duane Reade is the largest drugstore chain in New York City, based on sales volume, with 58 of its 67 stores located in Manhattan's high-traffic business and residential districts. The Company operates almost twice as many stores in Manhattan as its next largest competitor. Since opening its first store in 1960, the Company has successfully executed a marketing and operating strategy tailored to the unique characteristics of New York City, the largest and most densely populated market in the United States. According to Drug Store News, Duane Reade is the leading drugstore chain in the United States in terms of sales per square foot, at $1,010 per square foot in 1997, which was more than two times the national average for drugstore chains. For the fiscal year ended December 27, 1997, the Company had sales of $429.8 million and EBITDA of $43.1 million, increases of 12.7% and 22.0%, respectively, over the 1996 fiscal year. For the fiscal year ended December 27, 1997, the Company had a net loss of $14.7 million. The Company enjoys strong brand name recognition in New York City, which it believes results from the Company's many locations in high-traffic areas of Manhattan and the 30 million shopping bags with the distinctive Duane Reade logo that the Company distributes annually. An independent survey conducted in 1996 indicated that approximately 84% of the people who live or work in Manhattan recognize the Duane Reade name, and seven out of ten shopped at a Duane Reade store in the past twelve months. The Company was also recently named "Regional Drug Store Chain of the Year" for 1997 by Drug Store News. The Company has developed an operating strategy designed to capitalize on the unique characteristics of the New York City market, which include high-traffic volume, complex distribution logistics and high costs of occupancy, media advertising and personnel. The key elements of the Company's operating strategy are (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, relatively low warehouse and distribution costs and relatively 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 -4- turnover of inventory in Duane Reade's stores, result in relatively low warehouse and distribution costs. The Company plans to move all of its distribution facilities to another, recently leased warehouse in mid-1998. See "--Company Operations." 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 standardized 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 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 (as defined) acquired approximately 91.5% of the outstanding capital stock of the Company from Bain Capital and certain other selling securityholders. Since the 1992 acquisition, the Company has incurred net losses in each fiscal year. In 1994 and 1995, the Company experienced rapid expansion, growing from 40 stores to 59 stores. However, as a result of liquidity constraints and the need for improved inventory controls, the Company was forced to suspend its store expansion program in late 1995. In early 1996, a strengthened management team led by Anthony Cuti, the Company's new Chairman and Chief Executive Officer, took several measures to improve operations, including improving inventory controls and decreasing out-of-stock occurrences, creating a loss prevention function to control inventory shrink and continuing to invest in MIS. In 1997, the Company resumed its store expansion program, opening seven stores. During Mr. Cuti's tenure at the Company, EBITDA has increased by 60.2% from $26.9 million for the 52 weeks ended March 29, 1996 to $43.1 million for the fiscal year ended December 27, 1997, and the Company experienced net losses of $19.8 million and $14.7 million for the 52 weeks ended March 29, 1996 and the fiscal year ended December 27, 1997, respectively. Net loss before non-recurring charges for the fiscal year ended December 27, 1997 was $2.0 million. 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 -5- 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 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 1997, 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. Other merchandising initiatives completed during 1996 and 1997 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. 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's prescription drug sales (as reflected by same store pharmacy sales) grew by 24.6% in 1997 compared to 1996. Sales of prescription and OTC drugs represented approximately 40% of total sales in 1997 as compared with 35% of total sales in 1996. Although the average number of prescriptions filled by Duane Reade per store per week has increased from 640 in 1994 to 863 during 1997, the Company's average remains well below the industry chain store average of approximately 1,200, providing significant opportunity for -6- 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 benefits 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 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 74% in 1997 from approximately 64% in 1996. 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 December 27, 1997, the Company had contracts with over 100 Third Party Plans, including every major Third Party Plan in the Company market areas. 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 -7- 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 1997, 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 6,900 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, 52 stores have been designed by the system. Management believes that the Company's remaining stores will be planogrammed by the end of the second quarter of 1998. As a result, the Company believes that it has yet to realize the full benefits from this system. -8- The Company establishes each store's hours of operation 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. The Company attempts to mitigate inventory shrink through (i) the employment of full time security guards in each store, (ii) use of a state-of-the-art Electronic Article Surveillance ("EAS") system that detects unremoved EAS tags on valuable or easily concealed merchandise and (iii) merchandise delivery and stocking during non-peak hours. Additionally, all store and warehouse employees are trained to monitor inventory shrink, and the Company uses outside consulting services to monitor employee behavior. Recently, the Company hired a full-time team of loss prevention professionals and established an anonymous call-in line to allow employees to report instances of theft. The Company also instituted ongoing audits of warehouse picking and receiving and an anonymous reward line for the reporting of theft. The Company believes that these programs have enabled it to control inventory shrink and will enable it to continue to do so. Purchasing and Distribution. The Company purchases approximately 82% of its merchandise directly from manufacturers. The Company distributes approximately 84% of its merchandise through the Company's warehouses and receives direct-to-store deliveries for approximately 16% of its purchases. Direct-to-store deliveries are made for some 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 currently 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. -9- In March 1998, the Company entered into a new long-term lease for a 300,000 square foot distribution center in Long Island City, New York. The facility will approximately double in the Company's distribution capacity and is one mile away from the Company's current center. The new facility is scheduled to open in mid-year 1998 and will replace the existing warehouses. 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 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 system (PDX) has reduced the processing time for electronic reimbursement approval for prescriptions from Third Party Plan providers from 50 seconds to 7 seconds, and the inventory management systems (JDA merchandising and E3 replenishment) have allowed the Company to increase turns in the warehouse from 11 to 13 per year. In early 1997, the Company began the process of installing its point of sale (POS) systems in its stores,. The Company believes that these systems will better 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 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. The Company has several computer software systems which will require modification or upgrading to accommodate 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 all the changes to be material to the Company's financial condition or results of operations. 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 -10- 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 all favor regional chains and independents that are familiar with the market. Duane Reade's store format is tailored to meet all of these requirements and has proven successful in both the business and residential neighborhoods of Manhattan. Because of the difficulties of operating in densely populated areas, the New York City drugstore market remains under-penetrated by national chains as compared to the rest of the country. Nationwide, approximately 74% of the drugstore market is controlled by chains, while in New York City that number is approximately 50%. There can be no assurance that such underpenetration will continue. Duane Reade believes that it has significant competitive advantages over the approximately 1,400 independent drugstores in New York City, including purchasing economies of scale, centrally located warehouses that minimize store inventory and maximize selling space, a full line of in stock, brand name merchandise and a convenient store format. Major chain competitors in the New York City market include Rite-Aid, Genovese and CVS. GOVERNMENT REGULATION Duane Reade's stores and its distribution facility are registered with the federal U.S. Drug Enforcement Agency 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. EMPLOYEES As of December 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, employees at Duane Reade's personnel office and store management. The 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. -11- 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. The foregoing information contains certain forward-looking statements that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the drugstore industry in general and in the Company's specific market area; inflation; changes in costs of goods and services; economic conditions in general and in the Company's specific market areas; demographic changes; changes in prevailing interest rates and the availability of and terms of financing to fund the anticipated growth of the Company's business; liability and other claims asserted against the Company; changes in operating strategy or development plans; the ability to attract and retain qualified personnel; the significant indebtedness of the Company; labor disturbances; changes in the Company's acquisition and capital expenditure plans; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "pro forma," "anticipates," "intends" or the negative of any thereof, or other variations thereon or comparable terminology, or by discussions of strategy or intentions. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligations to update any such factors or to publicly announce the results of any revisions to any of the forward- looking statements contained herein to reflect future events or developments. ITEM 2. PROPERTIES. As of December 27, 1997, the Company is operating stores in the following locations: NO. OF STORES Manhattan, NY 58 Brooklyn, NY 4 Bronx, NY 2 Queens, NY 2 Newark, NJ 1 ----- Total: 67 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, six have renewal options. YEAR 1998...............................................2 1999...............................................1 2000...............................................4 2001...............................................0 2002...............................................9 Thereafter.........................................51 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 approximately one mile from the Long Island City facility. In addition, the Company recently entered into a new long-term lease for a distribution facility in Long Island City, New York. The Company plans to dispose of its owned warehouse once operations are moved to the new facility in mid - 1998. -12- The Company leases space for its corporate headquarters, which is located in Manhattan, New York. ITEM 3. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On November 24, 1997, a majority of the security holders of the Company approved the initial public offering of the Company's Common Stock, a change of the Company's name from Duane Reade Holding Corp. to Duane Reade Inc. and Anthony J. Cuti's Employment Agreement and Option Agreement (effective June 18, 1997) by written consent in lieu of a meeting. On December 23, 1997, a majority of the security holders of the Company approved and ratified all employee stock options granted pursuant to the 1997 Equity Participation Plan by written consent in lieu of a meeting. -13- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET PRICE RANGE OF COMMON STOCK Duane Reade's Common Stock is listed on the New York Stock Exchange under the symbol: "DRD". At March 23, 1998 there were 85 recordholders of the Common Stock. The Company's Common Stock was not publicly traded in 1997 and the Company paid no dividends. -14- ITEM 6. SELECTED FINANCIAL DATA. (in thousands, except per share amounts, percentages and store data)
Fiscal Year ------------------------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net sales.................................... $429,816 $381,466 $336,922 $281,103 $241,474 Cost of sales................................ 322,340 288,505 259,827 209,678 181,566 Gross profit................................. 107,476 92,961 77,095 71,425 59,908 Selling, general and administrative expenses................................... 65,414 59,048 50,326 39,741 29,666 Amortization................................. 5,303 16,217 11,579 18,238 27,432 Depreciation................................. 3,507 3,015 1,929 1,184 729 Store pre-opening expenses................... 767 139 1,095 1,220 300 Nonrecurring charges (1) .................... 12,726 -- -- -- -- -------- -------- -------- -------- -------- Operating income............................. 19,759 14,542 12,166 11,042 1,781 Net interest expense......................... 34,473 32,396 30,224 27,480 26,199 -------- -------- -------- -------- -------- Loss before taxes............................ (14,714) (17,854) (18,058) (16,438) (24,418) Provision for taxes.......................... -- -- -- -- -- -------- -------- -------- -------- -------- Net loss..................................... $(14,714) $(17,854) $(18,058) $(16,438) $(24,418) ======== ======== ======== ======== ======== Net loss per common share-basic.............. $(1.45) $(1.77) $(1.77) $(1.62) $(2.45) ======== ======== ======== ======== ======== Weighted average common shares outstanding-basic.......................... 10,161 10,103 10,178 10,161 9,976 ======== ======== ======== ======== ======== OPERATING AND OTHER DATA: EBITDA (2)................................... $43,056 $35,300 $27,443 $31,188 $29,975 EBITDA as a percentage of sales.............. 10.0% 9.3% 8.2% 11.1% 12.4% Number of stores at end of period............ 67 60 59 51 40 Same store sales growth (3) ................. 7.6% 8.3% (3.5)% 1.6% 3.3% Pharmacy same store sales growth (3)(5).............................. 24.6% 25.5% 7.0% 14.2% -- Average store size (square feet) at end of period.............................. 6,910 6,733 6,712 6,596 6,172 Sales per square foot (4).................... $1,010 $956 $898 $970 $1,022 Pharmacy sales as a % of net sales 25.1% 21.8% 19.0% 17.6% 16.6% Third-Party Plan sales as of % of pharmacy sales (5)......................... 74.2% 64.4% 58.2% 45.7% -- Capital expenditures......................... $13,493 $1,247 $6,868 $9,947 $1,838 BALANCE SHEET DATA (AT END OF PERIOD): Working capital.............................. $37,494 $9,917 $13,699 $20,152 $14,285 Total assets................................. 249,521 222,476 235,860 229,699 234,430 Total debt and capital lease obligations................................ 278,085 245,657 244,104 228,764 223,422 Stockholders' deficiency..................... (74,109) (59,396) (41,196) (23,170) (6,757)
(1) Refer to Note 12 of Consolidated Financial Statements. (2) As used herein, "EBITDA" means net 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 analysis 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. -15- A reconciliation of net loss to EBITDA for each period included above is set forth below (dollars in thousands):
Fiscal Year ------------------------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Net loss..................................... $(14,714) $(17,854) $(18,058) $(16,438) $(24,418) Net interest expense......................... 34,473 32,396 30,224 27,480 26,199 Amortization................................. 5,303 16,217 11,579 18,238 27,432 Depreciation................................. 3,507 3,015 1,929 1,184 729 Nonrecurring charges......................... 12,726 -- -- -- -- Other non-cash items......................... 1,761 1,526 1,769 724 33 -------- -------- -------- -------- -------- EBITDA....................................... $43,056 $35,300 $27,443 $31,188 $29,975 ======== ======== ======== ======== ========
(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) Prior to fiscal year 1994, the Company's pharmacy system did not separately track third-party sales. -16- ITEM 7. 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 document. 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 $1,010 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. 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, primarily in New York City. Over the past two years, Third Party Plans, including managed care providers and insurance companies, have comprised an increasing percentage of the Company's pharmacy business as the health care industry shifts to managed care. While sales to customers covered by -17- Third Party Plans results 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, acquired approximately 91.5% of the outstanding capital stock of the Company from Bain Capital and certain other selling securityholders, for approximately $78.7 million in cash, pursuant to a Recapitalization Agreement, dated June 18, 1997 (the "Recapitalization Agreement"). Upon consummation of such purchase, the Company reclassified all of its outstanding capital stock (then consisting of four classes) into one class of common stock, $0.01 par value per share. Prior to the consummation of the Offering in February 1998, the Company's primary asset was 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 interest 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 was merged with and into the Company (the "Merger"), resulting in the Company directly owning 99% of the partnership interests of Duane Reade (the "Partnership Interests") and DRI continuing to own a 1% partnership interest. Following the consummation of the Merger, the primary assets of the Company are 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. Fiscal Year -------------------------------------------------- 1997 1996 1995 Net Sales..................... 100.0% 100.0% 100.0% Cost of Sales................. 75.0 75.6 77.1 ---- ---- ---- Gross profit.................. 25.0 24.4 22.9 ---- ---- ---- Selling, general and administrative expenses.... 15.2 15.5 14.9 Amortization.................. 1.2 4.3 3.5 Depreciation.................. 0.8 0.8 0.6 Store pre-opening expenses.... 0.2 0.0 0.3 -18- Nonrecurring charges.......... 3.0 -- -- --- -- -- Operating income.............. 4.6 3.8 3.6 Net interest expense.......... 8.0 8.5 9.0 --- --- --- Net loss...................... (3.4)% (4.7)% (5.4)% ====== ====== ====== FISCAL 1997 COMPARED TO FISCAL 1996 Net sales in 1997 were $429.8 million, an increase of 12.7% over 1996 net sales of $381.5 million. The increase was attributable to increased comparable store sales of 7.6% and the inclusion of one new store opened during 1996 for the entire 1997 period and seven new stores opened in 1997. Cost of sales as a percentage of net sales decreased to 75.0% for 1997 from 75.6% for 1996, resulting in an increase in gross profit margin to 25.0% for 1997 from 24.4% during 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 venders and (iii) occupancy costs that increased at a lesser rate than the rate at which sales increased. Selling, general and administrative expenses were $65.4 million or 15.2% of net sales and $59.0 million or 15.5% of net sales in 1997 and 1996, respectively. The percentage decrease in 1997 compared to 1996 resulted principally from lower general and administrative expense as a percentage of net sales including the elimination of agreements requiring the annual payment of $1.0 million in management fees to Bain Capital, partially offset by higher selling expenses related to higher store salaries as a percentage of net sales (principally from new stores during the early months of operation). 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 1997 and 1996 was $5.3 million and $16.2 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 $3.5 million and $3.0 million in 1997 and 1996, respectively. Store pre-opening expenses increased to $0.8 million in 1997 from $0.1 in 1996 due to the opening of seven new store locations in 1997 compared to one in 1996. Net interest expense was $34.5 million in 1997 compared to $32.4 million in 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 $72.0 million for 1996 to $67.4 million for 1997 and a decrease in the average interest rate from 9.1% to 8.7% and (b) reduced interest on capital lease obligations. -19- The net loss for the Company decreased by $3.2 million from $17.9 million in 1996 to $14.7 million in 1997 primarily as a result of an increase in sales and gross profit margin and a reduction in amortization expense, partially offset by nonrecurring charges (see Note 12 of Notes to Consolidated Financial Statements). The Company's EBITDA improved by $7.8 million or 22.0% to $43.1 million in 1997 compared to $35.3 million in 1996. EBITDA as a percentage of sales increased to 10.0% in 1997 from 9.3% in 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 contribution 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 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. -20- 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 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. LIQUIDITY AND CAPITAL RESOURCES On September 30, 1997, the Company entered into the Old Credit Agreement, which provided for, among other things, $65.5 million of term loans and up to $30.0 million of revolving loans. As of December 27, 1997, outstanding balances thereunder totaled $89.8 million. The Company utilizes cash flow from operations, together with borrowings under the revolving portion of the Old 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). In February 1998, the Company successfully completed an initial public offering of its stock which was 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 Refinancing Plan resulted in a reduction in the Company's overall indebtedness, a simplification of the Company's capital structure and access to additional borrowings. The principal components of the Refinancing Plan were; (i) the sale by the Company of 6.7 million shares of common stock for net proceeds of approximately $102 million; (ii) the execution of a new secured credit agreement (the "Existing Credit Agreement") which provides for borrowings up to approximately $160 million ($130 million of term loans and up to $30 million of revolving loans); (iii) the issuance of $80 million aggregate principal amount of the Company's 9 1/4% Senior Subordinated Notes due 2008 (the "Senior Notes") for net proceeds of approximately $77 million; (iv) the repayment of all outstanding borrowings under the Old 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 Zero Coupon Notes; (vi) the redemption of the Company's outstanding 12% Senior Notes due 2002; and the (vii) Merger of Daboco with and into the Company. The Company believes the Refinancing Plan will result in a reduction in overall interest expense because total interest expense associated with the Existing Credit Agreement and the New Senior -21- Subordinated Notes will be less than the total interest expense associated with the 12% Senior Notes due 2002 and the Zero Coupon Notes. The interest rates under the Existing Credit Agreement will be approximately the same as interest rates under the Old Existing Credit Agreement. Working capital was $37.5 million and $9.9 million as of December 27, 1997 and December 28, 1996, respectively The increase is primarily due to the Company's investing in forward-buy inventory and increases in inventory related to the opening of additional stores in the first quarter or 1998. 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 expenses, 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 form a decrease in capital expenditures and decreases 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 fiscal year ended December 27, 1997, net cash used in operating activities was $3.8 million, compared to $12.6 million provided by operating activities during the fiscal year ended December 28, 1996. The primary reasons for this decrease are (i) an increase in inventory and (ii) an increase in accounts receivable due to increased pharmacy sales in connection with Third Party Plans. The Company's significant increase in inventory resulted from management's decision to take advantage of a number of forward purchasing opportunities, accumulate inventory in advance of additional store openings and seasonal inventory buildup during 1997. The Company believes that the activities did not and will not materially adversely affect its liquidity. For the fiscal year ended December 27, 1997, net cash used in investing -22- activities was $12.4 million, compared to $3.8 million for the fiscal year ended December 28, 1996. This increase primarily resulted from an increase in capital expenditures during 1997 partially offset by a decrease in systems development costs. For the fiscal year ended December 27, 1997, net cash provided by financing activities was $16.2 million, compared to $10.7 million used in financing activities for the fiscal year ended December 28, 1996. This increase primarily resulted from borrowings under the Old Credit Agreement which provided for a term loan of $65.5 million and borrowings of $24.5 million on a revolving credit facility of $30 million. These proceeds were used to repay the outstanding term loan balance of $69.5 million and the revolving loan balance of $2.5 million. Leases for seven of the Company's stores that generated approximately 10.7% of the Company's net sales for the fiscal year ended December 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. As of December 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. 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 Existing 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, many 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 repayment of its indebtedness in the future. Substantially all of the Company's borrowings under the Existing Credit Agreement 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. TAX BENEFITS FROM NET OPERATING LOSSES -23- At December 27, 1997, the Company had net operating loss carryforwards ("NOLs") of approximately $71.0 million, which are due to expire in the years 2007 through 2012. These NOLs may be used to offset future taxable income through 2012 and thereby reduce or eliminate the Company's federal income taxes otherwise payable. The Internal Revenue Code of 1986, as amended (the "Code"), imposes significant limitations on the utilization of NOLs in the event of an "ownership change," as defined in Section 382 of the Code (the "Section 382 Limitation"). The Section 382 Limitation is an annual limitation on the amount of pre-ownership change NOLs that a corporation may use to offset its post-ownership 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 YEAR 2000 COMPLIANCE The Company has several computer software systems which will require modification or upgrading to accommodate 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 drugstores 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 seasonable 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 27 1997. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -24- 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. As of December 27, 1997, there were outstanding options to purchase an aggregate of 1.65 million shares of Common Stock, which shares are not included in the calculation of earnings per share for the 52 weeks ended December 27, 1997 and would not be included in such calculation under the guidance prescribed by SFAS No. 128 because of the anit-dilutive nature of these instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. -25- REPORT OF INDEPENDENT ACCOUNTS To the Board of Directors and Stockholders of Duane Reade Inc. 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 Inc. (formerly known as Duane Reade Holding Corp.) and its subsidiaries at December 27, 1997 and December 28, 1996 and the results of their operations and their cash flows for each of the 52 week periods ended December 27, 1997, December 28, 1996 and December 30, 1995 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 March 6, 1998 -26- DUANE READE INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
FOR THE 52 WEEKS ENDED ---------------------------------------------------------------- DECEMBER 27, DECEMBER 28, DECEMBER 30, 1997 1996 1995 -------------------- ------------------ ------------------ Net sales $ 429,816 $ 381,466 $ 336,922 Cost of sales 322,340 288,505 259,827 -------------------- ------------------ ------------------ Gross profit 107,476 92,961 77,095 -------------------- ------------------ ------------------ Selling, general & administrative expenses 65,414 59,048 50,326 Amortization 5,303 16,217 11,579 Depreciation 3,507 3,015 1,929 Store pre-opening expenses 767 139 1,095 Nonrecurring charges 12,726 - - -------------------- ------------------ ------------------ 87,717 78,419 64,929 -------------------- ------------------ ------------------ Operating income 19,759 14,542 12,166 Interest expense, net 34,473 32,396 30,224 -------------------- ------------------ ------------------ Loss before income taxes (14,714) (17,854) (18,058) Income taxes - - - -------------------- ------------------ ------------------ Net loss $ (14,714) $ (17,854) $ (18,058) ==================== ================== ================== Net loss per common share: Basic $ (1.45) $ (1.77) $ (1.77) ==================== ================== ================== Diluted $ (1.45) $ (1.77) $ (1.77) ==================== ================== ================== Weighted average common shares outstanding: Basic 10,161 10,103 10,178 ==================== ================== ================== Diluted 10,161 10,103 10,178 ==================== ================== ==================
The accompanying notes are an integral part of these financial statements. -27- DUANE READE INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------
DECEMBER 27, DECEMBER 28, 1997 1996 ------------------ ------------------ ASSETS Current assets Cash $ 261 $ 216 Receivables 9,592 7,171 Inventories 66,665 47,914 Prepaid expenses 2,556 1,165 ------------------ ------------------ TOTAL CURRENT ASSETS 79,074 56,466 Property and equipment, net 32,557 23,065 Goodwill, net of accumulated amortization $18,264 and 120,890 124,369 $14,785 Other assets 17,000 18,576 ------------------ ------------------ TOTAL ASSETS $ 249,521 $ 222,476 ================== ================== LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities Accounts payable $ 23,510 $ 20,015 Accrued interest 4,634 3,873 Other accrued expenses 10,873 8,157 Current portion of long-term debt 660 12,000 Current portion of capital lease obligations 1,903 2,504 ------------------ ------------------ TOTAL CURRENT LIABILITIES 41,580 46,549 Senior debt, less current portion 179,043 149,975 Subordinated zero coupon debt, net of unamortized discount of $30,827 and $43,899 92,553 79,481 Capital lease obligations, less current portion 3,926 1,697 Other non-current liabilities 6,528 4,170 ------------------ ------------------ TOTAL LIABILITIES 323,630 281,872 ------------------ ------------------ COMMITMENTS AND CONTINGENCIES (NOTE 8) Stockholders' deficiency Common stock, $0.01 par; authorized 30,000,000 shares; issued and outstanding 10,260,577 and 10,062,497 shares 103 101 Paid-in capital 24,563 24,564 Accumulated deficit (98,775) (84,061) ------------------ ------------------ TOTAL STOCKHOLDERS' DEFICIENCY (74,109) (59,396) ------------------ ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 249,521 $ 222,476 ================== ==================
The accompanying notes are an integral part of these financial statements. -28- DUANE READE INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (IN THOUSANDS, EXCEPT SHARE AMOUNTS) - -------------------------------------------------------------------------------
COMMON STOCK --------------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL ------------- ---------- ------------ ---------------- ------------- 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) Issuance of common stock 198,080 2 (1) - 1 Net loss - - - (14,714) (14,714) ------------- ---------- ------------ ---------------- ------------- Balance, December 27, 1997 10,260,577 $ 103 $ 24,563 $ (98,775) $ (74,109) ============= ========== ============ ================ =============
The accompanying notes are an integral part of these financial statements. -29- DUANE READE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) - -------------------------------------------------------------------------------
FOR THE 52 WEEKS ENDED ------------------------------------------------------------- DECEMBER 27, DECEMBER 28, DECEMBER 30, 1997 1996 1995 ----------------- ----------------- ------------------ Cash flows from operating activities: Net loss $ (14,714) $ (17,854) $ (18,058) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization of property and equipment 3,507 3,015 1,929 Amortization of goodwill and other intangibles 9,542 18,897 13,940 Accretion of principal of zero coupon debt 13,081 11,249 9,628 Other 1,761 1,526 1,769 Changes in operating assets and liabilities: Receivables (2,421) (1,431) (1,962) Inventories (18,751) (4,767) (6,745) Accounts payable 3,495 (412) 7,382 Prepaid and accrued expenses 2,086 2,321 (658) Increase in other (liabilities) assets - net (1,392) 51 (491) ----------------- ----------------- ------------------ NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (3,806) 12,595 6,734 ----------------- ----------------- ------------------ Cash flows from investing activities: Proceeds from sales of capital assets 1,075 - - Capital expenditures (13,493) (1,247) (6,868) Systems development costs - (2,566) (6,268) Sale of government securities -net - 44 382 ----------------- ----------------- ------------------ NET CASH USED IN INVESTING ACTIVITIES (12,418) (3,769) (12,754) ----------------- ----------------- ------------------ Cash flows from financing activities: Proceeds from new term loan 65,475 - - Borrowings from new revolving credit facility 24,500 - - Repayments of old term loan (69,475) (5,625) (15,000) Net borrowings (repayments) - old revolving credit facility (2,500) (1,500) 4,000 Repayments of other long-term borrowings (116) - - Financing costs (3,079) (952) (885) Repayments of new term loan (165) - - Proceeds from issuance of long-term debt - - 15,000 Proceeds from issuance of stock 1 - 25 Repurchase of stock - (95) (68) Capital lease financing 4,133 274 4,329 Repayments of capital lease obligations (2,505) (2,845) (2,617) ----------------- ----------------- ------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 16,269 (10,743) 4,784 ----------------- ----------------- ------------------ Net increase (decrease) in cash 45 (1,917) (1,236) Cash at beginning of year 216 2,133 3,369 ----------------- ----------------- ------------------ CASH AT END OF YEAR $ 261 $ 216 $ 2,133 ================= ================= ================== Supplementary disclosures of cash flow information: Cash paid for interest $ 17,601 $ 18,391 $ 18,298 ================= ================= ==================
The accompanying notes are an integral part of these financial statements. -30- 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Duane Reade Inc. (the "Company") 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 (67 at December 27, 1997) in the New York City area. Also in June 1997 the Company entered into a recapitalization agreement (Note 10). 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 the Company and its subsidiaries. All intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform with the current presentation. REPORTING YEAR: The fiscal year for the Company is the 52/53 week reporting period ending on the last Saturday in December. RECEIVABLES: Receivables consist primarily of amounts due from various insurance companies and governmental agencies under third party payment plans for prescription sales and amounts due from vendors, a majority of which relate to promotional programs. The Company has not provided an allowance for doubtful accounts as its historical write-offs have been immaterial. The Company reflects promotional allowances from vendors as income when such allowances are earned. The carrying value of the Company's receivables approximate fair value given the short-term maturity of these financial instruments. 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 27, 1997 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 Subordinated 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. Deferred financing costs which arose in connection with the September 30, 1997 credit agreement are amortized utilizing the interest method, over the term of the debt. Deferred financing costs which arose in connection with the Old Credit Agreement are amortized utilizing the interest method over the term of the debt. -31- 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. 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: The Financial Accounting Standards Board (FASB) has issued several accounting pronouncements which the company will be required to adopt in future periods. FASB Statement No. 130 "Reporting Comprehensive Income," which the Company will adopt during the first quarter of 1998, establishes standards for reporting and display of comprehensive income and its components in financial statements. Comprehensive income generally represents all changes in shareholders' equity except those resulting from investments by or distributions to shareholders. With the exception of net earnings, such changes are generally not significant to the Company and the adoption of Statement No. 130, including the required comparative presentation for prior periods, is not expected to have a material impact on the consolidated financial statements. FASB Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information" requires that a publicly-held company report financial and descriptive information about its operating segments in the consolidated financial statements issued to shareholders for interim and annual periods. In addition, the Statement also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers which have not previously been presented in the consolidated financial statements and related notes. The Company will adopt Statement No. 131 in 1998. -32- 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 (10,160,851 for the 52 weeks ended December 27, 1997; 10,103,186 for the 52 weeks ended December 28, 1996 and 10,177,782 for the 52 weeks ended December 30, 1995). The Company adopted the provisions of FASB Statement No. 128 "Earnings per Share" in 1997. Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during the period. Potential common shares include shares issuable upon exercise of the Company's stock options. Potential common shares relating to options to purchase common stock were not included in the weighted average number of shares for the fiscal years 1997, 1996 and 1995 because their effect would have been anti-dilutive. 2. PROPERTY AND EQUIPMENT Property and equipment are summarized as follows (in thousands):
DECEMBER 27, DECEMBER 28, 1997 1996 ----------------------- ---------------------- Land...................................................... $ 312 $ 489 Buildings and building improvements ...................... 4,323 4,523 Furniture, fixtures and equipment ........................ 11,367 6,881 Leasehold improvements.................................... 17,620 13,134 Property under capital leases............................. 9,410 5,063 ----------------------- ---------------------- 43,032 30,090 Less--Accumulated depreciation and amortization .......... 10,475 7,025 ----------------------- ---------------------- $ 32,557 $ 23,065 ======================= ======================
-33- 3. OTHER ASSETS Other assets are summarized as follows (in thousands):
DECEMBER 27, DECEMBER 28, 1996 1997 ----------------------- ----------------------- Deferred financing costs (net of accumulated amortization of $4,117 and $10,417) ....................................................... $ 6,651 $ 7,811 Systems and integration costs (net of accumulated amortization of $3,009 and $1,461) .............................................. 8,231 9,798 Other............................................................... 2,118 967 ----------------------- ----------------------- $ 17,000 $ 18,576 ======================= =======================
Included in other assets are notes receivable from executives in the amount of $237,000 at December 27, 1997 and $381,000 at December 28, 1996. 4. DEBT Long-term debt consists of the following (in thousands):
DECEMBER 27, DECEMBER 28, 1997 1996 ------------------ ----------------------- Senior debt Term loan facility (A)................................ $ 65,310 $ 69,475 Notes payable bank--revolving credit (A) ............. 24,500 2,500 12% Senior Notes due September 15, 2002 (B) .......... 89,893 90,000 Subordinated debt 15% Senior Subordinated Zero Coupon Notes due September 15, 2004 (C)................................ 92,553 79,481 ------------------ ----------------------- 272,256 241,456 Less--Current portion ................................ 660 12,000 ------------------ ----------------------- $ 271,596 $ 229,456 ================== =======================
Amounts presented above are classified based upon their scheduled maturity dates. As noted below, all amounts were repaid during the first quarter of 1998 in connection with the Company's Existing Credit Agreement and the issuance of Common Stock and Senior Notes. -34- (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 27, 1997 averaged 8.9%. On September 30, 1997, the Company entered into a credit agreement (the "Old Credit Agreement") with an affiliate of the DLJMB Entities and various financial institutions providing for a term loan of $65.5 million and a revolving credit facility of $30 million. Proceeds of the term loan were used to repay outstanding term loans ($63.5 million) and revolving loans ($2 million). The term loan is payable in quarterly installments of $165,000 from December 1997 through March 2001, with additional payments as outlined in schedule below. The balance of the term loan at December 27, 1997 of $65.3 million reflects the above amount less the first quarterly payment made in December. As of December 27, 1997, the borrowings outstanding under the revolving credit facility were $24.5 million (classified as a noncurrent liability); in addition, $285,000 in letters of credit had been issued. At December 27, 1997, the aggregate principal amount of the term loan matures as follows (in thousands): 1998.............................. $ 660 1999.............................. 660 2000.............................. 660 2001.............................. 31,495 2002.............................. 31,835 ------------------ $ 65,310 ================== 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. Obligations under the Old Credit Agreement are secured by a pledge of all of Duane Reade's tangible and intangible assets and are guaranteed by the Company, which has pledged 100% of its partnership interests in support of such guarantees. The guarantees are joint and several and full and unconditional. The Old 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 net worth and fixed charge coverage. At December 27, 1997, the Company is in compliance with all of the covenants in the Old Credit Agreement. -35- (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 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 $96,400,000 at December 27, 1997. Purchasers of the Zero Coupon Notes received 15% of the fully diluted common stock of the Company, 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. 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 27, 1997. -36- 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. In connection with the Company's new Credit Agreement (the "Existing Credit Agreement") issuance of common stock and Senior Notes in February 1998, all outstanding amounts under (A), (B) and (C) above were repaid in full (see Note 15). 5. CAPITAL LEASE OBLIGATIONS As of December 27, 1997, the present value of capital lease obligations was $5.8 million (of which $1.9 million was payable during the next twelve months). Such obligations are payable in monthly installments over three to five year periods and bear interest at an average rate of 12.8%. 6. INCOME TAXES -37- Deferred tax assets and liabilities are determined based on the difference between book and tax bases of the respective assets and liabilities at December 27, 1997, December 28, 1996 and December 30, 1995 and are comprised of (in thousands):
DECEMBER 27, DECEMBER 28, DECEMBER 30, 1997 1996 1995 ------------------------- ---------------------- ---------------------- Inventories $ (3,884) $ (3,501) $ (3,238) ------------------------- ---------------------- ---------------------- Gross deferred tax liabilities (3,884) (3,501) (3,238) ------------------------- ---------------------- ---------------------- Covenants not to compete -- 1,851 4,318 Zero Coupon debt discount 19,838 14,041 9,885 Other 4,474 3,558 2,479 Net operating loss carryforward 32,255 50,072 49,217 ------------------------- ---------------------- ---------------------- Gross deferred tax assets 56,567 69,522 65,899 ------------------------- ---------------------- ---------------------- Net deferred tax assets 52,683 66,021 62,661 Valuation allowance (52,683) (66,021) (62,661) ------------------------- ---------------------- ---------------------- $ --- $ --- $ --- ========================= ====================== ======================
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 $22.2 million of the valuation allowance relates to the Retirement Payments. The Retirement Payments and other current tax deductions resulted in an available net operating loss of approximately $68.6 million which may be used 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, certain income tax law provisions apply which limit the ability of the Company to utilize the available net operating loss carryforwards. It is estimated that the annual limitation will be $5.1 million. -38- The provision for income taxes for the 52 weeks ended December 27, 1997, December 28, 1996 and December 30, 1995 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 (in thousands):
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED DECEMBER 27, 1997 DECEMBER 28, 1996 DECEMBER 30, 1995 ---------------------------- ---------------------------- ---------------------------- Pretax accounting loss $ (14,714) 100.0% $ (17,854) 100.0% $ (18,058) 100.0% ================= ========== ================ ========== ================ ========== Statutory rate (5,150) (35.0) (6,249) (35.0) (6,320) (35.0) State and local taxes, net of federal tax (332) (2.3) (1,201) (6.7) (1,233) (6.8) Goodwill amortization 1,218 8.3 1,218 6.8 1,218 6.7 Net operating losses not utilized 1,530 10.4 5,534 31.0 5,828 32.3 Nondeductible interest expense 796 5.4 684 3.8 585 3.2 Nondeductible recapitalization 1,915 13.0 0 0.0 0 0.0 Other 23 0.2 14 0.1 (78) (0.4) ----------------- ---------- ---------------- ---------- ---------------- ---------- Effective tax rate $ --- --% $ --- ---% $ --- ---% ================= ========== ================ ========== ================ ==========
7. STORE PRE-OPENING EXPENSES Duane Reade opened seven new store locations during the 52 weeks ended December 27, 1997, one new store location during the 52 weeks ended December 28, 1996 and eight new store locations during the 52 weeks ended December 30, 1995. 8. COMMITMENTS AND CONTINGENCIES LEASES Duane Reade leases all of its store facilities under operating lease agreements expiring on various dates through the year 2022. 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 27, 1997, December 28, 1996 and December 30, 1995 was $26,587,000, $24,420,000 and $22,703,000, respectively. -39- Minimum annual rentals at December 27, 1997 (including obligations under new store leases entered into but not opened as of December 27, 1997) are as follows (in thousands): 1998............................ $ 28,899 1999............................ 29,300 2000............................ 28,512 2001............................ 28,204 2002............................ 27,682 Remaining lease terms .......... 155,071 ---------------- Total........................... $ 297,668 ================ 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 common stock. In the event of employment termination, all of the stock may be repurchased by the Company. As a result of the recapitalization and the reverse stock split (Note 10), all outstanding shares were converted into common stock. As of December 27, 1997, an aggregate 287,578 shares of common stock are held by employees and former employees. COMMITMENTS 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 $700,000. The Company is subject to a loan agreement between the Company, certain of the DLJMB Entities and an executive of the Company whereby the Company has an obligation to assume a $1 million loan made to said executive, should certain of the DLJMB Entities elect. At December 27, 1997, the such DLJMB Entities have not exercised such election. -40- 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 15) 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 December 27, 1997, there were outstanding nonqualified stock options to purchase up to an aggregate of 635,207 (adjusted for the recapitalization and the reverse stock split, Note 10) shares of common stock (including options granted outside the Plan), all of which are vested. Changes in options outstanding (including options granted outside the Plan) during 1997 and 1996 are summarized as follows:
OPTION PRICE PER SHARE ------------------------------------------------- Total $.58 $7.34-$12.77 $29.37 $40.86 Options ---- ------------ ------ ------ ------- Options outstanding, December 30, 1995 40,110 40,109 40,109 40,109 160,437 Options granted 723,662 2,745 2,745 2,745 731,897 Options canceled (13,728) (13,726) (13,726) (13,726) (54,906) -------- -------- -------- -------- -------- Options outstanding, December 28, 1996 750,044 29,128 29,128 29,128 837,428 Options granted 851 68,953 851 851 71,506 Options exercised (2,745) --- --- --- (2,745) Options canceled (262,747) (2,745) (2,745) (2,745) (270,982) -------- -------- -------- -------- -------- Options outstanding, December 27, 1997 485,403 95,336 27,234 27,234 635,207 ======== ======== ======== ======== ======== Weighted average remaining life on outstanding options 8.2 years 8.3 years 6.2 years 6.2 years 8.1 years
During the second quarter of 1997, the Company adopted an Equity Participation Plan under which options for a total of 1,321,181 (adjusted for the recapitalization and the reverse stock split, Note 10) shares of common stock of the Company may be granted to employees, consultants and non-employee directors of the Company if the Company meets specific performance targets. At December 27, 1997, options for 1,019,284 shares have been granted to employees. -41- Changes in options outstanding under the Equity Participation Plan during the 52 weeks ended December 27, 1997 are summarized as follows:
Number of Options Option Price ------------------------------ ----------------------- Options outstanding, December 28, 1996 -- -- Options granted 1,019,284 $ 8.33 ------------------------------ ----------------------- Options outstanding, December 27, 1997 1,019,284 $ 8.33 ============================== =======================
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 proforma effect on the Company's net loss for the 52 weeks ended December 27, 1997 and December 28, 1996 would have been less than $100,000 and $200,000, respectively. The proforma compensation expense for stock options has been estimated using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0.0%, expected volatility of 60.0%, risk free interest rate of 6.0% and an expected term of 8 years. These proforma disclosures may not be representative of the effects on reported net income for future years since options vest over several years and options granted prior to 1995 are not considered. 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. For the 52 weeks ended December 27, 1997 and December 28, 1996, there were no employer contributions to the 401(k) Plan. For the 52 weeks ended December 30, 1995, employer contributions to the 401(k) Plan were $166,000. 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 27, 1997, December 28, 1996 and December 30, 1995, contributions to such plans were $6,751,000, $5,783,000 and $5,200,000, 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. -42- Shares were converted as follows: Approximate Prior Class Conversion Rate ----------- ---------------- Common and Common Class A ......................... 28/1 Common Class P and Common Class P-1 ................ 355/1 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. 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. -43- 11. NONRECURRING CHARGES During the first quarter of 1997, the Company considered a public offering of its common stock and took certain steps in connection with these plans. Such plans were abandoned upon consummation of the transaction discussed in Note 10. Costs and expenses incurred in connection with the abandoned public offering, the recapitalization and the exchange offers referred to in Note 10 aggregated approximately $12.7 million, including investment banking fees of $7.7 million (including $3.5 million to an affiliate of the Investors and $0.6 million to the Stockholders), write-off of unamortized deferred financing costs relating to the old credit agreement of $1.8 million, legal and accounting fees of $1.6 million, stand-by commitment fees relating to the exchange offers of $1.2 million to an affiliate of the Investors, and other costs of $0.4 million. The Company has treated these expenses as non-recurring because such expenses related to financing activities in connection with the Recapitalization and related events, which the Company does not expect to repeat. 12. RELATED PARTY TRANSACTIONS In 1992, the Company and the then principal stockholder of the Company (who has subsequently sold most of its shares, 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 52 weeks ended December 28, 1996 and December 30, 1995, such fees aggregated approximately $1.0 million. 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. Costs incurred in connection with the Old Credit Agreement aggregated approximately $2.7 million (including a funding fee of $2.4 million to an affiliate of the DLJMB Entities). 13. SUBSEQUENT EVENTS On February 13, 1998, the Company issued 6,700,000 shares of common stock in an initial public offering for net proceeds of approximately $101.8 million. In addition to the issuance of common stock, the Company entered into the Existing Credit Agreement which provides for borrowings of up to approximately $160 million and issued $80 million of new Senior Notes. The net proceeds of the common stock and the sale of the Senior Notes and borrowings under the Existing Credit Agreement were used for the (i) redemption of all of the Zero Coupon Notes for $99.8 million (including a redemption premium of $7.0 million), (ii) redemption of all the Senior Notes for $93.9 million (including a redemption premium of $4.0 million), (iii) repayment of the outstanding term loan indebtedness of $65.3 million, (iv) repayment of outstanding revolving indebtedness of $27.5 million and (v) payment of fees and expenses in connection with the Company's refinancing plan. The early payment of the Zero Coupon and Senior Notes will result in an extraordinary loss of approximately $23.6 million in the first quarter of 1998. -44- 14. SELECTED QUARTERLY INFORMATION (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------------
QUARTER 1997 1996 1995 SALES First $ 99,740 $ 90,594 $ 77,985 Second 107,423 96,438 84,141 Third 106,633 94,061 84,157 Fourth 116,020 100,373 90,639 ================ ================= ================== Year $ 429,816 $ 381,466 $ 336,922 ================ ================= ================== GROSS PROFIT First $ 23,837 $ 19,965 $ 19,007 Second 25,941 22,723 21,073 Third 27,605 22,608 19,775 Fourth 30,093 27,665 17,240 ---------------- ----------------- ------------------ Year $ 107,476 $ 92,961 $ 77,095 ================ ================= ================== NET LOSS First $ (2,165) $ (5,135) $ (3,436) Second (10,192) (3,225) (3,783) Third (1,808) (4,125) (4,669) Fourth (549) (5,369) (6,170) ---------------- ----------------- ------------------ Year $ (14,714) $ (17,854) $ (18,058) ================ ================= ================== NET LOSS PER COMMON SHARE (BASIC AND DILUTED) First $ (.21) $ (.50) $ (.34) Second (1.01) (.32) (.37) Third (.18) (.41) (.46) Fourth (.05) (.54) (.60) ---------------- ----------------- ------------------ Year $ (1.45) $ (1.77) $ (1.77) ================ ================= ==================
-45- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -46- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND OFFICERS The following table sets forth the directors and executive officers of the Company:
Name Age Position ---- --- --------- Anthony J. Cuti.............................52 Chairman, Chief Executive Officer and President William Tennant.............................50 Senior Vice President and Chief Financial Officer Gary Charboneau.............................53 Senior Vice President - Sales and Merchandising Jerry M. Ray................................50 Senior Vice President - Store Operations Nicole S. Arnaboldi.........................39 Director David L. Jaffe..............................39 Director Andrew J. Nathanson.........................40 Director Kevin Roberg................................46 Director David W. Johnson............................65 Director
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 Generals. 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. -47- 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. KEVIN ROBERG has been a Director of the Company since February 1998. Mr. Roberg currently serves as Chief Executive Officer and President of ValueRx. Prior to serving in this position, Mr. Roberg served as Chief Executive Officer and President of Medintell Systems Corporation during 1995 and as President - Western Health Plans and President - PRIMExtra, Inc. for EBP Health Plans, Inc. from 1994 to 1995. Mr. Roberg served as President-Self Funded and Private Label Division from 1993 to 1993 for Diversified Pharmaceutical Services (a subsidiary of United HealthCare Corporation) ("Diversified") and prior to that served as Chief Operating Officer of Diversified. DAVID W. JOHNSON has been a Director of the Company since February 1998. Since 1993, Mr. Johnson has served as Chairman of the Board of Campbell Soup Company. Prior to holding this position, Mr. Johnson served as President and Chief Executive Officer of Campbell Soup Company. Mr. Johnson also serves on the Board of Directors of Colgate Palmolive Company. COMMITTEES OF THE BOARD OF DIRECTORS The members of the Compensation Committee are Messrs. Jaffe and Johnson. The duties of the Compensation Committee are 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. -48- ITEM 11. 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.
LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------- ------------- SECURITIES NAME AND FISCAL OTHER ANNUAL UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION Anthony J. Cuti..................1997 $386,000 $475,000 $-- 496,569 $-- Chief Executive Officer Gary Charboneau..................1997 243,000 121,600 -- 141,877 -- Senior Vice President-Sales and Merchandising Jerry M. Ray`....................1997 200,000 100,000 -- 118,231 -- Senior Vice President-Store Operations William J. Tennant...............1997 151,000(1) 61,300 -- 115,393 -- Senior Vice President-Chief Financial Officer Joseph S. Lacko..................1997 150,000 52,500 -- 11,823 -- Vice President-Management Information Systems
- ---------------- (1) Reflects Mr. Tennant's salary for the partial year from February 18, 1997 (when he joined the Company) through December 27, 1997. -49- OPTION GRANTS IN LAST FISCAL YEAR The following table discloses options granted during fiscal year 1997 to the Named Executive Officers.
INDIVIDUAL GRANTS -------------------------------------------------------- NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT SECURITIES OPTIONS ASSUMED RATES OF STOCK PRICE UNDERLYING GRANTED TO EXERCISE OR APPRECIATION FOR OPTION TERM(2) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------------- GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10& Anthony J. Cuti.......... 496,569 45.5% $8.33 6/18/07 $2,602,022 $6,594,436 Gary Charboneau(3)....... 141,877 13.0 8.33 6/18/07 743,435 1,884,127 Jerry M. Ray(3).......... 118,231 10.8 8.33 6/18/07 619,530 1,570,081 William J. Tennant(4).... 115,393 10.6 7.34-8.33 2/18/07-6/18/07 561,964(5) 1,425,104(5) Joseph S. Lacko ......... 11,823 1.1 8.33 6/18/07 61,953 157,009 - ------------------ (1) Except for 68,101 options grated to Mr. Tennant under a separate program, all of such options vest fully on the eighth anniversary of the grant date and may vet sooner based on the Company's achievement of certain specified targets. (2) Amounts reflect certain assumed rates of appreciation for the term of the option as set forth in the executive compensation disclosure rules of the Securities and Exchange Commission and are not intended to forecast future appreciation of the Common Stock. Actual gains, if any, on stock option exercises depend on future performance of the Company's stock and overall market conditions. For each Named Executive Officer other than Mr. Tennant, at an annual rate of appreciation of 5% per year for the option term, the price of the Common Stock would be approximately $13.57 per share as of the expiration date, and for Mr. Tennant such price would be approximately $12.62 per share. For each Named Executive Officer other than Mr. Tennant, at an annual rate of appreciation of 10% per year for the option term, the price of the Common Stock would be approximately $21.61 per share as of the expiration date, and for Mr. Tennant such price would be approximately $20.10 per share. (3) All of such options were granted under the Equity Plan (as defined below). The options granted under such plan are subject to repurchase provisions upon termination of employment. See "-- Stock Options." (4) 68,101 of Mr. Tennant's options were granted pursuant to a separate program with the Company, and the remaining 47,292 options were granted pursuant to the Equity Plan. (5) Amounts for Mr. Tennant are calculated based on a weighted average exercise price of $7.75 per share.
-50- FISCAL YEAR END OPTION VALUES The following table summarizes the number and value of all unexercised options held by the Named Executive Officers at the end of 1997. There were no options exercised in the Company's last fiscal year.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS IN-THE-MONEY OPTIONS NAME ACQUIRED VALUE REALIZED FISCAL YEAR END AT FISCAL YEAR END ($)(1) - ---- -------- -------------- --------------- ------------------------- EXERCISABLE/ EXERCISABLE/ UNEXERCISABLE UNEXERCISABLE Anthony J. Cuti............ -- -- 409,931/451,168 $2,825,108/0 Gary Charboneau............ -- -- 68,985/128,905 306,443/0 Jerry M. Ray............... -- -- 55,842/107,421 285,161/0 William J. Tennant......... -- -- 72,425/42,968 67,420/0 Joseph S. Lacko............ -- -- 18,917/9,931 131,944/0
- ----------------- (1) Assumes the value of the Common Stock as of December 27, 1997 is equal to $8.33 per share. Mr. Barry 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 canceled. 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. As of the date of their election to the Board of Directors, each of Messrs. Roberg and Johnson received 5,000 options to purchase Common Stock at $21.5625 per share. The Company plans to compensate future Directors who are not employees of the Company, DLJ or DLJMB ("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 consummation of its initial public offering, the Company did not have a compensation committee. Instead, compensation decisions regarding the Company's executive officers were made by the Board of Directors. Each executive officer of the Company has an -51- employment agreement with the Company that establishes his annual compensation. See "--Employment Agreements." EMPLOYMENT AGREEMENTS Effective June 18, 1997, the Company entered into an employment agreement with Anthony J. Cuti (the "Cuti Employment Agreement"). Pursuant to the Cuti Employment Agreement, Mr. Cuti serves as Chairman, President and Chief Executive Officer of the Company. The Cuti Employment Agreement provides for (i) a base salary of $425,000 per year, which will increase to $500,000 in 1998 and $550,000 in 1999 if certain EBITDA targets (as defined in the Cuti Employment Agreement) are met and will increase every 18 months commencing July 1, 2001 by not less than the percentage increase in a designated consumer price index for such 18-month period, (ii) an annual incentive bonus of up to 200% of base salary based on certain EBITDA targets and (iii) participation in all benefit plans generally available to executive officers of the Company. Pursuant to the Cuti Employment Agreement and the Equity Plan described below, on June 18, 1997, Mr. Cuti was granted non-qualified stock options to purchase an aggregate of 496,569 shares of Common Stock at an exercise price of $8.33 per share. Subject to Mr. Cuti's continued employment with the Company, the options generally will become 100% vested on the eighth anniversary of the date of grant, but may vest sooner based on the Company's achievement of certain specified financial targets. Furthermore, the vesting of options will accelerate upon the occurrence of a sale of the Company (as defined in the Cuti Employment Agreement) on or prior to December 30, 2001, based on the Company's achievement of specified financial targets prior to the date of any such sale of the Company. The Cuti Employment Agreement provides that 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 instrument 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 -52- 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 Transaction-Cuti Loan Agreement." The Company has also entered into agreements with Messrs. Charboneau and Ray and certain other executives that provide for their initial base salary as well as annual incentive bonuses based on certain EBITDA targets. Mr. Charboneau's employment agreement provides for an annual base salary of $220,000 and for additional increases from time to time as the Company may determine. Mr. Ray's employment agreement provides for an annual base salary of $150,000 and for additional increases from time to time as the Company may determine. Each of Messrs. Charboneau and Ray are entitled to severance payments equalling 12 months of their respective salaries if they are terminated without "cause" (as respectively defined in the agreements). The Company's agreement with Mr. Lacko provides for payment of an annual base salary of $150,000 as well as for payment of annual incentive bonuses based upon achievement of certain corporate and financial objectives. Mr. Lacko's agreement also provides for the grant of stock options to acquire an aggregate of 6,805 shares of Common Stock. These options vested on June 18, 1997 and have an exercise price of $8.33 per share. In addition, Mr. Lacko's agreement provides for 12 months of salary continuation in the event Mr. Lacko is terminated without cause. The Company's agreement with Mr. Tennant provides for payment of an annual base salary of $175,000 per year as well as for payment of annual incentive bonuses based upon achievements 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. These options vested on June 18, 1997. The agreement also provides for 12 months of salary continuation in the event Mr. Tennant is terminated without cause. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The Company has established the Supplemental Executive Retirement Plan ("SERP"), an unfunded retirement plan that provides a lump sum benefit equal to the actuarial present value of a life annuity commencing at the later of age 65 or termination of employment for any reason other than for "cause." The SERP benefit is calculated as a percentage of a participant's Final Average Earnings (defined as the average base salary and bonus for the five years which produce the greatest amount multiplied by the participant's years of services with the Company). Currently, Mr. Cuti is the only SERP participant. Mr. Cuti's estimated SERP benefit, based on his annualized 1996 includable compensation and upon discount rates effective for termination of employment in December 1997, is estimated to be $619,000, if termination of employment occurs after 10 years when Mr. Cuti will be age 60 1/2, or $1,263,000 if termination of employment occurs after 14 1/2 years, when Mr. Cuti will be age 65. Pursuant to the Cuti -53- Employment Agreement, the Company is required to set aside funds in a "rabbi trust" to pay Mr. Cuti's SERP benefit in specified circumstances, including a sale of the Company, termination without "cause" and resignation for "good reason" (as respectively defined in the Cuti Employment Agreement). Furthermore, in the event of his termination without "cause" or by reason of the Company's non-renewal, his resignation for "good reason," or his death or disability, Mr. Cuti's SERP benefit will be calculated on the basis of 20 years of employment regardless of his actual number of years of employment with the Company (the present value of which was approximately $700,000 as of December 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 December 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 was frozen as to the future grants following the initial public offering of the Company's Common Stock. 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"). Since consummation of the initial public offering of the Company's Common Stock, the Equity Plan has been 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 a 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 -54- 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 initial public offering of the Company's Common Stock. 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). -55- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 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 March 15, 1998.
SHARES BENEFICIALLY OWNED (1) ----------------------------- NAME NO OF SHARES PERCENT - ---- ------------ ------- DLJ Merchant Banking Partners II, L.P. and related investors(2).............................. 8,292,162 48.9% Anthony J. Cuti............................. 409,931 2.4% David L. Jaffe(3)........................... __ __ Nicole S. Arnaboldi(3)...................... __ __ Andrew J. Nathanson(3)...................... __ __ Gary Charboneau............................. 272,436 1.6% Jerry M. Ray................................ 96,532 * William J. Tennant.......................... 72,425 * Joseph S. Lacko............................. 18,917 * Kevin Roberg................................ 5,000 * David W. Johnson............................ 5,000 * All executive officers and directors as a group (10 persons)(3)........................... 861,324 4.9
- -------------------- * 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 purposes of calculating the percentage ownership of any other person. (2) Consists of shares held directly by the following related investors, each of whom is affiliated with DLJ: DLJ Merchant Banking Partners II, L.P. ("DLJMBPII"), 5,223,192 shares; DLJ Merchant Banking Partners II-A, L.P. ("DLJMBPII-A"), 208,012 shares; DLJ Offshore Partners II, C.V. ("DLJOPII"), 256,849 shares; DLJ -56- Diversified Partners, L.P. ("DLJ"), 305,371 shares; DLJ Diversified Partners-A, L.P. ("DLJDPA"), 113,405 shares; DLJMB Funding II, Inc. ("DLJMBFII"), 927,352 shares; DLJ Millennium Partners, L.P. ("Millennium"), 84,453 shares; DLJ Millennium-A, L.P. :("Millennium-A"), 16,471 shares; DLJ EAB Partners, L.P. ("DLJEAB"), 23,452 shares; UK Investment Plan 1997 Partners ("UK Investment"), 138,196 shares; and DLJ First ESC L.P. ("DLJ ESC" and, collectively with the aforementioned entities, the "DLJMBPII Entities") 995,009 shares. See "Certain Relationships and Related Transactions--DLJMB Relationships." The address of each 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 DLJLBO 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, DLJESC and UK investment. The address of DLJ Merchant Banking, Inc. is 277 Park Avenue, New York, New York 10172. (3) Mr. Nathanson is a Managing Director of DLJ and, as a result may be deemed to beneficially own the shares of Common Stock held by the DLJMBPII Entities. Mr. Nathanson expressly disclaims beneficial ownership of such shares of Common Stock. Ms. Arnaboldi and Mr. Jaffe are managing directors of DLJMB and DLJ Diversified Partners, Inc. ("DLJDPI"). DLJMB is the managing general partner of DLJMBII, DLJMBIIA, DLJOPII, Millennium and Millennium-A. DLJDPI is the managing general partner of DLJDP and DLJDPA. As a result, Ms. Arnaboldi and Mr. Jaffe may be deemed to beneficially own the shares of Common Stock held by each of DLJMBPII, DLJMBIIA, DLJOPII, DLJDP, DLJDPA, Millennium, Millennium-A. Ms. Arnaboldi and Mr. Jaffe expressly disclaim beneficial ownership of such shares of Common Stock. -57- ITEM 13. 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, 383,420 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 a credit agreement (the "Old Existing Credit Agreement") in which DLJ Capital Funding, Inc., an affiliate of DLJMBPII, ("DLJ Funding") acted as the arranger and syndication agent. In connection with the Old Credit Agreement, DLJ Funding received a customary funding fee of approximately $2.4 million. On February 13, 1998, the Company entered into its existing credit agreement (the "Existing Credit Agreement") for which DLJ Funding acted as the manager and syndication agent. In connection with the Existing Credit Agreement, DLJ Funding received a customary funding fee of approximately $1.9 million. DLJ (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 received its pro rata portion of the underwriters compensation (approximately $4.258 million) in connection with its services as lead underwriter in the initial public offering of the Company's Common Stock that was consummated on February 13, 1998. DLJ also served as sole underwriter in connection with the offering of the Company's 9 1/4% Senior Subordinated Notes due 2008 that was consummated on February 13, 1998, for which DLJ received $2.4 million of underwriting compensation payable in connection therewith and $50,000 in connection with services relating to the defeasance of the Zero Coupon Notes and the Senior Notes. In addition, the DLJ Entities received $16.75 million from the sale of 1,091,658 shares of Common Stock in connection with the exercise by the Underwriters of their overallotment option in connection with the initial public offering of the Company's Common Stock. -58- 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 496,569 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 permits 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. At December 27, 1997, the DLJ Investors had not exercised such election. 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 among of $3.6 million, of which $1.4 million was paid upon consummation of the Recapitalization and the remaining $2.2 million was paid in connection with the consummation of the initial public offering of the Company's Common Stock. 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, 9,395,278 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 -59- 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 cam be used to register securities held by such Initial Shareholders. -60- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report: (i) Financial Statements (ii) Exhibits: EXHIBIT NO. DESCRIPTION 3.1(i) Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1(i) to the Common Stock S-1). 3.1(ii) Form of Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1(i) to the Common Stock S-1). 3.2(i) Certificate of Incorporation of DRI I Inc. (incorporated by reference to Exhibit 3.2(i) to the S-1 with respect to the Company's 9 1/4% Senior Subordinated Notes due 2008 (the "Notes S-1")). 3.2(ii) By-laws of DRI I Inc. (incorporated by reference to Exhibit 3.2(ii) of the Notes S-1) 3.3 Second Amended and Restated Partnership Agreement of Duane Reade. (incorporated by reference to Exhibit 3.3 of the Notes S-1) 4.1 Form of Indenture. (incorporated by reference to Exhibit 4.1 of the Notes S-1) 10.1 Duane Reade Inc. 1997 Equity Participation Plan (incorporated by reference to Exhibit 10.1 to the Company's Form S-1 registration Statement (File No. 333-41239), the "Common Stock S-1"). 10.2 Duane Read Inc. Holding Corp. 1992 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Common Stock S-1). 10.3 Employment Agreement, dated as of October 27, 1997, between the Company and Anthony J. Cuti (incorporated by reference to Exhibit 10.3 to the Common Stock S-1). 10.4 Employment Agreement, dated as of February 22, 1993, as amended, between the Company and Gary Charboneau (incorporated by reference to Exhibit 10.4 to the Common Stock S-1). 10.5 Employment Agreement, dated as of April 10, 1995, as amended, between Duane Reade and Jerry M. Ray (incorporated by reference to Exhibit 10.5 to the Common Stock S-1). 10.6 Employment Letter Agreement, dated as of October 9, 1996, between Duane Read and Joseph Lacko (incorporated by reference to Exhibit 10.6 to the Common Stock S-1). -61- 10.7 Employment Letter Agreement, dated as of February 12, 1997, between the Company and William Tennant (incorporated by reference to Exhibit 10.7 to the Common Stock S-1). 10.8 Agreement, dated as of November 22, 1996 between Duane Reade and Drug, Chemical, Cosmetic, Plastics and Affiliated Industries Warehouse Employees Local 815 (incorporated by reference to Exhibit 10.8 to the Common Stock S-1). 10.9 Agreement, dated July 16, 1992, as amended, between Duane Reade and Allied Trades Council (incorporated by reference to Exhibit 10.9 to the Common Stock S-1). 10.10 Agreement, dated February 4, 1997, as amended between Duane Reade and The Pharmacy fund, Inc. (incorporated by reference to Exhibit 10.10 to the Common Stock S-1). 10.11 Stockholders and Registration Rights Agreement, dated as of June 18, 1997, among the Company, DLJMB Funding II, Inc., DLJ Merchant Banking Partners II, L.P., DLJ Diversified Partners, L.P., DLJ First ESC L.L.C., DLJ Offshore Partners, II, C.V., DLJ EAB Partners, L.P., UK Investment Plan 1997 Partners, Bankers Trust New York Corporation, Conac & Co., Muico & Co., Roton & Co. , Putnam high Yield Trust, PaineWebber Managed Investment Trust on behalf of PaineWebber High Income Fund, USL Capital Corporation, Pearlman Family Partners, The Marion Trust, Bruce L. Weitz, BCIP Associates, BCIP Trust Associates, L.P., Tyler Capital fund L.P., Tyler International, L.P.-II, and Tyler Massachusetts, L.P. (incorporated by reference to Exhibit 10.13 to the Common Stock S-1). 10.12* Credit Agreement, dated as of February 13, 1998, among Duane Reade, as the Borrower, Duane Reade Inc. and DRI I Inc., as the Parent Guarantors, Various Financial Institutions set forth therein, as the Lenders, DLJ Capital Funding, Inc., as the Syndication Agent for the Lenders, Fleet National Bank, as the Administrative Agent for the Lenders and Credit Lyonnais New York Branch, as the Documentation Agent for the Lenders. 10.13* Partnership Security Agreement, dated as of February 13, 1998, among Duane Reade Inc. and DRI I Inc. and Fleet National Bank, as Administrative Agent. 10.14* Borrower Security Agreement, dated as of February 13, 1998 between Duane Reade and Fleet National Bank as Administrative Agent. 10.15* Holdings Pledge Agreement, dated as of February 13, 1997, among Duane Reade Inc. and Fleet National Bank, as Administrative Agent. 10.16 Form of Irrevocable Trust Agreement with respect to Senior Notes and Zero Coupon Notes between the Company and State Street Bank and Trust, as trustee. -62- 21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 3.1(i) to the Common Stock S-1). 27.1* Financial Data Schedule. * Filed herewith. (b) Reports on Form 8-K. None. (c) Financial Statement Schedules: None Schedules for which provision is made in the applicable accounting regulations of the Commission are either not required under the related instructions, are in applicable or not material, or the information called for thereby is otherwise included in the financial statements and therefore has been omitted. -63- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 27, 1998 DUANE READE INC. (Registrant) By: /s/ William J. Tennant ------------------------------ Name: William J. Tennant Title: Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on March 27, 1998: SIGNATURES TITLES ---------- ------ /s/ Anthony J. Cuti - ------------------------ President and Chief Executive Officer and Director Anthony J. Cuti (Principal Executive Officer) /s/ William J. Tennant - ------------------------ Senior Vice President, Chief Financial Officer William J. Tennant (Principal Financial Officer; Principal Accounting Officer) /s/ Nicole S. Arnaboldi Director - ------------------------ Nicole S. Arnaboldi /s/ David L. Jaffe Director - ------------------------ David L. Jaffe Director - ------------------------ David W. Johnson /s/ Andrew J. Nathanson Director - ------------------------ Andrew J. Nathanson Director - ------------------------ Kevin Roberg -64- SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 27, 1998 DRI I Inc. By: /s/ William J. Tennant ------------------------------ Name: William J. Tennant Title: Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 27, 1998 by the following persons in the capacities indicated with respect to DRI I Inc.: SIGNATURE CAPACITY --------- -------- /s/ Anthony J. Cuti - ------------------------ President and Chief Executive Officer and Director Anthony J. Cuti (Principal Executive Officer) /s/ William J. Tennant - ------------------------ Vice President, William J. Tennant (principal accounting and financial officer) /s/ Nicole S. Arnaboldi Director - ------------------------ Nicole S. Arnaboldi /s/ David L. Jaffe Director - ------------------------ David L. Jaffe /s/ Andrew J. Nathanson Director - ------------------------ Andrew J. Nathanson -65- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 27, 1998 DUANE READE INC. By: DRI I Inc., a general partner By: Duane Reade Inc. By: /s/ William J. Tennant By: /s/ William J. Tennant --------------------------- ------------------------------ Name: William J. Tennant Name: William J. Tennant Title: Senior Vice President and Title: Senior Vice President and Chief Financial Officer Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 27, 1998 by the following persons in the capacities indicated with respect to Duane Reade Inc. and DRI I Inc., the general partners of Duane Reade, on behalf of Duane Reade: SIGNATURE CAPACITY --------- -------- /s/ Anthony J. Cuti - ------------------------ President and Chief Executive Officer and Director Anthony J. Cuti (Principal Executive Officer) /s/ William J. Tennant - ------------------------ Senior Vice President, Chief Financial Officer William J. Tennant (principal accounting and financial officer) /s/ Nicole S. Arnaboldi Director - ------------------------ Nicole S. Arnaboldi /s/ David L. Jaffe Director - ------------------------ David L. Jaffe Director* - ------------------------ Kevin Roberg /s/ Andrew J. Nathanson Director - ------------------------ Andrew J. Nathanson Director* - ------------------------ David W. Johnson *Duane Reade Inc. only. -66- EX-10.12 2 CREDIT AGREEMENT [Execution Copy] U.S. $160,000,000 CREDIT AGREEMENT, dated as of February 13, 1998, among DUANE READE, as the Borrower, DUANE READE INC. (formerly known as Duane Reade Holding Corp.) and DRI I INC. (formerly known as Duane Reade Inc.), as the Parent Guarantors, VARIOUS FINANCIAL INSTITUTIONS, as the Lenders, DLJ CAPITAL FUNDING, INC., as the Syndication Agent for the Lenders, FLEET NATIONAL BANK, as the Administrative Agent for the Lenders, and CREDIT LYONNAIS NEW YORK BRANCH, as the Documentation Agent for the Lenders. ARRANGED BY: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION TABLE OF CONTENTS
Section Page - ------- ---- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1. Defined Terms..............................................................3 1.2. Use of Defined Terms......................................................31 1.3. Cross-References..........................................................31 1.4. Accounting and Financial Determinations...................................32 ARTICLE II COMMITMENTS, BORROWING AND ISSUANCE PROCEDURES, NOTES AND LETTERS OF CREDIT 2.1. Commitments...............................................................32 2.1.1. Term Loan Commitments.....................................................33 2.1.2. Revolving Loan Commitment and Swing Line Loan Commitment..................33 2.1.3. Letter of Credit Commitment...............................................34 2.1.4. Lenders Not Permitted or Required to Make the Loans.......................34 2.1.5. Issuer Not Permitted or Required to Issue Letters of Credit...............34 2.2. Reduction of the Commitment Amounts.......................................34 2.2.1. Optional..................................................................34 2.2.2. Mandatory.................................................................35 2.3. Borrowing Procedures and Funding Maintenance..............................35 2.3.1. Term Loans and Revolving Loans............................................35 2.3.2. Swing Line Loans..........................................................36 2.4. Continuation and Conversion Elections.....................................37 2.5. Funding...................................................................38 2.6. Issuance Procedures.......................................................38 2.6.1. Other Lenders' Participation..............................................39 2.6.2. Disbursements; Conversion to Revolving Loans..............................39 2.6.3. Reimbursement.............................................................40 2.6.4. Deemed Disbursements......................................................40 2.6.5. Nature of Reimbursement Obligations.......................................41 2.6.6. Indemnity.................................................................41 2.6.7. Borrower's Guaranty of Reimbursement Obligations under Letters of Credit Issued for the Account of its Subsidiaries...........................41 2.7. Register; Notes...........................................................45 ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES 3.1. Repayments and Prepayments; Application...................................47 3.1.1. Repayments and Prepayments................................................47 3.1.2. Application...............................................................51 3.2. Interest Provisions.......................................................51 3.2.1. Rates.....................................................................51 3.2.2. Post-Maturity Rates.......................................................52 3.2.3. Payment Dates.............................................................52 3.3. Fees .....................................................................52 3.3.1. Commitment Fee............................................................53 3.3.2. Syndication Agent's, Administrative Agent's and Arranger's Fees...........53 3.3.3. Letter of Credit Fee......................................................53 ARTICLE IV CERTAIN LIBO RATE AND OTHER PROVISIONS 4.1. LIBO Rate Lending Unlawful................................................54 4.2. Deposits Unavailable......................................................54 4.3. Increased LIBO Rate Loan Costs, etc.......................................54 4.4. Funding Losses............................................................54 4.5. Increased Capital Costs...................................................55 4.6. Taxes.....................................................................55 4.7. Payments, Computations, etc...............................................56 4.8. Sharing of Payments.......................................................57 4.9. Setoff....................................................................57 4.10. Replacement of Lenders....................................................58 ARTICLE V CONDITIONS TO CREDIT EXTENSIONS 5.1. Initial Credit Extension..................................................58 5.1.1. Corporate and Partnership Documents, etc..................................59 5.1.2. Consummation of Transaction...............................................59 5.1.3. Closing Date Certificates.................................................60 5.1.4. Delivery of Notes.........................................................60 5.1.5. Pledge Agreement..........................................................60 5.1.6. Security Agreements.......................................................60 5.1.7. Mortgage..................................................................61 5.1.8. Financial Information, etc................................................61 5.1.9. Solvency, etc.............................................................62 5.1.10. Payment of Outstanding Indebtedness, etc..................................62 5.1.11. Litigation................................................................62 5.1.12. Material Adverse Change...................................................62 5.1.13. Opinions of Counsel.......................................................62 5.1.14. Insurance.................................................................63 5.1.15. Perfection Certificate....................................................63 5.1.16. Approvals.................................................................63 5.1.17. Closing Fees, Expenses, etc...............................................63 5.1.18. Satisfactory Legal Form...................................................63 5.2. All Credit Extensions.....................................................63 5.2.1. Compliance with Warranties, No Default, etc...............................63 5.2.2. Credit Extension Request..................................................64 ARTICLE VI REPRESENTATIONS AND WARRANTIES 6.1. Organization, etc.........................................................64 6.2. Due Authorization, Non-Contravention, etc.................................65 6.3. Government Approval, Regulation, etc......................................65 6.4. Validity, etc.............................................................65 6.5. Financial Information.....................................................65 6.6. No Material Adverse Change................................................66 6.7. Litigation, Labor Controversies, etc......................................66 6.8. Subsidiaries..............................................................66 6.9. Ownership of Properties...................................................66 6.10. Taxes.....................................................................66 6.11. Pension and Welfare Plans.................................................67 6.12. Environmental Warranties..................................................67 6.13. Regulations G, U and X....................................................68 6.14. Accuracy of Information...................................................68 6.15. Solvency..................................................................69 6.16. Pharmaceutical Laws.......................................................69 6.17. Seniority of the Obligations and Permitted Indebtedness under the Indentures...........................................................70 ARTICLE VII COVENANTS 7.1. Affirmative Covenants.....................................................70 7.1.1. Financial Information, Reports, Notices, etc..............................71 7.1.2. Compliance with Laws, etc.................................................73 7.1.3. Maintenance of Properties.................................................73 7.1.4. Insurance.................................................................73 7.1.5. Books and Records.........................................................74 7.1.6. Environmental Covenant....................................................74 7.1.7. Future Subsidiaries.......................................................75 7.1.8. Future Leased Property and Future Acquisitions of Real Property; Future Acquisition of Other Property........................................76 7.1.9. Use of Proceeds, etc......................................................77 7.1.10. Hedging Obligations.......................................................77 7.1.11. Redemptions...............................................................77 7.1.12. Maintenance of Corporate Separateness.....................................78 7.1.13. Borrower Indebtedness.....................................................78 7.2. Negative Covenants........................................................78 7.2.1. Business Activities.......................................................78 7.2.2. Indebtedness..............................................................79 7.2.3. Liens.....................................................................80 7.2.4. Financial Covenants.......................................................82 7.2.5. Investments...............................................................83 7.2.6. Restricted Payments, etc..................................................84 7.2.7. Capital Expenditures, etc.................................................86 7.2.8. Consolidation, Merger, etc................................................86 7.2.9. Asset Dispositions, etc...................................................87 7.2.10. Modification of Certain Agreements........................................88 7.2.11. Transactions with Affiliates..............................................88 7.2.12. Negative Pledges, Restrictive Agreements, etc.............................88 7.2.13. Stock of Subsidiaries.....................................................89 7.2.14. Sale and Leaseback........................................................89 ARTICLE VIII EVENTS OF DEFAULT 8.1. Listing of Events of Default..............................................89 8.1.1. Non-Payment of Obligations................................................89 8.1.2. Breach of Warranty........................................................89 8.1.3. Non-Performance of Certain Covenants and Obligations......................90 8.1.4. Non-Performance of Other Covenants and Obligations........................90 8.1.5. Default on Other Indebtedness.............................................90 8.1.6. Judgments.................................................................90 8.1.7. Pension Plans.............................................................90 8.1.8. Change in Control.........................................................90 8.1.9. Bankruptcy, Insolvency, etc...............................................91 8.1.10. Impairment of Security, etc...............................................91 8.2. Action if Bankruptcy, etc.................................................92 8.3. Action if Other Event of Default..........................................92 ARTICLE IX GUARANTY 9.1. Guaranty..................................................................92 9.2. Acceleration of Parent Guaranty...........................................93 9.3. Guaranty Absolute, etc....................................................93 9.4. Reinstatement, etc........................................................94 9.5. Waiver, etc...............................................................94 9.6. Postponement of Subrogation, etc..........................................94 9.7. Successors, Transferees and Assigns; Transfers of Notes, etc..............95 ARTICLE X THE AGENTS 10.1. Actions...................................................................96 10.2. Funding Reliance, etc.....................................................96 10.3. Exculpation...............................................................97 10.4. Successor.................................................................97 10.5. Credit Extensions by each Agent...........................................97 10.6. Credit Decisions..........................................................98 10.7. Copies, etc...............................................................98 10.8. The Swing Line Lender, the Issuer, the Documentation Agent, the Syndication Agent and the Administrative Agent.......................98 ARTICLE XI MISCELLANEOUS PROVISIONS 11.1. Waivers, Amendments, etc..................................................99 11.2. Notices..................................................................100 11.3. Payment of Costs and Expenses............................................100 11.4. Indemnification..........................................................101 11.5. Survival.................................................................102 11.6. Severability.............................................................102 11.7. Headings.................................................................102 11.8. Execution in Counterparts, Effectiveness, etc............................103 11.9. Governing Law; Entire Agreement..........................................103 11.10. Successors and Assigns...................................................103 11.11. Sale and Transfer of Loans and Notes; Participations in Loans and Notes..103 11.11.1. Assignments..............................................................103 11.11.2. Participations...........................................................105 11.12. Other Transactions.......................................................106 11.13. Independence of Covenants................................................106 11.14. Confidentiality..........................................................107 11.15. Forum Selection and Consent to Jurisdiction..............................107 11.16. Waiver of Jury Trial.....................................................108
SCHEDULE I - Disclosure Schedule SCHEDULE II - Percentages and Administrative Information SCHEDULE III - Existing Letters of Credit EXHIBIT A-1 - Form of Revolving Note EXHIBIT A-2 - Form of Term A Note EXHIBIT A-3 - Form of Term B Note EXHIBIT A-4 - Form of Registered Note EXHIBIT A-5 - Form of Swing Line Note EXHIBIT B-1 - Form of Borrowing Request EXHIBIT B-2 - Form of Issuance Request EXHIBIT C - Form of Continuation/Conversion Notice EXHIBIT D-1 - Form of Holdings Closing Date Certificate EXHIBIT D-2 - Form of Borrower Closing Date Certificate EXHIBIT E - Form of Compliance Certificate EXHIBIT F-1 - Form of Partnership Security Agreement EXHIBIT F-2 - Form of Borrower Security Agreement EXHIBIT F-3 - Form of Subsidiary Security Agreement EXHIBIT G-1 - Form of Holdings Pledge Agreement EXHIBIT G-2 - Form of Borrower Pledge Agreement EXHIBIT G-3 - Form of Subsidiary Pledge Agreement EXHIBIT H - Form of Subsidiary Guaranty EXHIBIT I - Form of Perfection Certificate EXHIBIT J - Form of Lender Assignment Agreement EXHIBIT K - Form of Opinion of New York Counsel to the Obligors EXHIBIT L-1 - Form of Solvency Certificate of Holdings EXHIBIT L-2 - Form of Solvency Certificate of the Borrower CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of February 13, 1998, is made among DUANE READE, a New York general partnership (the "Borrower"), DUANE READE INC. (formerly known as Duane Reade Holding Corp.), a Delaware corporation ("Holdings"), DRI I INC. (formerly known as Duane Reade Inc.), a Delaware corporation ("DRI I" and, together with Holdings, collectively, the "Parent Guarantors"), the various financial institutions as are or may become parties hereto (collectively, the "Lenders"), DLJ CAPITAL FUNDING, INC. ("DLJ"), as syndication agent (in such capacity, the "Syndication Agent") for the Lenders, FLEET NATIONAL BANK ("Fleet"), as administrative agent (in such capacity, the "Administrative Agent") for the Lenders and CREDIT LYONNAIS NEW YORK BRANCH ("Credit Lyonnais"), as the documentation agent (in such capacity, the "Documentation Agent") for the Lenders. W I T N E S S E T H: WHEREAS, Holdings and the Borrower have proposed a refinancing (the "Refinancing") of their existing Indebtedness, and in connection with such refinancing, Daboco Inc., a New York corporation, a Wholly-owned Subsidiary of Holdings and a general partner of the Borrower ("Daboco"), will merge with and into Holdings (the "Merger"), with Holdings being the surviving corporation of such Merger; WHEREAS, approximately $320,550,000 will be required to consummate the Refinancing including fees and expenses related to the Transaction (as defined below), which Holdings and the Borrower propose to raise through: (a) the issuance by Holdings of 9 1/4% senior subordinated notes due 2008 (the "Senior Subordinated Notes") for gross cash proceeds of at least $80,000,000; (b) the issuance and sale by Holdings of approximately 6,700,000 shares of its common stock in an initial public offering (the "IPO") for gross cash proceeds of at least $110,550,000; and (c) a Borrowing hereunder of approximately $130,000,000; WHEREAS, such proceeds will be used: (a) to defease and redeem Holdings' $123,368,000 aggregate principal amount at maturity (approximately $100,100,000 Accreted Value) of outstanding 15% Senior Subordinated Zero Coupon Notes due 2004 (the "Holdings Subordinated Notes"); (b) to defease and redeem the Borrower's $89,893,000 aggregate principal amount of outstanding 12% Senior Notes due September 15, 2002, Series B (the "Senior Notes"); (c) to refinance approximately $90,000,000 of Indebtedness outstanding under the Borrower's existing senior credit facilities, evidenced by that certain credit agreement, dated as of September 30, 1997 (as amended, supplemented, amended and restated or otherwise modified prior to the Closing Date, the "Existing Credit Agreement"), among the Borrower, Holdings, Daboco, DRI I, the lenders parties thereto, DLJ, as the syndication agent, Fleet, as the administrative agent, and Credit Lyonnais New York Branch, as the documentation agent; and (d) to pay accrued interest, prepayment premiums and reasonable fees and expenses associated with the Refinancing, the Merger, the issuance of the Senior Subordinated Notes, the IPO, the financing contemplated hereunder and all other transactions related thereto (collectively, the "Transaction") of approximately $32,000,000; WHEREAS, in connection with the Refinancing and the ongoing working capital and general corporate needs of the Borrower, the Borrower desires to obtain the following financing facilities from the Lenders: (a) a Term A Loan Commitment pursuant to which Borrowings of Term A Loans will be made to the Borrower on the Closing Date in a maximum, original principal amount of $50,000,000; (b) a Term B Loan Commitment pursuant to which Borrowings of Term B Loans will be made to the Borrower on the Closing Date in a maximum, original principal amount of $80,000,000; (c) a Revolving Loan Commitment (to include availability for Revolving Loans, Swing Line Loans and Letters of Credit) pursuant to which Borrowings of Revolving Loans, in a maximum aggregate outstanding principal amount (together with the aggregate outstanding amount of all Swing Line Loans and Letter of Credit Outstandings) not to exceed $30,000,000 will be made to the Borrower from time to time on and subsequent to the Closing Date but prior to the Revolving Loan Commitment Termination Date; (d) a Letter of Credit Commitment pursuant to which the Issuer will issue Letters of Credit for the account of the Borrower from time to time on and subsequent to the Closing Date but prior to the Revolving Loan Commitment Termination Date in a maximum aggregate Stated Amount at any one time outstanding not to exceed $10,000,000 (provided, that the aggregate outstanding amount of all Revolving Loans, Swing Line Loans and Letter of Credit Outstandings at any time shall not exceed the then existing Revolving Loan Commitment Amount); and -2- (e) a Swing Line Loan Commitment pursuant to which Borrowings of Swing Line Loans in an aggregate outstanding principal amount not to exceed $5,000,000 will be made to the Borrower on and from time to time subsequent to the Closing Date but prior to the Revolving Loan Commitment Termination Date (provided, that the aggregate outstanding amount of all Swing Line Loans, Revolving Loans and Letter of Credit Outstandings at any time shall not exceed the then existing Revolving Loan Commitment Amount); with the proceeds of the Credit Extensions to be used for the purposes set forth in Section 7.1.9; and WHEREAS, the Lenders and the Issuer are willing, on the terms and subject to the conditions hereinafter set forth (including Article V), to extend the Commitments and make the Loans described herein to the Borrower and issue (or participate in) Letters of Credit for the account of the Borrower; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1. Defined Terms. The following terms (whether or not underscored) when used in this Agreement, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Accreted Value" is defined in the indenture relating to the Holdings Subordinated Notes and entered into by and between Holdings and The Connecticut National Bank, as trustee thereunder, as in effect on the date hereof. "Administrative Agent" is defined in the preamble and includes each other Person as shall have subsequently been appointed as the successor Administrative Agent pursuant to Section 10.4. "Administrative Agent's Fee Letter" means the confidential fee letter, dated as of February 13, 1998, between the Borrower and the Administrative Agent. "Affected Lender" is defined in Section 4.10. "Affiliate" of any Person means any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person (excluding any trustee under, or any committee with responsibility for administering, any Plan). A Person shall be deemed to be -3- "controlled by" any other Person if such other Person possesses, directly or indirectly, power (a) to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners, or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Agent" means, as the context may require, the Administrative Agent and/or the Syndication Agent. "Agreement" means, on any date, this Credit Agreement as originally in effect on the Closing Date and as thereafter from time to time amended, supplemented, amended and restated, or otherwise modified and in effect on such date. "Alternate Base Rate" means, for any day and with respect to all Base Rate Loans, the higher of: (a) 0.50% per annum above the Federal Funds Rate most recently determined by the Administrative Agent; and (b) the rate of interest in effect for such day as most recently publicly announced or established by the Administrative Agent in Boston, Massachusetts, as its "prime rate." (The "prime rate" is a rate set by the Administrative Agent based upon various factors including the Administrative Agent's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above or below such announced rate.) Any change in the reference rate established or announced by the Administrative Agent shall take effect at the opening of business on the day of such establishment or announcement. "Applicable Commitment Fee" means, (a) for each day from the Closing Date through (but excluding) the date upon which the Compliance Certificate for the second full Fiscal Quarter following the Closing Date is delivered or required to be delivered by Holdings to the Administrative Agent pursuant to clause (d) of Section 7.1.1, a fee which shall accrue at a rate of 1/2 of 1% per annum, and (b) for each day thereafter, a fee which shall accrue at the applicable rate per annum set forth below under the column entitled "Applicable Commitment Fee", determined by reference to the Leverage Ratio as in effect for the Fiscal Quarter last ended as of such time of determination: APPLICABLE LEVERAGE RATIO COMMITMENT FEE -------------- -------------- greater than or equal to 3.5 0.500% less than 3.5 0.375% With respect to any time of determining the Applicable Commitment Fee, the Leverage Ratio used to compute the Applicable Commitment Fee shall be equal to the Leverage Ratio set forth in the Compliance Certificate most recently delivered by Holdings to the Administrative Agent, as of such time of determination pursuant to clause (d) of Section 7.1.1. Changes in the Applicable Commitment Fee resulting from a change in the Leverage Ratio shall become effective upon delivery by Holdings to the Administrative Agent of a new Compliance Certificate pursuant to clause (d) of Section 7.1.1. If Holdings fails to deliver a Compliance -4- Certificate within the number of days required pursuant to clause (d) of Section 7.1.1, the Applicable Commitment Fee from and including the first day after the date on which such Compliance Certificate was required to be delivered through (but excluding) the date Holdings actually delivers to the Administrative Agent an appropriately completed Compliance Certificate shall conclusively equal the highest Applicable Commitment Fee set forth above. "Applicable Margin" means at all times during the applicable periods set forth below, (a) with respect to the unpaid principal amount of each Term B Loan maintained as a (i) Base Rate Loan, 1.75% per annum and (ii) LIBO Rate Loan, 2.75% per annum; (b) from the Closing Date through (but excluding) the date upon which the Compliance Certificate for the second full Fiscal Quarter following the Closing Date is delivered by Holdings to the Administrative Agent pursuant to clause (d) of Section 7.1.1, with respect to the unpaid principal amount of (i) each Swing Line Loan (each of which shall be borrowed and maintained only as a Base Rate Loan), 1.50% per annum, and (ii) each Term A Loan and each Revolving Loan maintained as (A) a Base Rate Loan, 1.50% per annum, and (B) a LIBO Rate Loan, 2.50% per annum; and (c) at all times after the date of such delivery of the Compliance Certificate described in clause (b) above, with respect to the unpaid principal amount of each Swing Line Loan (each of which shall be borrowed and maintained only as a Base Rate Loan), each Term A Loan and each Revolving Loan, by reference to the Leverage Ratio and at the applicable percentage per annum set forth below under the column entitled "Applicable Margin for Base Rate Loans", in the case of Swing Line Loans or Term A Loans or Revolving Loans maintained as Base Rate Loans, or by reference to the Leverage Ratio and at the applicable percentage per annum set forth below under the column entitled "Applicable Margin for LIBO Rate Loans" in the case of Term A Loans or Revolving Loans maintained as LIBO Rate Loans: APPLICABLE MARGIN FOR TERM A LOANS, REVOLVING LOANS AND SWING LINE LOANS
APPLICABLE APPLICABLE MARGIN FOR MARGIN FOR LEVERAGE RATIO BASE RATE LOANS LIBO RATE LOANS -------------- --------------- --------------- greater than or equal to 4.00 1.50% 2.50% less than 4.00 and greater than or equal to 3.50 1.00% 2.00% less than 3.50 and greater than or equal to 3.00 0.50% 1.50% less than 3.00 0.25% 1.25%
The Leverage Ratio used to compute the Applicable Margin for Swing Line Loans, Term A Loans and Revolving Loans shall be equal to the Leverage Ratio set forth in the Compliance Certificate most recently delivered by Holdings to the Administrative Agent pursuant to clause (d) of Section 7.1.1. Changes in the Applicable Margin for such Loans resulting from a -5- change in the Leverage Ratio shall become effective upon delivery by Holdings to the Administrative Agent of a new Compliance Certificate pursuant to clause (d) of Section 7.1.1. If Holdings fails to deliver a Compliance Certificate within the number of days required pursuant to clause (d) of Section 7.1.1, the Applicable Margin for Swing Line Loans, Term A Loans and Revolving Loans from and including the first day after the date on which such Compliance Certificate was required to be delivered through (but excluding) the date Holdings delivers to the Administrative Agent an appropriately completed Compliance Certificate shall conclusively equal the highest Applicable Margin for Swing Line Loans, Term A Loans and Revolving Loans of the same type set forth above. "Arranger" means Donaldson, Lufkin & Jenrette Securities Corporation, a Delaware corporation. "Assigned Amount" is defined in Section 11.11.1. "Assignee Lender" is defined in Section 11.11.1. "Assignor Lender" is defined in Section 11.11.1. "Authorized Officer" means, relative to any Obligor, those of its officers whose signatures and incumbency shall have been certified to the Administrative Agent and the Lenders pursuant to Section 5.1.1. "Base Financial Statements" is defined in clause (a) of Section 5.1.8. "Base Rate Loan" means a Loan bearing interest at a fluctuating rate determined by reference to the Alternate Base Rate. "Borrower" is defined in the preamble. "Borrower Closing Date Certificate" means a certificate of an Authorized Officer of the Borrower substantially in the form of Exhibit D-2 hereto, delivered pursuant to Section 5.1.3. "Borrower Defeasement/Redemption Documents" is defined in clause (f) of Section 5.1.2. "Borrower Partnership Agreement" means the Second Amended and Restated Agreement of Partnership of Duane Reade, dated as of September 25, 1992, between Daboco and DRI I, as in effect on the Closing Date and as amended or otherwise modified from time to time in accordance with the terms hereof and thereof. "Borrower Pledge Agreement" means the Pledge Agreement executed and delivered by an Authorized Officer of the Borrower pursuant to Section 7.1.7, substantially in the form of -6- Exhibit G-2 hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Borrower Security Agreement" means the Security Agreement executed and delivered by an Authorized Officer of the Borrower pursuant to Section 5.1.6, substantially in the form of Exhibit F-2 hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Borrowing" means Loans of the same type and, in the case of LIBO Rate Loans, having the same Interest Period made by the relevant Lenders on the same Business Day and pursuant to the same Borrowing Request in accordance with Section 2.1. "Borrowing Request" means a loan request and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit B-1 hereto. "Business Day" means any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York City or Boston, Massachusetts and, with respect to Borrowings of, interest rate determinations with respect to, Interest Periods with respect to, payments of principal and interest in respect of, conversions of Base Rate Loans into, and continuations of LIBO Rate Loans as, LIBO Rate Loans, on which dealings in Dollars are carried on in the London interbank market. "Capital Expenditures" means, with respect to any Person, for any period, the sum (without duplication) of (a) the aggregate amount of all expenditures of such Person and its Subsidiaries for fixed or capital assets made during such period which, in accordance with GAAP, would be classified as capital expenditures, and (b) the aggregate amount of all Capitalized Lease Liabilities incurred during such period by such Person and its Subsidiaries. "Capital Stock" means, with respect to any Person, (a) any and all shares, interests, participations, rights or other equivalents of or interests in (however designated) corporate or capital stock, including shares of preferred or preference stock of such Person, (b) all partnership interests (whether general or limited) in such Person, (c) all membership interests or limited liability company interests in such Person, and (d) all other equity or ownership interests in such Person of any other type. "Capitalized Lease Liabilities" means (without duplication) all monetary obligations of Holdings or any of its Subsidiaries under any leasing or similar arrangement which, in accordance with GAAP, would be classified as capitalized leases, and, for purposes of this Agreement and each other Loan Document, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP, and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. -7- "Cash Equivalent Investment" means, at any time: (a) any evidence of Indebtedness, maturing not more than one year after such time, issued directly, or guaranteed, by the United States of America or any agency thereof; (b) commercial paper, maturing not more than nine months from the date of issue, which is issued by (i) a corporation (other than an Affiliate of any Obligor) organized under the laws of any state of the United States or of the District of Columbia and rated at least A-l by S&P or P-l by Moody's, or (ii) any Lender (or its holding company); (c) any time deposit, certificate of deposit or banker's acceptance, maturing not more than one year after such time, maintained with or issued by either (i) a commercial banking institution (including U.S. branches of foreign banking institutions) that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000, or (ii) any Lender; (d) short-term tax-exempt securities rated not lower than MIG-1/1+ by either Moody's or S&P with provisions for liquidity or maturity accommodations of 183 days or less; (e) repurchase agreements which (i) are entered into with any entity referred to in clause (b) or (c) above or any other financial institution whose unsecured long-term debt (or the unsecured long-term debt of whose holding company) is rated at least A- or better by S&P or Baa1 or better by Moody's and maturing not more than one year after such time, (ii) are secured by a fully perfected security interest in securities of the type referred to in clauses (a) through (c) above and (iii) have a market value at the time of such repurchase agreement is entered into of not less than 100% of the repurchase obligation of such counterparty entity with whom such repurchase agreement has been entered into; or (e) shares of investment companies that are registered under the Investment Company Act of 1940, as amended and invest solely in one or more of the types of securities described in clauses (a) through (d) above. "Casualty Event" means the damage, destruction or condemnation, as the case may be, of any property of the Borrower, any Parent Guarantor or any of their respective Subsidiaries. "Casualty Proceeds" means, with respect to any Casualty Event, the amount of any insurance proceeds or condemnation awards received by the Borrower, any Parent Guarantor or any of their respective Subsidiaries in connection therewith, but excluding any proceeds or awards required to be paid to a creditor (other than the Lenders) which holds a first-priority Lien permitted by Section 7.2.3 on the property which is the subject of such Casualty Event. -8- "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "CERCLIS" means the Comprehensive Environmental Response Compensation Liability Information System List. "Change in Control" means (a) (i) the failure of Holdings or DRI I to be a general partner of the Borrower, or (ii) the failure of Holdings or DRI I at any time to own, free and clear of all Liens (other than the Liens granted in favor of the Administrative Agent for the benefit of the Secured Parties under the Loan Documents) and encumbrances, all right, title and interest in 100% of the partnership interests of the Borrower; (b) the failure of Holdings at any time to own, free and clear of all Liens (other than the Liens granted in favor of the Administrative Agent for the benefit of the Secured Parties under the Loan Documents) and encumbrances, all right, title and interest in 100% of the Capital Stock of DRI I on a fully diluted basis; (c) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) (other than the DLJMB Entities and their controlled Affiliates) (i) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total then outstanding voting power of the Voting Stock of Holdings or (ii) has the right or the ability by voting right, contract or otherwise to direct or control, directly or indirectly, the management or policies of Holdings; (d) during any period of twenty-four months, individuals who at the beginning of such period constituted the board of directors of Holdings (together with any new directors whose election or appointment by such board of directors, or whose nomination for election by the shareholders of Holdings, as the case may be, was approved by a vote of 662/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of directors then in office; or (e) any "Change of Control" as such term is defined in the Senior Subordinated Note Indenture. "Closing Date" means the date of the initial Credit Extension. "Closing Date Certificate" means, as the context may require, the Holdings Closing Date Certificate and/or the Borrower Closing Date Certificate. "Code" means the Internal Revenue Code of 1986, as amended. -9- "Commitment" means, as the context may require, (a) a Lender's Term Loan Commitment, Revolving Loan Commitment and/or Letter of Credit Commitment and/or (b) the Swing Line Lender's Swing Line Loan Commitment. "Commitment Amount" means, as the context may require, the Term Loan Commitment Amount, the Revolving Loan Commitment Amount, the Letter of Credit Commitment Amount and/or the Swing Line Loan Commitment Amount. "Commitment Letter" means the commitment letter, dated January 14, 1998, among the Borrower, the Arranger and the Syndication Agent, together with all annexes thereto. "Commitment Termination Date" means, as the context may require, the Revolving Loan Commitment Termination Date and/or the Term Loan Commitment Termination Date. "Commitment Termination Event" means (a) the occurrence of any Event of Default described in clauses (a) through (d) of Section 8.1.9, or (b) the occurrence and continuance of any other Event of Default and either (i) the declaration of the Loans to be due and payable pursuant to Section 8.3, or (ii) in the absence of such declaration, the giving of notice to the Borrower by the Administrative Agent, acting at the direction of the Required Lenders, that the Commitments have been terminated. "Compliance Certificate" means a certificate duly completed and executed by the chief financial or accounting Authorized Officer of Holdings, substantially in the form of Exhibit E hereto. "Contingent Liability" means any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, obligation or any other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount of the debt, obligation or other liability guaranteed thereby. "Continuation/Conversion Notice" means a notice of continuation or conversion and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit C hereto. "Controlled Group" means all members of a controlled group of corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with Holdings, are treated as a single employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA, or for purposes of Section 412 of the Code, Section 414(m) or Section 414(o) of the Code. -10- "Credit Extension" means, as the context may require, (a) the making of a Loan by a Lender and/or (b) the issuance of any Letter of Credit, or the extension of any Stated Expiry Date of any previously issued Letter of Credit, by the Issuer. "Credit Extension Request" means, as the context may require, any Borrowing Request and/or Issuance Request. "Credit Lyonnais" is defined in the preamble. "Daboco" is defined in the first recital. "Debt" means (without duplication) the aggregate amount of all Indebtedness of Holdings and its Subsidiaries that is of the type referred to in clauses (a), (b), (c) and (f) of the definition of "Indebtedness" and any Contingent Liability in respect of such Indebtedness. "Default" means any Event of Default or any condition, occurrence or event which, after notice or lapse of time or both, would, unless cured or waived, constitute an Event of Default. "Defeasement/Redemption Documents" means the Holdings Defeasement/Redemption Documents and the Borrower Defeasement/Redemption Documents. "Disbursement" is defined in Section 2.6.2. "Disbursement Date" is defined in Section 2.6.2. "Disbursement Due Date" is defined in Section 2.6.2. "Disclosure Schedule" means the Disclosure Schedule attached hereto as Schedule I, as it may be amended, supplemented or otherwise modified from time to time by the Borrower with the written consent of the Required Lenders. "DLJ" is defined in the preamble. "DLJMB Entities" means DLJMB Funding II, Inc., DLJ Merchant Banking Partners II, L.P., DLJ Merchant Banking Partners II-A, L.P., 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., DLJ Millennium Partners, L.P., DLJ Millennium-A Partners, L.P. and UK Investment Plan 1997 Partners. "Documentation Agent" is defined in the preamble and includes each other Person as shall have subsequently been appointed as the successor Documentation Agent pursuant to Section 10.4. "Dollar" and the symbol "$" mean lawful money of the United States. -11- "DRI I" is defined in the preamble. "EBITDA" means, for any applicable period, the sum (without duplication) for Holdings and its Subsidiaries on a consolidated basis of (a) Net Income, plus (b) the amount deducted in determining Net Income representing non-cash charges, including depreciation, amortization and deferred rent, plus (c) the amount deducted in determining Net Income representing income taxes (whether actually paid or deferred), plus (d) the amount deducted in determining Net Income representing Interest Expense, plus (e) the amount deducted in determining Net Income representing extraordinary or non-recurring expenses, minus (f) an amount equal to the amount of all extraordinary or non-recurring non-cash credits included in determining Net Income. "Environmental Laws" means all applicable federal, state or local statutes, laws, ordinances, codes, rules and regulations (including consent decrees and administrative orders) relating to public health and safety and protection of the environment. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Event of Default" is defined in Section 8.1. "Excess Cash Flow" means, for any applicable period, the excess (if any), of (a) EBITDA for such applicable period; -12- over (b) the sum (without duplication) (for such applicable period) of (i) the cash portion of Interest Expense (net of interest income) for such applicable period; plus (ii) scheduled payments and optional and mandatory prepayments, to the extent actually made, of the principal amount of the Term Loans or any other term Debt (including the principal component of payments in respect of Capitalized Lease Liabilities but excluding scheduled payments and optional and mandatory prepayments of (A) Indebtedness evidenced by the Holdings Subordinated Notes and the Senior Notes and (B) the Term Loans (as defined in the Existing Credit Agreement)) and mandatory prepayments of the principal amount of the Revolving Loans pursuant to clause (f) of Section 3.1.1 in connection with a permanent reduction of the Revolving Loan Commitment Amount, in each case for such applicable period; plus (iii) all federal, state and foreign income taxes paid or payable by Holdings and its Subsidiaries during such applicable period; plus (iv) Capital Expenditures of the Borrower and its Subsidiaries actually made during such applicable period pursuant to clause (a) of Section 7.2.7 (excluding Capital Expenditures of the Borrower and its Subsidiaries constituting Capitalized Lease Liabilities and by way of the incurrence of Indebtedness permitted pursuant to clause (e) of Section 7.2.2 to a vendor of any assets permitted to be acquired pursuant to Section 7.2.7 to finance the acquisition of such assets); plus (v) Investments permitted and actually made, in cash, pursuant to clauses (d) and (i) of Section 7.2.5 during such applicable period; plus -13- (vi) the amount of the net increase (or minus a net decrease) of current assets, other than cash and Cash Equivalent Investments, over current liabilities of Holdings and its Subsidiaries for such applicable period; minus (vii) the amount of tax refunds received by Holdings and its Subsidiaries during such applicable period. "Existing Credit Agreement" is defined in clause (c) of the third recital. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. "Fee Letter" means the confidential fee letter, dated February 6, 1998, among the Borrower, the Arranger and the Syndication Agent, which fee letter superseded the confidential fee letter, dated January 14, 1998, among such parties. "Fiscal Quarter" means any fiscal quarter of a Fiscal Year, which fiscal quarters shall end on the last Saturday of each March, June, September or December of such Fiscal Year. "Fiscal Year" means any period of twelve consecutive months ending on the last Saturday of December of any calendar year. "Fixed Charge Coverage Ratio" means, at the end of any Fiscal Quarter, the ratio computed for the period consisting of such Fiscal Quarter and each of the three immediately prior Fiscal Quarters of (a) EBITDA for all such Fiscal Quarters to (b) the sum (without duplication) of (i) Capital Expenditures of Holdings and its Subsidiaries actually made during all such Fiscal Quarters pursuant to clause (a) of Section 7.2.7 (excluding Capital Expenditures of Holdings and its Subsidiaries constituting Capitalized Lease Liabilities and by way of the incurrence of Indebtedness permitted pursuant to clause (e) of Section 7.2.2 to a vendor of any assets permitted to be acquired pursuant to Section 7.2.7 to finance the acquisition of such assets); -14- plus (ii) the cash portion of Interest Expense (net of cash interest income) for all such Fiscal Quarters; plus (iii) all scheduled payments of principal of the Term Loans and other term Debt (including the principal component of payments in respect of any Capitalized Lease Liabilities) during all such Fiscal Quarters; plus (iv) all federal, state and foreign income taxes paid or payable by Holdings and its Subsidiaries during such applicable period; plus (v) Restricted Payments of the types described in clause (e) of Section 7.2.6 made during such applicable period. "Fleet" is defined in the preamble. "Foreign Subsidiary" means any Subsidiary of the Borrower (a) which is organized under the laws of any jurisdiction outside of the United States of America, (b) which conducts the major portion of its business outside of the United States of America and (c) all or substantially all of the property and assets of which are located outside of the United States of America. "F.R.S. Board" means the Board of Governors of the Federal Reserve System or any successor thereto. "GAAP" is defined in Section 1.4. "Guarantees" means, as the context may require, the Parent Guaranty and/or the Subsidiary Guaranty. "Guarantors" means, collectively, the Parent Guarantors and the Subsidiary Guarantors, if any. "Hazardous Material" means (a) any "hazardous substance", as defined by CERCLA; -15- (b) any "hazardous waste", as defined by the Resource Conservation and Recovery Act, as amended; (c) any petroleum product; or (d) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other applicable federal, state or local law, regulation, ordinance or requirement (including consent decrees and administrative orders) relating to or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material, all as amended or hereafter amended. "Hedging Obligations" means, with respect to any Person, all liabilities of such Person under interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and all other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "herein", "hereof", "hereto", "hereunder" and similar terms contained in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular Section, paragraph or provision of this Agreement or such other Loan Document. "Holdings" is defined in the preamble. "Holdings Closing Date Certificate" means a certificate of an Authorized Officer of Holdings substantially in the form of Exhibit D-1 hereto, delivered pursuant to Section 5.1.3. "Holdings Defeasement/Redemption Documents" is defined in clause (e) of Section 5.1.2. "Holdings Pledge Agreement" means the Pledge Agreement executed and delivered by an Authorized Officer of Holdings pursuant to Section 5.1.5, substantially in the form of Exhibit G-1 hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Holdings Subordinated Notes" is defined in clause (a) of the third recital. "Impermissible Qualification" means, relative to the opinion or certification of any independent public accountant as to any financial statement of any Obligor, any qualification or exception to such opinion or certification (a) which is of a "going concern" or similar nature, (b) which relates to the limited scope of examination of matters relevant to such financial statement, or (c) which relates to the treatment or classification of any item in such financial statement and which, as a condition to its removal, would require an adjustment to such item the -16- effect of which would be to cause such Obligor to be in default of any of its obligations under Section 7.2.4. "including" means including without limiting the generality of any description preceding such term, and, for purposes of this Agreement and each other Loan Document, the parties hereto agree that the rule of ejusdem generis shall not be applicable to limit a general statement, which is followed by or referable to an enumeration of specific matters, to matters similar to the matters specifically mentioned. "Indebtedness" of any Person means (without duplication): (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (b) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances issued for the account of such Person; (c) all obligations of such Person as lessee under leases which have been or should be, in accordance with GAAP, recorded as Capitalized Lease Liabilities; (d) all other items which, in accordance with GAAP, would be included as liabilities on the liability side of the balance sheet of such Person as of the date at which Indebtedness is to be determined; (e) net liabilities of such Person under all Hedging Obligations; (f) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services, and indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; provided, however, that, to the extent such Indebtedness is limited in recourse to the assets securing such Indebtedness, the amount of such Indebtedness shall be limited to the fair market value of such assets; (g) Redeemable Capital Stock; and (h) all Contingent Liabilities of such Person in respect of any of the foregoing. For all purposes of this Agreement, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer (to the extent such Person is liable for such Indebtedness). -17- "Indemnified Liabilities" is defined in Section 11.4. "Indemnified Parties" is defined in Section 11.4. "Interest Coverage Ratio" means, at the end of any Fiscal Quarter, the ratio computed for the period consisting of such Fiscal Quarter and each of the three immediately prior Fiscal Quarters of: (a) EBITDA (for all such Fiscal Quarters) to (b) the cash portion of Interest Expense (for all such Fiscal Quarters). "Interest Expense" means, for any applicable period, the aggregate consolidated interest expense of Holdings and its Subsidiaries for such applicable period, as determined in accordance with GAAP, including the portion of any payments made in respect of Capitalized Lease Liabilities allocable to interest expense. "Interest Period" means, as to any LIBO Rate Loan, the period commencing on the Borrowing date of such Loan or on the date on which the Loan is converted into or continued as a LIBO Rate Loan, and ending on the date one, two, three or six months thereafter as selected by the Borrower in its Borrowing Request or its Conversion/Continuation Notice; provided, however that: (a) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (b) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; (c) no Interest Period for any Loan shall extend beyond the Stated Maturity Date for such Loan; (d) no Interest Period applicable to a Term Loan or any portion thereof shall extend beyond any date upon which is due any scheduled principal payment in respect of the Term Loans unless the aggregate principal amount of Term Loans represented by Base Rate Loans, or by LIBO Rate Loans having Interest Periods that will expire on or before such date, equals or exceeds the amount of such principal payment; and -18- (e) there shall be no more than five Interest Periods in effect at any one time. "Investment" means, relative to any Person, (a) any loan or advance made by such Person to any other Person (excluding commission, travel and similar advances to officers, directors and employees (or individuals acting in similar capacities) made in the ordinary course of business), and (b) any ownership or similar interest held by such Person in any other Person. The amount of any Investment shall be the original principal or capital amount thereof less all returns of principal or equity thereon (and without adjustment by reason of the financial condition of such other Person) and shall, if made by the transfer or exchange of property other than cash, be deemed to have been made in an original principal or capital amount equal to the fair market value of such property at the time of such transfer or exchange. "IPO" is defined in clause (b) of the second recital. "Issuance Request" means a Letter of Credit request and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit B-2 hereto. "Issuer" means Fleet, in its capacity as issuer of Letters of Credit and any Lender as may be designated by the Borrower (and consented to by the Agents and such Lender, such consent by the Agents not to be unreasonably withheld), in its capacity as issuer of Letters of Credit. "Lender Assignment Agreement" means a Lender Assignment Agreement, substantially in the form of Exhibit J hereto. "Lenders" is defined in the preamble. "Letter of Credit" is defined in Section 2.1.3. "Letter of Credit Commitment" means, with respect to the Issuer, the Issuer's obligation to issue Letters of Credit pursuant to Section 2.1.3 and, with respect to each of the other Lenders that has a Revolving Loan Commitment, the obligation of each such Lender to participate in such Letters of Credit pursuant to Section 2.6.1. "Letter of Credit Commitment Amount" means, on any date, $10,000,000, as such amount may be reduced from time to time pursuant to Section 2.2. "Letter of Credit Outstandings" means, on any date, an amount equal to the sum of (a) the then aggregate amount which is undrawn and available under all issued and outstanding Letters of Credit, plus -19- (b) the then aggregate amount of all unpaid and outstanding Reimbursement Obligations in respect of such Letters of Credit. "Leverage Ratio" means, at the end of any Fiscal Quarter, the ratio of (a) total Debt of Holdings and its Subsidiaries on a consolidated basis outstanding at such time; to (b) EBITDA for the period of four consecutive Fiscal Quarters ended on such date. "LIBO Rate" means, relative to any Interest Period for LIBO Rate Loans, the interest rate per annum for deposits in Dollars, if any, for a period equal to the relevant Interest Period which appears on Telerate Page 3750 at approximately 11:00 a.m., London time, prior to the commencement of such Interest Period. If such a rate does not appear on Telerate Page 3750, the LIBO Rate shall be the rate of interest per annum determined by the Administrative Agent to be the arithmetic mean (rounded upward to the next 1/16th of 1%) of the rates of interest per annum at which dollar deposits in the approximate amount of the Loan to be made or continued as, or converted into, a LIBO Rate Loan by the Administrative Agent and having a maturity comparable to such Interest Period would be offered to the Administrative Agent in the London interbank market at its request at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "LIBO Rate Loan" means a Loan bearing interest, at all times during an Interest Period applicable to such Loan, at a fixed rate of interest determined by reference to the LIBO Rate (Reserve Adjusted). "LIBO Rate (Reserve Adjusted)" means, relative to any Loan to be made, continued or maintained as, or converted into, a LIBO Rate Loan for any Interest Period, the rate of interest per annum (rounded upwards to the next 1/16th of 1%) determined by the Administrative Agent as follows: LIBO Rate LIBO Rate (Reserve = -------------------------------------------- Adjusted) 1.00 - LIBOR Reserve Percentage The LIBO Rate (Reserve Adjusted) for any Interest Period for LIBO Rate Loans will be adjusted automatically as to all LIBO Rate Loans then outstanding as of the effective date of any change in the LIBOR Reserve Percentage. -20- "LIBOR Office" means, relative to any Lender, the office of such Lender designated as such on Schedule II hereto or designated in the Lender Assignment Agreement pursuant to which such Lender became a Lender hereunder or such other office of a Lender as shall be so designated from time to time by notice from such Lender to the Borrower and the Administrative Agent, which shall be making or maintaining LIBO Rate Loans of such Lender hereunder. "LIBOR Reserve Percentage" means, relative to any Interest Period for LIBO Rate Loans, the percentage (expressed as a decimal, rounded upward to the next 1/16th of 1%) in effect on such day (whether or not applicable to any Lender) under regulations issued from time to time by the F.R.S. Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the F.R.S. Board). "Lien" means any security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property, or any filing or recording of any instrument or document in respect of the foregoing, to secure payment of a debt or performance of an obligation or any other priority or preferential treatment of any kind or nature whatsoever that has the practical effect of creating a security interest in property. "Loan" means, as the context may require, a Revolving Loan, a Term Loan and/or a Swing Line Loan, of any type. "Loan Document" means this Agreement, the Notes, the Letters of Credit, each Rate Protection Agreement, each Borrowing Request, each Issuance Request, the Fee Letter, each Pledge Agreement, the Subsidiary Guaranty, each Mortgage (upon execution and delivery thereof), each Security Agreement and each other agreement, document or instrument delivered in connection with this Agreement or any other Loan Document, whether or not specifically mentioned herein or therein. "Material Adverse Effect" means (a) a material adverse effect on the business, assets, debt service capacity, tax position, environmental liability, financial condition, operations, properties or prospects of the Borrower and its Subsidiaries, taken as a whole, or Holdings and its Subsidiaries, taken as a whole, (b) a material impairment of the ability of the Borrower or any other Obligor to perform its respective material obligations under the Loan Documents to which it is or will be a party, or (c) an impairment of the validity or enforceability of, or a material impairment of the rights, remedies or benefits available to the Issuer, the Agents, the Documentation Agent, the Arranger or the Lenders under this Agreement or any other Loan Document. "Material Documents" means the Merger Documents, the Senior Subordinated Note Documents, the Recapitalization Agreement, the Defeasement/Redemption Documents, the Rapid Remit Program Documents and the Borrower Partnership Agreement, each as amended or otherwise modified from time to time in accordance with the terms thereof and hereof. -21- "Merger" is defined in the first recital. "Merger Documents" means the Agreement and Plan of Merger, dated as of February 2, 1998, between Holdings and Daboco and the Certificate of Merger of Daboco Inc. into Duane Reade Inc. referred to therein, in each case as in effect on the Closing Date and as the same may be amended or otherwise modified from time to time thereafter in accordance with the terms hereof and thereof. "Moody's" means Moody's Investors Service, Inc. "Mortgage" means, collectively, each Mortgage or Deed of Trust executed and delivered pursuant to the terms of this Agreement, including Section 5.1.7 or 7.1.8(b), in form and substance reasonably satisfactory to the Agents. "Net Debt Proceeds" means, with respect to the incurrence, sale or issuance by the Borrower, any Parent Guarantor or any of their respective Subsidiaries of any Debt (other than Debt permitted by Section 7.2.2 as in effect on the date hereof), the excess of: (a) the gross cash proceeds received by the Borrower, any Parent Guarantor or any of their respective Subsidiaries from such incurrence, sale or issuance, over (b) all reasonable and customary underwriting commissions and legal, investment banking, brokerage and accounting and other professional fees, sales commissions and disbursements and all other reasonable fees, expenses and charges, in each case actually incurred in connection with such incurrence, sale or issuance. "Net Disposition Proceeds" means, with respect to any sale, transfer or other disposition of any assets of the Borrower, any Parent Guarantor or any of their respective Subsidiaries (other than sales permitted pursuant to clause (a), (b) or (c) of Section 7.2.9), the excess of (a) the gross cash proceeds received by the Borrower, any Parent Guarantor or any of their respective Subsidiaries from any such sale, transfer or other disposition and any cash payments received in respect of promissory notes or other non-cash consideration delivered to the Borrower, such Parent Guarantor or such Subsidiary in respect thereof, less (b) the sum (without duplication) of (i) all reasonable and customary fees and expenses with respect to legal, investment banking, brokerage, accounting and other professional fees, sales commissions and disbursements and all other reasonable fees, -22- expenses and charges, in each case actually incurred in connection with such sale, transfer or other disposition, (ii) all taxes and other governmental costs and expenses actually paid or estimated by Holdings (in good faith) to be payable in cash in connection with such sale, transfer or other disposition, and (iii) payments made by the Borrower, any Parent Guarantor or any of their respective Subsidiaries to retire Indebtedness (other than the Credit Extensions) of the Borrower, such Parent Guarantor or such Subsidiary where payment of such Indebtedness is required in connection with such sale, transfer or other disposition; provided, however, that if, after the payment of all taxes with respect to such sale, transfer or other disposition, the amount of estimated taxes, if any, pursuant to clause (b)(ii) above exceeded the tax amount actually paid in cash in respect of such sale, transfer or other disposition, the aggregate amount of such excess shall, at such time, constitute Net Disposition Proceeds. "Net Equity Proceeds" means with respect to the sale or issuance by the Borrower, any Parent Guarantor or any of their respective Subsidiaries to any Person, whether pursuant to a public or private offering, of any of its Capital Stock or any warrants or options with respect to its Capital Stock or the exercise of any such warrants or options after the Closing Date (other than pursuant to any subscription agreement, incentive plan or similar arrangement with any officer, employee or director of the Borrower, such Parent Guarantor or such Subsidiary), the excess of: (a) the gross cash proceeds received by the Borrower, such Parent Guarantor or such Subsidiary from such sale, exercise or issuance, over (b) all reasonable and customary underwriting commissions and legal, investment banking, brokerage, accounting and other professional fees, sales commissions and disbursements and all other reasonable fees, expenses and charges, in each case actually incurred in connection with such sale, exercise or issuance. "Net Income" means, for any period, the net income of Holdings and its Subsidiaries for such period on a consolidated basis, excluding extraordinary and non-recurring gains and extraordinary losses incurred in connection with the Transaction. "Net Worth" means the consolidated net worth of Holdings and its Subsidiaries. "Note" means, as the context may require, a Revolving Note, a Term Note, a Swing Line Note and/or a Registered Note. "Obligations" means all obligations (monetary or otherwise) of the Borrower and each other Obligor arising under or in connection with this Agreement, any Rate Protection Agreement, the Notes, each Letter of Credit and each other Loan Document. -23- "Obligor" means the Borrower or any other Person (other than any Agent, the Documentation Agent, the Arranger, the Issuer or any Lender) obligated under any Loan Document. "Organic Document" means, relative to any Obligor, its partnership agreement, its certificate of incorporation, its by-laws and all shareholder or equity holder agreements, voting trusts and similar arrangements to which such Obligor is a party or which is applicable to any of its Capital Stock, its partnership agreement and all other arrangements relating to the control or management of such entity. "Paid Visit" is defined in Section 7.1.5. "Parent Guarantors" is defined in the preamble. "Parent Guaranty" means the Obligations of the Parent Guarantors under Article IX. "Participant" is defined in Section 11.11.2. "Partnership Security Agreement" means the Security Agreement executed and delivered by an Authorized Officer of each of Holdings and DRI I pursuant to Section 5.1.6, substantially in the form of Exhibit F-1 hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "PBGC" means the Pension Benefit Guaranty Corporation and any successor entity. "Pension Plan" means a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer plan as defined in section 4001(a)(3) of ERISA), and to which Holdings or any corporation, trade or business that is, along with Holdings, a member of a Controlled Group, has or within the prior six years has had any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Percentage" means, relative to any Lender, the applicable percentage relating to Term A Loans, Term B Loans or Revolving Loans, as the case may be, as set forth opposite its name on Schedule II hereto under the applicable column heading or set forth in Lender Assignment Agreement(s) under the applicable column heading, as such percentage may be adjusted from time to time pursuant to Lender Assignment Agreement(s) executed by such Lender and its Assignee Lender(s) and delivered pursuant to Section 11.11. A Lender shall not have any Commitment to make Term A Loans, Term B Loans or Revolving Loans (as the case may be) if its percentage under the respective column heading is zero. As used herein, "Percentage" as it relates to a Lender's Percentage of Letter of Credit Outstandings or Swing Line Loans shall be equal to such Lender's Percentage of Revolving Loans. -24- "Perfection Certificate" means the Perfection Certificate executed and delivered by an Authorized Officer of each Obligor that is a party to a Security Agreement pursuant to Section 5.1.15 or 7.1.7, substantially in the form of Exhibit I hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Person" means any natural person, corporation, partnership, firm, association, trust, government, governmental agency, limited liability company or any other entity, whether acting in an individual, fiduciary or other capacity. "Pharmaceutical Laws" means Federal, state and local laws, rules or regulations, codes, orders, decrees, judgments or injunctions issued, promulgated, approved or entered, relating to dispensing, storing or distributing prescription medicines or products, including laws, rules or regulations relating to the qualifications of Persons employed to do the same. "Pharmacy Fund" means Pharmacy Fund Receivables, Inc., a New York corporation, and any successor thereto. "Plan" means any Pension Plan or Welfare Plan. "Pledge Agreement" means, as the context may require, the Holdings Pledge Agreement, the Borrower Pledge Agreement and/or the Subsidiary Pledge Agreement. "Prescription Receivables" is defined in clause (b) of Section 7.2.9. "Pro Forma Balance Sheets" is defined in clause (b) of Section 5.1.8. "Quarterly Payment Date" means the fifteenth day of each February, May, August and November, or, if any such day is not a Business Day, the next succeeding Business Day. "Rapid Remit Program" shall mean the program pursuant to which Prescription Receivables are sold by the Borrower to Pharmacy Fund for cash pursuant to the Rapid Remit Program Documents. "Rapid Remit Program Documents" shall mean (a) the Purchase Agreement, dated as of March 10, 1997, between the Borrower and Pharmacy Fund and each other document or agreement entered into in connection therewith, in each case as in effect on the Closing Date and as the same may be amended or otherwise modified from time to time thereafter in accordance with the terms hereof and thereof, and (b) each of the other documents and agreements entered into in connection therewith after the Closing Date in form and substance satisfactory to the Syndication Agent, and as each such other document and agreement may be amended or otherwise modified from time to time thereafter in accordance with the terms hereof and thereof. -25- "Rate Protection Agreement" means, collectively, any interest rate swap, cap, collar or similar agreement entered into by the Borrower in respect of the Loans pursuant to the terms of this Agreement under which the counterparty to such agreement is (or at the time such Rate Protection Agreement was entered into, was) a Lender or an Affiliate of a Lender. "Real Property" means, with respect to any Person, all of the right, title and interest of such Person in and to lands, improvements and fixtures, including all of the rights, title and interest of such Person as Lessee or licensee in, to and under leases or licenses of land, improvements and fixtures. "Recapitalization Agreement" shall mean the Recapitalization Agreement, dated as of June 18, 1997, among the DLJMB Entities and the stockholders parties thereto and Holdings and each other document or agreement entered into in connection therewith, in each case as in effect on the Closing Date and as the same may be amended or otherwise modified from time to time thereafter in accordance with the terms hereof and thereof. "Redeemable Capital Stock" means, with respect to any Person, any class of Capital Stock of such Person or any of its Subsidiaries which, either by its terms, by the terms of any security into which it is convertible or exchangeable or otherwise, (a) is or upon the happening of an event or passage of time would be required to be redeemed on or prior to the first anniversary of the Stated Maturity Date for the Term B Loans, (b) is redeemable at the option of the holder thereof at any time prior to such anniversary or (c) is convertible into or exchangeable for debt securities of such Person or any of its Subsidiaries at any time prior to such anniversary; provided, however, that for purposes of clauses (a) and (b) of this definition, any issuances of equity interests or the right to directly or indirectly acquire any equity interests of such Person pursuant to any director or employee stock option or similar plan of such Person shall be deemed not to be Redeemable Capital Stock. "Refinancing" is defined in the first recital. "Refunded Swing Line Loans" is defined in clause (b) of Section 2.3.2. "Register" is defined in clause (b) of Section 2.7. "Registered Note" means a promissory note of the Borrower payable to the order of any Lender, in the form of Exhibit A-4 hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time in accordance with the terms hereof and thereof), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Term A Loans or Term B Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Reimbursement Obligation" is defined in Section 2.6.3. "Reinstatement Date" is defined in Section 4.1. -26- "Related Fund" means, with respect to any Lender that is a fund that invests in loans, any other fund that invests in loans and is managed by the same investment advisor or investment manager as such Lender. "Release" means a "release", as such term is defined in CERCLA. "Replacement Notice" is defined in Section 4.10. "Replacement Lender" is defined in Section 4.10. "Required Lenders" means, at any time, (a) prior to the making of the initial Credit Extension hereunder, Lenders having greater than 50% of the sum of the Revolving Loan Commitments and Term Loan Commitments and (b) on and after the date of the initial Credit Extension, Lenders holding greater than 50% of (i) the Total Exposure Amount or (ii) if the Revolving Loan Commitments shall have been terminated or expired for purposes of acceleration pursuant to Section 8.3, the then outstanding Loans and Letter of Credit Outstandings. "Resource Conservation and Recovery Act" means the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., as in effect from time to time. "Restricted Payments" is defined in Section 7.2.6. "Revolving Loan" is defined in clause (a) of Section 2.1.2. "Revolving Loan Commitment" is defined in clause (a) of Section 2.1.2. "Revolving Loan Commitment Amount" means, on any date, $30,000,000, as such amount may be reduced from time to time pursuant to Section 2.2. "Revolving Loan Commitment Termination Date" means the earliest of (a) March 31, 1998 if the Term Loans have not been made on or prior to such date, (b) February 15, 2004, (c) the date on which the Revolving Loan Commitment Amount is terminated in full or reduced to zero pursuant to Section 2.2, and (d) the date on which any Commitment Termination Event occurs. "Revolving Note" means a promissory note of the Borrower payable to any Lender, substantially in the form of Exhibit A-1 hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time in accordance with the terms hereof and thereof), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Revolving Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. -27- "Secured Parties" means the Lenders, the Issuer, the Agents, the Documentation Agent, each counterparty to a Rate Protection Agreement that is (or at the time such Rate Protection Agreement was entered into, was) a Lender or an Affiliate thereof and in each case, each of their respective successors, transferees and assigns. "Security Agreement" means, as the context may require, the Partnership Security Agreement, the Borrower Security Agreement and/or the Subsidiary Security Agreement. "Senior Notes" is defined in clause (b) of the third recital. "Senior Subordinated Note Documents" means the Senior Subordinated Note Indenture, the Senior Subordinated Notes Guarantee and the Senior Subordinated Notes, in each case as in effect on the Closing Date and as the same may be amended or otherwise modified from time to time thereafter in accordance with the terms hereof and thereof. "Senior Subordinated Note Indenture" means that certain indenture among Holdings and the Borrower and DRI I, as subsidiary guarantors, and State Street Bank and Trust Company of Connecticut, N.A., as Trustee, as in effect on the Closing Date and as the same may be amended or otherwise modified from time to time thereafter in accordance with the terms hereof and thereof. "Senior Subordinated Notes Guarantee" means the joint and several guarantees of the Borrower, DRI I and each other Subsidiary of Holdings in favor of the holders of the Senior Subordinated Notes as set forth in Article 11 of the Senior Subordinated Note Indenture and each Subsidiary Guarantee delivered substantially in the form of Exhibit B to such indenture and, in each case, subject to the Subordination provisions of Article 12 of such indenture and as in effect on the Closing Date and as the same may be amended or otherwise modified from time to time thereafter in accordance with the terms hereof and thereof. "Senior Subordinated Notes" is defined in clause (a) of the second recital. "Solvency Certificate" means, as the context may require, a Solvency Certificate to be executed and delivered by the chief financial or accounting Authorized Officer of Holdings, substantially in the form of Exhibit L-1 hereto and/or a Solvency Certificate to be executed and delivered by the chief financial or accounting Authorized Officer of the Borrower, substantially in the form of Exhibit L-2 hereto. "Solvent" means, with respect to any Person and its Subsidiaries on a particular date, that on such date (a) the fair value of the property of such Person and its Subsidiaries on a consolidated basis is greater than the total amount of liabilities, including contingent liabilities, of such Person and its Subsidiaries on a consolidated basis, (b) the present fair salable value of the assets of such Person and its Subsidiaries on a consolidated basis is not less than the amount -28- that will be required to pay the probable liability of such Person and its Subsidiaries on a consolidated basis on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it or its Subsidiaries will, incur debts or liabilities beyond the ability of such Person and its Subsidiaries to pay as such debts and liabilities mature, and (d) such Person and its Subsidiaries on a consolidated basis is not engaged in business or a transaction, and such Person and its Subsidiaries on a consolidated basis is not about to engage in business or a transaction, for which the property of such Person and its Subsidiaries on a consolidated basis would constitute an unreasonably small capital. The amount of Contingent Liabilities at any time shall be computed as the amount that, in light of all the facts and circumstances existing at such time, can reasonably be expected to become an actual or matured liability. "Stated Amount" of each Letter of Credit means the total amount available to be drawn under such Letter of Credit upon the issuance thereof. "Stated Expiry Date" is defined in Section 2.6. "Stated Maturity Date" means (a) in the case of any Revolving Loan or any Term A Loan, February 15, 2004, and (b) in the case of any Term B Loan, February 15, 2005. "Subsidiary" means, with respect to any Person, any corporation, partnership or other business entity of which more than 50% of the outstanding Capital Stock (or other ownership interest) having ordinary voting power to elect a majority of the board of directors, managers or other voting members of the governing body of such entity (irrespective of whether at the time Capital Stock (or other ownership interests) of any other class or classes of such entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more other Subsidiaries of such Person, or by one or more other Subsidiaries of such Person. "Subsidiary Guarantor" means any Subsidiary of the Borrower that, pursuant to Section 7.1.7, executes and delivers a Subsidiary Guaranty or a supplement to a Subsidiary Guaranty. "Subsidiary Guaranty" means the Guaranty executed and delivered by an Authorized Officer of a Subsidiary Guarantor pursuant to Section 7.1.7, substantially in the form of Exhibit H hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Subsidiary Pledge Agreement" means the Pledge Agreement executed and delivered by an Authorized Officer of each Subsidiary of the Borrower that is not a Foreign Subsidiary pursuant to Section 7.1.7, substantially in the form of Exhibit G-3 hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. -29- "Subsidiary Security Agreement" means the Security Agreement executed and delivered by an Authorized Officer of each Subsidiary of the Borrower that is not a Foreign Subsidiary pursuant to Section 7.1.7, substantially in the form of Exhibit F-3 hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Swing Line Lender" means Fleet, in its capacity as Swing Line Lender hereunder. "Swing Line Loan" is defined in clause (b) of Section 2.1.2. "Swing Line Loan Commitment" is defined in clause (b) of Section 2.1.2. "Swing Line Loan Commitment Amount" means, on any date, $5,000,000, as such amount may be reduced from time to time pursuant to Section 2.2. "Swing Line Note" means a promissory note of the Borrower payable to the Swing Line Lender, in the form of Exhibit A-5 hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time), evidencing the aggregate Indebtedness of the Borrower to the Swing Line Lender resulting from outstanding Swing Line Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Syndication Agent" is defined in the preamble and includes each other Person as shall have subsequently been appointed as the successor Syndication Agent pursuant to Section 10.4. "Taxes" is defined in Section 4.6. "Telerate Page 3750" means the display designated as "Page 3750" on the Telerate Service (or such other page as may replace Page 3750 on the service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association interest settlement rates for Dollar deposits). "Term A Loan" is defined in clause (a) of Section 2.1.1. "Term A Loan Commitment" is defined in clause (a) of Section 2.1.1. "Term A Loan Commitment Amount" means $50,000,000. "Term A Note" means a promissory note of the Borrower payable to the order of any Lender, in the form of Exhibit A-2 hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time in accordance with the terms hereof and thereof), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Term A Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Term B Loan" is defined in clause (b) of Section 2.1.1. -30- "Term B Loan Commitment" is defined in clause (b) of Section 2.1.1. "Term B Loan Commitment Amount" means $80,000,000. "Term B Note" means a promissory note of the Borrower payable to the order of any Lender, in the form of Exhibit A-3 hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time in accordance with the terms hereof and thereof), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Term B Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Term Loan" means, as the context may require, a Term A Loan and/or a Term B Loan. "Term Loan Commitment" means, as the context may require, a Term A Loan Commitment and/or a Term B Loan Commitment. "Term Loan Commitment Amount" means, as the context may require, the Term A Loan Commitment Amount and/or the Term B Loan Commitment Amount. "Term Loan Commitment Termination Date" means the earliest of (a) March 31, 1998, if any Term Loans have not been made on or prior to such date, (b) the Closing Date (immediately after the making of the Term Loans on such date), and (c) the date on which any Commitment Termination Event occurs. "Term Note" means, as the context may require, a Term A Note and/or a Term B Note. "Total Exposure Amount" means, on any date of determination, the then outstanding principal amount of all Term Loans and the Revolving Loan Commitment Amount then in effect. "Tranche" means, as the context may require, the Loans constituting Term A Loans, Term B Loans, Revolving Loans and/or Swing Line Loans. "Transaction" is defined in clause (d) of the third recital. "type" means, relative to any Loan, the portion thereof, if any, being maintained as a Base Rate Loan or a LIBO Rate Loan. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of New York. "United States" or "U.S." means the United States of America, its fifty states and the District of Columbia. -31- "Waiver" means an agreement in favor of the Agents for the benefit of the Lenders in form and substance reasonably satisfactory to the Agents. "Welfare Plan" means a "welfare plan", as such term is defined in section 3(1) of ERISA, and to which the Borrower has any liability. "Wholly-owned Subsidiary" shall mean, with respect to any Person, any Subsidiary of such Person all of the Capital Stock (and all rights and options to purchase such Capital Stock) of which, other than directors' qualifying shares, are owned, beneficially and of record, by such Person and/or one or more wholly-owned Subsidiaries of such Person. SECTION 1.2. Use of Defined Terms. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in the Disclosure Schedule and in each other Loan Document, notice and other communication delivered from time to time in connection with this Agreement or any other Loan Document. SECTION 1.3. Cross-References. Unless otherwise specified, references in this Agreement and in each other Loan Document to any Article or Section are references to such Article or Section of this Agreement or such other Loan Document, as the case may be, and, unless otherwise specified, references in any Article, Section or definition to any clause are references to such clause of such Article, Section or definition. SECTION 1.4. Accounting and Financial Determinations. (a) Unless otherwise specified, all accounting terms used herein or in any other Loan Document shall be interpreted, all accounting determinations and computations hereunder or thereunder (including under Section 7.2.4) shall be made, and all financial statements required to be delivered hereunder or thereunder shall be prepared in accordance, and in a manner consistent, with those generally accepted accounting principles ("GAAP"), as in effect on December 28, 1996 and as used to prepare the audited consolidated financial statements of Holdings and its Subsidiaries for the Fiscal Year ending on such date and, unless otherwise expressly provided herein, shall be computed or determined on a consolidated basis and without duplication. (b) For purposes of calculating each of the Fixed Charge Coverage Ratio, the Interest Coverage Ratio and the Leverage Ratio, each such ratio shall be calculated giving pro forma effect to any acquisition, disposition, merger, consolidation or discontinued operation (including any related financing transaction) made by the Borrower or any of its Subsidiaries during the period comprised of the Fiscal Quarters that are the subject of such calculation as if such acquisition, disposition, merger, consolidation or discontinued operation (including such related financing transaction) had been made at the beginning of such period. Not in limitation of the immediately preceding sentence but in furtherance thereof, for purposes of such calculation, EBITDA for such period shall be calculated to (i) include the EBITDA (adjusted to exclude the cost of any compensation, remuneration or other benefit paid or provided to any employee, consultant, Affiliate or equity owner of the acquired entities to the extent such costs are -32- eliminated and not replaced and as determined in good faith by the chief financial or accounting Authorized Officer of Holdings) attributable to any business or assets acquired by the Borrower or any of its Subsidiaries utilizing the actual revenues attributable to such business or assets for such and the expenses that would have been attributable to such business or assets had the Borrower acquired such business or assets at the beginning of such period and (ii) exclude the EBITDA attributable to discontinued operations, as determined in accordance with GAAP, and operations, businesses and assets disposed of prior to the end of such period from such calculation, in each case, as determined in good faith by the chief financial or accounting Authorized Officer of Holdings. ARTICLE II COMMITMENTS, BORROWING AND ISSUANCE PROCEDURES, NOTES AND LETTERS OF CREDIT SECTION 2.1. Commitments. On the terms and subject to the conditions of this Agreement (including Sections 2.1.4 and 2.1.5 and Article V), (a) each Lender severally agrees to make Loans (other than Swing Line Loans) pursuant to the Commitments and the Swing Line Lender agrees to make Swing Line Loans pursuant to the Swing Line Loan Commitment, in each case as described in this Section 2.1; and (b) the Issuer agrees that it will issue Letters of Credit pursuant to Section 2.1.3, and each other Lender that has a Revolving Loan Commitment severally agrees that it will purchase participation interests in such Letters of Credit pursuant to Section 2.6.1. SECTION 2.1.1. Term Loan Commitments. Subject to compliance by the Borrower with the terms hereof (including Sections 2.1.4, 5.1 and 5.2), on (but solely on) the Closing Date (which shall be a Business Day) but prior to the Term Loan Commitment Termination Date, (a) each Lender that has a Percentage in excess of zero of the Term A Loan Commitment Amount will make loans (relative to such Lender, its "Term A Loans") to the Borrower equal to such Lender's Percentage of the aggregate amount of the Borrowing or Borrowings of Term A Loans requested by the Borrower to be made on the Closing Date (the commitment of each such Lender described in this Section 2.1.1 is herein referred to as its "Term A Loan Commitment"); and (b) each Lender that has a Percentage in excess of zero of the Term B Loan Commitment Amount will make loans (relative to such Lender, its "Term B Loans") to the Borrower equal to such Lender's Percentage of the aggregate amount of the Borrowing or Borrowings of Term B Loans requested by the Borrower to be made on the -33- Closing Date (the commitment of each such Lender described in this Section 2.1.1 is herein referred to as its "Term B Loan Commitment"). No amounts paid or prepaid with respect to any Term Loans may be reborrowed. SECTION 2.1.2. Revolving Loan Commitment and Swing Line Loan Commitment. Subject to compliance by the Borrower with the terms hereof (including Sections 2.1.4, 5.1 and 5.2), from time to time on any Business Day occurring on or after the Closing Date but prior to the Revolving Loan Commitment Termination Date, (a) each Lender that has a Percentage in excess of zero of the Revolving Loan Commitment Amount will make loans (relative to such Lender, its "Revolving Loans") to the Borrower equal to such Lender's Percentage of the aggregate amount of the Borrowing or Borrowings of Revolving Loans requested by the Borrower to be made on such day. The Commitment of each Lender described in this clause (a) is herein referred to as its "Revolving Loan Commitment". On the terms and subject to the conditions hereof, the Borrower may from time to time borrow, prepay and reborrow Revolving Loans. (b) the Swing Line Lender will make loans (each a "Swing Line Loan") to the Borrower equal to the principal amount of the Swing Line Loan requested by the Borrower to be made on such day. The Commitment of the Swing Line Lender described in this clause (b) is herein referred to as its "Swing Line Loan Commitment". On the terms and subject to the conditions hereof, the Borrower may from time to time borrow, prepay and reborrow Swing Line Loans. SECTION 2.1.3. Letter of Credit Commitment. Subject to compliance by the Borrower with the terms hereof (including Sections 2.1.5, 5.1 and 5.2), from time to time on any Business Day occurring concurrently with (or after) the Closing Date but prior to the Revolving Loan Commitment Termination Date, the Issuer will (a) issue one or more standby or commercial letters of credit (each referred to as a "Letter of Credit") for the account of the Borrower in the Stated Amount requested by the Borrower on such day, or (b) extend the Stated Expiry Date of an existing standby or commercial Letter of Credit previously issued hereunder. SECTION 2.1.4. Lenders Not Permitted or Required to Make the Loans. No Lender shall be permitted or required to, and the Borrower shall not request any Lender to, make (a) any Term Loan if, after giving effect thereto, the aggregate original principal amount of all the Term Loans (i) of all Lenders would exceed the Term Loan Commitment Amount, or (ii) of such Lender would exceed such Lender's Percentage of the Term Loan Commitment Amount; or (b) any Revolving Loan if, after giving effect thereto, the aggregate outstanding principal amount of all the Revolving Loans (i) of all Lenders, together with all Letter of -34- Credit Outstandings and the aggregate outstanding principal amount of all Swing Line Loans, would exceed the Revolving Loan Commitment Amount, or (ii) of such Lender (other than the Swing Line Lender), together with its Percentage of all Letter of Credit Outstandings, would exceed such Lender's Percentage of the Revolving Loan Commitment Amount; or (c) any Swing Line Loan if, after giving effect thereto, the aggregate outstanding principal amount of all Swing Line Loans (i) would exceed the Swing Line Loan Commitment Amount, or (ii) together with all Letter of Credit Outstandings and the aggregate outstanding principal amount of all Revolving Loans, would exceed the Revolving Loan Commitment Amount. SECTION 2.1.5. Issuer Not Permitted or Required to Issue Letters of Credit. No Issuer shall be permitted or required to issue any Letter of Credit if, after giving effect thereto, (a) the aggregate amount of all Letter of Credit Outstandings would exceed the Letter of Credit Commitment Amount or (b) the sum of the aggregate amount of all Letter of Credit Outstandings plus the aggregate principal amount of all Revolving Loans and all Swing Line Loans then outstanding would exceed the Revolving Loan Commitment Amount. SECTION 2.2. Reduction of the Commitment Amounts. The Commitment Amounts are subject to reductions from time to time pursuant to this Section 2.2. SECTION 2.2.1. Optional. The Borrower may, from time to time on any Business Day occurring after the time of the initial Credit Extension hereunder, voluntarily reduce the Revolving Loan Commitment Amount; provided, however, that all such reductions shall require at least three Business Days' prior notice to the Administrative Agent and be permanent, and any partial reduction of any Commitment Amount shall be in an aggregate amount of $5,000,000 or any larger integral multiple of $1,000,000. Any such reduction of the Revolving Loan Commitment Amount which reduces the Revolving Loan Commitment Amount below the Letter of Credit Commitment Amount or the Swing Line Loan Commitment Amount shall result in an automatic and corresponding reduction of the Letter of Credit Commitment Amount or the Swing Line Loan Commitment Amount, as the case may be, to an aggregate amount not in excess of the Revolving Loan Commitment Amount, as so reduced, without any further action on the part of the Issuer or the Swing Line Lender. SECTION 2.2.2. Mandatory. The Revolving Loan Commitment Amount shall, without any further action, automatically and permanently be reduced (a) on the Revolving Loan Commitment Termination Date so that the Revolving Loan Commitment Amount equals $0; and (b) following the prepayment in full of the Term Loans, on the date the Term Loans would otherwise have been required to be prepaid pursuant to clause (b), (c), (d), (e) or (f) of Section 3.1.1, in an amount equal to the amount by which the Term Loans -35- would otherwise have been required to be prepaid if any Term Loans had been outstanding. Any such reduction of the Revolving Loan Commitment Amount which reduces the Revolving Loan Commitment Amount below the Letter of Credit Commitment Amount or the Swing Line Loan Commitment Amount shall result in an automatic and corresponding permanent reduction of the Letter of Credit Commitment Amount or the Swing Line Loan Commitment Amount, as the case may be, to an aggregate amount not in excess of the Revolving Loan Commitment Amount, as so reduced, without any further action on the part of the Issuer or the Swing Line Lender. SECTION 2.3. Borrowing Procedures and Funding Maintenance. Loans (other than Swing Line Loans) shall be made by the Lenders in accordance with Section 2.3.1, and Swing Line Loans shall be made by the Swing Line Lender in accordance with Section 2.3.2. SECTION 2.3.1. Term Loans and Revolving Loans. By delivering a Borrowing Request to the Administrative Agent on or before 12:00 noon, New York City time, on a Business Day, the Borrower may from time to time irrevocably request, on not less than one Business Day's notice (in the case of Base Rate Loans) or three Business Days' notice (in the case of LIBO Rate Loans) nor more than five Business Days' notice (in the case of any Loans), that a Borrowing be made, in the case of LIBO Rate Loans, in an aggregate amount of $1,000,000 or any larger integral multiple of $500,000, and in the case of Base Rate Loans, in an aggregate amount of $500,000 or any larger integral multiple of $100,000, or, in either case, in the unused amount of the applicable Commitment. No Borrowing Request shall be required, and the minimum aggregate amounts specified under this Section 2.3.1 shall not apply, in the case of Revolving Loans made under clause (b) of Section 2.3.2 to refund Refunded Swing Line Loans or deemed made under Section 2.6.2 in respect of unreimbursed Disbursements. On the terms and subject to the conditions of this Agreement, each Borrowing shall be comprised of the type of Loans, and shall be made on the Business Day, specified in such Borrowing Request. On or before 11:00 a.m., New York City time, on such Business Day each Lender shall deposit with the Administrative Agent same day funds in an amount equal to such Lender's Percentage of the requested Borrowing. Such deposit will be made to an account which the Administrative Agent shall specify from time to time by notice to the Lenders. To the extent funds are received from the Lenders, the Administrative Agent shall make such funds available to the Borrower by wire transfer to the accounts the Borrower shall have specified in its Borrowing Request. No Lender's obligation to make any Loan shall be affected by any other Lender's failure to make any Loan. SECTION 2.3.2. Swing Line Loans. (a) By telephonic notice, promptly followed (within one Business Day) by the delivery of a confirming Borrowing Request, to the Swing Line Lender and the Administrative Agent on or before 12:00 noon, New York City time, on the Business Day the proposed Swing Line Loan is to be made, the Borrower may from time to time irrevocably request that a Swing Line Loan be made by the Swing Line Lender in a minimum principal amount of $100,000 or any larger integral multiple of $50,000. All Swing Line Loans shall be made as Base Rate Loans and shall not be entitled to be converted into LIBO Rate Loans. The proceeds of each Swing Line Loan shall be made available by the Swing Line Lender, by 5:00 p.m., New York City time, on the Business Day telephonic notice is received by -36- it as provided in this clause (a), to the Borrower by wire transfer to the account the Borrower shall have specified in its notice therefor. (b) If (i) any Swing Line Loan (A) shall be outstanding for more than four Business Days or (B) is or will be outstanding on a date when the Borrower requests that a Revolving Loan be made or (ii) any Default (other than a Default of the nature set forth in Section 8.1.9) shall occur and be continuing, each Lender with a Revolving Loan Commitment (other than the Swing Line Lender) irrevocably agrees that it will, at the request of the Swing Line Lender and upon notice from the Administrative Agent, make a Revolving Loan (which shall initially be funded as a Base Rate Loan) in an amount equal to such Lender's Percentage of the aggregate principal amount of all such Swing Line Loans then outstanding (such outstanding Swing Line Loans hereinafter referred to as the "Refunded Swing Line Loans"); provided, that the Swing Line Lender shall not request, and no Lender with a Revolving Loan Commitment shall make, any Refunded Swing Line Loan if, after giving effect to the making of such Refunded Swing Line Loan, the sum of all Swing Line Loans and Revolving Loans made by such Lender, plus such Lender's Percentage of the aggregate amount of all Letter of Credit Outstandings, would exceed such Lender's Percentage of the then existing Revolving Loan Commitment Amount. On or before 11:00 a.m. (New York City time) on the first Business Day following receipt by each Lender of a request to make Revolving Loans as provided in the preceding sentence, each such Lender with a Revolving Loan Commitment shall deposit in an account specified by the Swing Line Lender the amount so requested in same day funds and such funds shall be applied by the Swing Line Lender to repay the Refunded Swing Line Loans. At the time the aforementioned Lenders make the above referenced Revolving Loans, the Swing Line Lender shall be deemed to have made, in consideration of the making of the Refunded Swing Line Loans, a Revolving Loan in an amount equal to the Swing Line Lender's Percentage of the aggregate principal amount of the Refunded Swing Line Loans. Upon the making (or deemed making, in the case of the Swing Line Lender) of any Revolving Loans pursuant to this clause (b), the amount so funded shall become outstanding under such Lender's Revolving Note and shall no longer be owed under the Swing Line Note. All interest payable with respect to any Revolving Loans made (or deemed made, in the case of the Swing Line Lender) pursuant to this clause (b) shall be appropriately adjusted to reflect the period of time during which the Swing Line Lender had outstanding Swing Line Loans in respect of which such Revolving Loans were made. (c) If, at any time prior to the making of Revolving Loans to replace any outstanding Swing Line Loans pursuant to clause (b) above, any Default of the nature of the nature set forth in Section 8.1.9 shall have occurred, each Lender with a Revolving Loan Commitment (other than the Swing Line Lender) irrevocably agrees that it will, at the request of the Swing Line Lender and upon notice from the Administrative Agent, purchase an undivided participation interest in all such Swing Line Loans in an amount equal to its Percentage of the aggregate outstanding amount of such Swing Line Loans and transfer immediately to an account identified by the Swing Line Lender, in immediately available funds, the amount of its participation. The Swing Line Lender will deliver to each such Lender, promptly following receipt of such funds, a participation certificate, dated the date of receipt of such funds and in the amount of such Lender's participation if requested to do so by such Lender. -37- (d) The Borrower expressly agrees that, in respect of each Lender's funded participation interest in any Swing Line Loan, such Lender shall be deemed to be in privity of contract with the Borrower and have the same rights and remedies against the Borrower under the Loan Documents as if such funded participation interest in such Swing Line Loan were a Revolving Loan. (e) Each Lender's obligation (in the case of Lenders with a Revolving Loan Commitment) to make Revolving Loans or purchase participation interests in Swing Line Loans, as contemplated by clause (b) or (c) above, shall be absolute and unconditional and without recourse to the Swing Line Lender and shall not be affected by any circumstance, including (i) any set-off, counterclaim, recoupment, defense or other right which such Revolving Lender may have against the Swing Line Lender, the Borrower or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default, an Event of Default or a Material Adverse Effect; (iii) the acceleration or maturity of any Loans or the termination of any Commitment after the making of any Swing Line Loan; (iv) any breach of this Agreement or any other Loan Document by the Borrower, any other Obligor or any Lender; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. SECTION 2.4. Continuation and Conversion Elections. By delivering a Continuation/Conversion Notice to the Administrative Agent on or before 12:00 noon, New York City time, on a Business Day, the Borrower may from time to time irrevocably elect, on not less than one Business Day's notice (in the case of a conversion of LIBO Rate Loans to Base Rate Loans) or three Business Days' notice (in the case of a continuation of LIBO Rate Loans or a conversion of Base Rate Loans into LIBO Rate Loans) nor more than five Business Days' notice (in the case of any Loans) that all, or any portion (a) in a minimum amount of $1,000,000 or any larger integral multiple of $500,000, be, in the case of Base Rate Loans, converted into LIBO Rate Loans or, in the case of LIBO Rate Loans, continued as LIBO Rate Loans or (b) in a minimum amount of $500,000 or any larger integral multiple of $100,000, be, in the case of LIBO Rate Loans, converted into Base Rate Loans (in the absence of delivery of a Continuation/Conversion Notice with respect to any LIBO Rate Loan at least three Business Days before the last day of the then current Interest Period with respect thereto, such LIBO Rate Loan shall, on such last day, automatically convert to a Base Rate Loan); provided, however, that (x) each such conversion or continuation shall be pro rated among the applicable outstanding Loans of the relevant Lenders, and (y) no portion of the outstanding principal amount of any Loans may be continued as, or be converted into, LIBO Rate Loans when any Default or Event of Default has occurred and is continuing. SECTION 2.5. Funding. Each Lender may, if it so elects, fulfill its obligation to make, continue or convert LIBO Rate Loans hereunder by causing one of its foreign branches or Affiliates (or an international banking facility created by such Lender) to make or maintain such LIBO Rate Loan, so long as such action does not result in increased costs to the Borrower; provided, however, that such LIBO Rate Loan shall nonetheless be deemed to have been made and to be held by such Lender, and the obligation of the Borrower to repay such LIBO Rate Loan -38- shall nevertheless be to such Lender for the account of such foreign branch, Affiliate or international banking facility; provided further, however, that, except for purposes of determining whether any such increased costs are payable by the Borrower, such Lender shall cause such foreign branch, Affiliate or international banking facility to comply with the applicable provisions of clause (b) of Section 4.6 with respect to such LIBO Rate Loan. In addition, the Borrower hereby consents and agrees that, for purposes of any determination to be made for purposes of Section 4.1, 4.2, 4.3 or 4.4, it shall be conclusively assumed that each Lender elected to fund all LIBO Rate Loans by purchasing Dollar deposits in its LIBOR Office's interbank Eurodollar market. SECTION 2.6. Issuance Procedures. By delivering to the Administrative Agent an Issuance Request on or before 12:00 noon, New York City time, on a Business Day, the Borrower may, from time to time irrevocably request, on not less than three nor more than ten Business Days' notice (or such shorter or longer notice as may be acceptable to the Issuer), in the case of an initial issuance of a Letter of Credit, and not less than three nor more than ten Business Days' notice (unless a shorter or longer notice period is acceptable to the Issuer) prior to the then existing Stated Expiry Date of a Letter of Credit, in the case of a request for the extension of the Stated Expiry Date of a Letter of Credit, that the Issuer issue, or extend the Stated Expiry Date of, as the case may be, an irrevocable Letter of Credit on behalf of the Borrower (whether the account party on such Letter of Credit is the Borrower or a Subsidiary of the Borrower) in such form as may be requested by the Borrower and approved by the Issuer, for the purposes described in Section 7.1.9; provided, however, that no extension of the Stated Expiry Date of an outstanding Letter of Credit may provide for a Stated Expiry Date subsequent to the earlier of (i) the Revolving Loan Commitment Termination Date and (ii) one year from the date of such extension. Notwithstanding anything to the contrary contained herein or in any separate application for any Letter of Credit, the Borrower hereby acknowledges and agrees that it shall be obligated to reimburse the Issuer upon each Disbursement paid under a Letter of Credit, and it shall be deemed to be the obligor for purposes of each such Letter of Credit issued hereunder (whether the account party on such Letter of Credit is the Borrower or a Subsidiary of the Borrower). Upon receipt of an Issuance Request, the Administrative Agent shall promptly notify the Issuer and each Lender thereof. Each Letter of Credit shall by its terms be stated to expire on a date (its "Stated Expiry Date") no later than the earlier to occur of (i) the Revolving Loan Commitment Termination Date or (ii) one year from the date of its issuance. The Issuer will make available to the beneficiary thereof the original of each Letter of Credit which it issues hereunder. SECTION 2.6.1. Other Lenders' Participation. Upon the issuance of each Letter of Credit issued by the Issuer pursuant hereto, and without further action, each Lender (other than the Issuer) that has a Revolving Loan Commitment shall be deemed to have irrevocably purchased from the Issuer, to the extent of its Percentage in respect of Revolving Loans, and the Issuer shall be deemed to have irrevocably granted and sold to such Lender a participation interest in such Letter of Credit (including the Contingent Liability and any Reimbursement Obligation and all rights with respect thereto), and such Lender shall, to the extent of its Percentage in respect of Revolving Loans, be responsible for reimbursing promptly (and in any -39- event within one Business Day) the Issuer for Reimbursement Obligations which have not been reimbursed by the Borrower in accordance with Section 2.6.3. In addition, such Lender shall, to the extent of its Percentage in respect of Revolving Loans, be entitled to receive a ratable portion of the Letter of Credit fees payable pursuant to Section 3.3.3 with respect to each Letter of Credit and of interest payable pursuant to Section 3.2 with respect to any Reimbursement Obligation. To the extent that any Lender has reimbursed the Issuer for a Disbursement as required by this Section, such Lender shall be entitled to receive its ratable portion of any amounts subsequently received (from the Borrower or otherwise) in respect of such Disbursement. SECTION 2.6.2. Disbursements; Conversion to Revolving Loans. The Issuer will notify the Borrower and the Administrative Agent promptly of the presentment for payment of any drawing under any Letter of Credit issued by the Issuer, together with notice of the date (the "Disbursement Date") such payment shall be made (each such payment, a "Disbursement"). Subject to the terms and provisions of such Letter of Credit and this Agreement, the Issuer shall make such payment to the beneficiary (or its designee) of such Letter of Credit. Prior to 12:00 noon, New York City time, on the first Business Day following the Disbursement Date (the "Disbursement Due Date"), the Borrower will reimburse the Administrative Agent, for the account of the Issuer, for all amounts which the Issuer has disbursed under such Letter of Credit, together with interest thereon at the rate per annum otherwise applicable to Revolving Loans (made as Base Rate Loans) from and including the Disbursement Date to but excluding the Disbursement Due Date and, thereafter (unless such Disbursement is converted into a Revolving Loan made as a Base Rate Loan on the Disbursement Due Date), at a rate per annum equal to the rate per annum then in effect with respect to overdue Revolving Loans (made as Base Rate Loans) pursuant to Section 3.2.2 for the period from the Disbursement Due Date through the date of such reimbursement; provided, however, that, if no Default shall have then occurred and be continuing, unless the Borrower has notified the Administrative Agent no later than one Business Day prior to the Disbursement Due Date that it will reimburse the Issuer for the applicable Disbursement, then the amount of the Disbursement shall be deemed to be a Borrowing of Revolving Loans constituting Base Rate Loans and following the giving of notice thereof by the Administrative Agent to the Lenders, each Lender with a Revolving Loan Commitment (other than the Issuer) will deliver to the Issuer on the Disbursement Due Date immediately available funds in an amount equal to such Lender's Percentage of such Borrowing. Each conversion of Disbursement amounts into Revolving Loans shall constitute a representation and warranty by the Borrower that on the date of the making of such Revolving Loans all of the statements set forth in Section 5.2.1 are true and correct. SECTION 2.6.3. Reimbursement. The obligation (a "Reimbursement Obligation") of the Borrower under Section 2.6.2 to reimburse the Issuer with respect to each Disbursement (including interest thereon) not converted into a Revolving Loan made as a Base Rate Loan pursuant to Section 2.6.2, and, upon the failure of the Borrower to reimburse the Issuer and the giving of notice thereof by the Administrative Agent to the Lenders, each Lender's (to the extent it has a Revolving Loan Commitment) obligation under Section 2.6.1 to reimburse the Issuer or fund its Percentage of any Disbursement converted into a Revolving Loan made as a Base Rate Loan, shall be absolute and unconditional under any and all circumstances and irrespective of -40- any setoff, counterclaim or defense to payment which the Borrower or such Lender, as the case may be, may have or have had against the Issuer or any such Lender, including any defense based upon the failure of any Disbursement to conform to the terms of the applicable Letter of Credit (if, in the Issuer's good faith opinion, such Disbursement is determined to be appropriate) or any non-application or misapplication by the beneficiary of the proceeds of such Letter of Credit; provided, however, that after paying in full its Reimbursement Obligation hereunder, nothing herein shall adversely affect the right of the Borrower or such Lender, as the case may be, to commence any proceeding against the Issuer for any wrongful Disbursement made by the Issuer under a Letter of Credit as a result of acts or omissions constituting gross negligence or willful misconduct on the part of the Issuer. SECTION 2.6.4. Deemed Disbursements. Upon the occurrence and during the continuation of any Event of Default of the type described in clauses (a) through (d) of Section 8.1.9 or, with notice from the Administrative Agent acting at the direction of the Required Lenders, upon the occurrence and during the continuation of any other Event of Default, (a) an amount equal to that portion of all Letter of Credit Outstandings attributable to the then aggregate amount which is undrawn and available under all Letters of Credit issued and outstanding shall, without demand upon or notice to the Borrower or any other Person, be deemed to have been paid or disbursed by the Issuer under such Letters of Credit (notwithstanding that such amount may not in fact have been so paid or disbursed); and (b) upon notification by the Administrative Agent to the Borrower of its obligations under this Section, the Borrower shall be immediately obligated to reimburse the Issuer for the amount deemed to have been so paid or disbursed by the Issuer. Any amounts so payable by the Borrower pursuant to this Section shall be deposited in cash with the Administrative Agent and held as collateral security for the Obligations in connection with the Letters of Credit issued by the Issuer. At such time as the Events of Default giving rise to the deemed disbursements hereunder shall have been cured or waived, the Administrative Agent shall return to the Borrower all amounts then on deposit with the Administrative Agent pursuant to this Section, together with accrued interest at the Federal Funds Rate, which have not been applied to the satisfaction of such Obligations. SECTION 2.6.5. Nature of Reimbursement Obligations. The Borrower and, to the extent set forth in Section 2.6.1, each Lender with a Revolving Loan Commitment, shall assume all risks of the acts, omissions or misuse of any Letter of Credit by the beneficiary thereof. The Issuer (except to the extent of its own gross negligence or willful misconduct) shall not be responsible for (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any Letter of Credit or any document submitted by any party in connection with the application for and issuance of a Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged, (ii) the form, validity, sufficiency, -41- accuracy, genuineness or legal effect of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or the proceeds thereof in whole or in part, which may prove to be invalid or ineffective for any reason, (iii) failure of the beneficiary to comply fully with conditions required in order to demand payment under a Letter of Credit, (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, or (v) any loss or delay in the transmission or otherwise of any document or draft required in order to make a Disbursement under a Letter of Credit. None of the foregoing shall affect, impair or prevent the vesting of any of the rights or powers granted to the Issuer or any Lender with a Revolving Loan Commitment hereunder. In furtherance and extension and not in limitation or derogation of any of the foregoing, any action taken or omitted to be taken by the Issuer in good faith (and not constituting gross negligence or willful misconduct) shall be binding upon the Borrower, each Obligor and each such Lender, and shall not put the Issuer under any resulting liability to the Borrower, any Obligor or any such Lender, as the case may be. SECTION 2.6.6. Indemnity. In addition to amounts payable as elsewhere provided herein, the Borrower hereby agrees to protect, indemnify, pay and save the Issuer harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees and allocated costs of internal counsel) which the Issuer may incur or be subject to as a consequence, direct or indirect, of (a) the issuance of the Letters of Credit, other than as a result of the gross negligence or wilful misconduct of the Issuer as determined by a court of competent jurisdiction, or (b) the failure of the Issuer to honor a drawing under any Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority. SECTION 2.6.7. Borrower's Guaranty of Reimbursement Obligations under Letters of Credit Issued for the Account of its Subsidiaries. The Borrower agrees as follows in respect of the reimbursement obligations under Letters of Credit issued for the account of its Subsidiaries: (a) The Borrower hereby absolutely, unconditionally and irrevocably (i) guarantees the full and punctual payment when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, of all such reimbursement obligations now or hereafter existing, of each of its Subsidiaries (the "Account Parties") that is an account party to a Letter of Credit which arise out of, or are incurred in connection with, such Letters of Credit, whether for principal, interest, fees, expenses or otherwise (including all such amounts which would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code, 11 U.S.C. ss.362(a), and the operation of Sections 502(b) and 506(b) of the United States Bankruptcy Code, 11 U.S.C. ss.502(b) and ss.506(b)), and (ii) indemnifies and holds harmless each Secured Party and each holder of a Note for any and all costs and expenses (including reasonable attorney's fees and expenses) -42- incurred by such Secured Party or such holder, as the case may be, in enforcing any rights under the guaranty set forth in this Section 2.6.7. The guaranty set forth in this Section 2.6.7 constitutes a guaranty of payment when due and not of collection, and the Borrower specifically agrees that it shall not be necessary or required that any Secured Party or any holder of any Note exercise any right, assert any claim or demand or enforce any remedy whatsoever against any Account Party or any other Obligor (or any other Person) before or as a condition to the obligations of the Borrower under the guaranty set forth in this Section 2.6.7 (such obligations hereinafter referred to as the "Guaranteed Obligations"). (b) The Borrower agrees that upon the occurrence of an Event of Default of the nature set forth in clauses (a) through (d) of Section 8.1.9, at a time when any of the Guaranteed Obligations of any Account Party may not then be due and payable, then the Borrower agrees that it will pay to the Administrative Agent for the account of the Secured Parties forthwith the full amount which would be payable under the guaranty set forth in this Section 2.6.7 by the Borrower if all such Guaranteed Obligations were then due and payable. (c) The guaranty set forth in this Section 2.6.7 shall in all respects be a continuing, absolute, unconditional and irrevocable guaranty of payment, and shall remain in full force and effect until all Guaranteed Obligations of the Account Parties have been paid in full in cash, all Obligations of the Borrower and each other Obligor hereunder have been paid in full in cash, all Letters of Credit have been terminated or expired, all Rate Protection Agreements have been terminated or expired and all Commitments shall have terminated. The Borrower guarantees that the Guaranteed Obligations of the Account Parties will be paid strictly in accordance with the terms of this Agreement and each other Loan Document under which they arise, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any Secured Party or any holder of any Note with respect thereto. The liability of the Borrower under the guaranty set forth in this Section 2.6.7 shall be absolute, unconditional and irrevocable irrespective of: (i) any lack of validity, legality or enforceability of this Agreement, any Note or any other Loan Document; (ii) the failure of any Secured Party or any holder of any Note (A) to assert any claim or demand or to enforce any right or remedy against any Account Party, any other Obligor or any other Person (including any other guarantor (including the Borrower)) under the provisions of this Agreement, any Note, any other Loan Document or otherwise, or (B) to exercise any right or remedy against any other guarantor (including the Borrower) of, or collateral securing, any Guaranteed Obligations of any Account Party; -43- (iii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Guaranteed Obligations of any Account Party, or any other extension, compromise or renewal of any Guaranteed Obligation of any Account Party; (iv) any reduction, limitation, impairment or termination of any Guaranteed Obligations of any Account Party for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and the Borrower hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Guaranteed Obligations of any Account Party or otherwise; (v) any amendment to, rescission, waiver, or other modification of, or any consent to departure from, any of the terms of this Agreement, any Note or any other Loan Document; (vi) any addition, exchange, release, surrender or non-perfection of any collateral, or any amendment to or waiver or release or addition of, or consent to departure from, any other guaranty, held by any Secured Party or any holder of any Note securing any of the Guaranteed Obligations of any Account Party; or (vii) any other circumstance which might otherwise constitute a defense available to, or a legal or equitable discharge of, any Account Party any surety or any guarantor. (d) The Borrower agrees that the guaranty set forth in this Section 2.6.7 shall continue to be effective or be reinstated, as the case may be, if at any time any payment (in whole or in part) of any of the Guaranteed Obligations is rescinded or must otherwise be restored by any Secured Party or any holder of any Note, upon the insolvency, bankruptcy or reorganization of any Account Party or otherwise, all as though such payment had not been made. (e) The Borrower hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Guaranteed Obligations of any Account Party or any other Obligor and the guaranty set forth in this Section 2.6.7 and any requirement that the Administrative Agent, any other Secured Party or any holder of any Note protect, secure, perfect or insure any security interest or Lien, or any property subject thereto, or exhaust any right or take any action against any Account Party, any other Obligor or any other Person (including any other guarantor) or entity or any collateral securing the Guaranteed Obligations of any Account Party. (f) The Borrower agrees that it will not exercise any rights which it may acquire by way of rights of subrogation under the guaranty set forth in this Section 2.6.7, by any payment made under the guaranty set forth in this Section 2.6.7 or otherwise, until the prior payment in full in cash of all Guaranteed Obligations of each Account Party, the prior payment in full in cash of all Obligations of the Borrower, the termination or expiration of all Letters of Credit, the -44- termination or expiration of all Rate Protection Agreements and the termination of all Commitments. Any amount paid to the Borrower on account of any such subrogation rights prior to the payment in full in cash of all Guaranteed Obligations of each Account Party shall be held in trust for the benefit of the Secured Parties and each holder of a Note and shall immediately be paid to the Administrative Agent for the benefit of the Secured Parties and each holder of a Note and credited and applied against the Guaranteed Obligations of each Account Party, whether matured or unmatured, in accordance with the terms of this Agreement; provided, however, that if (i) the Borrower has made payment to the Secured Parties and each holder of a Note of all or any part of the Guaranteed Obligations of any Account Party, and (ii) all Guaranteed Obligations of each Account Party have been paid in full in cash, all Obligations of the Borrower have been paid in full in cash, all Letters of Credit have been terminated or expired and all Commitments have been permanently terminated, each Secured Party and each holder of a Note agrees that, at the Borrower's request, the Administrative Agent, on behalf of the Secured Parties and the holders of the Notes, will execute and deliver to the Borrower appropriate documents (without recourse and without representation or warranty) necessary to evidence the transfer by subrogation to the Borrower of an interest in the Guaranteed Obligations of each Account Party resulting from such payment by the Borrower. In furtherance of the foregoing, for so long as any Obligations (including Guaranteed Obligations) or Commitments remain outstanding, the Borrower shall refrain from taking any action or commencing any proceeding against any Account Party(or its successors or assigns, whether in connection with a bankruptcy proceeding or otherwise) to recover any amounts in the respect of payments made under the guaranty set forth in this Section 2.6.7 to any Secured Party or any holder of a Note. (g) The guaranty set forth in this Section 2.6.7 shall: (h) be binding upon the Borrower, and its successors, transferees and assigns; and (i) inure to the benefit of and be enforceable by the Administrative Agent and each other Secured Party. Without limiting the generality of the foregoing clause (b), any Lender may assign or otherwise transfer (in whole or in part) any Note or Credit Extension held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all rights and benefits in respect thereof granted to such Lender under any Loan Document (including the guaranty set forth in this Section 2.6.7) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 11.11 and Article X. SECTION 2.6.8. Continued Letters of Credit. Notwithstanding anything to the contrary herein, the Letters of Credit (as defined in the Existing Credit Agreement) described in Schedule -45- III attached hereto shall be deemed to be Letters of Credit issued hereunder by the Issuer on the Closing Date. SECTION 2.7. Register; Notes. (a) Each Lender may maintain in accordance with its usual practice an account or accounts evidencing the Indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. In the case of a Lender that does not request, pursuant to clause (b)(ii) below, execution and delivery of a Note evidencing the Loans made by such Lender to the Borrower, such account or accounts shall, to the extent not inconsistent with the notations made by the Administrative Agent in the Register, be conclusive and binding on the Borrower absent manifest error; provided, however, that the failure of any Lender to maintain such account or accounts shall not limit or otherwise affect any Obligations of the Borrower or any other Obligor. (b)(i) The Borrower hereby designates the Administrative Agent to serve as the Borrower's agent, solely for the purpose of this clause (b), to maintain a register (the "Register") on which the Administrative Agent will record each Lender's Commitment, the Loans made by each Lender and each repayment in respect of the principal amount of the Loans of each Lender and annexed to which the Administrative Agent shall retain a copy of each Lender Assignment Agreement delivered to the Administrative Agent pursuant to Section 11.11.1. Failure to make any recordation, or any error in such recordation, shall not affect the Borrower's obligation in respect of such Loans. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders shall treat each Person in whose name a Loan (and as provided in clause (ii) the Note evidencing such Loan, if any) is registered as the owner thereof for all purposes of this Agreement, notwithstanding notice or any provision herein to the contrary. A Lender's Commitment and the Loans made pursuant thereto may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer in the Register. Any assignment or transfer of a Lender's Commitment or the Loans made pursuant thereto shall be registered in the Register only upon delivery to the Administrative Agent of a Lender Assignment Agreement duly executed by the assignor thereof and the compliance by the parties thereto with the other requirements of Section 11.11.1. No assignment or transfer of a Lender's Commitment or the Loans made pursuant thereto shall be effective unless such assignment or transfer shall have been recorded in the Register by the Administrative Agent as provided in this Section. (ii) The Borrower agrees that, upon the request to the Administrative Agent by any Lender, the Borrower will execute and deliver to such Lender, as applicable, a Revolving Note, a Term Note (or Registered Note) and/or a Swing Line Note evidencing the Loans made by such Lender. The Borrower hereby irrevocably authorizes each Lender to make (or cause to be made) appropriate notations on the grid attached to such -46- Lender's Notes (or on any continuation of such grid), which notations, if made, shall evidence, inter alia, the date of, the outstanding principal amount of, and the interest rate and Interest Period applicable to the Loans evidenced thereby. Such notations shall, to the extent not inconsistent with the notations made by the Administrative Agent in the Register, be conclusive and binding on the Borrower absent manifest error; provided, however, that the failure of any Lender to make any such notations shall not limit or otherwise affect any Obligations of the Borrower or any other Obligor. The Loans evidenced by any Registered Note and interest thereon shall at all times (including after assignment pursuant to Section 11.11.1) be payable to the order of the payee named therein and its registered assigns. A Registered Note and the obligation evidenced thereby may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer of such Registered Note and the obligation evidenced thereby in the Register (and each Registered Note shall expressly so provide). Any assignment or transfer of all or part of an obligation evidenced by a Registered Note shall be registered in the Register only upon surrender for registration of assignment or transfer of the Registered Note evidencing such obligation, accompanied by a Lender Assignment Agreement duly executed by the assignor thereof and the compliance by the parties thereto with the other requirements of Section 11.11.1, and thereupon, if requested by the assignee, one or more new Notes shall be issued to the designated assignee and the old Registered Note shall be returned by the Administrative Agent to the Borrower marked "exchanged". No assignment of a Registered Note and the obligation evidenced thereby shall be effective unless it shall have been recorded in the Register by the Administrative Agent as provided in this Section. ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES SECTION 3.1. Repayments and Prepayments; Application. SECTION 3.1.1. Repayments and Prepayments. The Borrower shall repay in full the unpaid principal amount of each Loan upon the Stated Maturity Date therefor. Prior thereto, the Borrower (a) may, from time to time on any Business Day, make a voluntary prepayment, in whole or in part, of the outstanding principal amount of any (i) Loans (other than Swing Line Loans); provided, however, that (A) any such prepayment of the Term Loans shall be made pro rata among the Term Loans of the same type and, if applicable, having the same Interest Period of all Lenders that have made such Term Loans, and any such prepayment of Revolving Loans shall be made pro rata among -47- the Revolving Loans of the same type and, if applicable, having the same Interest Period of all Lenders that have made such Revolving Loans; (B) the Borrower shall comply with Section 4.4 in the event that any LIBO Rate Loan is prepaid on any day other than the last day of the Interest Period for such Loan; (C) all such voluntary prepayments shall require at least one Business Day's notice in the case of Base Rate Loans, three Business Days' notice in the case of LIBO Rate Loans, but no more than five Business Days' notice in the case of any Loans, in each case in writing to the Administrative Agent; and (D) all such voluntary partial prepayments shall be, in the case of LIBO Rate Loans, in an aggregate amount of $1,000,000 or any larger integral multiple of $500,000, and, in the case of Base Rate Loans, in an aggregate amount of $500,000 or any larger integral multiple of $100,000, or, in either case, in the aggregate principal amount of all Loans of the applicable Tranche and type then outstanding; or (ii) Swing Line Loans; provided, however, that (A) all such voluntary prepayments shall require prior telephonic notice to the Swing Line Lender on or before 12:00 noon, New York City time, on the day of such prepayment (such notice to be confirmed in writing by the Borrower within 24 hours thereafter); and (B) all such voluntary partial prepayments shall be in an aggregate amount of $100,000 and an integral multiple of $50,000 or in the aggregate principal amount of all Swing Line Loans then outstanding; (b) shall, no later than five Business Days following the delivery by the Borrower of its annual audited financial reports required pursuant to clause (c) of Section 7.1.1 (beginning with the financial reports delivered in respect of the 1998 Fiscal Year), deliver to the Administrative Agent a calculation of the Excess Cash Flow for the Fiscal Year last ended and, no later than five Business Days following the delivery of such calculation, make a mandatory prepayment of the Term Loans in an amount equal to 75% of the Excess Cash Flow (if any) for such Fiscal Year, to be applied as set forth in Section 3.1.2; (c) shall, not later than one Business Day following the receipt of any Net Debt Proceeds by the Borrower, any Parent Guarantor or any of their respective Subsidiaries, deliver to the Administrative Agent a calculation of the amount of such Net Debt Proceeds and make a mandatory prepayment of the Term Loans in an amount equal to 100% of such Net Debt Proceeds to be applied as set forth in Section 3.1.2; -48- (d) shall, concurrently with the receipt of any Net Equity Proceeds by the Borrower, any Parent Guarantor or any of their respective Subsidiaries, deliver to the Administrative Agent a calculation of the amount of such Net Equity Proceeds, and no later than five Business Days following the delivery of such calculation, make a mandatory prepayment of the Term Loans in an amount equal to 50% of such Net Equity Proceeds to be applied as set forth in Section 3.1.2; (e) shall, following the receipt by the Borrower, any Parent Guarantor or any of their respective Subsidiaries of any Casualty Proceeds in excess of $500,000 (individually or in the aggregate (when taken together with Net Disposition Proceeds) over the course of a Fiscal Year), deliver to the Administrative Agent a calculation of the amount of such Casualty Proceeds and make a mandatory prepayment of the Term Loans in an amount equal to 100% of such Casualty Proceeds within 60 days of the receipt thereof to be applied as set forth in Section 3.1.2; provided, however, that no mandatory prepayment on account of Casualty Proceeds shall be required under this clause if the Borrower informs the Agents in writing no later than 60 days following the occurrence of the Casualty Event resulting in such Casualty Proceeds of its, such Parent Guarantor's or such Subsidiary's good faith intention to apply such Casualty Proceeds to the rebuilding or replacement of the damaged, destroyed or condemned assets or property and the Borrower, such Parent Guarantor or such Subsidiary in fact uses such Casualty Proceeds to rebuild or replace such assets or property within 365 days following the receipt of such Casualty Proceeds, with the amount of such Casualty Proceeds unused after such 365-day period being applied to the Term Loans pursuant to Section 3.1.2; provided, further, however, that (i) at any time when any Default or Event of Default shall have occurred and be continuing, all Casualty Proceeds (together with Net Disposition Proceeds not applied as provided in clause (f) below) shall be deposited in an account maintained with the Administrative Agent to pay for such rebuilding or replacement whenever no Default or Event of Default is then continuing or except as otherwise agreed to by the Agents for disbursement at the request of the Borrower, such Parent Guarantor or such Subsidiary, as the case may be, or (ii) if all such Casualty Proceeds (together with Net Disposition Proceeds not applied as provided in clause (f) below) aggregating in excess of $1,000,000 have not yet been applied as described in the notice required above (or in accordance with clause (f) below), all such Casualty Proceeds and Net Disposition Proceeds shall be deposited in an account maintained with the Administrative Agent for disbursement at the request of the Borrower, such Parent Guarantor or such Subsidiary, as the case may be, to be used for the purpose(s) set forth in such written notice(s); (f) shall, following the receipt by the Borrower, any Parent Guarantor or any of their respective Subsidiaries of any Net Disposition Proceeds in excess of $500,000 (individually or in the aggregate (when taken together with Casualty Proceeds) over the course of a Fiscal Year), deliver to the Administrative Agent a calculation of the amount of such Net Disposition Proceeds and make a mandatory prepayment of the Term Loans in an amount equal to 100% of such Net Disposition Proceeds within one Business Day of the receipt thereof to be applied as set forth in Section 3.1.2; provided, however, that -49- no mandatory prepayment on account of Net Disposition Proceeds shall be required under this clause if the Borrower informs the Agents in writing no later than one Business Day following the receipt of such Net Disposition Proceeds of its, such Parent Guarantor's or such Subsidiary's good faith intention to apply such Net Disposition Proceeds to the replacement of the sold, conveyed or transferred assets or property and the Borrower, such Parent Guarantor or such Subsidiary in fact uses such Net Disposition Proceeds to replace such assets or property within 365 days following the receipt of such Net Disposition Proceeds, with the amount of such Net Disposition Proceeds unused after such 365-day period being applied to the Term Loans pursuant to Section 3.1.2; provided, further, however, that (i) at any time when any Default or Event of Default shall have occurred and be continuing, all Net Disposition Proceeds (together with Casualty Proceeds not applied as provided in clause (e) above) shall be deposited in an account maintained with the Administrative Agent to pay for such replacement whenever no Default or Event of Default is then continuing or except as otherwise agreed to by the Agents for disbursement at the request of the Borrower, such Parent Guarantor or such Subsidiary, as the case may be, or (ii) if all such Net Disposition Proceeds (together with Casualty Proceeds not applied as provided in clause (e) above) aggregating in excess of $1,000,000 have not yet been applied as described in the notice required above (or in accordance with clause (e) above), all such Net Disposition Proceeds and Casualty Proceeds shall be deposited in an account maintained with the Administrative Agent for disbursement at the request of the Borrower, such Parent Guarantor or such Subsidiary, as the case may be, to be used for the purpose(s) set forth in such written notice(s); (g) shall, on each date when any reduction in the Revolving Loan Commitment Amount shall become effective, make a mandatory prepayment of Revolving Loans and Swing Line Loans and (if necessary) deposit with the Administrative Agent cash collateral for Letter of Credit Outstandings in an aggregate amount equal to the excess, if any, of the sum of (i) the aggregate outstanding principal amount of all Revolving Loans and Swing Line Loans and (ii) the aggregate amount of all Letter of Credit Outstandings over the Revolving Loan Commitment Amount as so reduced; (h) shall on each Quarterly Payment Date occurring during any period set forth below, make a scheduled repayment of the outstanding principal amount, if any, of Term A Loans in an amount equal to the amount set forth below opposite such period (in each case as such amounts may have otherwise been reduced pursuant to this Agreement): SCHEDULED PERIOD PRINCIPAL REPAYMENT ------ ------------------- May 15, 1998 through November 15, 1998 $250,000 February 15, 1999 through November 15, 1999 $1,000,000 -50- SCHEDULED PERIOD PRINCIPAL REPAYMENT ------ ------------------- February 15, 2000 through November 15, 2000 $2,000,000 February 15, 2001 through November 15, 2002 $2,500,000 February 15, 2003 through $3,000,000 November 15, 2003 February 15, 2004 $5,250,000; (i) shall on each Quarterly Payment Date occurring during any period set forth below, make a scheduled repayment of the outstanding principal amount, if any, of Term B Loans in an amount equal to the amount set forth below opposite period (in each case as such amounts may have otherwise been reduced pursuant to this Agreement): SCHEDULED PERIOD PRINCIPAL REPAYMENT ------ ------------------- May 15, 1998 through February 15, 2004 $200,000 May 15, 2004 through $18,800,000; and February 15, 2005 (j) shall, immediately upon the occurrence of the Stated Maturity Date of any Loans or Obligations, whether by way of acceleration pursuant to Section 8.2 or 8.3 or otherwise, repay all outstanding Loans and other Obligations, unless, pursuant to Section 8.3, only a portion of all Loans and other Obligations are so accelerated (in which case the portion so accelerated shall be so prepaid). Each prepayment of any Loans made pursuant to this Section shall be without premium or penalty, except as may be required by Section 4.4. No prepayment of principal of any Revolving Loans or Swing Line Loans pursuant to clause (a) of this Section 3.1.1 shall cause a reduction in the Revolving Loan Commitment Amount or the Swing Line Loan Commitment Amount, as the case may be. SECTION 3.1.2. Application. (a) Subject to clause (b) below, each prepayment or repayment of principal of the Loans of any Tranche shall be applied, to the extent of such prepayment or repayment, first, to the principal amount thereof being maintained as Base Rate Loans, and second, to the principal amount thereof being maintained as LIBO Rate Loans. (b) Each prepayment of Term Loans made pursuant to clauses (a), (b), (c), (d), (e) and (f) of Section 3.1.1 shall be applied, on a pro rata basis, to the outstanding principal amount of all -51- remaining Term Loans and the remaining scheduled quarterly amortization payments in respect thereof, until all such Term Loans have been paid in full; provided, however, that in the case of any such prepayment of Term B Loans made pursuant to clause (b), (c), (d), (e) and (f) of Section 3.1.1, any Lender that has Term B Loans may elect not to have such Loans prepaid by delivering a notice to the Administrative Agent at least one Business Day prior to the date that such prepayment is to be made in which notice such Lender shall decline to have such Loans prepaid with the amounts set forth above, in which case the amounts that would have been applied to a prepayment of such Lender's Term B Loans shall instead be applied to a prepayment of the principal amount (if any) of all outstanding Term A Loans until all outstanding Term A Loans have been prepaid in full, then applied to a prepayment of the principal amount (if any) of all outstanding Swing Line Loans until all outstanding Swing Line Loans have been prepaid in full and then applied to a prepayment of the principal amount (if any) of all outstanding Revolving Loans until all outstanding Revolving Loans have been prepaid in full, with the balance (if any) being returned by the Administrative Agent to the Borrower. No prepayment of principal of any Revolving Loans or Swing Line Loans pursuant to the proviso of the immediately preceding sentence shall cause a reduction in the Revolving Loan Commitment Amount or the Swing Line Loan Commitment Amount, as the case may be. SECTION 3.2. Interest Provisions. Interest on the outstanding principal amount of the Loans shall accrue and be payable in accordance with this Section 3.2. SECTION 3.2.1. Rates. Each Base Rate Loan shall accrue interest on the unpaid principal amount thereof for each day from and including the day upon which such Loan was made or converted to a Base Rate Loan to but excluding the date such Loan is repaid or converted to a LIBO Rate Loan at a rate per annum equal to the sum of the Alternate Base Rate for such day plus the Applicable Margin for such Loan on such day. Each LIBO Rate Loan shall accrue interest on the unpaid principal amount thereof for each day from and including the first day of the Interest Period applicable thereto to but excluding the date such Loan is repaid or converted to a Base Rate Loan at a rate per annum equal to the sum of the LIBO Rate (Reserve Adjusted) for such Interest Period plus the Applicable Margin for such Loan on such day. SECTION 3.2.2. Post-Maturity Rates. After the date any principal amount of any Loan shall have become due and payable (whether on the applicable Stated Maturity Date, upon acceleration or otherwise), or any other monetary Obligation (other than overdue Reimbursement Obligations which shall bear interest as provided in Section 2.6.2) of the Borrower shall have become due and payable, the Borrower shall pay, but only to the extent permitted by law, interest (after as well as before judgment) on such amounts at a rate per annum equal to (a) in the case of any overdue principal of Loans, overdue interest thereon, overdue commitment fees or other overdue amounts in respect of Loans or other obligations (or the related Commitments) under a particular Tranche, the rate that would otherwise be applicable to Base Rate Loans under such Tranche pursuant to Section 3.2.1 plus 2% and (b) in the case of other overdue monetary Obligations, the rate that would otherwise be applicable to Revolving Loans made as Base Rate Loans plus 2%. -52- SECTION 3.2.3. Payment Dates. Interest accrued on each Loan shall be payable, without duplication: (a) on the Stated Maturity Date therefor; (b) on the date of any payment or prepayment, in whole or in part, of principal outstanding on such Loan, to the extent of the unpaid interest accrued through such date on the principal so paid or prepaid; (c) with respect to Base Rate Loans, on each Quarterly Payment Date occurring after the Closing Date hereunder; (d) with respect to LIBO Rate Loans, on the last day of the applicable Interest Period (and, if such Interest Period shall exceed three months, at intervals of three months after the first day of such Interest Period); (e) with respect to the principal amount of any Base Rate Loans converted into LIBO Rate Loans on a day when interest would not otherwise have been payable pursuant to clause (c), on the date of such conversion; and (f) on that portion of any Loans the Stated Maturity Date of which is accelerated pursuant to Section 8.2 or 8.3, immediately upon such acceleration. Interest accrued on Loans, Reimbursement Obligations or other monetary Obligations arising under this Agreement or any other Loan Document after the date such amount is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise) shall be payable upon demand. SECTION 3.3. Fees. The Borrower agrees to pay the fees set forth in this Section 3.3. All such fees shall be non-refundable. SECTION 3.3.1. Commitment Fee. The Borrower agrees to pay to the Administrative Agent for the account of each Lender that has a Revolving Loan Commitment, for each day during the period (including any portion thereof when any of the Lenders' Revolving Loan Commitments are suspended by reason of the Borrower's inability to satisfy any condition of Article V) commencing on the Closing Date and continuing to but excluding the Revolving Loan Commitment Termination Date, a commitment fee on such Lender's Percentage of the unused portion of the Revolving Loan Commitment Amount, whether or not then available, for such day at a rate per annum equal to the Applicable Commitment Fee for such day. Such commitment fees shall be payable by the Borrower in arrears on each Quarterly Payment Date, commencing with the first such day following the Closing Date, and on the Revolving Loan Commitment Termination Date. The making of Swing Line Loans by the Swing Line Lender shall not constitute usage under the Revolving Loan Commitment for the purpose of calculating the -53- commitment fees to be paid by the Borrower to the Lenders (other than the Swing Line Lender) pursuant to this Section 3.3.1. SECTION 3.3.2. Syndication Agent's, Administrative Agent's and Arranger's Fees. The Borrower agrees to pay to each of the Syndication Agent, the Administrative Agent and the Arranger for each such Person's own account, the fees set forth in the Fee Letter and the Administrative Agent's Fee Letter in accordance with their respective terms. SECTION 3.3.3. Letter of Credit Fee. The Borrower agrees to pay to (a) the Administrative Agent, for the pro rata account of the Issuer and each other Lender that has a Revolving Loan Commitment, a Letter of Credit fee for each day on which there shall be any Letters of Credit outstanding in an amount equal to the product of (i) a rate per annum equal to the then Applicable Margin for Revolving Loans maintained as LIBO Rate Loans multiplied by (ii) the Stated Amount of each such Letter of Credit; and (b) the Issuer (i) a Letter of Credit fronting fee for each day on which there shall be any Letters of Credit outstanding in an amount equal to 0.25% per annum on the Stated Amount of each such Letter of Credit, and (ii) from time to time promptly after demand, the normal issuance, presentation, amendment and other processing fees, and other standard administrative costs and charges of the Issuer relating to Letters of Credit as from time to time in effect. Fees payable pursuant to this Section shall be payable quarterly in arrears on each Quarterly Payment Date and on the Revolving Loan Commitment Termination Date. ARTICLE IV CERTAIN LIBO RATE AND OTHER PROVISIONS SECTION 4.1. LIBO Rate Lending Unlawful. If any Lender shall determine (which determination shall, upon notice thereof to the Borrower and the Lenders, be conclusive and binding on the Borrower) that the introduction of or any change in or in the interpretation of any law makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender to make, continue or maintain any Loan as, or to convert any Loan into, a LIBO Rate Loan, the obligations of such Lender to make, continue, maintain or convert any Loans as or to LIBO Rate Loans shall, upon such determination, forthwith be suspended until such Lender shall notify the Administrative Agent that the circumstances causing such suspension no longer exist (with the date of such notice being the "Reinstatement Date"), and (a) all LIBO Rate Loans previously made by such Lender shall automatically convert into Base Rate Loans at the end of the then current Interest Periods with respect thereto or sooner, if required by such law or assertion and (b) all Loans thereafter made by such Lender and -54- outstanding prior to the Reinstatement Date shall be made as Base Rate Loans, with interest thereon being payable on the same date that interest is payable with respect to the corresponding Borrowing of LIBO Rate Loans made by Lenders not so affected. SECTION 4.2. Deposits Unavailable. If the Administrative Agent shall have determined that (a) Dollar deposits in the relevant amount and for the relevant Interest Period are not available to the Administrative Agent in its relevant market, or (b) by reason of circumstances affecting the Administrative Agent's relevant market, adequate means do not exist for ascertaining the interest rate applicable hereunder to LIBO Rate Loans, then, upon notice from the Administrative Agent to the Borrower and the Lenders, the obligations of all Lenders under Sections 2.3 and 2.4 to make or continue any Loans as, or to convert any Loans into, LIBO Rate Loans shall forthwith be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 4.3. Increased LIBO Rate Loan Costs, etc. The Borrower agrees to reimburse each Lender for any increase in the cost to such Lender of, or any reduction in the amount of any sum receivable by such Lender in respect of, making, continuing or maintaining (or of its obligation to make, continue or maintain) any Loans as, or of converting (or of its obligation to convert) any Loans into, LIBO Rate Loans. Such Lender shall promptly notify the Administrative Agent and the Borrower in writing of the occurrence of any such event, such notice to state, in reasonable detail, the reasons therefor and the additional amount required fully to compensate such Lender for such increased cost or reduced amount. Such additional amounts shall be payable by the Borrower directly to such Lender within five days of its receipt of such notice, and such notice shall, in the absence of manifest error, be conclusive and binding on the Borrower. SECTION 4.4. Funding Losses. In the event any Lender shall incur any loss or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to make, continue or maintain any portion of the principal amount of any Loan as, or to convert any portion of the principal amount of any Loan into, a LIBO Rate Loan) as a result of (i) any conversion or repayment or prepayment of the principal amount of any LIBO Rate Loans on a date other than the scheduled last day of the Interest Period applicable thereto, whether pursuant to Section 3.1 or otherwise, (ii) any Loans not being made as LIBO Rate Loans in accordance with the Borrowing Request therefor, or (iii) any Loans not being continued as, or converted into, LIBO Rate Loans in accordance with the Continuation/Conversion Notice therefor, then, upon the written notice of such Lender to the Borrower (with a copy to the Administrative Agent), the Borrower shall, within five days of its receipt thereof, pay directly to such Lender such amount as will (in the reasonable determination of such Lender) reimburse such Lender for such loss or expense. Such written notice (which shall include calculations in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. SECTION 4.5. Increased Capital Costs. If any change in, or the introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, -55- guideline, decision or request (whether or not having the force of law) of any court, central bank, regulator or other governmental authority affects or would affect the amount of capital required or expected to be maintained by any Lender, the Issuer or any Person controlling such Lender or the Issuer, and such Lender or the Issuer determines (in its sole and reasonable discretion) that the rate of return on its or such controlling Person's capital as a consequence of its Commitments, participation in, or the issuance or extension of, any Letter of Credit or any Loan made by such Lender or the Issuer is reduced to a level below that which such Lender, the Issuer or such controlling Person could have achieved but for the occurrence of any such circumstance, then, in any such case upon notice from time to time by such Lender or the Issuer to the Borrower, the Borrower shall immediately pay directly to such Lender or the Issuer additional amounts sufficient to compensate such Lender, the Issuer or such controlling Person for such reduction in rate of return. A statement of such Lender or the Issuer as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. In determining such amount, such Lender or the Issuer may use any method of averaging and attribution that it (in its sole and absolute discretion) shall deem applicable. SECTION 4.6. Taxes. (a) All payments by the Borrower of principal of, and interest on, the Loans and all other amounts payable hereunder (including Reimbursement Obligations, fees and expenses) shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding franchise taxes and other taxes imposed on or measured by any Agent's, the Documentation Agent's, the Issuer's or any Lender's net income or receipts (such non-excluded items being called "Taxes"). In the event that any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower will (i) pay directly to the relevant taxing authority the full amount required to be so withheld or deducted, (ii) promptly forward to the Administrative Agent an official receipt or other documentation satisfactory to the Administrative Agent evidencing such payment to such authority, and (iii) pay to the Administrative Agent for the account of such Agent, the Documentation Agent, the Issuer or such Lender such additional amount or amounts as is necessary to ensure that the net amount actually received by such Agent, the Documentation Agent, the Issuer or such Lender will equal the full amount such Agent, the Documentation Agent, the Issuer or such Lender would have received had no such withholding or deduction been required. Moreover, if any Taxes are directly asserted against any Agent, the Documentation Agent, the Issuer or any Lender with respect to any payment received by such Agent, the Documentation Agent, the Issuer or such Lender hereunder, such Agent, the Documentation Agent, the Issuer or such Lender may pay such Taxes and the Borrower will promptly pay to such Person such additional amounts (including any penalties, interest or expenses) as is necessary in order that the net amount received by such Person after the payment of such taxes (including any Taxes on such additional amount) shall equal the amount such Person would have received had such Taxes not been asserted. -56- If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent, for the account of the respective Lenders, the required receipts or other required documentary evidence, the Borrower shall indemnify the Lenders for any incremental Taxes, interest or penalties that may become payable by any Lender as a result of any such failure. For purposes of this Section 4.6, a distribution hereunder by the Administrative Agent or any Lender to or for the account of any Lender shall be deemed a payment by the Borrower. (b) Upon the request of the Borrower or the Administrative Agent, each Lender that is organized under the laws of a jurisdiction other than the United States shall, on or prior to the due date of any payments under this Agreement to such Lender, provide two or more (as the Borrower or the Administrative Agent may reasonably request) United States Internal Revenue Service Forms 4224 or Forms 1001 or, solely if such Lender is claiming exemption from United States withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", United States Internal Revenue Service Forms W-8 and a certificate signed by a duly authorized officer of such Lender representing that such Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code, or such other forms or documents (or successor forms or documents), appropriately completed, as may be applicable to establish the extent, if any, to which a payment to such Lender are exempt from withholding or deduction of Taxes. SECTION 4.7. Payments, Computations, etc. Unless otherwise expressly provided, all payments by or on behalf of the Borrower pursuant to this Agreement, the Notes or any other Loan Document shall be made by the Borrower to the Administrative Agent for the pro rata account of the Lenders, the Documentation Agent, the Agents or the Arranger, as applicable, entitled to receive such payment. All such payments required to be made to the Administrative Agent shall be made, without setoff, deduction or counterclaim, not later than 11:00 a.m., New York City time, on the date due, in same day or immediately available funds, to such account as the Administrative Agent shall specify from time to time by notice to the Borrower. Funds received after that time shall be deemed to have been received by the Administrative Agent on the next succeeding Business Day. The Administrative Agent shall promptly remit in same day funds to each Lender, the Documentation Agent, each Agent or the Arranger, as the case may be, its share, if any, of such payments received by the Administrative Agent for the account of such Lender, the Documentation Agent, such Agent or the Arranger, as the case may be. All interest and fees shall be computed on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such interest or fee is payable over a year comprised of 360 days (or, in the case of interest on a Base Rate Loan that is not calculated at the Federal Funds Rate, 365 days or, if appropriate, 366 days). Whenever any payment to be made shall otherwise be due on a day which is not a Business Day, such payment shall (except as otherwise required by clause (a) of the definition of the term "Interest Period") be made on the next succeeding Business Day and such extension of time shall be included in computing interest and fees, if any, in connection with such payment. -57- SECTION 4.8. Sharing of Payments. If any Lender shall obtain any payment or other recovery (whether voluntary, involuntary, by application of setoff or otherwise) on account of any Loan or Reimbursement Obligations (other than pursuant to the terms of Sections 4.3, 4.4 and 4.5) in excess of its pro rata share of payments then or therewith obtained by all Lenders entitled thereto, such Lender shall purchase from the other Lenders such participations in the Credit Extensions made by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided, however, that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and each Lender which has sold a participation to the purchasing Lender shall repay to the purchasing Lender the purchase price to the ratable extent of such recovery together with an amount equal to such selling Lender's ratable share (according to the proportion of (i) the amount of such selling Lender's required repayment to the purchasing Lender in respect of such recovery, to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment (including pursuant to Section 4.9) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section to share in the benefits of any recovery on such secured claim. SECTION 4.9. Setoff. Each Lender shall, upon the occurrence of any Event of Default described in clauses (a) through (d) of Section 8.1.9 or, with the consent of the Required Lenders, upon the occurrence of any other Event of Default, to the fullest extent permitted by law, have the right to appropriate and apply to the payment of the Obligations then owing to it (whether or not then due), and (as security for such Obligations) the Borrower hereby grants to each Lender a continuing security interest in, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter maintained with or otherwise held by such Lender; provided, however, that any such appropriation and application shall be subject to the provisions of Section 4.8. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such setoff and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Lender may have. SECTION 4.10. Replacement of Lenders. Each Lender hereby severally agrees as set forth in this Section. If any Lender (an "Affected Lender") makes demand upon the Borrower for (or if the Borrower is otherwise required to pay) amounts pursuant to Section 4.3, 4.5 or 4.6 and the payment of such additional amounts are, and are likely to continue to be, more onerous in the reasonable judgment of the Borrower than with respect to the other Lenders, the Borrower may, within 30 days of receipt by the Borrower of such demand or notice (or the occurrence of -58- such other event causing the Borrower to be required to pay such compensation), as the case may be, give notice (a "Replacement Notice") in writing to the Agents and such Affected Lender of its intention to replace such Affected Lender with a financial institution (a "Replacement Lender") designated in such Replacement Notice. If the Agents shall, in the exercise of their reasonable discretion and within 30 days of their receipt of such Replacement Notice, notify the Borrower and such Affected Lender in writing that the designated financial institution is satisfactory to the Agents (such consent not being required where the Replacement Lender is already a Lender), then such Affected Lender shall, subject to the payment of any amounts due pursuant to Section 4.4, assign, in accordance with Section 11.11.1, all of its Commitments, Loans, Notes and other rights and obligations under this Agreement and all other Loan Documents (including Reimbursement Obligations, if applicable) to such designated financial institution; provided, however, that (i) such assignment shall be without recourse, representation or warranty and shall be on terms and conditions reasonably satisfactory to such Affected Lender and such designated financial institution, (ii) the purchase price paid by such designated financial institution shall be in the amount of such Affected Lender's Loans and its Percentage of outstanding Reimbursement Obligations, together with all accrued and unpaid interest and fees in respect thereof, plus all other amounts (including the amounts demanded and unreimbursed under Sections 4.3, 4.5 and 4.6), owing to such Affected Lender hereunder and (iii) the Borrower shall pay to the Affected Lender and the Agents all reasonable out-of-pocket expenses incurred by the Affected Lender and the Agents in connection with such assignment and assumption (including the processing fees described in Section 11.11.1). Upon the effective date of an assignment described above, the Replacement Lender shall become a "Lender" for all purposes under this Agreement and the other Loan Documents. ARTICLE V CONDITIONS TO CREDIT EXTENSIONS SECTION 5.1. Initial Credit Extension. The obligations of the Lenders and, if applicable, the Issuer to fund the initial Credit Extension shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 5.1. SECTION 5.1.1. Corporate and Partnership Documents, etc. The Agents shall have received, with a copy for each Lender, (a) from each Obligor that is a corporation a certificate, dated the Closing Date, of its Secretary or Assistant Secretary as to (i) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of each Loan Document to be executed by it, (ii) the incumbency and signatures of those of its officers authorized to act with respect to each Loan Document executed by it and (iii) the full force and validity of its Organic Documents and true and complete copies thereof, upon which certificate each Agent, the Documentation Agent, the Issuer and each Lender may -59- conclusively rely until it shall have received a further certificate of the Secretary or Assistant Secretary of such Obligor canceling or amending such prior certificate; and (b) from each Obligor that is a partnership, a certificate, dated the Closing Date, of each of its general partners as to (i) all partnership action then in full force and effect authorizing the execution, delivery and performance of each Loan Document to be executed by it, (ii) the incumbency and signatures of those officers of its general partners authorized to act with respect to each Loan Document executed by it and (iii) the full force and validity of its Organic Documents and true and complete copies thereof, upon which certificate each Agent, the Documentation Agent, the Issuer and each Lender may conclusively rely until it shall have received a further certificate canceling or amending such prior certificate. SECTION 5.1.2. Consummation of Transaction. (a) The Transaction shall have been consummated for an aggregate amount not to exceed $320,550,000, including the payment of accrued interest, prepayment premiums and reasonable fees and expenses associated therewith in an amount not to exceed $35,000,000. (b) The Merger shall have been consummated on terms and conditions (including in respect of all documentation related thereto) reasonably satisfactory to the Syndication Agent. (c) Holdings shall have received gross cash proceeds of at least $80,000,000 from the issuance of the Senior Subordinated Notes, on terms and conditions (including in respect of all documentation related thereto (including the Senior Subordinated Notes Guarantee)) reasonably satisfactory to the Syndication Agent. (d) Holdings shall have received gross cash proceeds of at least $110,550,000 from the IPO, on terms and conditions (including in respect of all documentation related thereto) reasonably satisfactory to the Syndication Agent. (e) Holdings shall have deposited at least $106,427,535.00 (which amount is sufficient to redeem all of its outstanding Holdings Subordinated Notes in full in cash) in an irrevocable trust for the purpose of defeasing all such Holdings Subordinated Notes and shall have concurrently issued redemption notices pursuant to which Holdings will redeem all such Holdings Subordinated Notes no later than March 16, 1998, at a redemption price of no more than 107.5% of the Accreted Value thereof, in each case on terms and conditions (including in respect of all documentation related thereto (a copy of such notice, together with such documentation, collectively, the "Holdings Defeasement/Redemption Documents") reasonably satisfactory to the Syndication Agent. (f) The Borrower shall have deposited at least $99,017,468.05 (which amount is sufficient to redeem all of its outstanding Senior Notes in full in cash) in an irrevocable trust for the purpose of defeasing all such Senior Notes and shall have concurrently issued redemption notices pursuant to which the Borrower will redeem all such Senior Notes no later than March 16, 1998, -60- at a redemption price of no more than 104.5% of the principal amount thereof, in each case on terms and conditions (including in respect of all documentation related thereto) (including in respect of all documentation related thereto (a copy of such notice, together with such documentation, collectively, the "Borrower Defeasement/Redemption Documents") reasonably satisfactory to the Syndication Agent. SECTION 5.1.3. Closing Date Certificates. The Agents shall have received, with counterparts for each Lender, the Closing Date Certificates, substantially in the forms of Exhibits D-1 and D-2 hereto, dated the Closing Date and duly executed and delivered by the chief executive, financial or accounting (or equivalent) Authorized Officers of Holdings and the Borrower, in which certificates Holdings and the Borrower, respectively, shall agree and acknowledge that the statements made therein shall be deemed to be true and correct representations and warranties of Holdings and the Borrower made as of such date under this Agreement, and, at the time such certificates are delivered, such statements shall in fact be true and correct. SECTION 5.1.4. Delivery of Notes. The Agents shall have received, for the account of each Lender that shall have requested a Note not less than two Business Days prior to the Closing Date, a Note of each applicable Tranche duly executed and delivered by an Authorized Officer of the Borrower. SECTION 5.1.5. Pledge Agreement. The Agents shall have received executed counterparts of the Holdings Pledge Agreement, dated as of the Closing Date, duly executed and delivered by an Authorized Officer of Holdings, together with the certificates evidencing all of the issued and outstanding shares of Capital Stock (or similar equity interests) of each direct Subsidiary of Holdings (in which a security interest is not concurrently granted under the Partnership Security Agreement) which shall be pledged pursuant to the Holdings Pledge Agreement, which certificates shall in each case be accompanied by undated stock powers duly executed in blank. SECTION 5.1.6. Security Agreements. The Agents shall have received executed counterparts of the Partnership Security Agreement and the Borrower Security Agreement, each dated as of the Closing Date and duly executed and delivered by an Authorized Officer of each of Holdings and DRI I and the Borrower, together with (a) executed Uniform Commercial Code financing statements (Form UCC-1) naming Holdings, DRI I or the Borrower as the debtor and the Administrative Agent as the secured party, or other similar instruments or documents, to be filed under the Uniform Commercial Code of all jurisdictions as may be necessary or, in the opinion of the Administrative Agent, desirable to perfect the security interest of the Administrative Agent pursuant to the Security Agreements; and (b) certified copies of Uniform Commercial Code Requests for Information or Copies (Form UCC-11), or a similar search report certified by a party acceptable to the -61- Agents, dated a date reasonably near to the Closing Date, listing all effective financing statements which name Holdings, DRI I or the Borrower (under its present name and any previous names) as the debtor and which are filed in the jurisdictions in which filings were made pursuant to clause (a) above, together with copies of such financing statements. SECTION 5.1.7. Mortgage. The Agents shall have received counterparts of each Mortgage relating to each property listed on Item 6.9 ("Real Property") of the Disclosure Schedule and designated as being the property to which a Mortgage relates, each dated the date hereof, duly executed by the Borrower or the applicable Parent Guarantor, together with (a) evidence of the completion of all recordings and filings of such Mortgage as may be necessary or, in the reasonable opinion of the Agents, desirable effectively to create a valid, perfected first priority Lien against the properties purported to be covered thereby; (b) mortgagee's title insurance policies in favor of the Administrative Agent for the benefit of the Secured Parties in amounts and in form and substance and issued by insurers, reasonably satisfactory to the Agents, with respect to the property purported to be covered by such Mortgage, insuring that title to such property is marketable and that the interests created by the Mortgage constitute valid first Liens thereon free and clear of all defects and encumbrances other than as approved by the Agents, and such policies shall also include a revolving credit endorsement and such other endorsements as the Agents shall request and shall be accompanied by evidence of the payment in full of all premiums thereon; and (c) such other approvals or documents as the Agents may reasonably request. SECTION 5.1.8. Financial Information, etc. The Agents shall have received, with counterparts for each Lender, (a) the (i) audited consolidated financial statements of Holdings and its Subsidiaries and Daboco and its Subsidiaries for the Fiscal Years ended on December 31, 1994, December 30, 1995 and December 28, 1996, (ii) unaudited consolidated financial statements of Holdings and its Subsidiaries and Daboco and its Subsidiaries for the Fiscal Quarters ended on March 29, 1997, June 28, 1997 and September 27, 1997 and (iii) unaudited consolidated financial statements of Holdings and its Subsidiaries and Borrower and its Subsidiaries for the fiscal months ended on October 25, 1997 and November 29, 1997 (collectively, the "Base Financial Statements"); and (b) pro forma consolidated balance sheets of Holdings and its Subsidiaries and the Borrower and its Subsidiaries, as at November 29, 1997 (the "Pro Forma Balance Sheets"), certified by the chief financial or accounting Authorized Officers of Holdings and the Borrower, respectively, giving effect to the consummation of the Transaction and -62- reflecting the proposed legal and capital structures of Holdings and its Subsidiaries and the Borrower and its Subsidiaries, in each case, as at the Closing Date, which legal and capital structure shall be satisfactory in all respects to the Syndication Agent. SECTION 5.1.9. Solvency, etc. The Agents shall have received, with copies for each Lender, Solvency Certificates, executed and delivered by the chief financial or accounting Authorized Officer of each of Holdings and the Borrower and dated the Closing Date, substantially in the form of Exhibit L-1 and L-2 hereto. SECTION 5.1.10. Payment of Outstanding Indebtedness, etc. All Indebtedness identified in Item 7.2.2(b) ("Indebtedness to be Paid") of the Disclosure Schedule, together with all interest, prepayment premiums and other amounts due and payable with respect thereto, shall have been paid or defeased in full (including, to the extent necessary, from proceeds of the initial Credit Extension); and all Liens securing payment of any such Indebtedness have been released or, in each Agent's discretion, assigned, and the Administrative Agent shall have received all Uniform Commercial Code Form UCC-3 termination statements or other instruments or documents as may be suitable or appropriate in connection therewith in the determination of the Agents. SECTION 5.1.11. Litigation. There shall exist no pending or threatened material litigation, proceedings or investigations which (x) contests the consummation of the Transaction or the legality or validity of the Credit Agreement, any other Loan Document or any Material Document or (y) could reasonably be expected to have a Material Adverse Effect. SECTION 5.1.12. Material Adverse Change. Except as set forth in Item 6.6 ("Material Adverse Change") of the Disclosure Schedule, there shall have occurred no material adverse change in the business, assets, debt service capacity, tax position, environmental liability, financial condition, operations, properties or prospects of the Borrower and its Subsidiaries, taken as a whole, or Holdings and its Subsidiaries, taken as a whole, in each case since December 28, 1996. SECTION 5.1.13. Opinions of Counsel. (a) The Agents shall have received opinions, dated the Closing Date and addressed to the Agents, the Documentation Agent and all of the Lenders from Latham & Watkins, special New York counsel to each of the Obligors, in substantially the form of Exhibit K hereto. (b) The Agents shall have received such reliance letters as they may reasonably request with respect to opinions delivered in connection with the Transaction, in each case dated the Closing Date and addressed to the Agents and all of the Lenders. SECTION 5.1.14. Insurance. The Agents shall have received satisfactory evidence of the existence of insurance in compliance with Section 7.1.4 (including all endorsements included therein), and the Administrative Agent shall be named additional insured or loss payee, on behalf of the Lenders, pursuant to documentation reasonably satisfactory to the Syndication Agent. -63- SECTION 5.1.15. Perfection Certificate. The Agents shall have received Perfection Certificates, dated as of the Closing Date, duly executed and delivered by an Authorized Officer of each of Holdings, DRI I, the Borrower and each other Obligor that is a party to a Security Agreement. SECTION 5.1.16. Approvals. All necessary governmental, shareholders' and third-party approvals in connection with the Transaction, the financing contemplated hereby, the continued operations of any Parent Guarantor, the Borrower and each of their respective Subsidiaries and the execution, delivery and performance of this Agreement and the other Loan Documents shall have been duly obtained and all applicable waiting periods shall have expired without, in all such cases, any action being taken or threatened by any competent authority that would restrain, prevent or otherwise imposes adverse conditions on the Transaction, the financing contemplated hereby or the continued operations of any Parent Guarantor, the Borrower or any of their respective Subsidiaries. SECTION 5.1.17. Closing Fees, Expenses, etc. Each Agent and the Arranger shall have received, each for its own respective account, all fees, costs and expenses due and payable to such Agent or the Arranger, as the case may be, pursuant to Sections 3.3 and 11.3, to the extent then invoiced. SECTION 5.1.18. Satisfactory Legal Form. All documents executed or submitted pursuant hereto by or on behalf of the Borrower or any of its Subsidiaries or any other Obligors shall be reasonably satisfactory in form and substance to the Agents and their counsel; the Agents and their counsel shall have received all information, approvals, opinions, documents or instruments as the Agents or their counsel may reasonably request. SECTION 5.2. All Credit Extensions. The obligation of each Lender and, if applicable, the Issuer, to make any Credit Extension (including its initial Credit Extension) shall be subject to the satisfaction of each of the conditions precedent set forth in this Section 5.2. SECTION 5.2.1. Compliance with Warranties, No Default, etc. Both before and after giving effect to any Credit Extension the following statements shall be true and correct: (a) the representations and warranties set forth in Article VI (excluding, however, those contained in Section 6.7) and each other Loan Document shall, in each case, be true and correct with the same effect as if then made (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); (b) except as disclosed by the Borrower or any Parent Guarantor to the Agents, the Documentation Agent and the Lenders pursuant to Section 6.7 -64- (i) no labor controversy, litigation, arbitration or governmental investigation or proceeding (including any relating to any Pharmaceutical Law) shall be pending or, to the knowledge of the Borrower or any Parent Guarantor, threatened against the Borrower, any Parent Guarantor or any of their respective Subsidiaries which could reasonably be expected to have a Material Adverse Effect or which purports to affect the legality, validity or enforceability of this Agreement, the Notes or any other Loan Document; and (ii) no development shall have occurred in any labor controversy, litigation, arbitration or governmental investigation or proceeding (including any relating to any Pharmaceutical Law) disclosed pursuant to Section 6.7 which could reasonably be expected to have a Material Adverse Effect; and (c) no Default shall have then occurred and be continuing, and neither the Borrower, any Parent Guarantor nor any of their respective Subsidiaries are in material violation of any law or governmental regulation or court order or decree (including any Pharmaceutical Law). SECTION 5.2.2. Credit Extension Request. The Agents shall have received a Borrowing Request if Loans are being requested, or an Issuance Request if a Letter of Credit is being requested or extended. Each of the delivery of a Borrowing Request or Issuance Request and the acceptance by the Borrower of proceeds of any Credit Extension shall constitute a representation and warranty by the Borrower that on the date of such Credit Extension (both immediately before and after giving effect thereto and the application of the proceeds thereof) the statements made in Section 5.2.1 are true and correct. ARTICLE VI REPRESENTATIONS AND WARRANTIES In order to induce the Lenders, the Documentation Agent, the Issuer and the Agents to enter into this Agreement and to make Credit Extensions hereunder, each of the Borrower and each Parent Guarantor represents and warrants unto the Agents, the Documentation Agent, the Issuer and each Lender as set forth in this Article VI. SECTION 6.1. Organization, etc. Each of the Borrower, each Parent Guarantor and each of their respective Subsidiaries (a) is a corporation or partnership validly organized and existing and in good standing to the extent required under the laws of the jurisdiction of its incorporation or formation, is duly qualified to do business and is in good standing as a foreign corporation or partnership to the extent required under the laws of each jurisdiction where the nature of its business requires such qualification, and (b) has full power and authority and holds all requisite governmental licenses, permits and other approvals to (i) enter into and perform its Obligations in connection with the Transaction and under this Agreement, the Notes and each -65- other Loan Document to which it is a party and (ii) own and hold under lease its property and to conduct its business substantially as currently conducted by it. SECTION 6.2. Due Authorization, Non-Contravention, etc. The execution, delivery and performance by each of the Borrower, each Parent Guarantor and each of their respective Subsidiaries of this Agreement, the Notes and each other Loan Document executed or to be executed by it, and the Borrower's and, where applicable, each such other Obligor's participation in the consummation of the Transaction, are within the Borrower's and each such Obligor's corporate or partnership powers, have been duly authorized by all necessary corporate or partnership action, and do not (i) contravene the Borrower's or any such Obligor's Organic Documents, (ii) contravene any contractual restriction, law or governmental regulation or court decree or order binding on or affecting the Borrower or any such Obligor, or (iii) result in, or require the creation or imposition of, any Lien on any of the Borrower's or any other Obligor's properties, except pursuant to the terms of a Loan Document. SECTION 6.3. Government Approval, Regulation, etc. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person, is required for the due execution, delivery or performance by any of the Borrower, any Parent Guarantor or any of their respective Subsidiaries of this Agreement, the Notes or any other Loan Document to which it is a party, or for the Borrower's and each such other Obligor's participation in the consummation of the Transaction, except as have been duly obtained or made and are in full force and effect. None of the Borrower, any Parent Guarantor or any of their respective Subsidiaries is an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 6.4. Validity, etc. This Agreement constitutes, and the Notes and each other Loan Document executed, or to be executed, by any of the Borrower, any Parent Guarantor or any of their respective Subsidiaries, as the case may be, constitutes, or will on the due execution and delivery thereof constitute, the legal, valid and binding obligations of the Borrower and such other Obligor enforceable in accordance with their respective terms. SECTION 6.5. Financial Information. Holdings has delivered to the Agents, the Documentation Agent and each Lender copies of each of (a) the Base Financial Statements, and (b) the Pro Forma Balance Sheets. Each of the financial statements described in clause (a) above has been prepared in accordance with GAAP consistently applied and presents fairly the consolidated financial condition of the corporations and partnerships covered thereby as at the date thereof and the results of their operations for the periods then ended, and each of the financial statements described in clause (b) above has been prepared on a basis substantially consistent with the basis used to prepare the financial statements referred to in clause (a), and includes appropriate pro forma adjustments to give pro forma effect to the Transaction. -66- SECTION 6.6. No Material Adverse Change. Except as set forth in Item 6.6 ("Material Adverse Change") of the Disclosure Schedule, since December 28, 1996, there has been no material adverse change in the business, assets, debt service capacity, tax position, environmental liability, financial condition, operations, properties or prospects of the Borrower and its Subsidiaries, taken as a whole, or Holdings and its Subsidiaries, taken as a whole. SECTION 6.7. Litigation, Labor Controversies, etc. There is no pending or, to the knowledge of the Borrower or any Parent Guarantor, threatened litigation, action, proceeding, labor controversy, arbitration or governmental investigation or proceeding (including any relating to any Pharmaceutical Law) affecting the Borrower, any Parent Guarantor or any of their respective Subsidiaries, or any of their respective properties, businesses, assets or revenues, which might have a Material Adverse Effect or which purports to affect the legality, validity or enforceability of this Agreement, the Notes or any other Loan Document, except as disclosed in Item 6.7 ("Litigation") of the Disclosure Schedule. SECTION 6.8. Subsidiaries. Holdings has no direct Subsidiaries other than DRI I and the Borrower (of which it is a general partner and directly holds a 99% general partnership interest). DRI I has no direct Subsidiaries other than the Borrower (of which it is a general partner and holds a 1% general partnership interest). The Borrower has no Subsidiaries, except those Subsidiaries which are permitted to have been acquired in accordance with Section 7.2.5 or 7.2.8. SECTION 6.9. Ownership of Properties. Each of the Borrower, each Parent Guarantor and each of their respective Subsidiaries owns (except where the failure to own such property would not reasonably be expected to have a Material Adverse Effect) good and marketable title to all of its properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges or claims (including infringement claims with respect to patents, trademarks, copyrights and the like), except as permitted pursuant to Section 7.2.3. All Real Property owned or leased by any of the Borrower, each Parent Guarantor and each of their respective Subsidiaries and the nature of the interest therein is described in Item 6.9 ("Real Property") of the Disclosure Schedule. SECTION 6.10. Taxes. Each of the Borrower, each Parent Guarantor and each of their respective Subsidiaries has filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 6.11. Pension and Welfare Plans. During the twelve-consecutive-month period prior to the date of the execution and delivery of this Agreement and prior to the Closing Date, no steps have been taken to terminate any Pension Plan (other than pursuant to a "standard termination" in accordance with section 4041(B) of ERISA), and no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of -67- ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which could reasonably be expected to result in the incurrence by Holdings or any member of the Controlled Group of any material liability, fine or penalty. Except as disclosed in Item 6.11 ("Employee Benefit Plans") of the Disclosure Schedule, neither Holdings nor any member of the Controlled Group has any contingent liability with respect to any post-retirement benefit under a Welfare Plan, other than liability for continuation coverage described in Part 6 of Title I of ERISA. SECTION 6.12. Environmental Warranties. Except as set forth in Item 6.12 ("Environmental Matters") of the Disclosure Schedule: (a) all facilities and property (including underlying groundwater) owned or leased by the Borrower, any Parent Guarantor or any of their respective Subsidiaries have been, and continue to be, owned or leased by the Borrower, such Parent Guarantor or such Subsidiary in material compliance with all Environmental Laws; (b) there have been no past, and there are no pending or, to the best of each of the Borrower's and each Parent Guarantor's knowledge after due inquiry, threatened (i) claims, complaints, notices or requests for information received by the Borrower, any Parent Guarantor or any of their respective Subsidiaries with respect to any alleged violation of any Environmental Law, or (ii) complaints, notices or inquiries to the Borrower, any Parent Guarantor or any of their respective Subsidiaries regarding potential liability under any Environmental Law; (c) there have been no Releases of Hazardous Materials at, on or under any property now or previously owned or leased by the Borrower, any Parent Guarantor or any of their respective Subsidiaries that, singly or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect; (d) the Borrower, each Parent Guarantor and each of their respective Subsidiaries have been issued and are in material compliance with all permits, certificates, approvals, licenses and other authorizations relating to environmental matters and necessary or desirable for their businesses; (e) no property now or previously owned or leased by the Borrower, any Parent Guarantor or any of their respective Subsidiaries is listed or, to the best of each of the Borrower's and each Parent Guarantor's knowledge after due inquiry, proposed for listing (with respect to owned property only) on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list of sites requiring investigation or clean-up; -68- (f) there are no underground storage tanks, active or abandoned, including petroleum storage tanks, on or under any property now or previously owned or leased by the Borrower, any Parent Guarantor or any of their respective Subsidiaries that, singly or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect; (g) neither the Borrower, any Parent Guarantor nor any of their respective Subsidiaries has directly transported or directly arranged for the transportation of any Hazardous Material to any location which is listed or proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list or which is the subject of federal, state or local enforcement actions or other investigations which may lead to claims against the Borrower, such Parent Guarantor or such Subsidiary thereof for any remedial work, damage to natural resources or personal injury, including claims under CERCLA that, singly or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect; (h) there are no polychlorinated biphenyls or friable asbestos present at any property now or previously owned or leased by the Borrower, any Parent Guarantor or any of their respective Subsidiaries that, singly or in the aggregate, have, or could reasonably be expected to have, a Material Adverse Effect; and (i) no conditions exist at, on or under any property now or previously owned or leased by the Borrower, any Parent Guarantor or any of their respective Subsidiaries which, with the passage of time, or the giving of notice or both, would give rise to liability under any Environmental Law that could reasonably be expected to have a Material Adverse Effect. SECTION 6.13. Regulations G, U and X. Neither the Borrower, any Parent Guarantor nor any of their respective Subsidiaries is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock, and no proceeds of any Credit Extension will be used to acquire any "margin stock". Terms for which meanings are provided in F.R.S. Board Regulation G, U or X or any regulations substituted therefor, as from time to time in effect, are used in this Section with such meanings. SECTION 6.14. Accuracy of Information. All material factual information concerning the financial condition, operations or prospects of the Borrower, each Parent Guarantor and their respective Subsidiaries heretofore or contemporaneously furnished by or on behalf of the Borrower, any Parent Guarantor or any of their respective Subsidiaries in writing to the Agents, the Documentation Agent, the Arranger, the Issuer or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby or with respect to the Transaction is, and all other such factual information hereafter furnished by or on behalf of the Borrower, any Parent Guarantor or any of their respective Subsidiaries to the Agents, the Documentation Agent, the Arranger, the Issuer or any Lender will be, taken as a whole, true and accurate in all material respects on the date as of which such information is dated or certified and -69- such information is not, or shall not be, taken as a whole, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading at such time in light of the circumstances under which such statements were made. Any term or provision of this Section to the contrary notwithstanding, insofar as any of the factual information described above includes assumptions, estimates, projections or opinions, no representation or warranty is made herein with respect thereto; provided, however, that to the extent any such assumptions, estimates, projections or opinions are based on factual matters, the Borrower and each Parent Guarantor have reviewed such factual matters and nothing has come to the attention of any such Person in the context of such review which would lead it to believe that such factual matters were not or are not true and correct in all material respects or that such factual matters omit to state any material fact necessary to make such assumptions, estimates, projections or opinions not misleading in any material respect. SECTION 6.15. Solvency. The Transaction (including, among other things, the incurrence of the initial Credit Extension hereunder and the execution and delivery by the Guarantors of the Guarantees) will not involve or result in any fraudulent transfer or fraudulent conveyance under the provisions of Section 548 of the Bankruptcy Code (11 U.S.C. ss.101 et seq., as from time to time hereafter amended, and any successor or similar statute) or any applicable state law respecting fraudulent transfers or fraudulent conveyances. On the Closing Date, after giving effect to the Transaction, Holdings and its Subsidiaries and the Borrower and its Subsidiaries, in each case taken as a whole, are Solvent. SECTION 6.16. Pharmaceutical Laws. (a) The Borrower, each Parent Guarantor and each of their respective Subsidiaries has obtained all permits, licenses and other authorizations which are required with respect to the ownership and operations of its business under any Pharmaceutical Law, except where the failure to obtain such permits, licenses or other authorizations would not reasonably be expected to have a Material Adverse Effect. (b) The Borrower, each Parent Guarantor and each of their respective Subsidiaries is in compliance with all terms and conditions of all such permits, licenses, orders and authorizations, and is also in compliance with all Pharmaceutical Laws, including all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Pharmaceutical Laws, except where the failure to comply with such terms, conditions or laws would not reasonably be expected to have a Material Adverse Effect. (c) Other than as set forth in Item 6.16(c) ("Pharmaceutical Liabilities") of the Disclosure Schedule, none of the Borrower, any Parent Guarantor nor any of their respective Subsidiaries has any liabilities, any claims against it and presently any outstanding notices imposed or based upon any provision of any Pharmaceutical Law, except for such liabilities, claims, citations or notices which individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect. SECTION 6.17. Seniority of the Obligations and Senior Debt under the Senior Subordinated Indenture. (a) The Senior Subordinated Notes have been issued and sold to the -70- underwriters thereof on the Closing Date in accordance with and pursuant to the Senior Subordinated Note Indenture and the other Senior Subordinated Note Documents and in compliance with all laws, including the Securities Act of 1933, as amended and all other applicable federal and state securities laws. The issuance of the Senior Subordinated Notes and the execution of the Senior Subordinated Note Indenture and the other Senior Subordinated Note Documents have been duly authorized by all necessary corporate action on the part of Holdings, the Borrower and DRI I and will not require any consent or approval of any governmental agency or authority that has not been obtained prior to the Closing Date. The issuance of the Senior Subordinated Notes and the execution of the Senior Subordinated Note Indenture and the other Senior Subordinated Note Documents do not conflict with (i) any material provision of any material law, (ii) the Organic Documents of Holdings, the Borrower or DRI I, (iii) any material agreement binding upon Holdings, the Borrower or DRI I, or (iv) any material court or administrative order or decree applicable to Holdings, the Borrower or DRI I, and do not and will not require, or result in, the creation or imposition of any Lien on any asset of Holdings, the Borrower or DRI I. All representations and warranties of Holdings, the Borrower or DRI I contained in the Senior Subordinated Note Indenture and the other Senior Subordinated Note Documents are true and correct in all material respects as of the Closing Date. (b) Each Senior Subordinated Note Document (including the Senior Subordinated Notes and the Senior Subordinated Notes Guarantee) constitutes the legal, valid and binding obligation of each of Holdings and the Borrower, as the case may be, enforceable against each of Holdings and the Borrower, as the case may be, in accordance with its terms. The subordination provisions of each such Senior Subordinated Note Document will be enforceable against the holders of the Senior Subordinated Notes by the holder of any "Senior Debt" (as defined in the Senior Subordinated Note Indenture). All Obligations, including those to pay principal of and interest (including post-petition interest) on the Loans and Reimbursement Obligations, and fees and expenses in connection therewith, constitute "Senior Debt" (as defined in the Senior Subordinated Note Indenture) and all such Obligations are entitled to the benefits of the subordination created by such Senior Subordinated Note Document. Each of Holdings and the Borrower acknowledges that the Agents, the Documentation Agent, the Issuer and each Lender is entering into this Agreement, and is extending its Commitments, in reliance upon the subordination provisions of such Senior Subordinated Note Documents and this Section. ARTICLE VII COVENANTS SECTION 7.1. Affirmative Covenants. Each of the Borrower and each Parent Guarantor agrees with the Agents, the Documentation Agent, the Issuer and each Lender that, until all Commitments have terminated, all Letters of Credit have terminated or expired and all -71- Obligations have been paid and performed in full, each of the Borrower and each Parent Guarantor will perform, or cause to be performed by their respective Subsidiaries, the obligations set forth in this Section 7.1. SECTION 7.1.1. Financial Information, Reports, Notices, etc. Holdings will furnish, or will cause to be furnished, to each Lender, the Documentation Agent, the Issuer and each Agent copies of the following financial statements, reports, notices and information: (a) as soon as available and in any event within 30 days after the end of each fiscal month other than the last such month of any Fiscal Quarter of Holdings, a consolidated balance sheet of Holdings and its Subsidiaries as at the end of such month, together, in each case, with the related consolidated statements of income and cash flows for such month and for the period commencing at the end of the previous Fiscal Year and ending with the last day of such month, certified by the chief financial or accounting Authorized Officer of Holdings; (b) as soon as available and in any event within 60 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of Holdings (or, if Holdings is required to file such information on a Form 10-Q with the Securities and Exchange Commission, promptly following such filing), a consolidated balance sheet of Holdings and its Subsidiaries as of the end of such Fiscal Quarter, together, in each case, with the related consolidated statements of income and cash flows for such Fiscal Quarter and for the period commencing at the end of the previous Fiscal Year and ending with the end of such Fiscal Quarter, certified by the chief financial or accounting Authorized Officer of Holdings; (c) as soon as available and in any event within 90 days after the end of each Fiscal Year of Holdings (or, if Holdings is required to file such information on a Form 10-K with the Securities and Exchange Commission, promptly following such filing), a copy of the annual audit report for such Fiscal Year for Holdings and its Subsidiaries, including therein a consolidated balance sheet for Holdings and its Subsidiaries as of the end of such Fiscal Year, together with the related consolidated statements of income and cash flows for such Fiscal Year certified (without any Impermissible Qualification) by Price Waterhouse LLP or another nationally recognized firm of independent public accountants acceptable to the Agents, together with a certificate from such accountants as to whether, in making the examination necessary for the signing of such annual report by such accountants, they have not become aware of any Default that has occurred and is continuing or, if in the opinion of such accounting firm such a Default has occurred and is continuing, a statement as to the nature thereof; (d) together with the delivery of the financial information required pursuant to clauses (b) and (c), a Compliance Certificate, in substantially the form of Exhibit E, executed by the chief financial or accounting Authorized Officer of Holdings, showing (in reasonable detail and with appropriate calculations and computations in all respects -72- satisfactory to the Agents) compliance with, among other things, the financial covenants set forth in Section 7.2.4; (e) (i) as soon as available and in any event no later than 60 days after the first day of each Fiscal Year of Holdings, an annual budget, setting forth on a monthly basis and in reasonable detail for such Fiscal Year of Holdings and its Subsidiaries containing consolidated and consolidating projected statements of earnings and cash flow and (ii) together with the delivery of financial statements pursuant to clause (a), (b) or (c) above, a comparison of the current year to date financial results (other than in respect of the balance sheets included therein) against the budgets required to be submitted pursuant to this clause (e); (f) as soon as possible and in any event within five Business Days after obtaining knowledge of the occurrence of any Default, a statement of the president, chief executive officer, treasurer, assistant treasurer, controller or chief financial or accounting Authorized Officer of the Borrower or Holdings setting forth details of such Default and the action which the Borrower or Holdings, as the case may be, has taken or proposes to take with respect thereto; (g) as soon as possible and in any event within five Business Days after (x) the occurrence of any material adverse development with respect to any litigation, action, proceeding, labor controversy, arbitration or governmental investigation or proceeding described in Section 6.7 or (y) the commencement of any labor controversy, litigation, action, proceeding of the type described in Section 6.7, notice thereof and of the action which the Borrower or Holdings has taken or proposes to take with respect thereto; (h) promptly after the sending or filing thereof, copies of all reports and registration statements (other than exhibits thereto and any registration statement on Form S-8 or its equivalent) which the Borrower, any Parent Guarantor or any of their respective Subsidiaries files with the Securities and Exchange Commission or any national securities exchange; (i) as soon as practicable after the chief executive or chief financial or accounting Authorized Officer of Holdings or the chief executive or chief financial or accounting officer of a member of Holdings' Controlled Group becomes aware of (i) formal steps in writing to terminate any Pension Plan or (ii) the occurrence of any event with respect to a Pension Plan which, in the case of (i) or (ii), could reasonably be expected to result in a contribution to such Pension Plan by (or a liability to) Holdings or a member of the Holdings' Controlled Group in excess of $1,000,000, (iii) the failure to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a Lien under section 302(f) of ERISA, (iv) the taking of any action with respect to a Pension Plan which could reasonably be expected to result in the requirement that Holdings or any of its Subsidiaries furnish a bond to the PBGC or such Pension Plan or (v) any material increase in the contingent liability of Holdings or any of its Subsidiaries with respect to -73- any post-retirement Welfare Plan benefit, notice thereof and copies of all documentation relating thereto; (j) as soon as possible and in any event within five Business Days after the delivery thereof, copies of all notices, agreements or documents delivered pursuant to the Senior Subordinated Note Documents and each other agreement for borrowed money to which any Parent Guarantor, the Borrower or any their respective Subsidiaries is a party and with a commitment or outstandings exceeding $3,000,000, except for such notices, agreements or documents delivered pursuant to the terms hereof; and (k) such other information respecting the condition or operations, financial or otherwise, of the Borrower, any Parent Guarantor or any of their respective Subsidiaries as any Lender through any Agent may from time to time reasonably request. SECTION 7.1.2. Compliance with Laws, etc. Each of the Borrower and each Parent Guarantor will, and will cause each of their respective Subsidiaries to, comply in all material respects with all applicable laws, rules, regulations, orders, decrees, judgments and injunctions, such compliance to include (a) the maintenance and preservation of its corporate or partnership existence and qualification as a foreign corporation or partnership, (b) the payment, before the same become delinquent, of all material taxes, assessments and governmental charges imposed upon it or upon its property except to the extent being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books and (c) compliance with all Pharmaceutical Laws. SECTION 7.1.3. Maintenance of Properties. Each of the Borrower and each Parent Guarantor will, and will cause each of their respective Subsidiaries to, maintain, preserve, protect and keep its material properties in good repair, working order and condition (ordinary wear and tear excepted), and make necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times unless the Borrower determines in good faith that the continued maintenance of any of such properties is no longer economically desirable. SECTION 7.1.4. Insurance. Each of the Borrower and each Parent Guarantor will, and will cause each of their respective Subsidiaries to, maintain or cause to be maintained with insurance companies rated A- or better by A.M. Best Company insurance with respect to its properties and business against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses in similar geographic locations and with such provisions and endorsements as the Agents may reasonably request (provided that in no event will any deductible or self-insured retention in respect of liability claims or in respect of casualty damage exceed, in each such case, $500,000 per occurrence) and will, upon request of the Agents, furnish to the Agents, the Documentation Agent and each Lender a certificate of an Authorized Officer of the Borrower setting forth the nature and extent of all insurance maintained by each of the Borrower, each Parent Guarantor and each of their respective Subsidiaries in accordance with this Section. Without limiting the foregoing, each of the -74- Borrower and each Parent Guarantor will, and will cause each of their respective Subsidiaries to, ensure that: (a) Each policy for property insurance shall show the Administrative Agent as loss payee. (b) Each policy for liability insurance shall show the Administrative Agent as an additional insured. (c) With respect to each life insurance policy, the Borrower, such Parent Guarantor or such Subsidiary, as the case may be, shall execute and deliver to the Administrative Agent a collateral assignment, notice of which has been acknowledged in writing by the insurer. (d) Each insurance policy shall provide that at least 30 days' prior written notice of cancellation or of lapse shall be given to the Administrative Agent by the insurer. (e) The Borrower, such Parent Guarantor or such Subsidiary, as the case may be, shall, if so requested by the Administrative Agent, deliver to the Administrative Agent a copy of each insurance policy. SECTION 7.1.5. Books and Records. Each of the Borrower and each Parent Guarantor will, and will cause each of their respective Subsidiaries to, (a) keep books and records which accurately reflect in all material respects all of its business affairs and transactions and (b) permit the Agents, the Documentation Agent, the Issuer and each Lender or any of their respective representatives, at reasonable times and intervals, and upon reasonable notice, (i) to visit all of its offices, (ii) to discuss its financial matters with its officers and, after notice to the Borrower and provision of an opportunity for the Borrower to participate in such discussion, its independent public accountant (and each of the Borrower and each Parent Guarantor hereby authorizes, and will cause each of their respective Subsidiaries to authorize, such independent public accountant to discuss the Borrower's, such Parent Guarantor's or such Subsidiary's financial matters with the Issuer and each Lender or its representatives whether or not any representative of the Borrower, such Parent Guarantor or such Subsidiary is present, so long as the Borrower, such Parent Guarantor or such Subsidiary has been afforded a reasonable opportunity to be present) and (iii) to examine, and photocopy extracts from, any of its books or other corporate or partnership records. The cost and expense of one such visit (the "Paid Visit") by each Agent in each Fiscal Year shall be borne by the Borrower; provided, however, that the cost and expenses of any visit made by such Agent after a Default or an Event of Default has occurred and is then continuing shall be for the account of the Borrower and shall not count as the Paid Visit made by such Agent. SECTION 7.1.6. Environmental Covenant. Each of the Borrower and each Parent Guarantor will, and will cause each of their respective Subsidiaries to, -75- (a) use and operate all of its facilities and properties in material compliance with all Environmental Laws, keep all necessary permits, approvals, certificates, licenses and other authorizations relating to environmental matters in effect and remain in material compliance therewith, and handle all Hazardous Materials in material compliance with all applicable Environmental Laws; (b) (i) ensure that the 10,000 gallon steel underground storage tank located at the Borrower's facility at 49-29 30th Place, Long Island City, New York, is tested in accordance with accepted industry procedures within three months from the Closing Date by an environmental consulting firm reasonably acceptable to the Syndication Agent and (ii) take corrective measures in accordance with accepted industry procedures to ensure the Borrower's compliance with all applicable federal and state rules and regulations if leakage is found; (c) immediately notify the Agents and provide copies upon receipt of all written claims, complaints, notices or inquiries relating to the condition of its facilities and properties or compliance with Environmental Laws; and (d) provide such information and certifications which the Agents may reasonably request from time to time to evidence compliance with this Section 7.1.6. SECTION 7.1.7. Future Subsidiaries. Each of the Borrower and each Parent Guarantor hereby covenants and agrees that, upon any Person becoming, after the Closing Date, a Subsidiary of the Borrower, or (in the case of clause (b) below only) upon the Borrower or any Subsidiary acquiring additional Capital Stock of any existing Subsidiary, the Borrower shall notify the Agents of such acquisition, and (a) the Borrower shall promptly cause such Subsidiary to execute and deliver to the Administrative Agent, with counterparts for each Lender, a Subsidiary Guaranty (or a supplement thereto in the form of the exhibit thereto), the Subsidiary Security Agreement (or a supplement thereto in the form of the exhibit thereto) (and, if such Subsidiary owns any real property, a Mortgage) and a Perfection Certificate, together with Uniform Commercial Code financing statements (form UCC-1) executed and delivered by the Subsidiary naming the Subsidiary as the debtor and the Administrative Agent as the secured party, or other similar instruments or documents, in appropriate form for filing under the Uniform Commercial Code and any other applicable recording statutes, in the case of real property, of all jurisdictions as may be necessary or, in the opinion of the Administrative Agent, desirable to perfect the security interest of the Administrative Agent pursuant to the Subsidiary Security Agreement or a Mortgage, as the case may be; and (b) the Borrower shall promptly deliver the Borrower Pledge Agreement to the Agents, duly executed and delivered by an Authorized Officer of the Borrower (unless so executed and delivered previously), and shall promptly deliver, or cause to be delivered, -76- the Subsidiary Pledge Agreement to the Agents, duly executed and delivered by an Authorized Officer of the relevant Subsidiary (unless so executed and delivered previously), and shall promptly deliver, or cause to be delivered, to the Administrative Agent under a Pledge Agreement (or a supplement thereto) certificates (if any) representing all of the issued and outstanding shares of Capital Stock of such Subsidiary owned by the Borrower or any Subsidiary of the Borrower, as the case may be, along with undated stock powers for such certificates, executed in blank, or, if any securities subject thereto are uncertificated securities or are held through a financial intermediary, confirmation and evidence satisfactory to the Agents that appropriate book entries have been made in the relevant books or records of a financial intermediary or the issuer of such securities, as the case may be, or other appropriate steps shall have been taken under applicable law resulting in the perfection of the security interest granted in favor of the Administrative Agent pursuant to the terms of a Pledge Agreement; together, in each case, with such opinions, in form and substance and from counsel satisfactory to the Agents, as the Agents may reasonably request; provided, however, that notwithstanding the foregoing, no Foreign Subsidiary shall be required to execute and deliver (x) a Mortgage or the Subsidiary Security Agreement (or a supplement thereto) or (y) the Subsidiary Guaranty (or a supplement thereto) in the event that such execution and delivery thereof would result in a material increase in tax or similar liabilities for the Borrower and its Subsidiaries, on a consolidated basis, nor will the Borrower or any Subsidiary of the Borrower be required to deliver in pledge pursuant to a Pledge Agreement in excess of 65% of the total combined voting power of all classes of Capital Stock of a Foreign Subsidiary entitled to vote in the event that such pledge would result in a material increase in tax or similar liabilities for the Borrower and its Subsidiaries, on a consolidated basis. SECTION 7.1.8. Future Leased Property and Future Acquisitions of Real Property; Future Acquisition of Other Property. (a) Prior to entering into any new lease of real property or renewing any existing lease of real property following the Closing Date, each of the Borrower and each Parent Guarantor shall, and shall cause each of their respective Subsidiaries that is not a Foreign Subsidiary to, use its (and their) commercially reasonable best efforts (which shall not require the expenditure of cash or the making of any material concessions under the relevant lease) to deliver to the Administrative Agent a Waiver executed by the lessor of any real property that is to be leased by the Borrower, such Parent Guarantor or such Subsidiary for a term in excess of one year in any state which by statute grants such lessor a "landlord's" (or similar) Lien which is superior to the Administrative Agent's. (b) In the event that the Borrower, any Parent Guarantor or any of their respective Subsidiaries that is not Foreign Subsidiary shall acquire any real property having a value as determined in good faith by the Agents in excess of $1,000,000 in the aggregate, the Borrower, such Parent Guarantor or such Subsidiary shall, promptly after such acquisition, execute a Mortgage and provide the Agents with (i) evidence of the completion (or satisfactory arrangements for the completion) of all recordings and filings of such Mortgage as may be necessary or, in the reasonable opinion of the Agents, desirable effectively to create a valid, -77- perfected first priority Lien, subject to Liens permitted by Section 7.2.3, against the properties purported to be covered thereby, (ii) mortgagee's title insurance policies in favor of the Administrative Agent for the benefit of the Secured Parties in amounts and in form and substance and issued by insurers, reasonably satisfactory to the Agents, with respect to the property purported to be covered by such Mortgage, insuring that title to such property is marketable and that the interests created by the Mortgage constitute valid first Liens thereon free and clear of all defects and encumbrances other than as approved by the Agents, and such policies shall also include a revolving credit endorsement and such other endorsements as the Agents shall request and shall be accompanied by evidence of the payment in full of all premiums thereon, and (iii) such other approvals, opinions, or documents as the Agents may reasonably request. (c) In accordance with the terms and provisions of the Security Documents, provide the Agents with evidence of all recordings and filings as may be necessary or, in the reasonable opinion of the Agents, desirable to create a valid, perfected first priority Lien, subject to the Liens permitted by Section 7.2.3, against all property acquired after the Closing Date (excluding leases of real property) and not otherwise subject to Section 5.1.7. SECTION 7.1.9. Use of Proceeds, etc. The Borrower shall, and each Parent Guarantor shall cause the Borrower to, (a) apply the proceeds of the Loans (i) to (A) make a distribution on the Closing Date to Holdings to enable Holdings to defease and redeem the Holdings Subordinated Notes, (B) defease and redeem the Senior Notes and (C) refinance existing Indebtedness of the Borrower under the Existing Credit Agreement and to pay any and all accrued interest, prepayment premiums and reasonable fees and expenses associated with the Transaction; and (ii) in the case of Revolving Loans and Swing Line Loans, for the general corporate purposes of (A) the Borrower and its Subsidiaries, including working capital needs and financing for store expansions and acquisitions and (B) Holdings, to the extent permitted under Section 7.2.6; and (b) use Letters of Credit only for purposes of supporting working capital and general corporate purposes of the Borrower and its Subsidiaries. SECTION 7.1.10. Hedging Obligations. Within nine months following the Closing Date, the Syndication Agent shall have received evidence satisfactory to it that the Borrower has entered into Rate Protection Agreements designed to protect the Borrower against fluctuations in interest rates with respect to the Term Loans with terms reasonably satisfactory to the Syndication Agent. -78- SECTION 7.1.11. Redemptions. (a) Holdings shall redeem all outstanding Holdings Subordinated Notes at a price of no more than 107.5% of the Accreted Value thereof no later than March 16, 1998, on terms and conditions (including in respect of all documentation related thereto) reasonably satisfactory to the Syndication Agent. (b) The Borrower shall redeem all of its outstanding Senior Notes at a price of no more than 104.5% of the principal amount thereof no later than March 16, 1998, on terms and conditions (including in respect of all documentation related thereto) reasonably satisfactory to the Syndication Agent. SECTION 7.1.12. Maintenance of Corporate Separateness. Each Parent Guarantor will satisfy customary corporate formalities, including the maintenance of corporate records. Each Parent Guarantor shall not make any payment to a creditor of any other Obligor in respect of any liability of such Obligor (other than pursuant to a Contingent Liability permitted hereunder), and no bank account of such Parent Guarantor shall be commingled with any bank account of any other Obligor. Any financial statements distributed to any creditors of any Parent Guarantor shall, to the extent permitted by GAAP, clearly establish the corporate separateness of such Parent Guarantor from each other Obligor. Finally, each Parent Guarantor shall not take any action, or conduct its affairs in a manner, which is likely to result in the corporate existence of such Parent Guarantor on the one hand and of any other Obligor on the other hand being ignored, or in the assets and liabilities of such other Obligor being substantively consolidated with those of such Parent Guarantor in a bankruptcy, reorganization or other insolvency proceeding. SECTION 7.1.13. Borrower Indebtedness. Any Indebtedness of the Borrower now or hereafter held by any Parent Guarantor or any of their respective Subsidiaries (other than the Borrower) is hereby subordinated to the Indebtedness of the Borrower to the Agents, the Issuer and the Lenders; and such indebtedness of the Borrower to such Parent Guarantor or such Subsidiary, if the Agents, after an Event of Default has occurred, so requests, shall be collected, enforced and received by such Parent Guarantor or such Subsidiary as trustee for the Agents, the Issuer and the Lenders and be paid over to the Administrative Agent on behalf of the Agents, the Issuer and the Lenders on account of the indebtedness of the Borrower to the Agents, the Issuer and the Lenders, but without affecting or impairing in any manner the obligations of such Parent Guarantor or such Subsidiary hereunder or under each other Loan Document to which it is a party. Prior to the transfer by any Parent Guarantor or any their respective Subsidiaries (other than the Borrower) of any note or negotiable instrument evidencing any indebtedness of the Borrower to such Parent Guarantor or such Subsidiary, such Parent Guarantor or such Subsidiary shall mark such note or negotiable instrument with a legend that the same is subject to this subordination. SECTION 7.2. Negative Covenants. Each of the Borrower and each Parent Guarantor agrees with the Agents, the Documentation Agent, the Issuer and each Lender that, until all Commitments have terminated, all Letters of Credit have terminated or expired and all -79- Obligations have been paid and performed in full, each of the Borrower and each Parent Guarantor will perform the obligations set forth in this Section 7.2. SECTION 7.2.1. Business Activities. (a) The Borrower will not, and will not permit any of its Subsidiaries to, engage in any business activity, except business activities of the type in which the Borrower and its Subsidiaries are engaged on the date hereof and such activities as may be incidental, similar or related thereto. (b) No Parent Guarantor will engage in any business activity other than (i) its continuing ownership of (A) in the case of Holdings, its 99% general partnership interest in the Borrower and all the shares of Capital Stock of DRI I and (B) in the case of DRI I, its 1% general partnership interest in the Borrower, and (ii) its compliance with all applicable laws, rules and regulations (including SEC reporting requirements) and the obligations applicable to it under the Loan Documents and the Material Documents to which such Parent Guarantor is a party. Without limiting the generality of the immediately preceding sentence, no Parent Guarantor will take any action, including the filing of any income tax return, that would result in the Borrower ceasing to be treated as a partnership within meaning of Section 761(a) of the Code for Federal income tax purposes. SECTION 7.2.2. Indebtedness. Each of the Borrower and each Parent Guarantor will not, and will not permit any of their respective Subsidiaries to, create, incur, assume or suffer to exist or otherwise become or be liable in respect of any Indebtedness, other than, without duplication, the following: (a) Indebtedness in respect of the Credit Extensions and other Obligations; (b) until the Closing Date, Indebtedness identified in Item 7.2.2(b) ("Indebtedness to be Paid") of the Disclosure Schedule; (c) Indebtedness identified in Item 7.2.2(c) ("Ongoing Indebtedness") of the Disclosure Schedule; (d) (i) Indebtedness of Holdings evidenced by the Senior Subordinated Notes and (ii) Indebtedness of the Borrower, DRI I and each other Subsidiary of Holdings consisting of Contingent Liabilities under the Senior Subordinated Notes Guarantees in respect of the Indebtedness described in clause (d)(i); (e) Indebtedness in an aggregate principal amount not to exceed $15,000,000 at any time outstanding which is, or has been, incurred by the Borrower or any of its Subsidiaries (i) to a vendor of any assets permitted to be acquired pursuant to Section 7.2.7 to finance its acquisition of such assets or (ii) in respect of Capitalized Lease Liabilities to the extent permitted by Section 7.2.7; (f) Indebtedness of the Borrower owing to any Subsidiary Guarantor; -80- (g) Indebtedness of Subsidiary Guarantors that are Wholly-owned Subsidiaries of the Borrower owing to the Borrower or any other Subsidiary Guarantor; (h) Indebtedness of Subsidiaries of the Borrower owing to the Borrower or a Subsidiary Guarantor to the extent permitted by clause (e) of Section 7.2.5; (i) Hedging Obligations of the Borrower in respect of the Loans; (j) unsecured Indebtedness of the Borrower or any of its Subsidiaries incurred in the ordinary course of business (including open accounts extended by suppliers on normal trade terms in connection with purchases of goods and services, but excluding Indebtedness incurred through the borrowing of money or Contingent Liabilities); (k) Indebtedness of the Borrower incurred under the Rapid Remit Program in an aggregate amount at any time outstanding not to exceed $5,000,000; (l) Indebtedness which refinances Indebtedness permitted by clause (c) and (d) above; provided, however, that after giving effect to such refinancing, (i) the principal amount of outstanding Indebtedness is not increased (other than in the case of a refinancing of Indebtedness permitted by clause (d) above by the amount of reasonable fees and expenses incurred in connection with such refinancing), (ii) neither the tenor nor the average life thereof is reduced, (iii) the respective obligor or obligors shall be the same on the refinancing Indebtedness as on the Indebtedness being refinanced, (iv) the security, if any, for the refinancing Indebtedness shall be the same as that for the Indebtedness being refinanced (except to the extent that less security is granted to holders of such refinancing Indebtedness), (v) the holders of such refinancing Indebtedness are not afforded covenants, defaults, rights or remedies more burdensome to the obligor or obligors than those contained in the Indebtedness being refinanced and (vi) the refinancing Indebtedness is subordinated to the same degree, if any, as the Indebtedness being refinanced; and (m) other unsecured Indebtedness of the Borrower and its Subsidiaries in an aggregate amount at any time outstanding not to exceed $7,500,000; provided, however, that (i) no Indebtedness otherwise permitted by clause (e) or (m) may be incurred if, after giving effect to the incurrence thereof, any Default shall have occurred and be continuing and (ii) no Indebtedness otherwise permitted hereunder by any of clauses (a) through (m) may be incurred if, after giving effect to the application thereof, there shall be a "Default" or "Event of Default" under and as defined in the Senior Subordinated Note Indenture, as in effect on the Closing Date. SECTION 7.2.3. Liens. Each of the Borrower and each Parent Guarantor will not, and will not permit any of their respective Subsidiaries to, create, incur, assume or suffer to exist any -81- Lien upon any of its property, revenues or assets, whether now owned or hereafter acquired, except: (a) Liens securing payment of the Obligations or any Hedging Obligations owed to any Lender or any Affiliate of any Lender, granted pursuant to any Loan Document; (b) until the Closing Date, Liens securing payment of Indebtedness of the type permitted and described in clause (b) of Section 7.2.2; (c) Liens granted prior to the Closing Date to secure payment of Indebtedness of the type permitted and described in clause (c) of Section 7.2.2; (d) Liens granted to secure payment of Indebtedness of the type permitted and described in clause (e) of Section 7.2.2 and covering only those assets acquired with the proceeds of such Indebtedness; (e) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (f) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business for sums not overdue or being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (g) Liens incurred in the ordinary course of business in connection with workmen's compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; (h) judgment Liens in existence less than 15 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered in full (subject to a customary deductible) by insurance maintained with insurance companies of the nature described in Section 7.1.4; (i) Liens granted by the Borrower in favor of Pharmacy Fund (A) securing the recourse obligations owing to Pharmacy Fund pursuant to the Rapid Remit Program for rejected or adjusted Prescription Receivables, (B) consisting of the right of set-off granted to Pharmacy Fund in connection with rejected or adjusted receivables, other payments owing to Pharmacy Fund and administrative fees and expenses pursuant to the Rapid Remit Program and (C) consisting of precautionary liens on receivables, chattel paper, general intangibles and the proceeds thereof directly related to the Rapid Remit Program; and -82- (j) Liens with respect to minor imperfections of title and easements, rights-of-way, restrictions, reservations, permits, servitudes and other similar encumbrances on real property and fixtures which do not materially detract from the value or materially impair the use by the Borrower or any of its Subsidiaries in the ordinary course of their business of the property subject thereto. SECTION 7.2.4. Financial Covenants. (a) Net Worth. Each of the Borrower and each Parent Guarantor will not permit Net Worth at any time from and after the last day of the 1998 Fiscal Year to be less than an amount equal to 50% of the cumulative Net Income (in excess of zero) for the period from the first day of the 1998 Fiscal Year to the end of the Fiscal Quarter most recently ended on or prior to such date of determination. (b) Leverage Ratio. Each of the Borrower and each Parent Guarantor will not permit the Leverage Ratio as of the end of any Fiscal Quarter ending after the Closing Date and occurring during any period set forth below to be greater than the ratio set forth opposite such period: Period Leverage Ratio ------ -------------- first Fiscal Quarter of the 1998 Fiscal Year through the 5.50:1 Fiscal Quarter of the third Fiscal Year 1998 fourth Fiscal Quarter of the 1998 Fiscal Year through the 5.00:1 Fiscal Quarter of the third Fiscal Year 1999 fourth Fiscal Quarter of the 1999 Fiscal Year through the 4.00:1 Fiscal Quarter of the third Fiscal Year 2000 fourth Fiscal Quarter of the 2000 3.00:1 Fiscal Year and each Fiscal Quarter thereafter (c) Interest Coverage Ratio. Each of the Borrower and each Parent Guarantor will not permit the Interest Coverage Ratio as of the end of any Fiscal Quarter ending after the Closing Date and occurring during any period set forth below to be less than the ratio set forth opposite such period: -83- Period Interest Coverage Ratio ------ ----------------------- first Fiscal Quarter of the 1998 Fiscal Year through the 1.85:1 Fiscal Quarter of the third Fiscal Year 1998 fourth Fiscal Quarter of the 1998 Fiscal Year through the 2.10:1 Fiscal Quarter of the third Fiscal Year 1999 fourth Fiscal Quarter of the 1999 Fiscal Year through the 2.50:1 Fiscal Quarter of the third Fiscal Year 2000 fourth Fiscal Quarter of the 2000 3.00:1 Fiscal Year and each Fiscal Quarter thereafter (d) Fixed Charge Coverage Ratio. Each of the Borrower and each Parent Guarantor will not permit the Fixed Charge Coverage Ratio as of the end of any Fiscal Quarter ending after the Closing Date to be less than 1.10:1. SECTION 7.2.5. Investments. Each of the Borrower and each Parent Guarantor will not, and will not permit any of their respective Subsidiaries to, make, incur, assume or suffer to exist any Investment in any other Person, except: (a) Investments existing on the Closing Date and identified in Item 7.2.5(a) ("Ongoing Investments") of the Disclosure Schedule; (b) Cash Equivalent Investments; (c) without duplication, Investments permitted as Indebtedness pursuant to Section 7.2.2; (d) without duplication, Investments permitted as Capital Expenditures of the Borrower and its Subsidiaries pursuant to Section 7.2.7; (e) Investments by any Parent Guarantor, the Borrower or any Subsidiary Guarantor in the Borrower or Subsidiary Guarantors that are Wholly-owned Subsidiaries of the Borrower; -84- (f) Investments to the extent the consideration received pursuant to clause (c)(i) of Section 7.2.9 is not all cash; (g) Investments in the form of loans to officers, directors and employees of Holdings and its Subsidiaries for the sole purpose of purchasing Capital Stock of Holdings (or purchases of such loans made by others) in an aggregate amount at any time outstanding not to exceed $3,000,000; (h) other Investments made by the Borrower or any of its Subsidiaries, by way of contributions to capital, the making of loans or advances or the incurrence of Contingent Liabilities, in an aggregate amount not to exceed (i) to the extent such Investments are made with the Capital Stock of Holdings, $30,000,000 since the Closing Date (such amounts in this clause (h)(i) to be determined based on the fair market value of such Capital Stock at the time of such Investments); and (ii) to the extent such Investments are not made with the Capital Stock of Holdings, $20,000,000 since the Closing Date, which Investments shall result in the Borrower or the relevant Subsidiary acquiring (subject to Section 7.2.1) a majority controlling interest in the Person in which such Investment was made or increasing any such controlling interest maintained by it in such Person; or (i) other Investments made by the Borrower or any of its Subsidiaries in an aggregate amount not to exceed $1,000,000 at any time outstanding; provided, however, that (j) any Investment which when made complies with the requirements of the definition of the term "Cash Equivalent Investment" may continue to be held notwithstanding that such Investment if made thereafter would not comply with such requirements; (k) no Investment otherwise permitted by clause (c) (except to the extent permitted under Section 7.2.2), (f), (g), (h) or (i) shall be permitted to be made if, immediately before or after giving effect thereto, any Default shall have occurred and be continuing; and (l) no Investment otherwise permitted by clauses (a) through (i) may be made if, after giving effect to the application thereof, there shall be a "Default" or "Event of Default" under and as defined in the Senior Subordinated Note Indenture, in each case as in effect on the Closing Date. -85- SECTION 7.2.6. Restricted Payments, etc. On and at all times after the date hereof: (a) each of the Borrower and each Parent Guarantor will not, and will not permit any of their respective Subsidiaries to, declare, pay or make any dividend, distribution or exchange (in cash, property or obligations) on or in respect of any shares of any class of Capital Stock (now or hereafter outstanding) of the Borrower or any Parent Guarantor or on any warrants, options or other rights with respect to any shares of any class of Capital Stock (now or hereafter outstanding) of the Borrower or any Parent Guarantor (other than (i) dividends or distributions payable in its common stock or warrants to purchase its common stock and (ii) splits or reclassifications of its stock into additional or other shares of its common stock) or apply, or permit any of its Subsidiaries to apply, any of its funds, property or assets to the purchase, redemption, exchange, sinking fund or other retirement of, or agree or permit any of its Subsidiaries to purchase, redeem or exchange, any shares of any class of Capital Stock (now or hereafter outstanding) of the Borrower or any Parent Guarantor, warrants, options or other rights with respect to any shares of any class of Capital Stock (now or hereafter outstanding) of the Borrower or any Parent Guarantor; (b) each of the Borrower and each Parent Guarantor will not, and will not permit any of their respective Subsidiaries to, (i) make any payment or prepayment of principal of, or make any payment of interest on, any subordinated note (including any Senior Subordinated Note) on any day other than the stated, scheduled date for such payment or prepayment set forth in the documents and instruments memorializing such subordinated note, or which would violate the subordination provisions of such subordinated note, or (ii) redeem, purchase or defease any subordinated note (including any Senior Subordinated Note) (the foregoing prohibited acts referred to in clauses (a) and (b) above are herein collectively referred to as "Restricted Payments"); provided, however, that (c) notwithstanding the provisions of clause (a) above, the Borrower shall be permitted to make Restricted Payments to DRI I (which shall in turn utilize all of any such Restricted Payment to make Restricted Payments to Holdings) and to Holdings to the extent necessary to enable Holdings to pay interest on the Senior Subordinated Notes, so long as (i) no Default or Event of Default exists or would result therefrom and (ii) the Restricted Payments referred to below are permitted to be paid at such time under the Senior Subordinated Note Indenture; (d) notwithstanding the provisions of clause (a) above, the Borrower shall be permitted to make Restricted Payments to Holdings and to DRI I (which may in turn utilize all or part of any such Restricted Payment to make Restricted Payments to Holdings), in each case to the extent necessary to enable Holdings and DRI I (i) to pay their overhead expenses to the extent permitted under the Senior Subordinated Note Indenture as in effect on the Closing Date; provided, that the -86- aggregate amount of Restricted Payments paid by the Borrower pursuant to this clause (d)(i) in any Fiscal Year shall not exceed $2,000,000; and (ii) to pay their respective taxes based on income and franchise taxes and other similar licensure expenses; and (iii) to defease and redeem the Holdings Subordinated Notes, as contemplated by Section 7.1.9(a); and (e) so long as (i) no Default or Event of Default shall have occurred and be continuing on the date such Restricted Payment is declared or to be made, nor would a Default or an Event of Default result from the making of such Restricted Payment, (ii) after giving effect to the making of such Restricted Payment, Holdings shall be in pro forma compliance with the covenants set forth in Section 7.2.4 for the most recent fully ended Fiscal Quarter preceding the date of the making of such Restricted Payment for which the relevant financial information has been delivered pursuant to clause (b) or (c) of Section 7.1.1, and (iii) an Authorized Officer of Holdings shall have delivered a certificate to the Administrative Agent in form and substance satisfactory to the Administrative Agent (including a calculation of Holdings' compliance with the covenants set forth in Section 7.2.4 in reasonable detail) certifying as to the accuracy of subclauses (i) and (ii) above, the Borrower shall be permitted to make Restricted Payments to Holdings and to DRI I (which shall in turn utilize all of any such Restricted Payment to make Restricted Payments to Holdings), in each case to the extent necessary to enable Holdings to repurchase, redeem or otherwise acquire or retire for value any Capital Stock of Holdings held by any member of management of Holdings or any of its Subsidiaries pursuant to any management equity subscription agreement or stock option agreement, in each case as in effect on the date hereof; provided, however, that (A) the aggregate price paid for all such repurchased, redeemed, acquired or retired Capital Stock shall not exceed an amount equal to $2,000,000 in any twelve month period plus (B) the aggregate cash proceeds received by Holdings during such twelve month period from any reissuance of Capital Stock of Holdings by Holdings to members of management of Holdings or any of its Subsidiaries. SECTION 7.2.7. Capital Expenditures, etc. Each of the Borrower and each Parent Guarantor will not, and will not permit any of their respective Subsidiaries to, make or commit to make Capital Expenditures in any Fiscal Year, except Capital Expenditures of the Borrower and its Subsidiaries which do not aggregate in excess of $25,000,000 in such Fiscal Year; provided, however, that, to the extent the amount of Capital Expenditures permitted to be made in any Fiscal Year pursuant to this Section exceeds the aggregate amount of Capital Expenditures actually made by the Borrower and its Subsidiaries during such Fiscal Year, up to 50% of such excess amount may be carried forward to (but only to) the next succeeding Fiscal Year (any such amount to be certified by Holdings to the Agents in the Compliance Certificate delivered for the last Fiscal Quarter of such Fiscal Year), and any such amount carried forward to a succeeding Fiscal Year shall be deemed to be used prior to the Borrower and its Subsidiaries using the -87- amount of Capital Expenditures permitted by this Section in such succeeding Fiscal Year, without giving effect to such carry-forward. SECTION 7.2.8. Consolidation, Merger, etc. Each of the Borrower and each Parent Guarantor will not, and will not permit any of their respective Subsidiaries to, liquidate or dissolve, consolidate with, or merge into or with, any other corporation, or purchase or otherwise acquire all or substantially all of the assets of any Person (or of any division thereof) except (a) any Subsidiary of the Borrower may liquidate or dissolve voluntarily into, and may merge with and into, the Borrower (so long as the Borrower is the surviving entity of such combination or merger) or any other Subsidiary, and the assets or stock of any such Subsidiary may be purchased or otherwise acquired by the Borrower or any other Subsidiary; provided, that notwithstanding the above, a Subsidiary may only liquidate or dissolve into, or merge with and into, another Subsidiary of the Borrower if, after giving effect to such combination or merger, the Borrower continues to own (directly or indirectly), and the Administrative Agent continues to have pledged to it pursuant to a Pledge Agreement, a percentage of the issued and outstanding shares of Capital Stock (on a fully diluted basis) of the Subsidiary surviving such combination or merger that is equal to or in excess of the percentage of the issued and outstanding shares of Capital Stock (on a fully diluted basis) of the Subsidiary that does not survive such combination or merger that was (immediately prior to the combination or merger) owned by the Borrower or pledged to the Administrative Agent; and (b) so long as no Default has occurred and is continuing or would occur after giving effect thereto, the Borrower or any of its Subsidiaries may purchase all or substantially all of the assets of any Person (or any division thereof) not then a Subsidiary, or acquire such Person by merger, if permitted (without duplication) pursuant to Section 7.2.7 or clause (i) of Section 7.2.5. SECTION 7.2.9. Asset Dispositions, etc. Each of the Borrower and each Parent Guarantor will not, and will not permit any of their respective Subsidiaries to, sell, transfer, lease, contribute or otherwise convey, or grant options, warrants or other rights with respect to, all or any part of its assets, whether now owned or hereafter acquired (including accounts receivable and Capital Stock of Subsidiaries) to any Person, unless: (a) such sale, transfer, lease, contribution or conveyance of such assets is (i) in the ordinary course of its business (and does not constitute a sale, transfer, lease, contribution or other conveyance of all or a substantial part of the Borrower's and its Subsidiaries' assets, taken as a whole) or is of obsolete or worn out property, (ii) permitted by Section 7.2.8, or (iii) between the Borrower and one of its Subsidiary Guarantors or between Subsidiary Guarantors of the Borrower; (b) such sale, transfer, lease, contribution or conveyance consists of the sale by the Borrower of third party prescription receivables resulting from the sale of pharmaceutical -88- products to customers covered by third party insurance or payment programs (the "Prescription Receivables") to Pharmacy Fund, in each case pursuant to, and in accordance with the terms of the Rapid Remit Program Documents; (c) such sale, transfer, lease, contribution or conveyance by (i) the Borrower or any of its Subsidiaries constitutes (A) an Investment permitted under Section 7.2.5 or (B) a Lien permitted under Section 7.2.3 or (ii) any Parent Guarantor constitutes an Investment permitted under clause (b), (c) or (e) of Section 7.2.5; or (d) (i) such sale, transfer, lease, contribution or conveyance by the Borrower or any of its Subsidiaries of such assets is for fair market value and the consideration consists of no less than 80% in cash (other than assets sold, transferred, leased, contributed or conveyed in an individual amount not to exceed $50,000 and in an aggregate amount not to exceed $500,000 since the Closing Date), (ii) the Net Disposition Proceeds received from such assets, together with the Net Disposition Proceeds of all other assets sold, transferred, leased, contributed or conveyed pursuant to this clause (d) since the Closing Date, does not exceed (individually or in the aggregate) $10,000,000 over the term of this Agreement and (iii) an amount equal to the Net Disposition Proceeds generated from such sale, transfer, lease, contribution or conveyance is applied to prepay the Loans pursuant to the terms of Sections 3.1.1 and 3.1.2. SECTION 7.2.10. Modification of Certain Agreements. Without the prior written consent of the Required Lenders, each of the Borrower and each Parent Guarantor will not, and will not permit any of their respective Subsidiaries to, consent to any amendment, supplement, amendment and restatement, waiver or other modification of any of the terms or provisions contained in, or applicable to, any Material Document or any schedules, exhibits or agreements related thereto, in each case which does not comply with the requirements set forth in the proviso to clause (l) of Section 7.2.2 or would adversely affect the rights or remedies of the Lenders, or the Borrower's, such Parent Guarantor's or such Subsidiary's ability to perform hereunder or under any Loan Document. SECTION 7.2.11. Transactions with Affiliates. Each of the Borrower and each Parent Guarantor will not, and will not permit any of their respective Subsidiaries to, enter into, or cause, suffer or permit to exist any arrangement or contract with any of its other Affiliates unless such arrangement or contract is fair and equitable to the Borrower, such Parent Guarantor or such Subsidiary and is an arrangement or contract of the kind which would be entered into by a prudent Person in the position of the Borrower, such Parent Guarantor or such Subsidiary with a Person which is not one of its Affiliates; provided, however that the Borrower, the Parent Guarantors and their respective Subsidiaries shall be permitted to enter into and perform their obligations under the Material Documents to which each is a party as of the Closing Date and arrangements with DLJ and its Affiliates for underwriting, investment banking and advisory services on usual and customary terms. -89- SECTION 7.2.12. Negative Pledges, Restrictive Agreements, etc. Each of the Borrower and each Parent Guarantor will not, and will not permit any of their respective Subsidiaries to, enter into any agreement prohibiting (a) the (i) creation or assumption of any Lien upon its properties, revenues or assets, whether now owned or hereafter acquired (other than, in the case of any assets acquired with the proceeds of any Indebtedness, or subject to Capitalized Lease Liabilities, permitted under clause (e) of Section 7.2.2, customary limitations and prohibitions contained in such Indebtedness or Capitalized Lease), or (ii) ability of the Borrower, any Parent Guarantor or any other Obligor to amend or otherwise modify this Agreement or any other Loan Document; or (b) any Subsidiary from making any payments, directly or indirectly, to the Borrower by way of dividends, advances, repayments of loans or advances, reimbursements of management and other intercompany charges, expenses and accruals or other returns on investments, or any other agreement or arrangement which restricts the ability of any such Subsidiary to make any payment, directly or indirectly, to the Borrower. SECTION 7.2.13. Stock of Subsidiaries. Each of the Borrower and each Parent Guarantor will not permit any Subsidiary of the Borrower to issue any Capital Stock (whether for value or otherwise) to any Person other than the Borrower or another Wholly-owned Subsidiary of the Borrower. SECTION 7.2.14. Sale and Leaseback. Each of the Borrower and each Parent Guarantor will not, and will not permit any of its Subsidiaries to, enter into any agreement or arrangement with any other Person providing for the leasing by the Borrower or any of its Subsidiaries of real or personal property which has been or is to be sold or transferred by the Borrower or any of its Subsidiaries to such other Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or any of its Subsidiaries. ARTICLE VIII EVENTS OF DEFAULT SECTION 8.1. Listing of Events of Default. Each of the following events or occurrences described in this Section 8.1 shall constitute an "Event of Default". SECTION 8.1.1. Non-Payment of Obligations. (a) The Borrower shall default in the payment or prepayment of any principal of any Loan when due or any Reimbursement Obligations or any deposit of cash for collateral purposes pursuant to Section 2.6.2 or Section 2.6.4, as the case may be, or (b) any Obligor (including the Borrower) shall default (and -90- such default shall continue unremedied for a period of three Business Days) in the payment when due of any interest or commitment fee with respect to the Loans or Commitments or of any other monetary Obligation. SECTION 8.1.2. Breach of Warranty. Any representation or warranty of the Borrower or any other Obligor made or deemed to be made by it hereunder or under any other Loan Document or any other writing or certificate furnished by or on behalf of the Borrower or any other Obligor to the Agents, the Documentation Agent, the Issuer, the Arranger or any Lender for the purposes of or in connection with this Agreement or any such other Loan Document (including any certificates delivered pursuant to Article V) is or shall be incorrect when made in any material respect. SECTION 8.1.3. Non-Performance of Certain Covenants and Obligations. The Borrower or any Parent Guarantor shall default in the due performance and observance of any of its obligations under Section 7.1.4, 7.1.6(b), 7.1.9, 7.1.10, 7.1.11 or 7.2 (other than clause (a) of Section 7.2.1), or any other Obligor shall default in the performance of any of its obligations in respect of such Sections as such Sections are incorporated by reference or otherwise in any Loan Document to which such Obligor is a party. SECTION 8.1.4. Non-Performance of Other Covenants and Obligations. Any Obligor shall default in the due performance and observance of any other agreement contained herein or in any other Loan Document executed by it, and such default shall continue unremedied for a period of 30 days from the earlier of the date an Authorized Officer of such Obligor has actual knowledge thereof and the receipt by such Obligor of written notice thereof from the Administrative Agent. SECTION 8.1.5. Default on Other Indebtedness. A default shall occur (i) in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness, other than Indebtedness described in Section 8.1.1, of the Borrower or any of its Subsidiaries or any other Obligor having a principal amount, individually or in the aggregate, in excess of $3,000,000, or (ii) a default shall occur in the performance or observance of any obligation or condition with respect to such Indebtedness if the effect of such default is to accelerate the maturity of any such Indebtedness or such default shall continue unremedied for any applicable period of time sufficient to permit the holder or holders of such Indebtedness, or any trustee or agent for such holders, to cause such Indebtedness to become due and payable prior to its expressed maturity. SECTION 8.1.6. Judgments. Any judgment or order for the payment of money in excess of $3,000,000 (not covered by insurance from an insurance company rated A- or better by A.M. Best Company that is not denying its liability with respect thereto) shall be rendered against the Borrower or any of its Subsidiaries or any other Obligor and remain unpaid and either (a) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (b) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect. -91- SECTION 8.1.7. Pension Plans. Any of the following events shall occur with respect to any Pension Plan (a) the institution of any steps by Holdings, any member of its Controlled Group or any other Person to terminate a Pension Plan if, as a result of such termination, Holdings or any such member could be required to make a contribution to such Pension Plan, or could reasonably expect to incur a liability or obligation to such Pension Plan, in excess of $1,000,000, or (b) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA. SECTION 8.1.8. Change in Control. Any Change in Control shall occur. SECTION 8.1.9. Bankruptcy, Insolvency, etc. The Borrower or any of its Subsidiaries or any other Obligor shall (a) become insolvent or generally fail to pay, or admit in writing its inability or unwillingness to pay, debts as they become due; (b) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any of its Subsidiaries or any other Obligor or any property of any thereof, or make a general assignment for the benefit of creditors; (c) in the absence of such application, consent, acquiescence or assignment, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any of its Subsidiaries or any other Obligor or for a substantial part of the property of any thereof, and such trustee, receiver, sequestrator or other custodian shall not be discharged within 60 days, provided that the Borrower, each Subsidiary and each other Obligor hereby expressly authorizes the Agents, the Documentation Agent, the Arranger, the Issuer and each Lender to appear in any court conducting any relevant proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; (d) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of the Borrower or any of its Subsidiaries or any other Obligor, and, if any such case or proceeding is not commenced by the Borrower or such Subsidiary or such other Obligor, such case or proceeding shall be consented to or acquiesced in by the Borrower or such Subsidiary or such other Obligor or shall result in the entry of an order for relief or shall remain for 60 days undismissed, provided that the Borrower, each Subsidiary and each other Obligor hereby expressly authorizes the Agents, the Documentation Agent, the Arranger, the Issuer and each Lender to appear in any court conducting any such case or proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; or -92- (e) take any action (partnership, corporate or otherwise) authorizing, or in furtherance of, any of the foregoing. SECTION 8.1.10. Impairment of Security, etc. Any Loan Document, or any Lien granted thereunder, shall (except in accordance with its terms), in whole or in part, terminate, cease to be in full force and effect or cease to be the legally valid, binding and enforceable obligation of any Obligor party thereto; the Borrower or any other Obligor shall, directly or indirectly, contest in any manner the effectiveness, validity, binding nature or enforceability thereof; or any Lien securing any Obligation shall, in whole or in part, cease to be a perfected first priority Lien, subject only to those exceptions expressly permitted by the Loan Documents. SECTION 8.2. Action if Bankruptcy, etc. If any Event of Default described in clauses (a) through (d) of Section 8.1.9 shall occur, the Commitments (if not theretofore terminated) shall automatically terminate and the outstanding principal amount of all outstanding Loans and all other Obligations (including Reimbursement Obligations) shall automatically be and become immediately due and payable, without notice or demand and the Borrower shall automatically and immediately be obligated to deposit with the Administrative Agent cash collateral in an amount equal to the undrawn amount of all Letters of Credit outstanding. SECTION 8.3. Action if Other Event of Default. If any Event of Default (other than an Event of Default described in clauses (a), through (d) of Section 8.1.9) shall occur for any reason, whether voluntary or involuntary, and be continuing, the Administrative Agent, upon the direction of the Required Lenders, shall by notice to the Borrower declare all or any portion of the outstanding principal amount of the Loans and other Obligations (including Reimbursement Obligations) to be due and payable, require the Borrower to provide cash collateral to be deposited with the Administrative Agent in an amount equal to the undrawn amount of all Letters of Credit outstanding and/or declare the Commitments (if not theretofore terminated) to be terminated, whereupon the full unpaid amount of such Loans and other Obligations which shall be so declared due and payable shall be and become immediately due and payable, without further notice, demand or presentment, and/or, as the case may be, the Commitments shall terminate and the Borrower shall deposit with the Administrative Agent cash collateral in an amount equal to the undrawn amount of all Letters of Credit outstanding. ARTICLE IX GUARANTY SECTION 9.1. Guaranty. Each Parent Guarantor hereby jointly and severally, absolutely, unconditionally and irrevocably (a) guarantees the full and punctual payment when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise, of all Obligations of the Borrower now or hereafter existing, whether for principal, interest, -93- fees, expenses or otherwise (including all such amounts which would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code, 11 U.S.C. ss.362(a), and the operation of Sections 502(b) and 506(b) of the United States Bankruptcy Code, 11 U.S.C. ss.502(b) and ss.506(b)), and (b) indemnifies and holds harmless each Secured Party and each holder of a Note for any and all costs and expenses (including reasonable attorney's fees and expenses) incurred by such Secured Party or such holder, as the case may be, in enforcing any rights under the guaranty set forth in this Article IX. The guaranty set forth in this Article IX constitutes a guaranty of payment when due and not of collection, and each Parent Guarantor specifically agrees that it shall not be necessary or required that any Secured Party or any holder of any Note exercise any right, assert any claim or demand or enforce any remedy whatsoever against the Borrower or any other Obligor (or any other Person) before or as a condition to the obligations of each Parent Guarantor under the guaranty set forth in this Article IX. SECTION 9.2. Acceleration of Parent Guaranty. Each Parent Guarantor agrees that upon the occurrence of an Event of Default of the nature set forth in clauses (a) through (d) of Section 8.1.9, at a time when any of the Obligations of the Borrower and each other Obligor may not then be due and payable, then each Parent Guarantor agrees that it will pay to the Administrative Agent for the account of the Secured Parties forthwith the full amount which would be payable under the guaranty set forth in this Article IX by each Parent Guarantor if all such Obligations were then due and payable. SECTION 9.3. Guaranty Absolute, etc. The guaranty set forth in this Article IX shall in all respects be a continuing, absolute, unconditional and irrevocable guaranty of payment, and shall remain in full force and effect until all Obligations of the Borrower and each other Obligor have been paid in full in cash, all obligations of each Parent Guarantor under the guaranty set forth in this Article IX shall have been paid in full in cash, all Letters of Credit have been terminated or expired, all Rate Protection Agreements have been terminated or expired and all Commitments shall have terminated. Each Parent Guarantor guarantees that the Obligations of the Borrower will be paid strictly in accordance with the terms of this Agreement and each other Loan Document under which they arise, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any Secured Party or any holder of any Note with respect thereto. The liability of each Parent Guarantor under the guaranty set forth in this Article IX shall be absolute, unconditional and irrevocable irrespective of: (a) any lack of validity, legality or enforceability of this Agreement, any Note or any other Loan Document; (b) the failure of any Secured Party or any holder of any Note -94- (i) to assert any claim or demand or to enforce any right or remedy against the Borrower, any other Obligor or any other Person (including any other guarantor (including any Parent Guarantor)) under the provisions of this Agreement, any Note, any other Loan Document or otherwise, or (ii) to exercise any right or remedy against any other guarantor (including any Parent Guarantor) of, or collateral securing, any Obligations of the Borrower; (c) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations of the Borrower, or any other extension, compromise or renewal of any Obligation of the Borrower; (d) any reduction, limitation, impairment or termination of any Obligations of the Borrower for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and the each Parent Guarantor hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Obligations of the Borrower or otherwise; (e) any amendment to, rescission, waiver, or other modification of, or any consent to departure from, any of the terms of this Agreement, any Note or any other Loan Document; (f) any addition, exchange, release, surrender or non-perfection of any collateral, or any amendment to or waiver or release or addition of, or consent to departure from, any other guaranty, held by any Secured Party or any holder of any Note securing any of the Obligations of the Borrower; or (g) any other circumstance which might otherwise constitute a defense available to, or a legal or equitable discharge of, the Borrower, any surety or any guarantor. SECTION 9.4. Reinstatement, etc. Each Parent Guarantor agrees that the guaranty set forth in this Article IX shall continue to be effective or be reinstated, as the case may be, if at any time any payment (in whole or in part) of any of the Obligations is rescinded or must otherwise be restored by any Secured Party or any holder of any Note, upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as though such payment had not been made. SECTION 9.5. Waiver, etc. Each Parent Guarantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Obligations of the Borrower and the guaranty set forth in this Article IX and any requirement that the Administrative Agent, any other Secured Party or any holder of any Note protect, secure, perfect or insure any security interest or Lien, or any property subject thereto, or exhaust any right or -95- take any action against the Borrower, any other Obligor or any other Person (including any other guarantor) or entity or any collateral securing the Obligations of the Borrower. SECTION 9.6. Postponement of Subrogation, etc. Each Parent Guarantor agrees that it will not exercise any rights which it may acquire by way of rights of subrogation under the guaranty set forth in this Article IX, by any payment made under the guaranty set forth in this Article IX or otherwise, until the prior payment in full in cash of all Obligations of the Borrower and each other Obligor, the termination or expiration of all Letters of Credit, the termination or expiration of all Rate Protection Agreements and the termination of all Commitments. Any amount paid to any Parent Guarantor on account of any such subrogation rights prior to the payment in full in cash of all Obligations of the Borrower and each other Obligor shall be held in trust for the benefit of the Secured Parties and each holder of a Note and shall immediately be paid to the Administrative Agent for the benefit of the Secured Parties and each holder of a Note and credited and applied against the Obligations of the Borrower and each other Obligor, whether matured or unmatured, in accordance with the terms of this Agreement; provided, however, that if (a) each Guarantor has made payment to the Secured Parties and each holder of a Note of all or any part of the Obligations of the Borrower, and (b) all Obligations of the Borrower and each other Obligor have been paid in full in cash, all Letters of Credit have been terminated or expired, all Rate Protection Agreements have been terminated or expired and all Commitments have been permanently terminated, each Secured Party and each holder of a Note agrees that, at any Parent Guarantor's request, the Administrative Agent, on behalf of the Secured Parties and the holders of the Notes, will execute and deliver to the applicable Parent Guarantor appropriate documents (without recourse and without representation or warranty) necessary to evidence the transfer by subrogation to such Parent Guarantor of an interest in the Obligations of the Borrower resulting from such payment by such Parent Guarantor. In furtherance of the foregoing, for so long as any Obligations or Commitments remain outstanding, each Parent Guarantor shall refrain from taking any action or commencing any proceeding against the Borrower (or its successors or assigns, whether in connection with a bankruptcy proceeding or otherwise) to recover any amounts in the respect of payments made under the guaranty set forth in this Article IX to any Secured Party or any holder of a Note. SECTION 9.7. Successors, Transferees and Assigns; Transfers of Notes, etc. The guaranty set forth in this Article IX shall: (a) be binding upon each Parent Guarantor and its successors, transferees and assigns; and -96- (b) inure to the benefit of and be enforceable by the Administrative Agent and each other Secured Party. Without limiting the generality of the foregoing clause (b), any Lender may assign or otherwise transfer (in whole or in part) any Note or Credit Extension held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all rights and benefits in respect thereof granted to such Lender under any Loan Document (including the guaranty set forth in this Article IX) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 11.11 and Article X. ARTICLE X THE AGENTS SECTION 10.1. Actions. Each Lender hereby appoints DLJ as its Syndication Agent and Fleet as its Administrative Agent under and for purposes of this Agreement, the Notes and each other Loan Document. Each Lender authorizes the Agents to act on behalf of such Lender under this Agreement, the Notes and each other Loan Document and, in the absence of other written instructions from the Required Lenders received from time to time by the Agents (with respect to which each of the Agents agrees that it will comply, except as otherwise provided in this Section or as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agents by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Lender hereby indemnifies (which indemnity shall survive any termination of this Agreement) the Agents, ratably in accordance with their respective Term Loans outstanding and Commitments (or, if no Term Loans or Commitments are at the time outstanding and in effect, then ratably in accordance with the principal amount of Term Loans held by such Lender, and their respective Commitments as in effect in each case on the date of the termination of this Agreement), from and against any and all liabilities, obligations, losses, damages, claims, costs or expenses of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against, any of the Agents in any way relating to or arising out of this Agreement, the Notes and any other Loan Document, including reasonable attorneys' fees, and as to which any Agent is not reimbursed by the Borrower or any other Obligor (and without limiting the obligation of the Borrower or any other Obligor to do so); provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from such Agent's gross negligence or willful misconduct. The Agents shall not be required to take any action hereunder, under the Notes or under any other Loan Document, or to prosecute or defend any suit in respect of this Agreement, the Notes or any other Loan Document, unless it is indemnified hereunder to its satisfaction. If any indemnity in favor of any of the Agents shall be or become, in such Agent's determination, inadequate, such Agent may call for additional indemnification from the Lenders and cease to do the acts indemnified against hereunder until such additional indemnity is given. -97- SECTION 10.2. Funding Reliance, etc. Unless the Administrative Agent shall have been notified by telephone, confirmed in writing, by any Lender by 5:00 p.m., New York City time, on the day prior to a Borrowing that such Lender will not make available the amount which would constitute its Percentage of such Borrowing on the date specified therefor, the Administrative Agent may assume that such Lender has made such amount available to the Administrative Agent and, in reliance upon such assumption, make available to the Borrower a corresponding amount. If and to the extent that such Lender shall not have made such amount available to the Administrative Agent, such Lender severally agrees and the Borrower agrees to repay the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date the Administrative Agent made such amount available to the Borrower to the date such amount is repaid to the Administrative Agent, at the interest rate applicable at the time to Loans comprising such Borrowing. SECTION 10.3. Exculpation. None of the Agents, the Swing Line Lender, the Issuer or the Arranger nor any of their respective directors, officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it under this Agreement or any other Loan Document, or in connection herewith or therewith, except for its own willful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement or any other Loan Document, nor for the creation, perfection or priority of any Liens purported to be created by any of the Loan Documents, or the validity, genuineness, enforceability, existence, value or sufficiency of any collateral security, nor to make any inquiry respecting the performance by the Borrower of its obligations hereunder or under any other Loan Document. Any such inquiry which may be made by any Agent, the Swing Line Lender or the Issuer shall not obligate it to make any further inquiry or to take any action. The Agents, the Swing Line Lender and the Issuer shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agents, the Swing Line Lender or the Issuer, as applicable, believe to be genuine and to have been presented by a proper Person. SECTION 10.4. Successor. The Syndication Agent may resign as such upon one Business Day's notice to the Borrower and the Administrative Agent. The Administrative Agent may resign as such at any time upon at least 30 days' prior notice to the Borrower and all Lenders. If the Administrative Agent at any time shall resign, the Required Lenders may, with the prior consent of the Borrower (which consent shall not be unreasonably withheld), appoint another Lender as a successor Administrative Agent which shall thereupon become the Administrative Agent hereunder. If no successor Administrative Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be one of the Lenders or a commercial banking institution organized under the laws of the United States or a United States branch or agency of a commercial banking institution, and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such -98- successor Administrative Agent shall be entitled to receive from the retiring Administrative Agent such documents of transfer and assignment as such successor Administrative Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation hereunder as the Administrative Agent, the provisions of (i) this Article X shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Administrative Agent under this Agreement, and (ii) Section 11.3 and Section 11.4 shall continue to inure to its benefit. SECTION 10.5. Credit Extensions by each Agent. Each Agent, the Swing Line Lender and the Issuer shall have the same rights and powers with respect to (x) (i) in the case of the Agents and the Swing Line Lender, the Credit Extensions made by it or any of its Affiliates and (ii) in the case of the Issuer, the Loans made by it or any of its Affiliates, and (y) the Notes held by such Agent, the Swing Line Lender, the Issuer or any of their respective Affiliates as any other Lender and may exercise the same as if it were not an Agent or the Issuer. Each Agent, the Swing Line Lender, the Issuer and each and their respective Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or Affiliate of the Borrower as if such Agent, the Swing Line Lender or Issuer were not an Agent, the Swing Line Lender or the Issuer hereunder. SECTION 10.6. Credit Decisions. Each Lender acknowledges that it has, independently of each Agent, the Documentation Agent, the Arranger, the Swing Line Lender, the Issuer and each other Lender, and based on such Lender's review of the financial information of the Borrower, this Agreement, the other Loan Documents (the terms and provisions of which being satisfactory to such Lender) and such other documents, information and investigations as such Lender has deemed appropriate, made its own credit decision to extend its Commitments. Each Lender also acknowledges that it will, independently of each Agent, the Documentation Agent, the Arranger, the Swing Line Lender, the Issuer and each other Lender, and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any other Loan Document. SECTION 10.7. Copies, etc. The Administrative Agent shall give prompt notice to each Lender and the Issuer of each notice or request required or permitted to be given to the Administrative Agent by the Borrower pursuant to the terms of this Agreement (unless concurrently delivered to the Lenders and the Issuer by the Borrower). The Administrative Agent will distribute to each Lender and the Issuer each document or instrument received for such Lender's or the Issuers's account and copies of all other communications received by the Administrative Agent from the Borrower for distribution to the Lenders and/or the Issuer by the Administrative Agent in accordance with the terms of this Agreement. SECTION 10.8. The Swing Line Lender, the Issuer, the Documentation Agent, the Syndication Agent and the Administrative Agent. Notwithstanding anything else to the contrary -99- contained in this Agreement or any other Loan Document, the Swing Line Lender, the Issuer, the Documentation Agent and the Agents, in their respective capacities as such, each in such capacity, shall have no duties or responsibilities under this Agreement or any other Loan Document nor any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against the Swing Line Lender, the Issuer, the Documentation Agent or any Agent, as applicable, in such capacity except as are explicitly set forth herein or in the other Loan Documents. ARTICLE XI MISCELLANEOUS PROVISIONS SECTION 11.1. Waivers, Amendments, etc. The provisions of this Agreement and of each other Loan Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Borrower and each Obligor party thereto and by the Required Lenders; provided, however, that no such amendment, modification or waiver which would: (a) modify any requirement hereunder that any particular action be taken by all the Lenders or by the Required Lenders shall be effective unless consented to by each Lender; (b) modify this Section 11.1, or clause (a) of Section 11.10, change the definition of "Required Lenders", increase any Commitment Amount or the Percentage of any Lender, reduce, or extend the due date for, any fees described in Section 3.3 (other than any fee referred to in Section 3.3.2), release any Guarantor from its obligations under any Guaranty, or release all or substantially all of the collateral security (except in each case as otherwise specifically provided in this Agreement, any such Guaranty, a Security Agreement or a Pledge Agreement) or extend any Commitment Termination Date shall be made without the consent of each Lender adversely affected thereby; (c) extend the due date for, or reduce the amount of, (i) any scheduled repayment or prepayment of principal of or interest on any Loan (or reduce the principal amount of or rate of interest on any Loan) or (ii) any repayment of any Reimbursement Obligation (or reduce the amount of or rate of interest on any Reimbursement Obligation) shall be made without the consent of the holder of the Note evidencing such Loan or, in the case of a Reimbursement Obligation, the Issuer owed, and those Lenders participating in, such Reimbursement Obligation; (d) affect adversely the interests, rights or obligations of any Agent, the Swing Line Lender, the Issuer or the Arranger (in its capacity as Agent, the Swing Line Lender, -100- the Issuer or the Arranger), unless consented to by such Agent, the Swing Line Lender, the Issuer or the Arranger, as the case may be; or (e) have the effect (either immediately or at some later time) of enabling the Borrower to satisfy a condition precedent to the making of a Revolving Loan, the Swing Line Loan or the issuance of a Letter of Credit without the consent of Lenders holding at least 51% of the Revolving Loan Commitments; or (f) amend, modify or waive the provisions of clause (a)(i) of Section 3.1.1 or clause (b) of Section 3.1.2 or effect any amendment, modification or waiver that by its terms adversely affects the Lenders participating in any Tranche differently from those of Lenders participating in other Tranches, without the consent of the holders of the Notes evidencing greater than 50% of the aggregate amount of Loans outstanding under each Tranche affected by such modification, or, in the case of a modification affecting the Revolving Loan Commitment Amount, the Lenders holding greater than 50% of the Revolving Loan Commitments. No failure or delay on the part of any Agent, the Issuer, any Lender or the holder of any Note in exercising any power or right under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Borrower in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by any Agent, the Issuer, any Lender or the holder of any Note under this Agreement or any other Loan Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. SECTION 11.2. Notices. All notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing or by facsimile and addressed, delivered or transmitted to such party at its address or facsimile number set forth on its signature page hereto or on Schedule II hereto or, in the case of a Lender that becomes a party hereto after the date hereof, as set forth in the Lender Assignment Agreement pursuant to which such Lender becomes a Lender hereunder or at such other address or facsimile number as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted (and electronic confirmation of receipt thereof has been received). SECTION 11.3. Payment of Costs and Expenses. The Borrower agrees to pay on demand all reasonable expenses of each of the Agents and the Arranger (including the reasonable fees and out-of-pocket expenses of counsel to the Agents and the Arranger and of local or foreign counsel, if any, who may be retained by counsel to the Agents) in connection with -101- (a) the syndication by the Syndication Agent and the Arranger of the Loans, the negotiation, preparation, execution and delivery of this Agreement and of each other Loan Document, including schedules and exhibits, and any amendments, waivers, consents, supplements or other modifications to this Agreement or any other Loan Document as may from time to time hereafter be required, whether or not the transactions contemplated hereby are consummated; (b) the filing, recording, refiling or rerecording of each Pledge Agreement and each Security Agreement and/or any Uniform Commercial Code financing statements relating thereto and all amendments, supplements and modifications to any thereof and any and all other documents or instruments of further assurance required to be filed or recorded or refiled or rerecorded by the terms hereof or of such Pledge Agreement, Security Agreement or Uniform Commercial Code financial statements; and (c) the preparation and review of the form of any document or instrument relevant to this Agreement or any other Loan Document. The Borrower further agrees to pay, and to save the Agents, the Documentation Agent, the Arranger, the Issuer and the Lenders harmless from all liability for, any stamp or other similar taxes which may be payable in connection with the execution or delivery of this Agreement, the Credit Extensions made hereunder or the issuance of the Notes or Letters of Credit or any other Loan Documents. The Borrower also agrees to reimburse each Agent, the Documentation Agent, the Arranger, the Issuer and each Lender upon demand for all reasonable out-of-pocket expenses (including reasonable attorneys' fees and legal expenses) incurred by such Agent, the Documentation Agent, the Arranger, the Issuer or such Lender in connection with (x) the negotiation of any restructuring or "work-out", whether or not consummated, of any Obligations and (y) the enforcement of any Obligations. SECTION 11.4. Indemnification. In consideration of the execution and delivery of this Agreement by each Lender and the extension of the Commitments, the Borrower hereby, to the fullest extent permitted under applicable law, indemnifies, exonerates and holds each Agent, the Documentation Agent, the Arranger, the Issuer, and each Lender and each of their respective Affiliates, and each of their respective partners, officers, directors, trustees, employees and agents, and each other Person controlling any of the foregoing within the meaning of either Section 15 of the Securities Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934, as amended (collectively, the "Indemnified Parties"), free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses actually incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Credit Extension; -102- (b) the entering into and performance of this Agreement and any other Loan Document by any of the Indemnified Parties (including any action brought by or on behalf of the Borrower as the result of any determination by any Lender to make any Credit Extension hereunder); (c) any investigation, litigation or proceeding related to any acquisition or proposed acquisition by the Borrower or any of its Subsidiaries of all or any portion of the stock or assets of any Person, whether or not such Agent, the Documentation Agent, the Issuer, the Arranger or such Lender is party thereto; (d) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to the Borrower's or any of its Subsidiaries' compliance with or liability under Environmental Law or the Release by the Borrower or any of its Subsidiaries of any Hazardous Material; or (e) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission or release from, any real property owned or operated by the Borrower or any Subsidiary thereof of any Hazardous Material present on or under such property in a manner giving rise to liability at or prior to the time the Borrower or such Subsidiary owned or operated such property (including any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any Environmental Law), regardless of whether caused by, or within the control of, the Borrower or such Subsidiary, except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's gross negligence or willful misconduct. The Borrower and its permitted successors and assigns hereby waive, release and agree not to make any claim, or bring any cost recovery action against, any Agent, the Documentation Agent, the Issuer, the Arranger or any Lender under CERCLA or any state equivalent, or any similar law now existing or hereafter enacted, except to the extent arising out of the gross negligence or willful misconduct of any Indemnified Party. It is expressly understood and agreed that to the extent that any of such Persons is strictly liable under any Environmental Laws, the Borrower's obligation to such Person under this indemnity shall likewise be without regard to fault on the part of the Borrower, to the extent permitted under applicable law, with respect to the violation or condition which results in liability of such Person. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. SECTION 11.5. Survival. The obligations of the Borrower under Sections 2.6.7(a)(ii), 4.3, 4.4, 4.5, 4.6, 11.3 and 11.4, the obligations of each Parent Guarantor under Section 9.1(b) and the obligations of the Lenders under Sections 4.8 and 10.1, shall in each case survive any assignment or participation pursuant to Section 11.11, any termination of this Agreement, the payment in full of all Obligations and the termination of all Commitments. The representations -103- and warranties made by the Borrower and each other Obligor in this Agreement and in each other Loan Document shall survive the execution and delivery of this Agreement and each such other Loan Document. SECTION 11.6. Severability. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 11.7. Headings. The various headings of this Agreement and of each other Loan Document are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such other Loan Document or any provisions hereof or thereof. SECTION 11.8. Execution in Counterparts, Effectiveness, etc. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SECTION 11.9. Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTES AND, EXCEPT TO THE EXTENT OTHERWISE EXPRESSLY PROVIDED THEREIN, EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. This Agreement, the Notes and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. SECTION 11.10. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that (a) the Borrower may not assign or transfer its rights or obligations hereunder without the prior written consent of each of the Agents and all Lenders, and (b) the rights of sale, assignment and transfer of the Lenders are subject to Section 11.11. SECTION 11.11. Sale and Transfer of Loans and Notes; Participations in Loans and Notes. Each Lender may assign, or sell participations in, its Loans and Commitments to one or more other Persons, on a non pro rata basis (except as provided below), in accordance with this Section 11.11. SECTION 11.11.1. Assignments. Any Lender (the "Assignor Lender"), (a) with the written consents of the Borrower, the Agents and (in the case of any assignment of participations in Letters of Credit or Revolving Loan Commitments) the Issuer (which consents shall not be unreasonably delayed or withheld and which consents of the Agents and the Issuer shall not be required in the case of assignments made by or -104- to DLJ or any of its Affiliates and which consent of the Borrower shall not be required if a Default or an Event of Default shall have occurred and be continuing), may at any time assign and delegate to one or more commercial banks or other financial institutions or funds which are regularly engaged in making, purchasing or investing in loans or securities, and (b) with notice to the Borrower, the Agents, and (in the case of any assignment of participations in Letters of Credit or Revolving Loan Commitments) the Issuer, but without the consent of the Borrower, the Agents or the Issuer, may assign and delegate to any of its Affiliates or Related Funds or to any other Lender (each Person described in either of the foregoing clauses as being the Person to whom such assignment and delegation is to be made, being hereinafter referred to as an "Assignee Lender"), all or any fraction of such Lender's total Loans, participations in Letters of Credit and Letter of Credit Outstandings with respect thereto and Commitments (which assignment and delegation shall be, as among Revolving Loan Commitments, Revolving Loans and participations in Letters of Credit, of a constant, and not a varying, percentage) (the "Assigned Amount") in a minimum aggregate amount of (i) $1,000,000 in the case of an assignment to an existing Lender or an Affiliate or Related Fund thereof and $5,000,000 in the case of an assignment to an Assignee Lender that is not an existing Lender or an Affiliate or Related Fund thereof or (ii) the then remaining amount of such Lender's Loans and Commitments; provided, however, that any such Assignee Lender will comply, if applicable, with the provisions contained in Section 4.6 and the Borrower, each other Obligor, the Agents and the Issuer shall be entitled to continue to deal solely and directly with such Assignor Lender in connection with the interests so assigned and delegated to an Assignee Lender until (c) written notice of such assignment and delegation, together with payment instructions, addresses and related information with respect to such Assignee Lender, shall have been given to the Borrower and the Agents by such Assignor Lender and such Assignee Lender; (d) such Assignee Lender shall have executed and delivered to the Borrower and the Agents a Lender Assignment Agreement, accepted by the Agents; (e) the processing fees described below shall have been paid; and (f) the Administrative Agent shall have registered such assignment and delegation in the Register pursuant to clause (b) of Section 2.7. From and after the date that the Agents accept such Lender Assignment Agreement and such assignment and delegation is registered in the Register pursuant to clause (b) of Section 2.7, (i) the Assignee Lender thereunder shall be deemed automatically to have become a party hereto and to the extent that rights and obligations hereunder have been assigned and delegated to such Assignee Lender in connection with such Lender Assignment Agreement, shall have the rights -105- and obligations of a Lender hereunder and under the other Loan Documents, and (ii) the Assignor Lender, to the extent that rights and obligations hereunder have been assigned and delegated by it in connection with such Lender Assignment Agreement, shall be released from its obligations hereunder and under the other Loan Documents. Subject to the provisions of Section 2.7, within ten Business Days after its receipt of notice that the Agent has received an executed Lender Assignment Agreement, the Borrower shall execute and deliver to the Administrative Agent (for delivery to the relevant Assignee Lender) new Notes evidencing such Assignee Lender's assigned Loans and Commitments and, if the Assignor Lender has retained Loans and Commitments hereunder, replacement Notes in the principal amount of the Loans and Commitments retained by the Assignor Lender hereunder (such Notes to be in exchange for, but not in payment of, those Notes then held by such Assignor Lender). Each such Note requested shall be dated the date of the predecessor Notes, if any. The Assignor Lender shall mark such predecessor Notes "exchanged" and deliver them to the Borrower. Unless otherwise specified in the Lender Assignment Agreement, interest and fees in respect of the Assigned Amount that (A) have accrued prior to the date of such assignment shall be for the account of the Assignor Lender and (B) accrue on and subsequent to the date of such assignment shall be for the account of the Assignee Lender. Accrued interest and fees shall be paid at the same time or times provided in this Agreement. Such Assignor Lender or such Assignee Lender (unless the Assignor Lender or the Assignee Lender is DLJ or any of its Affiliates) must also pay a processing fee to the Administrative Agent upon delivery of any Lender Assignment Agreement in the amount of $3,500, unless such assignment and delegation is by a Lender to its Affiliate or Related Fund or if such assignment and delegation consists of a pledge by a Lender to a Federal Reserve Bank (or in the case of a Lender that is an investment fund, to the trustee under the indenture to which such fund is a party), as provided below or is otherwise consented to by the Administrative Agent. Any attempted assignment and delegation not made in accordance with this Section 11.11.1 shall be null and void. Nothing contained in this Section 11.11.1 shall prevent or prohibit any Lender from pledging its rights (but not its obligations to make Loans or participate in Letters of Credit or Letter of Credit Outstandings) under this Agreement and/or its Loans and/or its Notes hereunder (i) to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank, or (ii) in the case of a Lender that is an investment fund, to the trustee under the indenture to which such fund is a party in support of its obligations to such trustee, in either case without notice to or consent of the Borrower or the Agents; provided, however, that (A) such Lender shall remain a "Lender" under this Agreement and shall continue to be bound by the terms and conditions set forth in this Agreement and the other Loan Documents, and (B) any assignment by such trustee shall be subject to the provisions of clause (a) of this Section 11.11.1. In the event that S&P, Moody's or Thompson's BankWatch (or InsuranceWatch Ratings Service, in the case of Lenders that are insurance companies (or Best's Insurance Reports, if such insurance company is not rated by Insurance Watch Ratings Service)) shall, after the date that any Lender with a Commitment to make Revolving Loans or participate in Letters of Credit becomes a Lender, downgrade the long-term certificate of deposit rating or long-term senior unsecured debt rating of such Lender, and the resulting rating shall be below BBB-, Baa3 or C (or BB, in the case of Lender that is an insurance company (or B, in the case of an insurance company not rated by InsuranceWatch Ratings Service)) respectively, then the Issuer or the Borrower (with the consent of the Agents and the Issuer) shall have the right, -106- but not the obligation, upon notice to such Lender and the Agents, to replace such Lender with an Assignee Lender in accordance with and subject to the restrictions contained in this Section, and such Lender hereby agrees to transfer and assign without recourse (in accordance with and subject to the restrictions contained in this Section) all its interests, rights and obligations in respect of its Revolving Loan Commitment under this Agreement to such Assignee Lender; provided, however, that (i) no such assignment shall conflict with any law, rule and regulation or order of any governmental authority and (ii) such Assignee Lender shall pay to such Lender in immediately available funds on the date of such assignment the principal of and interest and fees (if any) accrued to the date of payment on the Loans made, and Letters of Credit participated in, by such Lender hereunder and (iii) the Borrower shall have paid such Lender all other amounts accrued for such Lender's account or owed to it hereunder or under any other Loan Document. SECTION 11.11.2. Participations. Any Lender may at any time sell to one or more commercial banks or other financial institution (each such commercial bank and other financial institution being herein called a "Participant") participating interests in any of the Loans, Commitments, participations in Letters of Credit and Letters of Credit Outstandings or other interests of such Lender hereunder; provided, however, that (a) no participation contemplated in this Section shall relieve such Lender from its Commitments or its other obligations hereunder or under any other Loan Document; (b) such Lender shall remain solely responsible for the performance of its Commitments and such other obligations; (c) the Borrower and each other Obligor, the Agents and the Issuer shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and each of the other Loan Documents; (d) no Participant, unless such Participant is an Affiliate or Related Fund of such Lender, or is itself a Lender, shall be entitled to require such Lender to take or refrain from taking any action hereunder or under any other Loan Document, except that such Lender may agree with any Participant that such Lender will not, without such Participant's consent, agree to (i) any reduction in the interest rate or amount of fees that such Participant is otherwise entitled to, (ii) a decrease in the principal amount, or an extension of the final Stated Maturity Date, of any Loan in which such Participant has purchased a participating interest or (iii) a release of all or substantially all of the collateral security under the Loan Documents or any Guarantor under any Guaranty, in each case except as otherwise specifically provided in a Loan Document; and (e) the Borrower shall not be required to pay any amount under Sections 4.3, 4.4, 4.5, 4.6, 11.3 and 11.4 that is greater than the amount which it would have been required to pay had no participating interest been sold. -107- The Borrower acknowledges and agrees, subject to clause (e) above, that, to the fullest extent permitted under applicable law, each Participant, for purposes of Sections 4.3, 4.4, 4.5, 4.6, 4.8, 4.9, 11.3 and 11.4, shall be considered a Lender. SECTION 11.12. Other Transactions. Nothing contained herein shall preclude any Agent, the Documentation Agent, the Issuer, the Arranger or any other Lender from engaging in any transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Affiliates in which the Borrower or such Affiliate is not restricted hereby from engaging with any other Person. SECTION 11.13. Independence of Covenants. All covenants contained in this Agreement and each other Loan Document shall be given independent effect such that, in the event a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not, unless expressly so provided in such first covenant, avoid the occurrence of a Default or an Event of Default if such action is taken or such condition exists. SECTION 11.14. Confidentiality. The Agents, the Documentation Agent, the Issuer, the Arranger and the Lenders shall hold all non-public information obtained pursuant to or in connection with this Agreement or obtained by them based on a review of the books and records of Holdings or any of its Subsidiaries in accordance with their customary procedures for handling confidential information of this nature, but may make disclosure to any of their examiners, regulators (including the National Association of Insurance Commissioners), Affiliates, outside auditors, counsel and other professional advisors in connection with this Agreement or as reasonably required by any potential bona fide transferee, participant or assignee, or in connection with the exercise of remedies under a Loan Document, or as requested by any governmental agency or representative thereof or pursuant to legal process; provided, however, that (a) unless specifically prohibited by applicable law or court order, each Agent, the Documentation Agent, the Issuer, the Arranger and each Lender shall promptly notify the Borrower of any request by any governmental agency or representative thereof (other than any such request in connection with an examination of the financial condition of such Agent, the Documentation Agent, the Issuer, Arranger and Lender by such governmental agency) for disclosure of any such non-public information and, where practicable, prior to disclosure of such information; (b) prior to any such disclosure pursuant to this Section 11.14, each Agent, the Documentation Agent, the Issuer, the Arranger and each Lender shall require any such bona fide transferee, participant and assignee receiving a disclosure of non-public information to agree, for the benefit of Holdings and its Subsidiaries, in writing (i) to be bound by this Section 11.14; and -108- (ii) to require such Person to require any other Person to whom such Person discloses such non-public information to be similarly bound by this Section 11.14; (c) disclosure may, with the consent of the Agents and the Borrower, be made by any Lender to any direct or indirect contractual counterparties of such Lender in swap agreements or such contractual counterparties' professional advisors; provided that such contractual counterparty or professional advisor agrees in writing to keep such information confidential to the same extent required of the Lenders hereunder; and (d) except as may be required by an order of a court of competent jurisdiction and to the extent set forth therein, no Lender shall be obligated or required to return any materials furnished by the Borrower or any Subsidiary. SECTION 11.15. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENTS, THE DOCUMENTATION AGENT, THE ARRANGER, THE LENDERS, THE ISSUER, THE BORROWER OR ANY PARENT GUARANTOR RELATING THERETO SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) IN THE COURTS OF THE STATE OF NEW YORK, OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, IN EACH CASE LOCATED IN NEW YORK COUNTY OF THE STATE OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENTS' OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE BORROWER AND EACH PARENT GUARANTOR HEREBY EXPRESSLY AND IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, IN EACH CASE LOCATED IN NEW YORK COUNTY OF THE STATE OF NEW YORK, FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER AND EACH PARENT GUARANTOR IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER AND EACH PARENT GUARANTOR HEREBY EXPRESSLY AND IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH ANY OF THEM MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION -109- HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER OR ANY PARENT GUARANTOR HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER AND EACH PARENT GUARANTOR HEREBY IRREVOCABLY WAIVE (TO THE EXTENT PERMITTED UNDER APPLICABLE LAW) SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. SECTION 11.16. Waiver of Jury Trial. THE AGENTS, THE DOCUMENTATION AGENT, THE ARRANGER, THE ISSUER, THE LENDERS, THE BORROWER AND THE PARENT GUARANTORS HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENTS, THE DOCUMENTATION AGENT, THE ARRANGER, THE LENDERS, THE BORROWER OR THE PARENT GUARANTORS RELATING THERETO. THE BORROWER AND THE PARENT GUARANTORS ACKNOWLEDGE AND AGREE THAT EACH SUCH PERSON HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH SUCH PERSON IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENTS, THE DOCUMENTATION AGENT, THE ARRANGER, THE ISSUER AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. -110- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. BORROWER: DUANE READE By Duane Reade Inc. (formerly known as Duane Reade Holding Corp.), a general partner By /s/ William J. Tennant ------------------------------- Title: Senior Vice President By DRI I Inc. (formerly known as Duane Reade Inc.), a general partner By /s/ William J. Tennant ------------------------------- Title: Senior Vice President PARENT GUARANTORS: DUANE READE INC. (formerly known as Duane Reade Holding Corp.) By /s/ William J. Tennant ------------------------------------- Title: Senior Vice President DRI I INC. (formerly known as Duane Reade Inc.) By /s/ William J. Tennant ------------------------------------- Title: Senior Vice President -111- AGENTS: DLJ CAPITAL FUNDING, INC., as the Syndication Agent By /s/ Authorized Signatory --------------------------------------- Title: FLEET NATIONAL BANK, as the Administrative Agent By /s/ Authorized Signatory --------------------------------------- Title: CREDIT LYONNAIS NEW YORK BRANCH, as the Documentation Agent By /s/ Authorized Signatory --------------------------------------- Title: -112- LENDERS: DLJ CAPITAL FUNDING, INC. By /s/ Authorized Signatory ----------------------------------- Title: FLEET NATIONAL BANK By /s/ Authorized Signatory ----------------------------------- Title: CREDIT LYONNAIS NEW YORK BRANCH By /s/ Authorized Signatory ----------------------------------- Title: SUMMIT BANK By /s/ Authorized Signatory ----------------------------------- Title: BHF-BANK AKTIENGESELLSCHAFT By /s/ Authorized Signatory ----------------------------------- Title: By /s/ Authorized Signatory ----------------------------------- Title: -113- HELLER FINANCIAL, INC. By /s/ Authorized Signatory ----------------------------------- Title: -114- SCHEDULE I DISCLOSURE SCHEDULE ITEM 6.6 Material Adverse Change ITEM 6.7 Litigation. Description of Proceeding Action or Claim Sought ITEM 6.9 Real Property. ITEM 6.11 Employee Benefit Plans. ITEM 6.12 Environmental Matters. ITEM 6.16(c) Pharmaceutical Liabilities. ITEM 7.2.2(b) Indebtedness to be Paid. ITEM 7.2.2(c) Ongoing Indebtedness. ITEM 7.2.5(a) Ongoing Investments. SCHEDULE II to Credit Agreement PERCENTAGES
REVOLVING LOAN Term A Loan Term B Loan COMMITMENT Commitment Commitment -------------- -------------- ------------ DLJ Capital Funding, Inc. 6.2500000000% 6.2500000000% 100% Fleet National Bank 25.0000000000% 25.0000000000% 0% Credit Lyonnais New 18.7500000000% 18.7500000000% 0% York Branch Summit Bank 18.7500000000% 18.7500000000% 0% BHF-Bank 15.6250000000% 15.6250000000% 0% Aktiengesellschaft Heller Financial, Inc. 15.6250000000% 15.6250000000% 0%
ADMINISTRATIVE INFORMATION Notice Information BORROWER: Duane Reade 440 Ninth Avenue New York, New York 10001 Telecopier: 212-273-5795 Attention: Bill Tennant PARENT GUARANTORS: Duane Reade Inc. 440 Ninth Avenue New York, New York 10001 Telecopier: 212-273-5795 Attention: Bill Tennant DRI I Inc. 440 Ninth Avenue New York, New York 10001 Telecopier: 212-273-5795 Attention: Bill Tennant -2- AGENTS: DLJ Capital Funding, Inc., as Syndication Agent 277 Park Avenue New York, New York 10172 Telecopier: 212-892-7272 Attention: Tania Holman Fleet National Bank, as Administrative Agent 1 Federal Street Boston, Massachusetts 02211 Telecopier: 617-346-4806 Attention: Eric Vander Mel Credit Lyonnais New York Branch, as Documentation Agent 1301 Avenue of the Americas New York, New York 10019 Telecopier: 212-459-3176 Attention: John J. D'Angelo -3-
LENDERS: Name of Lender Domestic Office LIBOR Office - -------------- --------------- ------------ DLJ Capital Funding, Inc. 525 Washington Blvd. 525 Washington Blvd. Jersey City, NJ 07310 Jersey City, NJ 07310 Telecopier: 201-610-1965 Telecopier: 201-610-1965 Attention: Ed Vowinkel Attention: Ed Vowinkel Fleet National Bank 1 Federal Street 1 Federal Street Boston, MA 02211 Boston, MA 02211 Telecopier: 617-346-4806 Telecopier: 617-346-4806 Attention: Eric Vander Mel Attention: Eric Vander Mel Credit Lyonnais New York 1301 Avenue of the Americas 1301 Avenue of the Americas Branch New York, NY 10019 New York, NY 10019 Telecopier: 212-261-3776 Telecopier: 212-261-3776 Attention: Allison L. Adams Attention: Allison L. Adams Summit Bank 750 Walnut Ave., 3rd Floor 750 Walnut Ave., 3rd Floor Cranford, NJ 07016 Cranford, NJ 07016 Telecopier: 908-709-6433 Telecopier: 908-709-6433 Attention: Wayne R. Trotman Attention: Wayne R. Trotman BHF-Bank Aktiengesellschaft NY Branch Grand Cayman Branch 590 Madison Ave. c/o 590 Madison Ave. New York, NY 10022 New York, NY 10022 Telecopier: 212-756-5536 Telecopier: 212-756-5536 Attention: Tom Scifo Attention: Tom Scifo Heller Financial, Inc. 500 W. Monroe St. 500 W. Monroe St. Chicago, IL 60661 Chicago, IL 60661 Telecopier: 312-441-7357 Telecopier: 312-441-7357 Attention: Patrick Hayes Attention: Patrick Hayes
-4- SCHEDULE III EXISTING LETTERS OF CREDIT EX-10.13 3 PARTNERSHIP SECURITY AGREEMENT [EXECUTION COPY] PARTNERSHIP SECURITY AGREEMENT This PARTNERSHIP SECURITY AGREEMENT (as amended, supplemented, amended and restated or otherwise modified from time to time, this "Security Agreement"), dated as of February 13, 1998, is made by each of the parties identified on the signature pages hereto as a "Grantor" (each, individually, a "Grantor", and collectively, the "Grantors") in favor of FLEET NATIONAL BANK, as administrative agent (together with its successor(s) thereto, in such capacity, the "Administrative Agent") for each of the Secured Parties. W I T N E S S E T H: WHEREAS, pursuant to a Credit Agreement, dated the date hereof (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Credit Agreement"), among Duane Reade, a New York general partnership (the "Borrower" or the "Partnership"), each of the Grantors, the various financial institutions as are, or may from time to time become, parties thereto (each, individually, a "Lender", and collectively, the "Lenders"), DLJ Capital Funding, Inc., as the Syndication Agent, Fleet National Bank, as the Administrative Agent and Credit Lyonnais New York Branch, as Documentation Agent, the Lenders and the Issuer have extended Commitments to make Credit Extensions to the Borrower; WHEREAS, as a condition precedent to the making of the Credit Extensions (including the initial Credit Extension) under the Credit Agreement, each Grantor is required to execute and deliver this Security Agreement; WHEREAS, each Grantor has duly authorized the execution, delivery and performance of this Security Agreement; and WHEREAS, it is in the best interests of each Grantor to execute this Security Agreement inasmuch as such Grantor will derive substantial direct and indirect benefits from the Credit Extensions made from time to time to the Borrower by the Lenders and the Issuer pursuant to the Credit Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce the Lenders and the Issuer to make Credit Extensions (including the initial Credit Extension) to the Borrower pursuant to the Credit Agreement, and to induce the Secured Parties to enter into Rate Protection Agreement(s), each Grantor agrees, for the benefit of each Secured Party, as follows: ARTICLE I DEFINITIONS SECTION 1.1. Certain Terms. The following terms (whether or not underscored) when used in this Security Agreement, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Administrative Agent" is defined in the preamble. "Borrower" is defined in the first recital. "Collateral" is defined in Section 2.1. "Credit Agreement" is defined in the first recital. "Grantor" and "Grantors" are defined in the preamble. "Lender" and "Lenders" are defined in the first recital. "Partnership" is defined in the first recital. "Partnership Agreement" means the Borrower Partnership Agreement as defined in the Credit Agreement. "Secured Obligations" is defined in Section 2.2. "Security Agreement" is defined in the preamble. "U.C.C." means the Uniform Commercial Code, as in effect from time to time in the State of New York. SECTION 1.2. Credit Agreement Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Security Agreement, including its preamble and recitals, have the meanings provided in the Credit Agreement. SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or in the Credit Agreement or the context otherwise requires, terms for which meanings are provided in the U.C.C. are used in this Security Agreement, including its preamble and recitals, with such meanings. -2- ARTICLE II SECURITY INTEREST SECTION 2.1. Grant of Security. Each Grantor hereby assigns and pledges to the Administrative Agent for its benefit and the ratable benefit of each of the Secured Parties, and hereby grants to the Administrative Agent for its benefit and the ratable benefit of each of the Secured Parties, a security interest in all of the following, whether now or hereafter existing or acquired by such Grantor (the "Collateral"): (a) all right, title and interest of such Grantor, whether now existing or hereafter arising or acquired, in, to and under the Partnership Agreement, including such Grantor's rights, now existing or hereafter arising or acquired, to receive from time to time its share of profits, income, surplus, compensation, return of capital, distributions and other reimbursements and payments from the Partnership (including specific properties of the Partnership upon dissolution and otherwise and all rights and interests as general partner to operate the Partnership); (b) all general or limited partnership interests now owned or hereafter acquired by such Grantor in the Partnership as a result of exchange offers, direct investments or contributions or otherwise; (c) such Grantor's accounts, general intangibles and other rights to payment or reimbursement, now existing or hereafter arising or acquired, from the Partnership, existing or arising from loans, advances or other extensions of credit by such Grantor from time to time to or for the account of the Partnership, or from services rendered by such Grantor from time to time to or for the account of the Partnership; and (d) all products, offspring, rents, issues, profits, returns, income and proceeds of and from any and all of the foregoing Collateral (including proceeds which constitute property of the types described in clauses (a), (b) and (c), and, to the extent not otherwise included, all payments under insurance (whether or not the Administrative Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral). SECTION 2.2. Security for Obligations. This Security Agreement secures the payment of all Obligations of the Borrower now or hereafter existing under the Credit Agreement, the Notes and each other Loan Document to which the Borrower is or may become a party, whether for principal, interest, costs, fees, expenses or otherwise, and all obligations of each Grantor and each other Obligor now or hereafter existing under this Security Agreement and each other Loan Document to which such Grantor or such other Obligor is or may become a party (all such obligations of the Borrower and such Grantor and such other Obligor being the "Secured Obligations"). -3- SECTION 2.3. Continuing Security Interest; Transfer of Notes. This Security Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until payment in full in cash of all Secured Obligations, the termination of all Letters of Credit, the termination or expiration of all Rate Protection Agreements and the termination of all Commitments, (b) be binding upon each Grantor, its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Administrative Agent hereunder, to the benefit of the Administrative Agent and each other Secured Party. Without limiting the generality of the foregoing clause (c), any Lender may assign or otherwise transfer (in whole or in part) any Note or Credit Extension held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under any Loan Document (including this Security Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 11.11 and Article X of the Credit Agreement. Upon the payment in full in cash of all Secured Obligations, the termination or expiration of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments, the security interest granted herein shall terminate and all rights to the Collateral shall revert to such Grantor. Upon any such termination, the Administrative Agent will, at such Grantor's sole expense, execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination. SECTION 2.4. Grantors Remain Liable. Anything herein to the contrary notwithstanding (a) each Grantor shall remain liable under the Partnership Agreement and the contracts and agreements included in the Collateral to the extent set forth therein, and shall perform all of its duties and obligations under the Partnership Agreement and such contracts and agreements to the same extent as if this Security Agreement had not been executed, (b) the exercise by the Administrative Agent of any of its rights hereunder shall not release any Grantor from any of its duties or obligations under the Partnership Agreement and any such contracts or agreements included in the Collateral, and (c) neither the Administrative Agent nor any other Secured Party shall have any obligation or liability under the Partnership Agreement and any such contracts or agreements included in the Collateral by reason of this Security Agreement, nor shall the Administrative Agent or any other Secured Party be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. -4- SECTION 2.5. Security Interest Absolute. All rights of the Administrative Agent and the security interests granted to the Administrative Agent hereunder, and all obligations of each Grantor hereunder, shall be absolute and unconditional, irrespective of (a) any lack of validity or enforceability of the Credit Agreement, any Note or any other Loan Document; (b) the failure of any Secured Party or any holder of any Note (i) to assert any claim or demand or to enforce any right or remedy against the Borrower, any other Obligor or any other Person under the provisions of the Credit Agreement, any Note, any other Loan Document or otherwise, or (ii) to exercise any right or remedy against any other guarantor of, or collateral securing, any Secured Obligations; (c) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations or any other extension, compromise or renewal of any Secured Obligations; (d) any reduction, limitation, impairment or termination of any Secured Obligations for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and each Grantor hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Secured Obligations or otherwise; (e) any amendment to, rescission, waiver, or other modification of, or any consent to departure from, any of the terms of the Credit Agreement, any Note or any other Loan Document; (f) any addition, exchange, release, surrender or non-perfection of any collateral (including the Collateral), or any amendment to or waiver or release of or addition to or consent to departure from any guaranty, for any of the Secured Obligations; or (g) any other circumstances which might otherwise constitute a defense available to, or a legal or equitable discharge of, the Borrower, any other Obligor, any surety or any guarantor. SECTION 2.6. Postponement of Subrogation, etc. Each Grantor hereby agrees that it will not exercise any rights which it may acquire by reason of any payment made hereunder, whether by way of subrogation, reimbursement or otherwise, until the prior payment in full in cash of all Secured Obligations, the termination or expiration of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments. Any -5- amount paid to any Grantor on account of any payment made hereunder prior to the payment in full in cash of all Secured Obligations shall be held in trust for the benefit of the Secured Parties and each holder of a Note and shall immediately be paid to the Administrative Agent for the benefit of the Secured Parties and each holder of a Note and credited and applied against the Secured Obligations, whether matured or unmatured, in accordance with the terms of the Credit Agreement; provided, however, that if (a) such Grantor has made payment to the Administrative Agent for the benefit of the Secured Parties and each holder of a Note of all or any part of the Secured Obligations, and (b) all Secured Obligations have been paid in full in cash, all Letters of Credit have been terminated or expired, all Rate Protection Agreements have been terminated and all Commitments have been permanently terminated, each Secured Party and each holder of a Note agrees that, at the requesting Grantor's request, the Administrative Agent, on behalf of the Secured Parties and the holders of the Notes, will execute and deliver to such Grantor appropriate documents (without recourse and without representation or warranty) necessary to evidence the transfer by subrogation to such Grantor of an interest in the Secured Obligations resulting from such payment by such Grantor. In furtherance of the foregoing, for so long as any Secured Obligations, Commitments or Letters of Credit remain outstanding or any Rate Protection Agreement remains in full force and effect, each Grantor shall refrain from taking any action or commencing any proceeding against the Borrower or any other Obligor (or its successors or assigns, whether in connection with a bankruptcy proceeding or otherwise) to recover any amounts in respect of payments made under this Security Agreement to any Secured Party or any holder of a Note. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1. Representations and Warranties. Each Grantor represents and warrants to each Secured Party insofar as the representations and warranties contained herein are applicable to such Grantor and its properties, as set forth in this Article III. SECTION 3.2. Ownership, No Liens, etc. Such Grantor owns its Collateral free and clear of any Lien, security interest, charge or encumbrance except for the security interest created by this Security Agreement and except as permitted by the Credit Agreement. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Administrative Agent relating to this Security Agreement or as to which a duly executed termination statement relating to such financing statement or other similar instrument has been delivered to the Administrative Agent on the Closing Date. -6- SECTION 3.3. Validity, etc. This Security Agreement creates a valid security interest in the Collateral securing the payment of the Secured Obligations, and upon the filing of the Uniform Commercial Code financing statements delivered by each Grantor to the Administrative Agent with respect to such Collateral, such security interest will be a first priority perfected security interest. The Partnership Agreement (and all amendments thereto) constitutes the valid, binding and enforceable obligations of each Grantor a party thereto, sets forth the entire agreement of the parties thereto with respect to the subject matter thereof, has not been further amended or modified and remains in full force and effect. SECTION 3.4. Partnership Interests, Profits. The character (general and/or limited partner) of each Grantor's interest in the Partnership and each Grantor's percentage interest in the Partnership's profits (with profit interests as a general and as a limited partner separately stated) are as set forth in Schedule I hereto, as amended, supplemented or otherwise modified from time to time with the prior written consent of the Administrative Agent. SECTION 3.5. Certificate. No interest of such Grantor in the Partnership is represented by a certificate of interest or similar instrument, except such certificates or instruments, if any, as have been delivered to the Administrative Agent and are held in its possession (and such Grantor covenants and agrees that any such certificates or instruments hereafter received by such Grantor with respect to any of the Collateral will be promptly delivered to the Administrative Agent, together with all necessary instruments or transfer or assignment, duly executed in blank). SECTION 3.6. Interest in Partnership Agreements. Such Grantor had and has the power and legal capacity to execute and carry out the provisions of the Partnership Agreement. Such Grantor has substantially performed all of its obligations to date under the Partnership Agreement and has not received notice of the failure of any other party thereto to perform substantially its obligations thereunder. SECTION 3.7. Location, Records, etc. The chief executive office of such Grantor and the office where such Grantor keeps its records concerning the Collateral are located at the addresses specified in Schedule II hereto. During the four months preceding the date hereof, such Grantor has not been known by any legal name different from the one set forth on the signature page hereto, nor has such Grantor been the subject of any merger or other corporate reorganization. SECTION 3.8. Authorization, Approval, etc. Except as have been obtained or made and are in full force and effect (or otherwise provided for to the satisfaction of the Agents), no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (a) for the grant by such Grantor of the security interest granted hereby or for the execution, delivery and performance of this Security Agreement by such Grantor, or (b) for the perfection of or the exercise by the Administrative Agent of its rights and remedies hereunder. -7- SECTION 3.9. Compliance with Laws. Such Grantor is in compliance with the requirements of all applicable laws (including the provisions of the Fair Labor Standards Act), rules, regulations and orders of every governmental authority, the non-compliance with which could reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to materially adversely affect the value of the Collateral or the worth of the Collateral as collateral security. ARTICLE IV COVENANTS SECTION 4.1. Certain Covenants. Each Grantor covenants and agrees that, so long as any portion of the Secured Obligations shall remain unpaid, any Rate Protection Agreements shall remain in full force and effect, any Letters of Credit shall be outstanding or any Lender shall have any outstanding Commitment, such Grantor will, unless the Required Lenders shall otherwise consent in writing, perform, comply with and be bound by the obligations set forth in this Article IV. SECTION 4.2. Covenants from Other Agreements. Such Grantor will take all actions necessary to cause the Partnership to perform, comply with and be bound by all of the agreements, covenants and obligations contained in Article VII of the Credit Agreement and in any other Loan Document applicable to the Partnership and its properties. Each such agreement, covenant and obligation contained in such Article or in any other Loan Document and all other terms of the Credit Agreement and the Loan Documents to which reference is made therein, together with all related definitions and ancillary provisions, is hereby incorporated into this Security Agreement by reference as though specifically set forth in this Section, and each such agreement, covenant and obligation shall, for purposes hereof, survive the termination of the Credit Agreement and the Loan Documents (other than this Security Agreement). SECTION 4.3. Maintenance of Records. Such Grantor will keep, at its address indicated on Schedule II hereto, all of its records concerning the Collateral, which records will be of such character as will enable the Administrative Agent or its designees to determine at any time the status thereof, or, upon 30 days' prior written notice to the Administrative Agent, at such other locations in a jurisdiction where all actions necessary to (a) perfect, preserve and protect any security interest granted or purported to be granted hereby and (b) enable the Administrative Agent to exercise and enforce its rights and remedies hereunder, shall have been taken. Such Grantor shall not change its name except upon 30 days' prior written notice to the Administrative Agent and shall hold and preserve such records concerning the Collateral and permit representatives of the Administrative Agent at any time during normal business hours to inspect and make abstracts from such records. SECTION 4.4. Amendment of Partnership Agreement. Such Grantor will not amend, supplement or otherwise modify, or permit, consent or suffer to occur any amendment, supplement or modification of any terms or provisions contained in, or applicable to, the -8- Partnership Agreement, if the effect thereof is to impair, or is in any manner adverse to, the rights or interests of any Secured Party under the Credit Agreement or any other Loan Document, without the prior written consent of the Administrative Agent and the Required Lenders. SECTION 4.5. Withdraw from Partnership. No Grantor will, without the express written consent of the Administrative Agent and the Lenders, actively cause itself to withdraw as a general partner or limited partner, as the case may be, of the Partnership. SECTION 4.6. Transfers and Other Liens. Such Grantor shall not (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral; or (b) create or suffer to exist any Lien or other charge or encumbrance upon or with respect to any of the Collateral to secure Indebtedness of any Person or entity, except for the security interest created by this Security Agreement and except as permitted by the Credit Agreement. SECTION 4.7. Further Assurances, etc. Such Grantor agrees that, from time to time at its own expense, such Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Administrative Agent may request, in order to perfect, preserve and protect any security interest granted or purported to be granted hereby or to enable the Administrative Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, such Grantor will (a) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices (including any assignment of claim form under or pursuant to the federal assignment of claims statute, 31 U.S.C. ss. 3726, any successor or amended version thereof or any regulation promulgated under or pursuant to any version thereof), as may be necessary or desirable, or as the Administrative Agent may request, in order to perfect and preserve the security interests and other rights granted or purported to be granted to the Administrative Agent hereby; and (b) furnish to the Administrative Agent, from time to time at the Administrative Agent's request, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Administrative Agent may reasonably request, all in reasonable detail. With respect to the foregoing and the grant of the security interest hereunder, such Grantor hereby authorizes the Administrative Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of such Grantor where permitted by law. A carbon, photographic or other reproduction -9- of this Security Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. ARTICLE V THE ADMINISTRATIVE AGENT SECTION 5.1. Administrative Agent Appointed Attorney-in-Fact. Each Grantor hereby irrevocably appoints the Administrative Agent such Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor or otherwise, from time to time in the Administrative Agent's discretion, following the occurrence and continuation of a Default of the nature set forth in Section 8.1.9 of the Credit Agreement or an Event of Default, to take any action and to execute any instrument which the Administrative Agent may deem necessary or advisable to accomplish the purposes of this Security Agreement, including: (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; (c) to file any claims or take any action or institute any proceedings which the Administrative Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Administrative Agent with respect to any of the Collateral; and (d) to perform the affirmative obligations of such Grantor hereunder (including all obligations of such Grantor pursuant to Section 4.7). Such Grantor hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 5.2. Administrative Agent May Perform. If any Grantor fails to perform any agreement contained herein, the Administrative Agent may itself perform, or cause performance of, such agreement, and the expenses of the Administrative Agent incurred in connection therewith shall be payable by such Grantor pursuant to Section 6.2. SECTION 5.3. Administrative Agent Has No Duty. In addition to, and not in limitation of, Section 2.4, the powers conferred on the Administrative Agent hereunder are solely to protect its interest (on behalf of the Secured Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Administrative Agent shall have -10- no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4. Reasonable Care. The Administrative Agent is required to exercise reasonable care in the custody and preservation of any of the Collateral in its possession; provided, however, the Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral, if it takes such action for that purpose as any Grantor reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Administrative Agent to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. ARTICLE VI REMEDIES SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred and be continuing: (a) The Administrative Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and also may (i) require each Grantor to, and such Grantor hereby agrees that it will, at its expense and upon request of the Administrative Agent forthwith, assemble all or part of the Collateral as directed by the Administrative Agent and make it available to the Administrative Agent at a place to be designated by the Administrative Agent which is reasonably convenient to all parties, and (ii) without notice except as specified below, sell the Collateral or any part thereof at public or private sale, at any of the Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Administrative Agent may deem commercially reasonable. Each Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to such Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. -11- (b) All cash proceeds received by the Administrative Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral shall be applied by the Administrative Agent against, all or any part of the Obligations as follows: (i) first, to the payment of any amounts payable to the Administrative Agent pursuant to Section 11.3 of the Credit Agreement and Section 6.2; (ii) second, to the equal and ratable payment of Obligations, in accordance with each Secured Party's Obligations owing to it under or pursuant to the Credit Agreement or any other Loan Document, or under or pursuant to any Hedging Obligation included in the Obligations as to each Secured Party, applied (A) first to fees and expense reimbursements then due to such Secured Party, (B) then to interest due to such Secured Party, (C) then to pay or prepay principal of the Loans owing to, or to reduce the "credit exposure" of, such Secured Party under such Hedging Obligation, as the case may be, and (D) then to pay the remaining outstanding Obligations and cash collateralize all Letter of Credit Outstandings; (iii) third, without duplication of any amounts paid pursuant to clause (b)(ii) above, to the Indemnified Parties to the extent of any amounts owing pursuant to Section 11.4 of the Credit Agreement; and (iv) fourth, to be held as additional collateral security until the payment in full in cash of all of the Obligations, the termination or expiration of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments, after which such remaining cash proceeds shall be paid over to the applicable Grantor or to whomsoever may be lawfully entitled to receive such surplus. For purposes of this Security Agreement, the "credit exposure" at any time of any Secured Party with respect to a Hedging Obligation to which such Secured Party is a party shall be determined at such time in accordance with the customary methods of calculating credit exposure under similar arrangements by the counterparty to such arrangements, taking into account potential interest rate movements and the respective termination provisions and notional principal amount and term of such Hedging Obligation. SECTION 6.2. Indemnity and Expenses. -12- (a) Each Grantor jointly and severally agrees to indemnify the Administrative Agent from and against any and all claims, losses and liabilities arising out of or resulting from this Security Agreement (including enforcement of this Security Agreement), except claims, losses or liabilities resulting from the Administrative Agent's gross negligence or wilful misconduct. (b) Each Grantor will upon demand pay to the Administrative Agent the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, which the Administrative Agent may incur in connection with (i) the administration of this Security Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Administrative Agent or the Secured Parties hereunder, and (iv) the failure by any Grantor to perform or observe any of the provisions hereof. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1. Loan Document. This Security Agreement is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. SECTION 7.2. Amendments; etc. No amendment to or waiver of any provision of this Security Agreement nor consent to any departure by any Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Administrative Agent (on behalf of the Lenders or the Required Lenders, as the case may be) and by the Guarantor in the case of an amendment, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 7.3. Addresses for Notices. All notices and other communications provided for hereunder to any party hereto shall be in writing (including telegraphic communication) and mailed or telecopied or delivered to such party, addressed to such party at its address specified in the Credit Agreement. All such notices and other communications, when mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any such notice or communication, if transmitted by telecopier, shall be deemed given when transmitted and electronically confirmed. -13- SECTION 7.4. Section Captions. Section captions used in this Security Agreement are for convenience of reference only, and shall not affect the construction of this Security Agreement. SECTION 7.5. Severability. Wherever possible each provision of this Security Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Security Agreement. SECTION 7.6. Counterparts. This Security Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SECTION 7.7. Governing Law, Entire Agreement, etc. THIS SECURITY AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. THIS SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO. -14- IN WITNESS WHEREOF, each Grantor has caused this Security Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. GRANTORS: DUANE READE INC. (formerly known as Duane Reade Holding Corp.), a Delaware corporation By /s/ William J. Tennant ---------------------------------- Name: William J. Tennant Title: Senior Vice President DRI I INC. (formerly known as Duane Reade Inc., a Delaware corporation By /s/ William J. Tennant ---------------------------------- Name: William J. Tennant Title: Senior Vice President FLEET NATIONAL BANK, as Administrative Agent By /s/ Eric C. Vander Mel ---------------------------------- Name: Eric C. Vander Mel Title: Vice President -15- SCHEDULE I to Partnership Security Agreement TYPE OF PERCENTAGE OF PARTNERSHIP INTEREST NAME OF GRANTOR INTEREST PLEDGED PLEDGED - --------------- ---------------- ------- DUANE READE INC. GENERAL 99% DRI I Inc. General 1% SCHEDULE II to Partnership Security Agreement Chief Executive Office ---------------------- DUANE READE INC. 440 NINTH AVENUE NEW YORK, NEW YORK 10001 DRI I INC. 440 NINTH AVENUE NEW YORK, NEW YORK 10001 EX-10.14 4 BORROWER SECURITY AGREEMENT [EXECUTION COPY] BORROWER SECURITY AGREEMENT This BORROWER SECURITY AGREEMENT (as amended, supplemented, amended and restated or otherwise modified from time to time, this "Security Agreement"), dated as of February 13, 1998, is made by DUANE READE, a New York general partnership (the "Grantor"), in favor of FLEET NATIONAL BANK, as administrative agent (together with its successor(s) thereto, in such capacity the "Administrative Agent") for each of the Secured Parties. W I T N E S S E T H: WHEREAS, pursuant to a Credit Agreement, dated February 13, 1998 (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Credit Agreement"), among the Grantor, each of the Parent Guarantors named therein, the various financial institutions as are, or may from time to time become, parties thereto (each individually a "Lender" and collectively the "Lenders"), DLJ Capital Funding, Inc., as Syndication Agent, Fleet National Bank, as the Administrative Agent and Credit Lyonnais New York Branch, as Documentation Agent, the Lenders and the Issuer have extended Commitments to make Credit Extensions to the Grantor; WHEREAS, as a condition precedent to the making of the Credit Extensions (including the initial Credit Extension) under the Credit Agreement, the Grantor is required to execute and deliver this Security Agreement; and WHEREAS, the Grantor has duly authorized the execution, delivery and performance of this Security Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce the Lenders and the Issuer to make Credit Extensions (including the initial Credit Extension) to the Grantor pursuant to the Credit Agreement and to induce the Secured Parties to enter into Rate Protection Agreement(s), the Grantor agrees, for the benefit of each Secured Party, as follows: ARTICLE I DEFINITIONS SECTION 1.1. Certain Terms. The following terms (whether or not underscored) when used in this Security Agreement, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Administrative Agent" is defined in the preamble. "Collateral" is defined in Section 2.1. "Collateral Account" is defined in Section 4.3(b). "Computer Hardware and Software Collateral" means: (a) all computer and other electronic data processing hardware, integrated computer systems, central processing units, memory units, display terminals, printers, features, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories and all peripheral devices and other related computer hardware; (b) all software programs (including both source code, object code and all related applications and data files), whether now owned, licensed or leased or hereafter acquired by the Grantor, designed for use on the computers and electronic data processing hardware described in clause (a) above; (c) all firmware associated therewith; (d) all documentation (including flow charts, logic diagrams, manuals, guides and specifications) with respect to such hardware, software and firmware described in the preceding clauses (a) through (c); and (e) all rights with respect to all of the foregoing, including any and all copyrights, licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications and any substitutions, replacements, additions or model conversions of any of the foregoing. "Copyright Collateral" means all copyrights (including all copyrights for semiconductor chip product mask works) of the Grantor, whether statutory or common law, registered or unregistered, now or hereafter in force throughout the world including all of the Grantor's right, title and interest in and to all copyrights registered in the United States Copyright Office or anywhere else in the world and also including the copyrights referred to in Item A of Schedule IV attached hereto, and all applications for registration thereof, whether pending or in -2- preparation, all copyright licenses, including each copyright license referred to in Item B of Schedule IV attached hereto, the right to sue for past, present and future infringements of any thereof, all rights corresponding thereto throughout the world, all extensions and renewals of any thereof and all proceeds of the foregoing, including licenses, royalties, income, payments, claims, damages and proceeds of suit. "Credit Agreement" is defined in the first recital. "Equipment" is defined in clause (a) of Section 2.1. "Grantor" is defined in the preamble. "Intellectual Property Collateral" means, collectively, the Computer Hardware and Software Collateral, the Copyright Collateral, the Patent Collateral, the Trademark Collateral and the Trade Secrets Collateral. "Inventory" is defined in clause (b) of Section 2.1 "Lender" and "Lenders" are defined in the first recital. "Patent Collateral" means: (a) all letters patent and applications for letters patent throughout the world, including all patent applications in preparation for filing anywhere in the world and including each patent and patent application referred to in Item A of Schedule II attached hereto; (b) all reissues, divisions, continuations, continuations-in-part, extensions, renewals and reexaminations of any of the items described in clause (a); (c) all patent licenses, including each patent license referred to in Item B of Schedule II attached hereto; and (d) all proceeds of, and rights associated with, the foregoing (including license royalties and proceeds of infringement suits), the right to sue third parties for past, present or future infringements of any patent or patent application, including any patent or patent application referred to in Item A of Schedule II attached hereto, and for breach or enforcement of any patent license, including any patent license referred to in Item B of Schedule II attached hereto, and all rights corresponding thereto throughout the world. "Receivables" is defined in clause (c) of Section 2.1. "Related Contracts" is defined in clause (c) of Section 2.1. -3- "Security Agreement" is defined in the preamble. "Trademark Collateral" means: (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, certification marks, collective marks, logos, other source of business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of a like nature (all of the foregoing items in this clause (a) being collectively called a "Trademark"), now existing anywhere in the world or hereafter adopted or acquired, whether currently in use or not, all registrations and recordings thereof and all applications in connection therewith, whether pending or in preparation for filing, including registrations, recordings and applications in the United States Patent and Trademark Office or in any office or agency of the United States of America or any State thereof or any foreign country, including those referred to in Item A of Schedule III attached hereto; (b) all Trademark licenses, including each Trademark license referred to in Item B of Schedule III attached hereto; (c) all reissues, extensions or renewals of any of the items described in clauses (a) and (b); (d) all of the goodwill of the business connected with the use of, and symbolized by the items described in, clauses (a) and (b); and (e) all proceeds of, and rights associated with, the foregoing, including any claim by the Grantor against third parties for past, present or future infringement or dilution of any Trademark, Trademark registration or Trademark license, including any Trademark, Trademark registration or Trademark license referred to in Item A and Item B of Schedule III attached hereto, or for any injury to the goodwill associated with the use of any such Trademark or for breach or enforcement of any Trademark license. "Trade Secrets Collateral" means all common law and statutory trade secrets and all other confidential or proprietary or useful information and all know-how obtained by or used in or contemplated at any time for use in the business of the Grantor (all of the foregoing being collectively called a "Trade Secret"), whether or not such Trade Secret has been reduced to a writing or other tangible form, including all documents and things embodying, incorporating or referring in any way to such Trade Secret, all Trade Secret licenses, including each Trade Secret license referred to in Schedule V attached hereto, and including the right to sue for and to enjoin and to collect damages for the actual or threatened misappropriation of any Trade Secret and for the breach or enforcement of any such Trade Secret license. -4- "U.C.C." means the Uniform Commercial Code, as in effect from time to time in the State of New York. SECTION 1.2. Credit Agreement Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Security Agreement, including its preamble and recitals, have the meanings provided in the Credit Agreement. SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or in the Credit Agreement or the context otherwise requires, terms for which meanings are provided in the U.C.C. are used in this Security Agreement, including its preamble and recitals, with such meanings. ARTICLE II SECURITY INTEREST SECTION 2.1. Grant of Security. The Grantor hereby assigns and pledges to the Administrative Agent for its benefit and the ratable benefit of each of the Secured Parties, and hereby grants to the Administrative Agent for its benefit and the ratable benefit of each of the Secured Parties, a security interest in all of the following, whether now or hereafter existing or acquired by the Grantor (the "Collateral"): (a) all equipment in all of its forms of the Grantor, wherever located, including all parts thereof and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor and all accessories related thereto (any and all of the foregoing being the "Equipment"); (b) all inventory in all of its forms of the Grantor, wherever located, including (i) all raw materials and work in process therefor, finished goods thereof, and materials used or consumed in the manufacture or production thereof, (ii) all goods in which the Grantor has an interest in mass or a joint or other interest or right of any kind (including goods in which the Grantor has an interest or right as consignee), and (iii) all goods which are returned to or repossessed by the Grantor, and all accessions thereto, products thereof and documents therefor (any and all such inventory, materials, goods, accessions, products and documents being the "Inventory"); (c) all accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles (including tax refunds) of the Grantor, whether or not arising out -5- of or in connection with the sale or lease of goods or the rendering of services, and all rights of the Grantor now or hereafter existing in and to all security agreements, guaranties, leases and other contracts securing or otherwise relating to any such accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles (any and all such accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles being the "Receivables" (provided, however, that Receivables shall not include Prescription Receivables sold to Pharmacy Fund pursuant to the Rapid Remit Program), and any and all such security agreements, guaranties, leases and other contracts being the "Related Contracts") (provided, however, that Related Contracts shall not include the Rapid Remit Program Documents); (d) all Intellectual Property Collateral of the Grantor; (e) all books, records, writings, data bases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating or referring to, any of the foregoing in this Section 2.1; (f) all of the Grantor's other property and rights of every kind and description and interests therein; and (g) all products, offspring, rents, issues, profits, returns, income and proceeds of and from any and all of the foregoing Collateral (including proceeds which constitute property of the types described in clauses (a), (b), (c), (d), (e) and (f), proceeds deposited from time to time in the Collateral Account and in any lock boxes of the Grantor, and, to the extent not otherwise included, all payments under insurance (whether or not the Administrative Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral). Notwithstanding the foregoing, "Collateral" shall not include any general intangibles or other rights arising under any contracts, instruments, licenses or other documents as to which the grant of a security interest would constitute a violation of a valid and enforceable restriction in favor of a third party on such grant, unless and until any required consents shall have been obtained. The Grantor agrees to use its commercially reasonable best efforts to obtain any such required consent. SECTION 2.2. Security for Obligations. This Security Agreement secures the payment of all Obligations of the Grantor now or hereafter existing under the Credit Agreement, the Notes and each other Loan Document to which the Grantor is or may become a party, whether for principal, interest, costs, fees, expenses or otherwise. SECTION 2.3. Continuing Security Interest; Transfer of Notes. This Security Agreement shall create a continuing security interest in the Collateral and shall -6- (a) remain in full force and effect until payment in full in cash of all Obligations, the termination or expiration of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments, (b) be binding upon the Grantor, its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Administrative Agent hereunder, to the benefit of the Administrative Agent and each other Secured Party. Without limiting the generality of the foregoing clause (c), any Lender may assign or otherwise transfer (in whole or in part) any Note or Credit Extension held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under any Loan Document (including this Security Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 11.11 and Article X of the Credit Agreement. Upon the payment in full in cash of all Obligations, the termination or expiration of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments, the security interest granted herein shall terminate and all rights to the Collateral shall revert to the Grantor. Upon any such termination, the Administrative Agent will, at the Grantor's sole expense, execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination. Upon any sale or other transfer of Collateral permitted by the terms of Section 7.2.9 of the Credit Agreement, the security interest created hereunder in such Collateral (but not in the proceeds thereof) shall be deemed to be automatically released and the Administrative Agent will, at the Grantor's sole expense, execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such release. SECTION 2.4. Grantor Remains Liable. Anything herein to the contrary notwithstanding (a) the Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein, and shall perform all of its duties and obligations under such contracts and agreements to the same extent as if this Security Agreement had not been executed, (b) the exercise by the Administrative Agent of any of its rights hereunder shall not release the Grantor from any of its duties or obligations under any such contracts or agreements included in the Collateral, and (c) neither the Administrative Agent nor any other Secured Party shall have any obligation or liability under any such contracts or agreements included in the Collateral by reason of this Security Agreement, nor shall the Administrative Agent or any other Secured Party be obligated to perform any of the obligations or duties of the Grantor -7- thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1. Representations and Warranties. The Grantor represents and warrants to each Secured Party as set forth in this Article III. SECTION 3.2. Location of Collateral, etc. All of the Equipment, Inventory and lock boxes of the Grantor are located at the places specified in Item A, Item B and Item C, respectively, of Schedule I hereto. None of the Equipment and Inventory has, within the four months preceding the date of this Security Agreement (if then owned by the Grantor), been located at any place other than the places specified in Item A and Item B, respectively, of Schedule I hereto except as set forth in a footnote thereto. The place(s) of business and chief executive office of the Grantor and the office(s) where the Grantor keeps its records concerning the Receivables, and all originals of all chattel paper which evidence Receivables, are located at the address set forth in Item D of Schedule I hereto. The Grantor has no trade names other than those set forth in Item E of Schedule I hereto. During the four months preceding the date hereof, the Grantor has not been known by any legal name different from the one set forth on the signature page hereto, nor has the Grantor been the subject of any merger or other corporate reorganization, except as set forth in Item F of Schedule I hereto. If the Collateral includes any Inventory located in the State of California, the Grantor is not a "retail merchant" within the meaning of Section 9102 of the Uniform Commercial Code - Secured Transactions of the State of California. All Receivables evidenced by a promissory note or other instrument, negotiable document or chattel paper have been duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to the Administrative Agent and delivered and pledged to the Administrative Agent pursuant to Section 4.8. The Grantor is not a party to any Federal, state or local government contract except as set forth in Item G of Schedule I hereto. SECTION 3.3. Ownership, No Liens, etc. The Grantor owns its Collateral free and clear of any Lien, security interest, charge or encumbrance except for the security interest created by this Security Agreement and except as permitted by the Credit Agreement. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Administrative Agent relating to this Security Agreement or as have been filed in connection with Liens permitted pursuant to Section 7.2.3 of the Credit Agreement or as to which a duly executed termination statement relating to such financing statement or other instrument has been delivered to the Administrative Agent on the Closing Date. -8- SECTION 3.4. Possession and Control. The Grantor has exclusive possession and control of its Equipment and Inventory. SECTION 3.5. Negotiable Documents, Instruments and Chattel Paper. The Grantor has, contemporaneously herewith, delivered to the Administrative Agent possession of all originals of all negotiable documents, instruments and chattel paper currently owned or held by the Grantor (duly endorsed in blank, if requested by the Administrative Agent). SECTION 3.6. Intellectual Property Collateral. With respect to any Intellectual Property Collateral the loss, impairment or infringement of which might have a Material Adverse Effect: (a) such Intellectual Property Collateral is subsisting and has not been adjudged invalid or unenforceable, in whole or in part; (b) such Intellectual Property Collateral is valid and enforceable; (c) the Grantor has made all necessary filings and recordations to protect its interest in such Intellectual Property Collateral, including recordations of all of its interests in the Patent Collateral and Trademark Collateral in the United States Patent and Trademark Office and in corresponding offices in countries in which the failure to so file and/or record could reasonably be expected to have a Material Adverse Effect and its claims to the Copyright Collateral in the United States Copyright Office and in corresponding offices in countries in which the failure to so file and/or record could reasonably be expected to have a Material Adverse Effect; (d) the Grantor is the exclusive owner of the entire and unencumbered right, title and interest in and to such Intellectual Property Collateral and no claim has been made that the use of such Intellectual Property Collateral does or may violate the asserted rights of any third party; and (e) the Grantor has performed and will continue to perform all acts and has paid and will continue to pay all required fees and taxes to maintain each and every such item of Intellectual Property Collateral in full force and effect throughout the world, as applicable. The Grantor owns directly or is entitled to use by license or otherwise, all patents, Trademarks, Trade Secrets, copyrights, mask works, licenses, technology, know-how, processes and rights with respect to any of the foregoing used in, necessary for or of importance to the conduct of the Grantor's business. SECTION 3.7. Validity, etc. This Security Agreement creates a valid first priority security interest in the Collateral securing the payment of the Obligations, and -9- (a) in the case of Collateral comprised of certificated securities or instruments, upon the delivery of such Collateral to the Administrative Agent, such security interest will be a first priority perfected security interest; (b) in the case of Collateral comprised of uncertificated securities with respect to which a security interest therein may not be perfected under applicable law by the filing of a Uniform Commercial Code financing statement, upon a "transfer" (as such term is used in Section 8-313 of the U.C.C.) of such Collateral to the Administrative Agent, such security interest will be a first priority perfected security interest; and (c) in the case of all other Collateral, upon the filing of the Uniform Commercial Code financing statements delivered by the Grantor to the Administrative Agent with respect to such Collateral, such security interest will be a first priority perfected security interest. The Grantor has filed all Uniform Commercial Code financing statements referred to above in the appropriate offices therefor (or has provided the Administrative Agent with copies thereof suitable for filing in such offices), and has taken all of the other actions referred to above necessary to create perfected, first-priority security interests in the applicable Collateral. SECTION 3.8. Authorization, Approval, etc. Except as have been obtained or made and are in full force and effect (or otherwise provided for to the satisfaction of the Agents), no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (a) for the grant by the Grantor of the security interest granted hereby or for the execution, delivery and performance of this Security Agreement by the Grantor, or (b) for the perfection of or the exercise by the Administrative Agent of its rights and remedies hereunder. SECTION 3.9. Compliance with Laws. The Grantor is in compliance with the requirements of all applicable laws (including the provisions of the Fair Labor Standards Act), rules, regulations and orders of every governmental authority, the non-compliance with which could reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to materially adversely affect the value of the Collateral or the worth of the Collateral as collateral security. -10- ARTICLE IV COVENANTS SECTION 4.1. Certain Covenants. The Grantor covenants and agrees that, so long as any portion of the Obligations shall remain unpaid, any Letters of Credit shall be outstanding, any Rate Protection Agreements shall remain in full force and effect, or any Lender shall have any outstanding Commitment, the Grantor will, unless the Required Lenders shall otherwise consent in writing, perform, comply with and be bound by the obligations set forth in this Article IV. SECTION 4.2. As to Equipment and Inventory. The Grantor hereby agrees that it shall (a) keep all the Equipment and Inventory (other than Inventory sold in the ordinary course of business) at the places therefor specified in Section 3.2 or, upon 30 days' prior written notice to the Administrative Agent, at such other places in a jurisdiction where all representations and warranties set forth in Article III (including Section 3.7) shall be true and correct, and all action required pursuant to the first sentence of Section 4.8 shall have been taken with respect to the Equipment and Inventory; (b) cause the Equipment to be maintained and preserved as required by Section 7.1.3 of the Credit Agreement; and promptly furnish to the Administrative Agent a statement respecting any loss or damage to any of such material Equipment; and (c) pay promptly when due all property and other material taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Equipment and Inventory, except to the extent the validity thereof is being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been set aside. SECTION 4.3. As to Receivables. (a) The Grantor shall keep its place(s) of business and chief executive office and the office(s) where it keeps its records concerning the Receivables, and all originals of all chattel paper which evidences Receivables, located at the address(es) set forth in Item D of Schedule I hereto, or, upon 30 days' prior written notice to the Administrative Agent, at such other locations in a jurisdiction where all actions required by the first sentence of Section 4.8 shall have been taken with respect to the Receivables; not change its name except upon 30 days' prior written notice to the Administrative Agent; hold and preserve such records and chattel paper; and permit representatives of the Administrative Agent at any time during normal business hours to inspect and make abstracts from such records and chattel paper. In addition, the Grantor shall give the Administrative Agent a supplement to Schedule I hereto on each date a Compliance Certificate is required to be -11- delivered to the Administrative Agent under the Credit Agreement, which shall set forth any changes to the information set forth in Section 3.2. (b) Upon written notice by the Administrative Agent to the Grantor pursuant to this Section 4.3(b), all proceeds of Collateral received by the Grantor shall be delivered in kind to the Administrative Agent for deposit to a deposit account (the "Collateral Account") of the Grantor maintained with the Administrative Agent, and the Grantor shall not commingle any such proceeds, and shall hold separate and apart from all other property, all such proceeds in express trust for the benefit of the Administrative Agent until delivery thereof is made to the Administrative Agent. The Administrative Agent will not give the notice referred to in the preceding sentence unless there shall have occurred and be continuing a Default of the nature set forth in Section 8.1.9 of the Credit Agreement or an Event of Default. (c) The Administrative Agent shall have the right to apply any amount in the Collateral Account to the payment of any Obligations which are due and payable or payable upon demand, or to the payment of any Obligations at any time that an Event of Default shall exist. SECTION 4.4. As to Collateral. (a) Until the occurrence and continuance of a Default of the nature set forth in Section 8.1.9 of the Credit Agreement or an Event of Default, and such time as the Administrative Agent shall notify the Grantor of the revocation of such power and authority the Grantor (i) may in the ordinary course of its business (except as otherwise permitted under the Credit Agreement), at its own expense, sell, lease or furnish under the contracts of service any of the Inventory normally held by the Grantor for such purpose, and use and consume, in the ordinary course of its business (except as otherwise permitted under the Credit Agreement), any raw materials, work in process or materials normally held by the Grantor for such purpose, (ii) will, at its own expense, endeavor to collect, as and when due, all amounts due with respect to any of the Collateral, including the taking of such action with respect to such collection as the Administrative Agent may reasonably request following the occurrence of a Default of the nature set forth in Section 8.1.9 of the Credit Agreement or an Event of Default or, in the absence of such request, as the Grantor may deem advisable, and (iii) may grant, in the ordinary course of business (except as otherwise permitted under the Credit Agreement), to any party obligated on any of the Collateral, any rebate, refund or allowance to which such party may be lawfully entitled, and may accept, in connection therewith, the return of goods, the sale or lease of which shall have given rise to such Collateral. The Administrative Agent, however, may, at any time following a Default of the nature set forth in Section 8.1.9 of the Credit Agreement or an Event of Default, whether before or after any revocation of such power and authority or the maturity of any of the Obligations, notify any parties obligated on any of the Collateral to make payment to the Administrative Agent of any amounts due or to become due thereunder and enforce collection of any of -12- the Collateral by suit or otherwise and surrender, release, or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder or evidenced thereby. Upon request of the Administrative Agent following a Default of the nature set forth in Section 8.1.9 of the Credit Agreement or an Event of Default, the Grantor will, at its own expense, notify any parties obligated on any of the Collateral to make payment to the Administrative Agent of any amounts due or to become due thereunder. (b) Following a Default of the nature set forth in Section 8.1.9 of the Credit Agreement or an Event of Default, the Administrative Agent is authorized to endorse, in the name of the Grantor, any item, howsoever received by the Administrative Agent, representing any payment on or other proceeds of any of the Collateral. SECTION 4.5. As to Intellectual Property Collateral. The Grantor covenants and agrees to comply with the following provisions as such provisions relate to any Intellectual Property Collateral of the Grantor: (a) the Grantor shall not, unless the Grantor shall either (i) reasonably and in good faith determine (and notice of such determination shall have been delivered to the Administrative Agent) that any of the Patent Collateral is of negligible economic value to the Grantor, or (ii) have a valid business purpose to do otherwise, do any act, or omit to do any act, whereby any of the Patent Collateral may lapse or become abandoned or dedicated to the public or unenforceable. (b) the Grantor shall not, and the Grantor shall not permit any of its licensees to, unless the Grantor shall either (i) reasonably and in good faith determine (and notice of such determination shall have been delivered to the Administrative Agent) that any of the Trademark Collateral is of negligible economic value to the Grantor, or (ii) have a valid business purpose to do otherwise, (i) fail to continue to use any of the Trademark Collateral in order to maintain all of the Trademark Collateral in full force free from any claim of abandonment for non-use, (ii) fail to maintain as in the past the quality of products and services offered under all of the Trademark Collateral, (iii) fail to employ all of the Trademark Collateral registered with any Federal or state or foreign authority with an appropriate notice of such registration, (iv) adopt or use any other Trademark which is confusingly similar or a colorable imitation of any of the Trademark Collateral, -13- (v) use any of the Trademark Collateral registered with any Federal or state or foreign authority except for the uses for which registration or application for registration of all of the Trademark Collateral has been made, and (vi) do or permit any act or knowingly omit to do any act whereby any of the Trademark Collateral may lapse or become invalid or unenforceable. (c) the Grantor shall not, unless the Grantor shall either (i) reasonably and in good faith determine (and notice of such determination shall have been delivered to the Administrative Agent) that any of the Copyright Collateral or any of the Trade Secrets Collateral is of negligible economic value to the Grantor, or (ii) have a valid business purpose to do otherwise, do or permit any act or knowingly omit to do any act whereby any of the Copyright Collateral or any of the Trade Secrets Collateral may lapse or become invalid or unenforceable or placed in the public domain except upon expiration of the end of an unrenewable term of a registration thereof. (d) the Grantor shall notify the Administrative Agent immediately if it knows, or has reason to know, that any application or registration relating to any material item of the Intellectual Property Collateral may become abandoned or dedicated to the public or placed in the public domain or invalid or unenforceable, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any foreign counterpart thereof or any court) regarding the Grantor's ownership of any of the Intellectual Property Collateral, its right to register the same or to keep and maintain and enforce the same. (e) in no event shall the Grantor or any of its agents, employees, designees or licensees file an application for the registration of any Intellectual Property Collateral with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, unless it promptly informs the Administrative Agent, and upon request of the Administrative Agent, executes and delivers any and all agreements, instruments, documents and papers as the Administrative Agent may reasonably request to evidence the Administrative Agent's security interest in such Intellectual Property Collateral and the goodwill and general intangibles of the Grantor relating thereto or represented thereby. (f) the Grantor shall take all necessary steps, including in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue any application (and to obtain the relevant registration) filed with respect to, and to maintain any registration of, the Intellectual Property Collateral, including the filing of applications for renewal, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings and the -14- payment of fees and taxes (except to the extent that dedication, abandonment or invalidation is permitted under the foregoing clauses (a), (b) and (c)). (g) the Grantor shall, contemporaneously herewith, execute and deliver to the Administrative Agent a Trademark Security Agreement in the form of Exhibit B hereto, and shall execute and deliver to the Administrative Agent any other document required to acknowledge or register or perfect the Administrative Agent's interest in any part of the Intellectual Property Collateral. SECTION 4.6. Insurance. The Grantor will maintain or cause to be maintained with responsible insurance companies insurance with respect to its business and properties (including the Equipment and Inventory) against such casualties and contingencies and of such types and in such amounts as is required pursuant to the Credit Agreement and will, upon the request of the Administrative Agent, furnish a certificate of a reputable insurance broker setting forth the nature and extent of all insurance maintained by the Grantor in accordance with this Section. SECTION 4.7. Transfers and Other Liens. The Grantor shall not: (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except Inventory in the ordinary course of business or as permitted by the Credit Agreement; or (b) create or suffer to exist any Lien or other charge or encumbrance upon or with respect to any of the Collateral to secure Indebtedness of any Person or entity, except for the security interest created by this Security Agreement and except as permitted by the Credit Agreement. SECTION 4.8. Further Assurances, etc. The Grantor agrees that, from time to time at its own expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Administrative Agent may request, in order to perfect, preserve and protect any security interest granted or purported to be granted hereby or to enable the Administrative Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Grantor will (a) mark conspicuously each document included in the Inventory, each chattel paper included in the Receivables and each Related Contract and, at the request of the Administrative Agent, each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to the Administrative Agent, indicating that such document, chattel paper, Related Contract or Collateral is subject to the security interest granted hereby; (b) if any Receivable shall be evidenced by a promissory note or other instrument, negotiable document or chattel paper, deliver and pledge to the -15- Administrative Agent hereunder such promissory note, instrument, negotiable document or chattel paper duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to the Administrative Agent; (c) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices (including any assignment of claim form under or pursuant to the federal assignment of claims statute, 31 U.S.C. ss. 3726, any successor or amended version thereof or any regulation promulgated under or pursuant to any version thereof), as may be necessary or desirable, or as the Administrative Agent may request, in order to perfect and preserve the security interests and other rights granted or purported to be granted to the Administrative Agent hereby; and (d) furnish to the Administrative Agent, from time to time at the Administrative Agent's request, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Administrative Agent may reasonably request, all in reasonable detail. With respect to the foregoing and the grant of the security interest hereunder, the Grantor hereby authorizes the Administrative Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Grantor where permitted by law. A carbon, photographic or other reproduction of this Security Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. ARTICLE V THE ADMINISTRATIVE AGENT SECTION 5.1. Administrative Agent Appointed Attorney-in-Fact. The Grantor hereby irrevocably appoints the Administrative Agent the Grantor's attorney-in-fact, with full authority in the place and stead of the Grantor and in the name of the Grantor or otherwise, from time to time in the Administrative Agent's discretion, following the occurrence and continuation of a Default of the nature set forth in Section 8.1.9 of the Credit Agreement or an Event of Default, to take any action and to execute any instrument which the Administrative Agent may deem necessary or advisable to accomplish the purposes of this Security Agreement, including: (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; -16- (c) to file any claims or take any action or institute any proceedings which the Administrative Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Administrative Agent with respect to any of the Collateral; and (d) to perform the affirmative obligations of the Grantor hereunder (including all obligations of the Grantor pursuant to Section 4.8). The Grantor hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 5.2. Administrative Agent May Perform. If the Grantor fails to perform any agreement contained herein, the Administrative Agent may itself perform, or cause performance of, such agreement, and the expenses of the Administrative Agent incurred in connection therewith shall be payable by the Grantor pursuant to Section 6.2. SECTION 5.3. Administrative Agent Has No Duty. In addition to, and not in limitation of, Section 2.4, the powers conferred on the Administrative Agent hereunder are solely to protect its interest (on behalf of the Secured Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Administrative Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4. Reasonable Care. The Administrative Agent is required to exercise reasonable care in the custody and preservation of any of the Collateral in its possession; provided, however, the Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral, if it takes such action for that purpose as the Grantor reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Administrative Agent to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. ARTICLE VI REMEDIES SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred and be continuing: (a) The Administrative Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and also may -17- (i) require the Grantor to, and the Grantor hereby agrees that it will, at its expense and upon request of the Administrative Agent forthwith, assemble all or part of the Collateral as directed by the Administrative Agent and make it available to the Administrative Agent at a place to be designated by the Administrative Agent which is reasonably convenient to both parties, and (ii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Administrative Agent may deem commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) All cash proceeds received by the Administrative Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral shall be applied by the Administrative Agent against, all or any part of the Obligations as follows: (i) first, to the payment of any amounts payable to the Administrative Agent pursuant to Section 11.3 of the Credit Agreement and Section 6.2; (ii) second, to the equal and ratable payment of Obligations, in accordance with each Secured Party's Obligations owing to it under or pursuant to the Credit Agreement or any other Loan Document, or under or pursuant to any Hedging Obligation included in the Obligations as to each Secured Party, applied (A) first to fees and expense reimbursements then due to such Secured Party, (B) then to interest due to such Secured Party, (C) then to pay or prepay principal of the Loans owing to, or to reduce the "credit exposure" of, such Secured Party under such Hedging Obligation, as the case may be, and (D) then to pay the remaining outstanding Obligations and cash collateralize all Letter of Credit Outstandings; -18- (iii) third, without duplication of any amounts paid pursuant to clause (b)(ii) above, to the Indemnified Parties to the extent of any amounts owing pursuant to Section 11.4 of the Credit Agreement; and (iv) fourth, to be held as additional collateral security until the payment in full in cash of all of the Obligations, the termination or expiration of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments, after which such remaining cash proceeds shall be paid over to the Grantor or to whomsoever may be lawfully entitled to receive such surplus. For purposes of this Security Agreement, the "credit exposure" at any time of any Secured Party with respect to a Hedging Obligation to which such Secured Party is a party shall be determined at such time in accordance with the customary methods of calculating credit exposure under similar arrangements by the counterparty to such arrangements, taking into account potential interest rate movements and the respective termination provisions and notional principal amount and term of such Hedging Obligation. SECTION 6.2. Indemnity and Expenses. (a) The Grantor agrees to indemnify the Administrative Agent from and against any and all claims, losses and liabilities arising out of or resulting from this Security Agreement (including enforcement of this Security Agreement), except claims, losses or liabilities resulting from the Administrative Agent's gross negligence or wilful misconduct. (b) The Grantor will upon demand pay to the Administrative Agent the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, which the Administrative Agent may incur in connection with (i) the administration of this Security Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Administrative Agent or the Secured Parties hereunder, and (iv) the failure by the Grantor to perform or observe any of the provisions hereof. -19- ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1. Loan Document. This Security Agreement is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. SECTION 7.2. Amendments; etc. No amendment to or waiver of any provision of this Security Agreement nor consent to any departure by the Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Administrative Agent (on behalf of the Lenders or the Required Lenders, as the case may be), and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 7.3. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including telegraphic communication) and mailed or telecopied or delivered to either party hereto, addressed to such party at the address of such party specified in the Credit Agreement. All such notices and other communications, when mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any such notice or communication, if transmitted by telecopier, shall be deemed given when transmitted and electronically confirmed. SECTION 7.4. Section Captions. Section captions used in this Security Agreement are for convenience of reference only, and shall not affect the construction of this Security Agreement. SECTION 7.5. Severability. Wherever possible each provision of this Security Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Security Agreement. SECTION 7.6. Counterparts. This Security Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed an original and all of which shall constitute together but one and the same agreement. SECTION 7.7. Governing Law, Entire Agreement, etc. THIS SECURITY AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. THIS SECURITY -20- AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO. -21- IN WITNESS WHEREOF, the Grantor has caused this Security Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. DUANE READE By Duane Reade Inc. (formerly known as Duane Reade Holding Corp.), a general partner By /s/ William J. Tennant ----------------------------------- Name: William J. Tennant Title: Senior Vice President By DRI I Inc., a general partner By /s/ William J. Tennant ----------------------------------- Name: William J. Tennant Title: Senior Vice President FLEET NATIONAL BANK, as Administrative Agent By /s/ Eric C. Vander Mel ------------------------------------- Name: Eric C. Vander Mel Title: Vice President -22- SCHEDULE I to Borrower Security Agreement Item A. Location of Equipment Description Location ----------- -------- 1. Equipment used in connection See Item 6.9 of Schedule I with the Borrower's business. to the Credit Agreement. Item B. Location of Inventory Description Location ----------- -------- 1. Inventory held by the Borrower for sale See Item 6.9 of Schedule I or other use in connection with the to the Credit Agreement. Borrower's business. Item C. Location of Lock Boxes Contact Bank Name and Address Account Number Person --------------------- -------------- ------ 1. None. Item D. Place(s) of Business and Chief Executive Office 1. See Item 6.9 of Schedule I to the Credit Agreement. Item E. Trade Names 1. Duane Reade Item F. Merger or Other Corporate Reorganization 1. None. Item G. Government Contracts 1. None. SCHEDULE II to Borrower Security Agreement Item A. Patents Issued Patents *Country Patent No. Issue Date Inventor(s) Title - -------- ---------- ---------- ----------- ----- NONE. Pending Patent Applications *Country Serial No. Filing Date Inventor(s) Title - -------- ---------- ----------- ----------- ----- NONE. Patent Applications in Preparation Expected *Country Docket No. Filing Date Inventor(s) Title - -------- ---------- ----------- ----------- ----- NONE. Item B. Patent Licenses *Country or Effective Expiration Subject Territory Licensor Licensee Date Date Matter --------- -------- -------- ---- ---- ------ NONE. - -------- * List items related to the United States first for ease of recordation. List items related to other countries next, grouped by country and in alphabetical order by country name. SCHEDULE III to Borrower Security Agreement Item A. Trademarks Registered Trademarks *Country Trademark Registration No. Registration Date U.S. DR (Stylized) 1,099,871 08/15/78 U.S. DUANE READE 1,106,451 11/21/78 U.S. DR (Stylized) 1,106,961 11/28/78 U.S. DUANE READE 1,092,555 05/30/78 U.S. DR (Stylized) 1,099,209 08/15/78 U.S. DUANE READE 1,105,420 11/07/78 Pending Trademark Applications *Country Trademark Serial No. Filing Date - -------- --------- ---------- ----------- NONE. Trademark Applications in Preparation Expected Products/ *Country Trademark Docket No. Filing Date Services - -------- --------- ---------- ----------- -------- NONE. - -------- * List items related to the United States first for ease of recordation. List items related to other countries next, grouped by country and in alphabetical order by country name. Item B. Trademark Licenses *Country or Effective Expiration Territory Trademark Licensor Licensee Date Date --------- --------- -------- -------- ---- ---- NONE. SCHEDULE IV to Borrower Security Agreement Item A. Copyrights/Mask Works Registered Copyrights/Mask Works *Country Registration No. Registration Date Author(s) Title - -------- ---------------- ----------------- --------- ----- NONE. Copyright/Mask Work Pending Registration Applications *Country Serial No. Filing Date Author(s) Title - -------- ---------- ----------- --------- ----- NONE. Copyright/Mask Work Registration Applications in Preparation Expected *Country Docket No. Filing Date Author(s) Title - -------- ---------- ----------- --------- ----- NONE. Item B. Copyright/Mask Work Licenses *Country or Effective Expiration Subject Territory Licensor Licensee Date Date Matter --------- -------- -------- ---- ---- ------ NONE. - -------- * List items related to the United States first for ease of recordation. List items related to other countries next, grouped by country and in alphabetical order by country name. SCHEDULE V to Borrower Security Agreement Trade Secret or Know-How Licenses *Country or Effective Expiration Subject Territory Licensor Licensee Date Date Matter --------- -------- -------- ---- ---- ------ NONE. - -------- * List items related to the United States first for ease of recordation. List items related to other countries next, grouped by country and in alphabetical order by country name. EXHIBIT A to Borrower Security Agreement PATENT SECURITY AGREEMENT This PATENT SECURITY AGREEMENT (this "Agreement"), dated as of __________ __, ____, is made between DUANE READE, a New York general partnership (the "Grantor"), and FLEET NATIONAL BANK, as Administrative Agent (together with its successor(s) thereto in such capacity, the "Administrative Agent") for each of the Secured Parties; W I T N E S S E T H : WHEREAS, pursuant to a Credit Agreement, dated as of September 30, 1997 (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Credit Agreement"), among the Grantor, each of the Parent Guarantors named therein, the various financial institutions as are, or may from time to time become, parties thereto (each, individually, a "Lender", and collectively, the "Lenders"), DLJ Capital Funding, Inc., as Syndication Agent, the Administrative Agent and Credit Lyonnais New York Branch, as Documentation Agent, the Lenders and the Issuer have extended Commitments to make Credit Extensions to the Grantor; WHEREAS, in connection with the Credit Agreement, the Grantor has executed and delivered a Borrower Security Agreement, dated as of September 30, 1997 (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Security Agreement"); WHEREAS, as a condition precedent to the making of the Credit Extensions (including the initial Credit Extension) under the Credit Agreement, the Grantor is required to execute and deliver this Agreement and to grant to the Administrative Agent a continuing security interest in all of the Patent Collateral (as defined below) to secure all Obligations; and WHEREAS, the Grantor has duly authorized the execution, delivery and performance of this Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, and in order to induce the Lenders and the Issuer to make Credit Extensions (including the initial Credit Extension) to the Grantor pursuant to the Credit Agreement, and to induce the Secured Parties to enter into Rate Protection Agreements, the Grantor agrees, for the benefit of each Secured Party, as follows: SECTION 1. Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Agreement, including its preamble and recitals, have the meanings provided (or incorporated by reference) in the Security Agreement. SECTION 2. Grant of Security Interest. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, to secure all of the Obligations, the Grantor does hereby mortgage, pledge and hypothecate to the Administrative Agent, and grant to the Administrative Agent a security interest in, for its benefit and the benefit of each Secured Party, all of the following property (the "Patent Collateral"), whether now owned or hereafter acquired or existing by it: (a) all letters patent and applications for letters patent throughout the world, including all patent applications in preparation for filing anywhere in the world and including each patent and patent application referred to in Item A of Attachment 1 attached hereto; (b) all reissues, divisions, continuations, continuations-in-part, extensions, renewals and reexaminations of any of the items described in clause (a); (c) all patent licenses, including each patent license referred to in Item B of Attachment 1 attached hereto; and (d) all proceeds of, and rights associated with, the foregoing (including license royalties and proceeds of infringement suits), the right to sue third parties for past, present or future infringements of any patent or patent application, including any patent or patent application referred to in Item A of Attachment 1 attached hereto, and for breach or enforcement of any patent license, including any patent license referred to in Item B of Attachment 1 attached hereto, and all rights corresponding thereto throughout the world. SECTION 3. Security Agreement. This Agreement has been executed and delivered by the Grantor for the purpose of registering the security interest of the Administrative Agent in the Patent Collateral with the United States Patent and Trademark Office and corresponding offices in other countries of the world. The security interest granted hereby has been granted as a supplement to, and not in limitation of, the security interest granted to the Administrative Agent for its benefit and the benefit of each Secured Party under the Security Agreement. The Security Agreement (and all rights and remedies of the Administrative Agent and each Secured Party thereunder) shall remain in full force and effect in accordance with its terms. SECTION 4. Release of Security Interest. Upon payment in full in cash of all Obligations, the termination or expiry of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments, the Administrative Agent shall, at the Grantor's expense, execute and deliver to the Grantor all instruments and other documents -2- as may be necessary or proper to release the lien on and security interest in the Patent Collateral which has been granted hereunder. SECTION 5. Acknowledgment. The Grantor does hereby further acknowledge and affirm that the rights and remedies of the Administrative Agent with respect to the security interest in the Patent Collateral granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which (including the remedies provided for therein) are incorporated by reference herein as if fully set forth herein. SECTION 6. Loan Document, etc. This Agreement is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions of the Credit Agreement. SECTION 7. Counterparts. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. -3- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. DUANE READE By Duane Reade Inc. (formerly known as Duane Reade Holding Corp.), a general partner By -------------------------------- Name: Title: By DRI I Inc. (formerly known as Duane Reade Inc.), a general partner By -------------------------------- Name: Title: FLEET NATIONAL BANK, as Administrative Agent By ------------------------------------- Name: Title: -4- ATTACHMENT 1 to Borrower Patent Security Agreement Item A. Patents Issued Patents ***Country Patent No. Issue Date Inventor(s) Title - ---------- ---------- ---------- ----------- ----- Pending Patent Applications *Country Serial No. Filing Date Inventor(s) Title - -------- ---------- ----------- ----------- ----- Patent Applications in Preparation Expected *Country Docket No. Filing Date Inventor(s) Title - -------- ---------- ----------- ----------- ----- Item B. Patent Licenses *Country or Effective Expiration Subject Territory Licensor Licensee Date Date Matter --------- -------- -------- ---- ---- ------ - -------- * List items related to the United States first for ease of recordation. List items related to other countries next, grouped by country and in alphabetical order by country name. EXHIBIT B to Borrower Security Agreement TRADEMARK SECURITY AGREEMENT This TRADEMARK SECURITY AGREEMENT (this "Agreement"), dated as of __________ __, ____, is made between DUANE READE, a New York general partnership (the "Grantor"), and FLEET NATIONAL BANK, as Administrative Agent (together with its successor(s) thereto in such capacity, the "Administrative Agent") for each of the Secured Parties; W I T N E S S E T H : WHEREAS, pursuant to a Credit Agreement, dated as of September 30, 1997 (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Credit Agreement"), among the Grantor, each of the Parent Guarantors named therein, the various financial institutions as are, or may from time to time become, parties thereto (each, individually, a "Lender", and collectively, the "Lenders"), DLJ Capital Funding, Inc., as Syndication Agent, the Administrative Agent and Credit Lyonnais New York Branch, as Documentation Agent, the Lenders and the Issuer have extended Commitments to make Credit Extensions to the Grantor; WHEREAS, in connection with the Credit Agreement, the Grantor has executed and delivered a Borrower Security Agreement, dated as of September 30, 1997 (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Security Agreement"); WHEREAS, as a condition precedent to the making of the Credit Extensions (including the initial Credit Extension) under the Credit Agreement, the Grantor is required to execute and deliver this Agreement and to grant to the Administrative Agent a continuing security interest in all of the Trademark Collateral (as defined below) to secure all Obligations; and WHEREAS, the Grantor has duly authorized the execution, delivery and performance of this Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, and in order to induce the Lenders and the Issuer to make Credit Extensions (including the initial Credit Extension) to the Grantor pursuant to the Credit Agreement, and to induce the Secured Parties to enter into Rate Protection Agreements, the Grantor agrees, for the benefit of each Secured Party, as follows: SECTION 1. Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Agreement, including its preamble and recitals, have the meanings provided (or incorporated by reference) in the Security Agreement. SECTION 2. Grant of Security Interest. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, to secure all of the Obligations, the Grantor does hereby mortgage, pledge and hypothecate to the Administrative Agent, and grant to the Administrative Agent a security interest in, for its benefit and the benefit of each Secured Party, all of the following property (the "Trademark Collateral"), whether now owned or hereafter acquired or existing by it: (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, certification marks, collective marks, logos, other source of business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of a like nature (all of the foregoing items in this clause (a) being collectively called a "Trademark"), now existing anywhere in the world or hereafter adopted or acquired, whether currently in use or not, all registrations and recordings thereof and all applications in connection therewith, whether pending or in preparation for filing, including registrations, recordings and applications in the United States Patent and Trademark Office or in any office or agency of the United States of America or any State thereof or any foreign country, including those referred to in Item A of Attachment 1 attached hereto; (b) all Trademark licenses, including each Trademark license referred to in Item B of Attachment 1 attached hereto; (c) all reissues, extensions or renewals of any of the items described in clauses (a) and (b); (d) all of the goodwill of the business connected with the use of, and symbolized by the items described in, clauses (a) and (b); and (e) all proceeds of, and rights associated with, the foregoing, including any claim by the Grantor against third parties for past, present or future infringement or dilution of any Trademark, Trademark registration or Trademark license, including any Trademark, Trademark registration or Trademark license referred to in Item A and Item B of Attachment 1 attached hereto, or for any injury to the goodwill associated with the use of any such Trademark or for breach or enforcement of any Trademark license. SECTION 3. Security Agreement. This Agreement has been executed and delivered by the Grantor for the purpose of registering the security interest of the Administrative Agent in the Trademark Collateral with the United States Patent and Trademark Office and corresponding offices in other countries of the world. The security interest granted hereby has been granted as -2- a supplement to, and not in limitation of, the security interest granted to the Administrative Agent for its benefit and the benefit of each Secured Party under the Security Agreement. The Security Agreement (and all rights and remedies of the Administrative Agent and each Secured Party thereunder) shall remain in full force and effect in accordance with its terms. SECTION 4. Release of Security Interest. Upon payment in full in cash of all Obligations, the termination or expiry of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments, the Administrative Agent shall, at the Grantor's expense, execute and deliver to the Grantor all instruments and other documents as may be necessary or proper to release the lien on and security interest in the Trademark Collateral which has been granted hereunder. SECTION 5. Acknowledgment. The Grantor does hereby further acknowledge and affirm that the rights and remedies of the Administrative Agent with respect to the security interest in the Trademark Collateral granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which (including the remedies provided for therein) are incorporated by reference herein as if fully set forth herein. SECTION 6. Loan Document, etc. This Agreement is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions of the Credit Agreement. SECTION 7. Counterparts. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. -3- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. DUANE READE By Duane Reade Inc. (formerly known as Duane Reade Holding Corp.), a general partner By --------------------------------- Name: Title: By DRI I Inc. (formerly known as Duane Reade Inc.), a general partner By --------------------------------- Name: Title: FLEET NATIONAL BANK, as Administrative Agent By -------------------------------------- Name: Title: -4- ATTACHMENT 1 to Borrower Trademark Security Agreement Item A. Trademarks Registered Trademarks ***Country Trademark Registration No. Registration Date - ---------- --------- ---------------- ----------------- Pending Trademark Applications *Country Trademark Serial No. Filing Date - -------- --------- ---------- ----------- Trademark Applications in Preparation Expected Products/ *Country Trademark Docket No. Filing Date Services - -------- --------- ---------- ----------- -------- Item B. Trademark Licenses *Country or Effective Expiration Territory Trademark Licensor Licensee Date Date --------- --------- -------- -------- ---- ---- - -------- * List items related to the United States first for ease of recordation. List items related to other countries next, grouped by country and in alphabetical order by country name. EXHIBIT C to Borrower Security Agreement COPYRIGHT SECURITY AGREEMENT This COPYRIGHT SECURITY AGREEMENT (this "Agreement"), dated as of __________ __, ____, is made between DUANE READE, a New York general partnership (the "Grantor"), and FLEET NATIONAL BANK, as Administrative Agent (together with its successor(s) thereto in such capacity, the "Administrative Agent") for each of the Secured Parties; W I T N E S S E T H : WHEREAS, pursuant to a Credit Agreement, dated as of September 30, 1997 (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Credit Agreement"), among the Grantor, each of the Parent Guarantors named therein, the various financial institutions as are, or may from time to time become, parties thereto (each, individually, a "Lender", and collectively, the "Lenders"), DLJ Capital Funding, Inc., as Syndication Agent, the Administrative Agent and Credit Lyonnais New York Branch, as Documentation Agent, the Lenders and the Issuer have extended Commitments to make Credit Extensions to the Grantor; WHEREAS, in connection with the Credit Agreement, the Grantor has executed and delivered a Borrower Security Agreement, dated as of September 30, 1997 (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Security Agreement"); WHEREAS, as a condition precedent to the making of the Credit Extensions (including the initial Credit Extension) under the Credit Agreement, the Grantor is required to execute and deliver this Agreement and to grant to the Administrative Agent a continuing security interest in all of the Copyright Collateral (as defined below) to secure all Obligations; and WHEREAS, the Grantor has duly authorized the execution, delivery and performance of this Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, and in order to induce the Lenders and the Issuer to make Credit Extensions (including the initial Credit Extension) to the Grantor pursuant to the Credit Agreement, and to induce the Secured Parties to enter into Rate Protection Agreements, the Grantor agrees, for the benefit of each Secured Party, as follows: SECTION 1. Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Agreement, including its preamble and recitals, have the meanings provided (or incorporated by reference) in the Security Agreement. SECTION 2. Grant of Security Interest. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, to secure all of the Obligations, the Grantor does hereby mortgage, pledge and hypothecate to the Administrative Agent, and grant to the Administrative Agent a security interest in, for its benefit and the benefit of each Secured Party, all of the following property (the "Copyright Collateral"), whether now owned or hereafter acquired or existing by it, being all copyrights (including all copyrights for semi-conductor chip product mask works) of the Grantor, whether statutory or common law, registered or unregistered, now or hereafter in force throughout the world including all of the Grantor's right, title and interest in and to all copyrights registered in the United States Copyright Office or anywhere else in the world and also including the copyrights referred to in Item A of Attachment 1 attached hereto, and all applications for registration thereof, whether pending or in preparation, all copyright licenses, including each copyright license referred to in Item B of Attachment 1 attached hereto, the right to sue for past, present and future infringements of any thereof, all rights corresponding thereto throughout the world, all extensions and renewals of any thereof and all proceeds of the foregoing, including licenses, royalties, income, payments, claims, damages and proceeds of suit. SECTION 3. Security Agreement. This Agreement has been executed and delivered by the Grantor for the purpose of registering the security interest of the Administrative Agent in the Copyright Collateral with the United States Copyright Office and corresponding offices in other countries of the world. The security interest granted hereby has been granted as a supplement to, and not in limitation of, the security interest granted to the Administrative Agent for its benefit and the benefit of each Secured Party under the Security Agreement. The Security Agreement (and all rights and remedies of the Administrative Agent and each Secured Party thereunder) shall remain in full force and effect in accordance with its terms. SECTION 4. Release of Security Interest. Upon payment in full in cash of all Obligations, the termination or expiry of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments, the Administrative Agent shall, at the Grantor's expense, execute and deliver to the Grantor all instruments and other documents as may be necessary or proper to release the lien on and security interest in the Copyright Collateral which has been granted hereunder. SECTION 5. Acknowledgment. The Grantor does hereby further acknowledge and affirm that the rights and remedies of the Administrative Agent with respect to the security interest in the Copyright Collateral granted hereby are more fully set forth in the Security Agreement, the terms and provisions of which (including the remedies provided for therein) are incorporated by reference herein as if fully set forth herein. -2- SECTION 6. Loan Document, etc. This Agreement is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions of the Credit Agreement. SECTION 7. Counterparts. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. DUANE READE By Duane Reade Inc. (formerly known as Duane Reade Holding Corp.), a general partner By -------------------------------- Name: Title: By DRI I Inc. (formerly known as Duane Reade Inc.), a general partner By -------------------------------- Name: Title: FLEET NATIONAL BANK, as Administrative Agent By ------------------------------------- Name: Title: -3- ATTACHMENT 1 to Borrower Copyright Security Agreement Item A. Copyrights/Mask Works Registered Copyrights/Mask Works ****Country Registration No. Registration Date Author(s) Title - ----------- ---------------- ----------------- --------- ----- Copyright/Mask Work Pending Registration Applications *Country Serial No. Filing Date Author(s) Title - -------- ---------- ----------- --------- ----- Copyright/Mask Work Registration Applications in Preparation Expected *Country Docket No. Filing Date Author(s) Title - -------- ---------- ----------- --------- ----- Item B. Copyright/Mask Work Licenses *Country or Effective Expiration Subject Territory Licensor Licensee Date Date Matter - -------- * List items related to the United States first for ease of recordation. List items related to other countries next, grouped by country and in alphabetical order by country name. EX-10.15 5 HOLDINGS PLEDGE AGREEMENT [EXECUTION COPY] HOLDINGS PLEDGE AGREEMENT This HOLDINGS PLEDGE AGREEMENT (as amended, supplemented, amended and restated or otherwise modified from time to time, this "Pledge Agreement"), dated as of February 13, 1998, is made by DUANE READE INC. (formerly known as Duane Reade Holding Corp.), a Delaware corporation (the "Pledgor"), in favor of FLEET NATIONAL BANK, as administrative agent (together with its successor(s) thereto, in such capacity the "Administrative Agent") for each of the Secured Parties. W I T N E S S E T H: WHEREAS, pursuant to a Credit Agreement, dated as of February 13, 1998 (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Credit Agreement"), among Duane Reade, a New York general partnership (the "Borrower"), each of the Parent Guarantors named therein (including the Pledgor), the various financial institutions as are, or may from time to time become, parties thereto (each, individually, a "Lender", and collectively, the "Lenders"), DLJ Capital Funding, Inc., as Syndication Agent, the Administrative Agent and Credit Lyonnais New York Branch, as the Documentation Agent, the Lenders and the Issuer have extended Commitments to make Credit Extensions to the Borrower; WHEREAS, as a condition precedent to the making of the Credit Extensions (including the initial Credit Extension) under the Credit Agreement, the Pledgor is required to execute and deliver this Pledge Agreement; WHEREAS, the Pledgor has duly authorized the execution, delivery and performance of this Pledge Agreement; and WHEREAS, it is in the best interests of the Pledgor to execute this Pledge Agreement inasmuch as the Pledgor will derive substantial direct and indirect benefits from the Credit Extensions made from time to time to the Borrower by the Lenders and the Issuer pursuant to the Credit Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce the Lenders and the Issuer to make Credit Extensions (including the initial Credit Extension) to the Borrower pursuant to the Credit Agreement, and to induce Secured Parties to enter into Rate Protection Agreement(s), the Pledgor agrees, for the benefit of each Secured Party, as follows: ARTICLE I DEFINITIONS SECTION 1.1. Certain Terms. The following terms (whether or not underscored) when used in this Pledge Agreement, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Administrative Agent" is defined in the preamble. "Borrower" is defined in the first recital. "Collateral" is defined in Section 2.1. "Credit Agreement" is defined in the first recital. "Distributions" means all stock dividends, liquidating dividends, shares of stock resulting from (or in connection with the exercise of) stock splits, reclassifications, warrants, options, non-cash dividends, mergers, consolidations, and all other distributions (whether similar or dissimilar to the foregoing) on or with respect to any Pledged Shares or other shares of capital stock constituting Collateral, but shall not include Dividends. "Dividends" means cash dividends and cash distributions with respect to any Pledged Shares or other Pledged Property made in the ordinary course of business and not a liquidating dividend. "Lender" and "Lenders" are defined in the first recital. "Pledge Agreement" is defined in the preamble. "Pledged Note Issuer" means each Person identified in Item A of Attachment 1 hereto as the issuer of the Pledged Note identified opposite the name of such Person. "Pledged Notes" means all promissory notes of any Pledged Note Issuer in substantially the form of Exhibit A hereto which are delivered by any Pledgor to the Administrative Agent as Pledged Property hereunder, as such promissory notes, in accordance with Section 4.6, are amended, modified or supplemented from time to time, together with any promissory note of any Pledged Note Issuer taken in extension or renewal thereof or substitution therefor. "Pledged Property" means all Pledged Shares, all Pledged Notes, and all other pledged shares of capital stock or promissory notes, all other securities, all assignments of any amounts due or to become due, all other instruments which are now being delivered by -2- any Pledgor to the Administrative Agent or may from time to time hereafter be delivered by such Pledgor to the Administrative Agent for the purpose of pledge under this Pledge Agreement or any other Loan Document, and all proceeds of any of the foregoing. "Pledged Share Issuer" means each Person identified in Item B of Attachment 1 hereto as the issuer of the Pledged Shares identified opposite the name of such Person. "Pledged Shares" means all shares of capital stock of any Pledged Share Issuer which are delivered by any Pledgor to the Administrative Agent as Pledged Property hereunder. "Pledgor" is defined in the preamble. "Secured Obligations" is defined in Section 2.2. "Securities Act" is defined in Section 6.2. "U.C.C." means the Uniform Commercial Code, as in effect from time to time in the State of New York. SECTION 1.2. Credit Agreement Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Pledge Agreement, including its preamble and recitals, have the meanings provided in the Credit Agreement. SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or in the Credit Agreement or the context otherwise requires, terms for which meanings are provided in the U.C.C. are used in this Pledge Agreement, including its preamble and recitals, with such meanings. ARTICLE II PLEDGE SECTION 2.1. Grant of Security Interest. The Pledgor hereby pledges, hypothecates, assigns, charges, mortgages, delivers, and transfers to the Administrative Agent, for its benefit and the ratable benefit of each of the Secured Parties, and hereby grants to the Administrative Agent, for its benefit and the ratable benefit of the Secured Parties, a continuing security interest in, all of the following property of the Pledgor (the "Collateral"): (a) all promissory notes of each Pledged Note Issuer identified in Item A of Attachment 1 hereto; (b) all other Pledged Notes issued from time to time; -3- (c) all issued and outstanding shares of capital stock of each Pledged Share Issuer identified in Item B of Attachment 1 hereto; (d) all other Pledged Shares issued from time to time; (e) all other Pledged Property, whether now or hereafter delivered to the Administrative Agent in connection with this Pledge Agreement; (f) all Dividends, Distributions, interest, and other payments and rights with respect to any Pledged Property; and (g) all proceeds of any of the foregoing. SECTION 2.2. Security for Obligations. This Pledge Agreement secures the payment in full in cash of all Obligations of the Borrower now or hereafter existing under the Credit Agreement, the Notes and each other Loan Document to which the Borrower is or may become a party, whether for principal, interest, costs, fees, expenses, or otherwise, and all obligations of the Pledgor and each other Obligor whether now or hereafter existing under this Pledge Agreement and each other Loan Document to which the Pledgor or such other Obligor is or may become a party (all such obligations of the Borrower, such Pledgor and such other Obligor being the "Secured Obligations"). SECTION 2.3. Delivery of Pledged Property. All certificates or instruments representing or evidencing any Collateral, including all Pledged Shares and all Pledged Notes, shall be delivered to and held by or on behalf of (and, in the case of the Pledged Notes, endorsed to the order of) the Administrative Agent pursuant hereto, shall be in suitable form for transfer by delivery, and shall be accompanied by all necessary instruments of transfer or assignment, duly executed in blank. SECTION 2.4. Dividends on Pledged Shares and Payments on Pledged Notes. In the event that any Dividend is to be paid on any Pledged Share or any payment of principal or interest is to be made on any Pledged Note at a time when no Default of the nature referred to in Section 8.1.9 of the Credit Agreement or Event of Default has occurred and is continuing or would result therefrom, such Dividend or payment may be paid directly to the applicable Pledgor. If any such Default or Event of Default has occurred and is continuing, then any such Dividend or payment shall be paid directly to the Administrative Agent. SECTION 2.5. Continuing Security Interest; Transfer of Note. This Pledge Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until payment in full in cash of all Secured Obligations, the termination or expiration of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments, -4- (b) be binding upon the Pledgor and its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Administrative Agent hereunder, to the benefit of the Administrative Agent and each other Secured Party. Without limiting the foregoing clause (c), any Lender may assign or otherwise transfer (in whole or in part) any Note or Loan held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under any Loan Document (including this Pledge Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 11.11 and Article X of the Credit Agreement. Upon (i) the sale, transfer or other disposition of Collateral in accordance with the Credit Agreement or (ii) the payment in full in cash of all Secured Obligations, the termination or expiration of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments, the security interests granted herein shall automatically terminate with respect to (x) such Collateral (in the case of clause (i)) or (y) all Collateral (in the case of clause (ii)). Upon any such sale, transfer, disposition or termination, the Administrative Agent will, at the Pledgor's sole expense, deliver to the Pledgor, without any representations, warranties or recourse of any kind whatsoever, all certificates and instruments representing or evidencing all Pledged Shares and all Pledged Notes, together with all other Collateral held by the Administrative Agent hereunder, and execute and deliver to the Pledgor such documents as the Pledgor shall reasonably request to evidence such termination. SECTION 2.6. Security Interest Absolute. All rights of the Administrative Agent and the security interests granted to the Administrative Agent hereunder, and all obligations of the Pledgor hereunder, shall be absolute and unconditional, irrespective of (a) any lack of validity or enforceability of the Credit Agreement, any Note or any other Loan Document, (b) the failure of any Secured Party or any holder of any Note (i) to assert any claim or demand or to enforce any right or remedy against the Borrower, any other Obligor or any other Person under the provisions of the Credit Agreement, any Note, any other Loan Document or otherwise, or (ii) to exercise any right or remedy against any other guarantor of, or collateral securing, any Secured Obligations, -5- (c) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations or any other extension, compromise or renewal of any Secured Obligation, (d) any reduction, limitation, impairment or termination of any Secured Obligations for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to (and the Pledgor hereby waives any right to or claim of) any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, nongenuineness, irregularity, compromise, unenforceability of, or any other event or occurrence affecting, any Secured Obligations or otherwise, (e) any amendment to, rescission, waiver, or other modification of, or any consent to departure from, any of the terms of the Credit Agreement, any Note or any other Loan Document, (f) any addition, exchange, release, surrender or non-perfection of any collateral (including the Collateral), or any amendment to or waiver or release of or addition to or consent to departure from any guaranty, for any of the Secured Obligations, or (g) any other circumstances which might otherwise constitute a defense available to, or a legal or equitable discharge of, the Borrower, any other Obligor, any surety or any guarantor. SECTION 2.7. Postponement of Subrogation, etc. The Pledgor will not exercise any rights which it may acquire by reason of any payment made hereunder, whether by way of subrogation, reimbursement or otherwise, until the prior payment, in full and in cash, of all Secured Obligations, the termination or expiration of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments. Any amount paid to the Pledgor on account of any payment made hereunder prior to the payment in full in cash of all Secured Obligations shall be held in trust for the benefit of the Secured Parties and each holder of a Note and shall immediately be paid to the Secured Parties and each holder of a Note and credited and applied against the Secured Obligations, whether matured or unmatured, in accordance with the terms of the Credit Agreement; provided, however, that if (a) the Pledgor has made payment to the Secured Parties and each holder of a Note of all or any part of the Secured Obligations, and (b) all Secured Obligations have been paid in full in cash, all Letters of Credit have been terminated or expired, all Rate Protection Agreements have been terminated and all Commitments have been permanently terminated, -6- each Secured Party and each holder of a Note agrees that, at the Pledgor's request, the Secured Parties and the holders of the Notes will execute and deliver to the Pledgor appropriate documents (without recourse and without representation or warranty) necessary to evidence the transfer by subrogation to the Pledgor of an interest in the Secured Obligations resulting from such payment by the Pledgor. In furtherance of the foregoing, for so long as any Secured Obligations, Letters of Credit or Commitments remain outstanding or any Rate Protection Agreement remains in full force and effect, the Pledgor shall refrain from taking any action or commencing any proceeding against the Borrower or any other Obligor (or its successors or assigns, whether in connection with a bankruptcy proceeding or otherwise) to recover any amounts in respect of payments made under this Pledge Agreement to any Secured Party or any holder of a Note. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1. Representations and Warranties, etc. The Pledgor represents and warrants to each Secured Party, as at the date of each pledge and delivery hereunder (including each pledge and delivery of Pledged Shares and each pledge and delivery of a Pledged Note) by the Pledgor to the Administrative Agent of any Collateral, as set forth in this Article III. SECTION 3.2. Ownership, No Liens, etc. The Pledgor is the legal and beneficial owner of, and has good and marketable title to (and has full right and authority to pledge and assign) such Collateral, free and clear of all liens, security interests, options, or other charges or encumbrances, except any lien or security interest granted pursuant hereto in favor of the Administrative Agent. SECTION 3.3. Valid Security Interest. The delivery of such Collateral to the Administrative Agent is effective to create a valid, perfected, first priority security interest in such Collateral and all proceeds thereof, securing the Secured Obligations. No filing or other action will be necessary to perfect or protect such security interest. SECTION 3.4. As to Pledged Shares. In the case of any Pledged Shares constituting such Collateral, all of such Pledged Shares are duly authorized and validly issued, fully paid, and non-assessable, and constitute all of the issued and outstanding shares of capital stock of each Pledged Share Issuer. The Pledgor has no Subsidiaries other than the Pledged Share Issuers, except as set forth in Item C of Attachment 1. SECTION 3.5. As to Pledged Notes. In the case of each Pledged Note, all of such Pledged Notes have been duly authorized, executed, endorsed, issued and delivered, and are the legal, valid and binding obligation of the issuers thereof, and are not in default. -7- SECTION 3.6. Authorization, Approval, etc. No authorization, approval, or other action by, and no notice to or filing with, any governmental authority, regulatory body or any other Person is required either (a) for the pledge by the Pledgor of any Collateral pursuant to this Pledge Agreement or for the execution, delivery, and performance of this Pledge Agreement by the Pledgor, or (b) for the exercise by the Administrative Agent of the voting or other rights provided for in this Pledge Agreement, or, except with respect to any Pledged Shares, as may be required in connection with a disposition of such Pledged Shares by laws affecting the offering and sale of securities generally, the remedies in respect of the Collateral pursuant to this Pledge Agreement. SECTION 3.7. Compliance with Laws. The Pledgor is in compliance with the requirements of all applicable laws (including the provisions of the Fair Labor Standards Act), rules, regulations and orders of every governmental authority, the non-compliance with which could reasonably be expected to have a Material Adverse Effect or which could reasonably be expected to materially adversely affect the value of the Collateral or the worth of the Collateral as collateral security. ARTICLE IV COVENANTS SECTION 4.1. Certain Covenants. The Pledgor covenants and agrees that, so long as any portion of the Secured Obligations shall remain unpaid, any Letters of Credit shall be outstanding, any Rate Protection Agreement shall remain in full force and effect or any Secured Party shall have any outstanding Commitment, the Pledgor will, unless the Required Lenders shall otherwise consent in writing, perform, comply with and be bound by the obligations set forth in this Article IV. SECTION 4.2. Protect Collateral; Further Assurances, etc. The Pledgor agrees and covenants that it will not sell, assign, transfer, pledge, or encumber in any other manner the Collateral (except in favor of the Administrative Agent hereunder). The Pledgor will warrant and defend the right and title herein granted unto the Administrative Agent in and to the Collateral (and all right, title, and interest represented by the Collateral) against the claims and demands of all Persons whomsoever. The Pledgor agrees that at any time, and from time to time, at the expense of the Pledgor, the Pledgor will promptly execute and deliver all further instruments, and take all further action, that may be necessary or desirable, or that the Administrative Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the -8- Administrative Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. SECTION 4.3. Stock Powers, etc. The Pledgor agrees that all Pledged Shares (and all other shares of capital stock constituting Collateral) delivered by the Pledgor pursuant to this Pledge Agreement will be accompanied by duly executed undated blank stock powers, or other equivalent instruments of transfer acceptable to the Administrative Agent. The Pledgor will, from time to time upon the request of the Administrative Agent, promptly deliver to the Administrative Agent such stock powers, instruments, and similar documents, satisfactory in form and substance to the Administrative Agent, with respect to the Collateral as the Administrative Agent may reasonably request and will, from time to time upon the request of the Administrative Agent after the occurrence of any Event of Default, promptly transfer any Pledged Shares or other shares of common stock constituting Collateral into the name of any nominee designated by the Administrative Agent. SECTION 4.4. Continuous Pledge. The Pledgor will, at all times, keep pledged to the Administrative Agent pursuant hereto all Pledged Shares and all other shares of capital stock constituting Collateral, all Dividends and Distributions with respect thereto, all Pledged Notes, all interest, principal and other proceeds received by the Administrative Agent with respect to the Pledged Notes, and all other Collateral and other securities, instruments, proceeds, and rights from time to time received by or distributable to the Pledgor in respect of any Collateral and will not permit any Pledged Share Issuer to issue any capital stock which shall not have been immediately duly pledged hereunder on a first priority perfected basis. SECTION 4.5. Voting Rights; Dividends, etc. The Pledgor agrees: (a) after any Default of the nature referred to in Section 8.1.9 of the Credit Agreement or any Event of Default shall have occurred and be continuing, promptly upon receipt of notice thereof by the Pledgor and without any request therefor by the Administrative Agent, to deliver (properly endorsed where required hereby or requested by the Administrative Agent) to the Administrative Agent all Dividends, Distributions, all interest, all principal, all other cash payments, and all proceeds of the Collateral, all of which shall be held by the Administrative Agent as additional Collateral for use in accordance with Section 6.4; and (b) after any Event of Default shall have occurred and be continuing and the Administrative Agent has notified the Pledgor of the Administrative Agent's intention to exercise its voting power under this Section 4.5(b) (i) the Administrative Agent may exercise (to the exclusion of the Pledgor) the voting power and all other incidental rights of ownership with respect to any Pledged Shares or other shares of capital stock constituting Collateral and the Pledgor hereby grants the Administrative Agent an -9- irrevocable proxy, exercisable under such circumstances, to vote the Pledged Shares and such other Collateral; and (ii) promptly to deliver to the Administrative Agent such additional proxies and other documents as may be necessary to allow the Administrative Agent to exercise such voting power. All Dividends, Distributions, interest, principal, cash payments, and proceeds which may at any time and from time to time be held by the Pledgor but which the Pledgor is then obligated to deliver to the Administrative Agent, shall, until delivery to the Administrative Agent, be held by the Pledgor separate and apart from its other property in trust for the Administrative Agent. The Administrative Agent agrees that unless an Event of Default shall have occurred and be continuing and the Administrative Agent shall have given the notice referred to in Section 4.5(b), the Pledgor shall have the exclusive voting power with respect to any shares of capital stock (including any of the Pledged Shares) constituting Collateral and the Administrative Agent shall, upon the written request of the Pledgor, promptly deliver such proxies and other documents, if any, as shall be reasonably requested by the Pledgor which are necessary to allow the Pledgor to exercise voting power with respect to any such share of capital stock (including any of the Pledged Shares) constituting Collateral; provided, however, that no vote shall be cast, or consent, waiver, or ratification given, or action taken by the Pledgor that would impair any Collateral or be inconsistent with or violate any provision of the Credit Agreement or any other Loan Document (including this Pledge Agreement). SECTION 4.6. Additional Undertakings. The Pledgor will not, without the prior written consent of the Administrative Agent: (a) enter into any agreement amending, supplementing, or waiving any provision of any Pledged Note (including any underlying instrument pursuant to which such Pledged Note is issued) or compromising or releasing or extending the time for payment of any obligation of the maker thereof; or (b) take or omit to take any action the taking or the omission of which would result in any impairment or alteration of any obligation of the maker of any Pledged Note or other instrument constituting Collateral. ARTICLE V THE ADMINISTRATIVE AGENT SECTION 5.1. Administrative Agent Appointed Attorney-in-Fact. The Pledgor hereby irrevocably appoints the Administrative Agent such Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or -10- otherwise, from time to time in the Administrative Agent's discretion, to take any action and to execute any instrument which the Administrative Agent may deem necessary or advisable to accomplish the purposes of this Pledge Agreement, including after the occurrence and during the continuance of a Default of the nature referred to in Section 8.1.9 of the Credit Agreement or an Event of Default: (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; and (c) to file any claims or take any action or institute any proceedings which the Administrative Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Administrative Agent with respect to any of the Collateral. The Pledgor hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 5.2. Administrative Agent May Perform. If the Pledgor fails to perform any agreement contained herein, the Administrative Agent may itself perform, or cause performance of, such agreement, and the expenses of the Administrative Agent incurred in connection therewith shall be payable by the Pledgor pursuant to Section 6.4. SECTION 5.3. Administrative Agent Has No Duty. The powers conferred on the Administrative Agent hereunder are solely to protect its interest (on behalf of the Secured Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Administrative Agent shall have no duty as to any Collateral or responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Property, whether or not the Administrative Agent has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4. Reasonable Care. The Administrative Agent is required to exercise reasonable care in the custody and preservation of any of the Collateral in its possession; provided, however, the Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral, if it takes such action for that -11- purpose as the Pledgor reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Administrative Agent to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. ARTICLE VI REMEDIES SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred and be continuing: (a) The Administrative Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and also may, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Administrative Agent may deem commercially reasonable. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) The Administrative Agent may (i) transfer all or any part of the Collateral into the name of the Administrative Agent or its nominee, with or without disclosing that such Collateral is subject to the lien and security interest hereunder, (ii) notify the parties obligated on any of the Collateral to make payment to the Administrative Agent of any amount due or to become due thereunder, (iii) enforce collection of any of the Collateral by suit or otherwise, and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect thereto, -12- (iv) endorse any checks, drafts, or other writings in the Pledgor's name to allow collection of the Collateral, (v) take control of any proceeds of the Collateral, and (vi) execute (in the name, place and stead of the Pledgor) endorsements, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Collateral. SECTION 6.2. Securities Laws. If the Administrative Agent shall determine to exercise its right to sell all or any of the Collateral pursuant to Section 6.1, each Pledgor agrees that, upon request of the Administrative Agent, the Pledgor will, at its own expense: (a) execute and deliver, and cause each issuer of the Collateral contemplated to be sold and the directors and officers thereof to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts and things, as may be necessary or, in the opinion of the Administrative Agent, advisable to register such Collateral under the provisions of the Securities Act of 1933, as from time to time amended (the "Securities Act"), and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectus which, in the opinion of the Administrative Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (b) use its best efforts to qualify the Collateral under the state securities or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Collateral, as requested by the Administrative Agent; (c) cause each such issuer to make available to its security holders, as soon as practicable, an earnings statement that will satisfy the provisions of Section 11(a) of the Securities Act; and (d) do or cause to be done all such other acts and things as may be necessary to make such sale of the Collateral or any part thereof valid and binding and in compliance with applicable law. The Pledgor further acknowledges the impossibility of ascertaining the amount of damages that would be suffered by the Administrative Agent or the Secured Parties by reason of the failure by the Pledgor to perform any of the covenants contained in this Section and, consequently, agrees that, if such Pledgor shall fail to perform any of such covenants, it shall pay, as liquidated damages and not as a penalty, an amount equal to the value (as determined -13- by the Administrative Agent) of the Collateral on the date the Administrative Agent shall demand compliance with this Section. SECTION 6.3. Compliance with Restrictions. The Pledgor agrees that in any sale of any of the Collateral whenever an Event of Default shall have occurred and be continuing, the Administrative Agent is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of applicable law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualifications, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and the Pledgor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Administrative Agent be liable nor accountable to the Pledgor for any discount allowed by the reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. SECTION 6.4. Application of Proceeds. All cash proceeds received by the Administrative Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral shall be applied by the Administrative Agent against, all or any part of the Secured Obligations as follows: (a) first, to the payment of any amounts payable to the Administrative Agent pursuant to Section 11.3 of the Credit Agreement and Section 6.5; (b) second, to the equal and ratable payment of Secured Obligations, in accordance with each Secured Party's Secured Obligations owing to it under or pursuant to the Credit Agreement or any other Loan Document, or under or pursuant to any Hedging Obligation included in the Secured Obligations as to each Secured Party, applied (i) first to fees and expense reimbursements then due to such Secured Party, (ii) then to interest due to such Secured Party, (iii) then to pay or prepay principal of the Loans owing to, or to reduce the "credit exposure" of, such Secured Party under such Hedging Obligation, as the case may be, and (iv) then to pay the remaining outstanding Secured Obligations and cash collateralize all Letter of Credit Outstandings; -14- (c) third, without duplication of any amounts paid pursuant to clause (b) above, to the Indemnified Parties to the extent of any amounts owing pursuant to Section 11.4 of the Credit Agreement; and (d) fourth, to be held as additional collateral security until the payment in full in cash of all of the Secured Obligations, the termination or expiration of all Letters of Credit, the termination of all Rate Protection Agreements and the termination of all Commitments, after which such remaining cash proceeds shall be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive such surplus. For purposes of this Pledge Agreement, the "credit exposure" at any time of any Secured Party with respect to a Hedging Obligation to which such Secured Party is a party shall be determined at such time in accordance with the customary methods of calculating credit exposure under similar arrangements by the counterparty to such arrangements, taking into account potential interest rate movements and the respective termination provisions and notional principal amount and term of such Hedging Obligation. SECTION 6.5. Indemnity and Expenses. The Pledgor hereby agrees to jointly and severally indemnify and hold harmless the Administrative Agent from and against any and all claims, losses, and liabilities arising out of or resulting from this Pledge Agreement (including enforcement of this Pledge Agreement), except claims, losses, or liabilities resulting from the Administrative Agent's gross negligence or wilful misconduct. Upon demand, such Pledgor will pay to the Administrative Agent the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, which the Administrative Agent may incur in connection with: (a) the administration of this Pledge Agreement, the Credit Agreement and each other Loan Document; (b) the custody, preservation, use, or operation of, or the sale of, collection from, or other realization upon, any of the Collateral; (c) the exercise or enforcement of any of the rights of the Administrative Agent hereunder; or (d) the failure by such Pledgor to perform or observe any of the provisions hereof. -15- ARTICLE VII MISCELLANEOUS PROVISION SECTION 7.1. Loan Document. This Pledge Agreement is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. SECTION 7.2. Amendments, etc. No amendment to or waiver of any provision of this Pledge Agreement nor consent to any departure by the Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by the Administrative Agent (on behalf of the Lenders or the Required Lenders, as the case may be) and the Pledgor in the case of an amendment, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. SECTION 7.3. Protection of Collateral. The Administrative Agent may from time to time, at its option, perform any act which the Pledgor agrees hereunder to perform and which the Pledgor shall fail to perform after being requested in writing so to perform (it being understood that no such request need be given after the occurrence and during the continuance of an Event of Default) and the Administrative Agent may from time to time take any other action which the Administrative Agent reasonably deems necessary for the maintenance, preservation or protection of any of the Collateral or of its security interest therein. SECTION 7.4. Addresses for Notices. All notices and other communications provided for hereunder to any party hereto shall be in writing (including telegraphic communication) and mailed or telecopied or delivered to such party, addressed to such party at its address specified in the Credit Agreement. All such notices and other communications, when mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any such notice or communication, if transmitted by telecopier, shall be deemed given when transmitted and electronically confirmed. SECTION 7.5. Section Captions. Section captions used in this Pledge Agreement are for convenience of reference only, and shall not affect the construction of this Pledge Agreement. SECTION 7.6. Severability. Wherever possible each provision of this Pledge Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Pledge Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Pledge Agreement. -16- SECTION 7.7. Counterparts. This Pledge Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SECTION 7.8. Governing Law, Entire Agreement, etc. THIS PLEDGE AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO. -17- IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. PLEDGOR: DUANE READE INC. (formerly known as Duane Reade Holding Corp.), a Delaware corporation By /s/ William J. Tennant -------------------------------------- Name: William J. Tennant Title: Senior Vice President FLEET NATIONAL BANK, as Administrative Agent By /s/ Eric C. Vander Mel -------------------------------------- Name: Eric C. Vander Mel Title: Vice President -18- EXHIBIT A to Holding Pledge Agreement PROMISSORY NOTE $ , 19__ FOR VALUE RECEIVED, the undersigned, ______________, a _______________ corporation (the "Maker"), promises to pay to the order of DUANE READE INC. (formerly known as Duane Reade Holding Corp.), a Delaware corporation (the "Payee"), in equal ________ installments, commencing __________ __, ____ to and including __________ __, ____, the principal sum of DOLLARS ($ ), representing the aggregate principal amount of an intercompany loan made by the Payee to the Maker. The unpaid principal amount of this promissory note (this "Note") from time to time outstanding shall bear interest at a rate of interest equal to ____________, which the Maker represents to be a lawful and commercially reasonable rate, payable __________, and all payments of principal of and interest on this Note shall be payable in lawful currency of the United States of America. All such payments shall be made by the Maker to an account established by the Payee at _______________ and shall be recorded on the grid attached hereto by the holder hereof (including the Administrative Agent (hereinafter defined) as pledgee). Upon notice from the Administrative Agent that a Default (as defined in the Credit Agreement, dated as of September 30, 1997 (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Credit Agreement"), among Duane Reade, a New York general partnership (the "Borrower"), the Payee and the other Parent Guarantors named therein, the various financial institutions as are, or may from time to time become, parties thereto (each, individually, a "Lender", and collectively, the "Lenders"), DLJ Capital Funding, Inc., as Syndication Agent, Fleet National Bank, as the administrative agent (in such capacity, the "Administrative Agent") and Credit Lyonnais New York Branch, as the Documentation Agent) of the nature referred to in Section 8.1.9 of the Credit Agreement or an Event of Default (as defined in the Credit Agreement) has occurred and is continuing under the Credit Agreement, the Maker shall make such payments, in same day funds, to such other account as the Administrative Agent shall direct in such notice. This Note is one of the Pledged Notes referred to in the Pledge Agreement. Upon the occurrence and continuance of an Event of Default under the Credit Agreement, and notice thereof by the Administrative Agent to the Maker, the Administrative Agent shall have all rights of the Payee to collect and accelerate, and enforce all rights with respect to, the Indebtedness evidenced by this Note. Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. Reference is made to the Credit Agreement for a description of the Pledge Agreement pursuant to which this Note has been pledged to the Administrative Agent as security for the Secured Obligations outstanding from time to time under the Credit Agreement and each other Loan Document. In addition to, but not in limitation of, the foregoing, the Maker further agrees to pay all expenses, including reasonable attorneys' fees and legal expenses, incurred by the holder (including the Administrative Agent as pledgee) of this Note endeavoring to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. -2- THE MAKER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON THIS NOTE. THE MAKER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PAYEE TO ACCEPT THIS NOTE. [NAME OF MAKER] By -------------------------------------- Name: Title: Pay to the order of FLEET NATIONAL BANK, as Administrative Agent DUANE READE INC. (formerly known as Duane Reade Holding Corp.) By -------------------------------------- Name: Title: -3- GRID Intercompany Loans made by [Name of Payee] to [Name of Maker] and payments of principal of such Loans. - ------------------------------------------------------------------------------- Amount of Amount of Outstanding Intercompany Principal Principal Notation Date Loan Payment Balance Made By - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ATTACHMENT 1 to Holding Pledge Agreement DUANE READE INC. Item A. Pledged Notes Pledged Note Issuer Description NONE. Item B. Pledged Shares Common Stock ---------------------------------------------- % of Authorized Outstanding Shares Shares Shares Pledged ---------- ----------- ------- Pledged Share Issuer DRI I INC. 1,000 1,000 100% Item C. Additional Subsidiaries NONE. EX-27.1 6 FINANCIAL DATA SCHEDULE
5 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. 0000895364 DUANE READE INC. 1,000 12-MOS DEC-27-1997 DEC-27-1997 261 0 9,592 0 66,665 79,074 43,032 (10,475) 249,521 41,580 278,085 0 0 854 74,415 249,521 429,816 429,816 322,340 322,340 0 0 34,473 (14,714) 0 (14,714) 0 0 0 (14,714) (1.45) (1.45)
EX-27.2 7 FINANCIAL DATA SCHEDULE
5 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. 0001052796 DRI I INC. 1,000 12-MOS DEC-27-1997 DEC-27-1997 261 0 9,592 0 66,665 79,074 43,032 (10,475) 249,521 41,580 278,085 0 0 854 74,415 249,521 429,816 429,816 322,340 322,340 0 0 34,473 (14,714) 0 (14,714) 0 0 0 (14,714) (1.45) (1.45)
EX-27.3 8 FINANCIAL DATA SCHEDULE
5 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. 0000895366 DUANE READE 1,000 12-MOS DEC-27-1997 DEC-27-1997 261 0 9,592 0 66,665 79,074 43,032 (10,475) 249,521 41,580 278,085 0 0 854 74,415 249,521 429,816 429,816 322,340 322,340 0 0 34,473 (14,714) 0 (14,714) 0 0 0 (14,714) (1.45) (1.45)
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