Filed pursuant to Rule 424(B)(3)
File No.333-70150
PROSPECTUS
RITE AID CORPORATION
Offer to Exchange 11 1/4% Senior Notes Due 2008
for 11 1/4% Senior Notes Due 2008
which have been registered under the Securities Act of 1933, as amended
The exchange offer will expire at 5:00 p.m., New York City time, on December
14, 2001, unless we extend the exchange offer in our sole and absolute
discretion.
Terms of the exchange offer:
o We will exchange New Notes for all outstanding Old Notes that are validly
tendered and not withdrawn prior to the expiration or termination of the
exchange offer.
o You may withdraw tenders of Old Notes at any time prior to the expiration or
termination of the exchange offer.
o The terms of the New Notes are substantially identical to those of the
outstanding Old Notes, except that the transfer restrictions and registration
rights relating to the Old Notes do not apply to the New Notes.
o The exchange of Old Notes for New Notes will not be a taxable transaction for
U.S. federal income tax purposes, but you should see the discussion under the
caption "Material Federal Income Tax Considerations" beginning on page 69 for
more information.
o We will not receive any cash proceeds from the exchange offer.
o We issued the Old Notes in a transaction not requiring registration under the
Securities Act, and as a result, their transfer is restricted. We are making
the exchange offer to satisfy your registration rights, as a holder of the
Old Notes.
There is no established trading market for the New Notes or the Old Notes.
Each broker-dealer that receives New Notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The letter of transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. We have agreed that, starting on the Expiration Date (as defined
herein) and ending on the close of business 180 days after the Expiration
Date, it will make this prospectus available to any broker-dealer for use in
connection with any such resale. See "Plan of Distribution".
See "Risk Factors" beginning on page 14 for a discussion of risks you should
consider prior to tendering your outstanding Old Notes for exchange.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is November 8, 2001.
TABLE OF CONTENTS
Page
--------
Cautionary Note Regarding Forward Looking Statements ............... 2
Where You Can Find More Information ................................ 3
Incorporation of Certain Documents by Reference .................... 3
Prospectus Summary ................................................. 4
Risk Factors ....................................................... 14
Use Of Proceeds .................................................... 21
Ratio Of Earnings To Fixed Charges ................................. 21
Selected Consolidated Financial Information ........................ 22
The Exchange Offer ................................................. 24
Description Of The New Notes ....................................... 31
Material Federal Income Tax Considerations ......................... 69
Plan Of Distribution ............................................... 72
Legal Matters ...................................................... 72
Experts ............................................................ 72
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This prospectus includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are identified by terms and phrases such as "anticipate,"
"believe," "intend," "estimate," "expect," "continue," "should," "could,"
"may," "plan," "project," "predict," "will," and similar expressions and
include references to assumptions and relate to our future prospects,
developments and business strategies.
Factors that could cause our actual results to differ materially from those
expressed or implied in such forward-looking statements include, but are not
limited to:
o our high level of indebtedness;
o our ability to make interest and principal payment on our debt and satisfy
the other covenants contained in our credit facilities and other debt
agreements;
o our ability to improve the operating performance of our existing stores,
and, in particular, our new and relocated stores in accordance with our
management's long term strategy;
o the outcomes of pending lawsuits and governmental investigations, both
civil and criminal, involving our financial reporting and other matters;
o competitive pricing pressures, continued consolidation of the drugstore
industry;
o third-party prescription reimbursement levels, regulatory changes
governing pharmacy practices;
o general economic conditions, inflation and interest rate movements;
o merchandise supply constraints or disruptions;
o access to capital; and
o our ability to further develop, implement and maintain reliable and
adequate internal accounting systems and controls.
We undertake no obligation to revise the forward-looking statements included
in this prospectus to reflect any future events or circumstances. Our actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Factors that
could cause or contribute to such differences are discussed in this prospectus
in the section titled "Risk Factors".
2
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934. Accordingly, we file annual, quarterly and current reports, proxy
statements and other information with the SEC. We also furnish to our
stockholders annual reports, which include financial statements audited by our
independent certified public accountants and other reports which the law
requires us to send to our stockholders. The public may read and copy any
reports, proxy statements or other information that we file at the SEC's
public reference room at Judiciary Plaza, 450 Fifth Street N.W., Washington,
D.C. 20549 and at the SEC's regional office at 505 West Madison Street, Suite
1400, Chicago, Illinois 60661. The public may obtain information on the public
reference room by calling the SEC at 1-800-SEC-0330. Our SEC filings are also
available to the public from commercial document retrieval services and at the
web site maintained by the SEC at "http://www.sec.gov".
Our common stock is listed on the New York Stock Exchange and the Pacific
Stock Exchange under the symbol "RAD". You can inspect and copy reports, proxy
statements and other information about us at the NYSE's offices at 20 Broad
Street, New York, New York 10005 and at the offices of the Pacific Stock
Exchange, 301 Pine Street, San Francisco, California 94104 and 618 South
Spring Street, Los Angeles, California 90014.
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act with respect to the New Notes. This prospectus does not contain
all of the information in the registration statement. You will find more
information about us and the New Notes in the registration statement. Any
statements made in this prospectus concerning the provisions of legal
documents are not necessarily complete and you should read the documents which
are filed as exhibits to the registration statement or otherwise filed with
the SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference into this document the
information we file with it, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus, and
information that we later file with the SEC will automatically update and
supersede the information contained or incorporated by reference in this
prospectus. Accordingly, we incorporate by reference:
o our annual report on Form 10-K for the fiscal year ended March 3, 2001,
filed on May 21, 2001;
o our proxy statement on Schedule 14A for our 2001 annual stockholders'
meeting, filed on May 31, 2001;
o our quarterly reports on Form 10-Q for the thirteen week periods ended
June 2, 2001 and September 1, 2001; and
o our current reports on Form 8-K dated June 21, 2001 and June 28, 2001.
All documents that we subsequently file pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 prior to the termination of
this exchange offer will be deemed to be incorporated by reference into this
prospectus from the date of filing of such documents. These documents are or
will be available for inspection or copying at the locations identified above
under the caption "Where you can find more information".
We will provide without charge to each person, including each beneficial
owner of Old Notes, to whom this prospectus is delivered, upon written or oral
request, a copy of any and all of the documents that have been incorporated by
reference (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference but not delivered with this
prospectus). You should direct requests for documents to 30 Hunter Lane, Camp
Hill, Pennsylvania 17011, attn: Senior Executive Vice President and General
Counsel. His telephone number is (717) 761-2633.
3
PROSPECTUS SUMMARY
The following information summarizes the detailed information and financial
statements included elsewhere and incorporated by reference in this
prospectus. We encourage you to read this entire prospectus and the
information we are incorporating by reference carefully. Unless otherwise
indicated or the context otherwise requires, dates in this prospectus that
refer to a particular fiscal year (e.g. fiscal 2001) refer to the fiscal year
ended on the Saturday closest to February 28 of that year. The fiscal year
ended March 3, 2001 included 53 weeks. The fiscal years ended February 26,
2000, February 27, 1999 and February 28, 1998 included 52 weeks.
Rite Aid Corporation
Our Business
We are the second largest retail drugstore chain in the United States,
based on number of stores, and the third largest based on revenues. As of
September 1, 2001, we operated 3,594 drugstores in 29 states across the
country and in the District of Columbia. We have a first or second place
market position, based on revenues, in 34 of the 65 major U.S. metropolitan
markets in which we operate. During fiscal 2001, we generated $14.5 billion in
revenues and we generated $7.4 billion in revenues in our first half of fiscal
2002. Since the beginning of fiscal 1997, we have purchased 1,554 stores,
relocated 952 stores, opened 469 new stores and remodeled 435 stores. As a
result, we believe we have one of the most modern store bases in the industry.
In our stores, we sell prescription drugs and a wide assortment of other
merchandise, which we call "front-end" products. In fiscal 2001, our
pharmacists filled more than 204 million prescriptions, which accounted for
59.5% of our total sales. In the first half of fiscal 2002, pharmacy sales
accounted for 61.3% of our total sales. We believe that our pharmacy
operations will continue to represent a significant part of our business due
to favorable industry trends, including an aging population, increased life
expectancy and the discovery of new and better drug therapies. We offer
approximately 24,600 front-end products, including over-the-counter
medications, health and beauty aids, personal care items, cosmetics, household
items, beverages, convenience foods, greeting cards, photo processing,
seasonal merchandise and numerous other everyday and convenience products,
which accounted for the remaining 40.5% of our total sales in fiscal 2001. We
distinguish our stores from other national chain drugstores, in part, through
our private label brands and our strategic alliance with General Nutrition
Companies, Inc. ("GNC"), a leading retailer of vitamin and mineral
supplements. We offer over 1,500 products under the Rite Aid private label
brand, which contributed approximately 10% of our front-end sales in fiscal
2001.
Background
Under prior management, we were engaged in an aggressive expansion program
from 1997 until 1999. During that period, we purchased 1,554 stores, relocated
866 stores, opened 445 new stores, remodeled 308 stores and acquired PCS
Health Systems, Inc. These activities had a significant negative impact on our
operating results and financial condition, severely strained our liquidity and
increased our indebtedness to $6.6 billion as of February 26, 2000, which
contributed to our inability to access the financial markets. A resulting
decrease in revenue due to inventory shortages, reduction in advertising and
uncompetitive prices on front-end products led to a decline in customer
traffic, which had a negative impact on our store operations. In October 1999,
we announced that we had identified accounting irregularities and our former
chairman and chief executive officer resigned. In November 1999, our former
auditors resigned and withdrew their previously issued opinions on our
financial statements for fiscal 1998 and fiscal 1999. We needed to restate our
financial statements and develop accounting systems and controls that would
allow us to manage our business and accurately report the results of our
operations.
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In December 1999, a new management team was hired, and since that time we
have been addressing our business, operational and financial challenges. In
response to our situation, new management has:
o Reduced our indebtedness from $6.6 billion as of February 26, 2000 to
$3.7 billion as of September 1, 2001, after giving effect to the
Refinancing (described below);
o Improved front-end same store sales growth from a negative 2.2% in fiscal
2000 to a positive 6.5% in fiscal 2001 by improving store conditions and
product pricing and launching a competitive marketing program;
o Improved same store sales growth from 8.0% in the first half of fiscal
2001 to 9.1% in the first half of fiscal 2002 and front-end same store
sales growth from 4.8% in the first half of 2001 to 5.0% in the first
half of 2002;
o Restated our financial statements for fiscal 1998 and fiscal 1999, as
well as engaged Deloitte & Touche LLP as our new auditors to audit our
fiscal years beginning with fiscal 1998;
o Continued developing and implementing a comprehensive plan, which is
ongoing, to address problems with our accounting systems and controls,
and also resumed normal financial reporting;
o Significantly reduced the amount of our indebtedness maturing prior to
March 2005; and
o Addressed out-of-stock inventory levels and strengthened our vendor
relationships.
Refinancing Transactions
On June 27, 2001, we completed a comprehensive $3.2 billion refinancing
package (the "Refinancing") that includes a new $1.9 billion senior secured
credit facility underwritten by Citicorp North America, Inc., The Chase
Manhattan Bank, Credit Suisse First Boston and Fleet Retail Finance, Inc. As a
result of the Refinancing, we have significantly reduced our debt and the
amount of our debt maturing prior to March 2005.
Simultaneously with or prior to the closing of the new credit facility, we
completed the following transactions, which also form part of the Refinancing:
o $552.0 million in private placements of our common stock.
o An exchange with a financial institution of $152.025 million of our 10.5%
senior secured notes due 2002 for $152.025 million of new 12.5% senior
secured notes due 2006. The 12.5% senior secured notes due 2006 are
secured by a second lien on the collateral securing the new credit
facility.
o Private exchanges of common stock for $303.5 million of our bank debt and
10.5% senior secured notes due 2002.
o A synthetic lease transaction with respect to two of our distribution
centers in the amount of approximately $106.9 million.
o $150 million in a private placement of new 11.25% senior notes due 2008.
o The reclassification of $850.8 million of capital leases as operating
leases.
o An operating lease that we entered into with respect to our aircraft for
approximately $25.6 million.
o A tender offer whereby we accepted for payment $174.5 million of our
10.5% senior secured notes due 2002 at 103.25% of their principal amount.
With the proceeds of the Refinancing, we repaid our previous senior secured
credit facility, our PCS and RCF credit facilities and our secured exchange
debt. As a result of the Refinancing, our remaining debt due before March 2005
consists of $152.0 million of our 5.25% convertible subordinated notes due
2002, $107.8 million of our 6.00% dealer remarketable securities due 2003,
$21.9 million of our 10.5% senior secured
5
notes due 2002 and amortization of the new credit facility. We expect to use
internally generated funds to retire both the 5.25% notes and the dealer
remarketable securities at maturity and to meet the amortization payments
under the new credit facility.
Risk Factors
Prospective purchasers of our senior notes should carefully consider the
information set forth under the heading "Risk Factors", together with all
other information in this prospectus, including the information we are
incorporating by reference, before making an investment in the senior notes
offered by this prospectus.
Our headquarters are located at 30 Hunter Lane, Camp Hill, Pennsylvania
17011, and our telephone number is (717) 761-2633. The address of our Web site
is www.riteaid.com. The information on our Web site is not part of this
prospectus. Our common stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange under the trading symbol "RAD". We were incorporated in
1968 and are a Delaware corporation.
6
THE EXCHANGE OFFER
Old Notes . . . . . . . . . . . . . . . 11 1/4% Senior Notes due 2008, which
we issued on June 27, 2001.
New Notes . . . . . . . . . . . . . . . 11 1/4% Senior Notes due 2008, the
issuance of which has been registered
under the Securities Act of 1933. The
form and terms of the New Notes are
identical in all material respects to
those of the Old Notes, except that
the transfer restrictions and
registration rights relating to the
Old Notes do not apply to the New
Notes.
Exchange Offer. . . . . . . . . . . . . We are offering to issue up to
$150,000,000 aggregate principal
amount of the New Notes in exchange
for a like principal amount of the
Old Notes to satisfy our obligations
under the registration rights
agreement that we entered into when
the Old Notes were issued in
transactions in reliance upon the
exemption from registration provided
by Rule 144A under the Securities
Act.
Expiration Date; Tenders. . . . . . . . The exchange offer will expire at
5:00 p.m., New York City time, on
December 14, 2001, unless extended in
our sole and absolute discretion. By
tendering your Old Notes, you
represent to us that:
o you are not our "affiliate," as
defined in Rule 405 under the
Securities Act;
o any New Notes you receive in the
exchange offer are being acquired by
you in the ordinary course of your
business;
o at the time of commencement of the
exchange offer, neither you nor, to
your knowledge, anyone receiving New
Notes from you, has any arrangement
or understanding with any person to
participate in the distribution, as
defined in the Securities Act, of
the New Notes in violation of the
Securities Act;
o if you are not a participating
broker-dealer, you are not engaged
in, and do not intend to engage in,
the distribution of the New Notes,
as defined in the Securities Act;
and
o if you are a broker-dealer, you will
receive the New Notes for your own
account in exchange for Old Notes
that were acquired by you as a
result of your market-making or
other trading activities and that
you will deliver a prospectus in
connection with any resale of the
New Notes you receive. For further
information regarding resales of the
New Notes by participating broker-
dealers, see the discussion under
the caption "Plan of Distribution"
beginning on page 72.
7
Withdrawal; Non-Acceptance. . . . . . . You may withdraw any Old Notes
tendered in the exchange offer at any
time prior to 5:00 p.m., New York
City time, on December 14, 2001. If
we decide for any reason not to
accept any Old Notes tendered for
exchange, the Old Notes will be
returned to the registered holder at
our expense promptly after the
expiration or termination of the
exchange offer. In the case of Old
Notes tendered by book-entry transfer
into the exchange agent's account at
The Depository Trust Company, any
withdrawn or unaccepted Old Notes
will be credited to the tendering
holder's account at DTC. For further
information regarding the withdrawal
of tendered Old Notes, see the "The
Exchange Offer--Terms of the Exchange
Offer; Period for Tendering Old
Notes" beginning on page 24 and the
"The Exchange Offer--Withdrawal
Rights" beginning on page 27.
Conditions to the Exchange Offer. . . . The exchange offer is subject to
customary conditions, which we may
waive. See the discussion below under
the caption "The Exchange
Offer--Conditions to the Exchange
Offer" beginning on page 27 for more
information regarding the conditions
to the exchange offer.
Procedures for Tendering Old Notes. . . Unless you comply with the procedures
described below under the caption
"The Exchange Offer--Guaranteed
Delivery Procedures" beginning on
page 26, you must do one of the
following on or prior to the
expiration or termination of the
exchange offer to participate in the
exchange offer:
o tender your Old Notes by sending the
certificates for your Old Notes, in
proper form for transfer, a properly
completed and duly executed letter
of transmittal, with any required
signature guarantees, and all other
documents required by the letter of
transmittal, to BNY Midwest Trust
Company, as exchange agent, at one
of the addresses listed below under
the caption "The Exchange
Offer--Exchange Agent" beginning on
page 29, or
o tender your Old Notes by using the
book-entry transfer procedures
described below and transmitting a
properly completed and duly executed
letter of transmittal, with any
required signature guarantees, or an
agent's message instead of the
letter of transmittal, to the
exchange agent. In order for a book-
entry transfer to constitute a valid
tender of your Old Notes in the
exchange offer, BNY Midwest Trust
Company, as exchange agent, must
receive a confirmation of book-entry
transfer of your Old Notes into the
exchange agent's account at DTC
prior to the expiration or
termination of the exchange offer.
For more information regarding the
use of book-entry transfer
procedures,
8
including a description of the
required agent's message, see the
discussion below under the caption
"The Exchange Offer--Book-Entry
Transfers" beginning on page 26.
Guaranteed Delivery Procedures. . . . . If you are a registered holder of Old
Notes and wish to tender your Old
Notes in the exchange offer, but
o the Old Notes are not immediately
available,
o time will not permit your Old Notes
or other required documents to reach
the exchange agent before the
expiration or termination of the
exchange offer, or
o the procedure for book-entry
transfer cannot be completed prior
to the expiration or termination of
the exchange offer,
then you may tender Old Notes by
following the procedures described
below under the caption "The Exchange
Offer--Guaranteed Delivery
Procedures" on page 26.
Special Procedures for Beneficial If you are a beneficial owner whose
Owners. . . . . . . . . . . . . . . . . Old Notes are registered in the name
of the broker, dealer, commercial
bank, trust company or other nominee
and you wish to tender your Old Notes
in the exchange offer, you should
promptly contact the person in whose
name the Old Notes are registered and
instruct that person to tender on
your behalf. If you wish to tender in
the exchange offer on your behalf,
prior to completing and executing the
letter of transmittal and delivering
your Old Notes, you must either make
appropriate arrangements to register
ownership of the Old Notes in your
name or obtain a properly completed
bond power from the person in whose
name the Old Notes are registered.
Material Federal Income Tax The exchange of the Old Notes for New
Considerations. . . . . . . . . . . . . Notes in the exchange offer will not
be a taxable transaction for United
States Federal income tax purposes.
See the discussion below under the
caption "Material Federal Income Tax
Considerations" beginning on page 69
for more information regarding the
tax consequences to you of the
exchange offer.
Use of Proceeds . . . . . . . . . . . . We will not receive any cash proceeds
from the exchange offer.
Exchange Agent. . . . . . . . . . . . . BNY Midwest Trust Company is the
exchange agent for the exchange
offer. You can find the address and
telephone number of the exchange
agent below under the caption "The
Exchange Offer--Exchange Agent"
beginning on page 29.
Resales . . . . . . . . . . . . . . . . Based on interpretations by the staff
of the SEC, as set forth in no-action
letters issued to the third parties,
we believe that the New Notes you
receive in the exchange
9
offer may be offered for resale,
resold or otherwise transferred
without compliance with the
registration and prospectus delivery
provisions of the Securities Act.
However, you will not be able to
freely transfer the New Notes if:
o you are our "affiliate," as defined
in Rule 405 under the Securities
Act;
o you are not acquiring the New Notes
in the exchange offer in the
ordinary course of your business;
o you have an arrangement or
understanding with any person to
participate in the distribution , as
defined in the Securities Act, of
the New Notes, you will receive in
the exchange offer; or
o you are a participating broker-
dealer that received New Notes for
its own account in the exchange
offer in exchange for Old Notes that
were acquired as a result of market-
making or other trading activities.
If you fall within one of the
exceptions listed above, you must
comply with the registration and
prospectus delivery requirements of
the Securities Act in connection with
any resale transaction involving the
New Notes. See the discussion below
under the caption "The Exchange
Offer--Procedures for Tendering Old
Notes" beginning on page 24 for more
information.
10
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
If you do not exchange your Old Notes in the exchange offer, your Old Notes
will continue to be subject to the restrictions on transfer described in the
legend on the certificate for your Old Notes. In general, you may offer or
sell your Old Notes only:
o if they are registered under the Securities Act and applicable state
securities laws;
o if they are offered or sold under an exemption from registration under the
Securities Act and applicable state securities laws; or
o if they are offered or sold in a transaction not subject to the Securities
Act and applicable state securities laws.
We do not currently intend to register the Old Notes under the Securities
Act. Under some circumstances, however, holders of the Old Notes, including
holders who are not permitted to participate in the exchange offer or who may
not freely resell New Notes received in the exchange offer, may require us to
file, and to cause to become effective, a shelf registration statement
covering resales of Old Notes by these holders. For more information regarding
the consequences of not tendering your Old Notes and our obligation to file a
shelf registration statement, see "The Exchange Offer--Consequences of
Exchanging or Failing to Exchange Old Notes" beginning on page 29 and
"Description of the New Notes--Registration Rights Agreement" beginning on
page 48.
11
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and those of the outstanding Old Notes are
substantially identical, except that the transfer restrictions and
registration rights relating to the Old Notes do not apply to the New Notes.
In addition, if we do not have an effective registration statement on file
with the SEC to register the New Notes within 180 days of the original
issuance of the Old Notes, or if the exchange offer is not completed on or
before the 210th day after the Old Notes were issued, we will be required to
pay liquidated damages to each holder of Old Notes until we cure the
registration default. See "Description of the New Notes--Registration Rights
Agreement" beginning on page 48.
Issuer. . . . . . . . . . . . . . . Rite Aid Corporation
Securities Offered. . . . . . . . . $150,000,000 aggregate principal amount of
11 1/4% senior notes due 2008.
Maturity Date . . . . . . . . . . . July 1, 2008.
Interest. . . . . . . . . . . . . . We will pay interest on the New Notes at
the rate of 11 1/4% per year payable in
cash on January 1 and July 1 of each year,
beginning on January 1, 2002.
Optional Redemption . . . . . . . . Prior to July 1, 2005, we may redeem some
or all of the New Notes by paying a "make-
whole" premium based on U.S. Treasury
rates. On or after July 1, 2005 we may
redeem some or all of the New Notes at the
redemption prices listed under the heading
"Description of Notes--Optional
Redemption" plus accrued and unpaid
interest to the date of redemption.
At any time and from time to time, prior
to July 1, 2004, we may redeem up to a
maximum of 35% of the original aggregate
principal amount of the New Notes
(including additional notes) originally
issued with the proceeds of one or more of
our equity offerings at a redemption price
of 111.25% of the principal amount plus
accrued and unpaid interest, if any, to
the date of redemption, provided that at
least 65% of the original aggregate
principal amount of New Notes (including
additional notes) originally issued
remains outstanding immediately after
redemption.
Change of Control . . . . . . . . . If we experience a change of control, we
will be required to make an offer to
repurchase our New Notes at a price equal
to 101% of the principal amount plus
accrued and unpaid interest, if any, to
the date of repurchase. For more detailed
information, see "Description of New
Notes--Repurchase at the Option of Holders
Upon a Change of Control."
Ranking . . . . . . . . . . . . . . The New Notes will be:
o our senior unsecured obligations; and
o equal in ranking with all of our
existing and future unsubordinated,
unsecured debt.
Our subsidiaries conduct substantially all
our operations and have significant
liabilities, including trade payables.
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The New Notes will be structurally
subordinated to our substantial subsidiary
liabilities, which include guarantees of
our secured debt. In addition, the New
Notes will be effectively subordinated to
any secured debt that we issue in the
future.
Certain Covenants . . . . . . . . . The indenture governing the New Notes will
contain covenants that limit our ability
and the ability of our restricted
subsidiaries to, among other things:
o incur additional debt;
o pay dividends or make other restricted
payments;
o purchase, redeem or retire capital stock
or subordinated debt;
o make asset sales;
o enter into transactions with affiliates;
o incur liens;
o make investments;
o enter into sale leaseback transactions;
o provide subsidiary guarantees; and
o merge or consolidate with any other
person.
For more detailed information on covenants
in the indenture, see "Description of
Notes--Restrictive Covenants".
Events of Default . . . . . . . . . The following events, among others,
constitute events of default under the New
Notes:
o default for 30 days in any payment of
interest upon any New Notes;
o default in any payment of principal of
(or premium, if any) upon any New Notes
when due;
o default for 30 days after appropriate
notice in the performance of any other
covenant in the New Notes or the
indenture governing the New Notes;
o default under any other debt that
results in its acceleration, or failure
to pay any of the debt on maturity, in
each case where the aggregate of such
debt exceeds $35 million;
o certain events involving bankruptcy,
insolvency or reorganization.
13
RISK FACTORS
You should consider carefully the following factors, as well as the other
information set forth or incorporated by reference in this prospectus, before
tendering your Old Notes in the exchange offer. When
we use the term "Notes" in this prospectus, the term includes the Old Notes
and the New Notes.
Risks related to the Exchange Offer and holding the New Notes
Holders who fail to exchange their Old Notes will continue to be subject to
restrictions on transfer.
If you do not exchange your Old Notes for New Notes in the exchange offer,
you will continue to be subject to the restrictions on transfer of your Old
Notes described in the legend on the certificates for your Old Notes. The
restrictions on transfer of your Old Notes arise because we issued the Old
Notes under exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state
securities laws. In general, you may only offer or sell the Old Notes if they
are registered under the Securities Act and applicable state securities laws,
or offered and sold under an exemption from these requirements. We do not plan
to register the Old Notes under the Securities Act. For further information
regarding the consequences of tendering your Old Notes in the exchange offer,
see the discussions below under the captions "The Exchange Offer--Consequences
of Exchanging or Failing to Exchange Old Notes" and "Material Federal Income
Tax Considerations."
You must comply with the exchange offer procedures in order to receive new,
freely tradable notes.
Delivery of New Notes in exchange for Old Notes tendered and accepted for
exchange pursuant to the exchange offer will be made only after timely receipt
by the exchange agent of the following:
o certificates for Old Notes or a book-entry confirmation of a book-entry
transfer of Old Notes into the Exchange Agent's account at DTC, New York,
New York as depository, including an Agent's Message (as defined) if the
tendering holder does not deliver a letter of transmittal,
o a completed and signed letter of transmittal (or facsimile thereof), with
any required signature guarantees, or, in the case of a book-entry
transfer, an Agent's Message in lieu of the letter of transmittal, and
o any other documents required by the letter of transmittal.
Therefore, holders of Old Notes who would like to tender Old Notes in
exchange for New Notes should be sure to allow enough time for the Old Notes
to be delivered on time. We are not required to notify you of defects or
irregularities in tenders of Old Notes for exchange. Old Notes that are not
tendered or that are tendered but we do not accept for exchange will,
following consummation of the exchange offer, continue to be subject to the
existing transfer restrictions under the Securities Act and, upon consummation
of the exchange offer, certain registration and other rights under the
registration rights agreement will terminate. See "The Exchange
Offer--Procedures for Tendering Old Notes" and "The Exchange
Offer--Consequences of Exchanging or Failing to Exchange Old Notes."
Some holders who exchange their Old Notes may be deemed to be underwriters.
If you exchange your Old Notes in the exchange offer for the purpose of
participating in a distribution of the New Notes, you may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
Since the New Notes are effectively subordinated to all of our secured debt
and the liabilities of our subsidiaries, we may not have sufficient assets to
pay amounts owed on the New Notes if a default occurs.
The New Notes are general unsecured senior obligations that rank equal in
right of payment with all of our existing and future unsecured and
unsubordinated debt. The New Notes are effectively subordinated to all
14
of our secured debt to the extent of the value of the assets securing that
debt. Also, the Notes are structurally subordinated to all obligations of our
subsidiaries.
We are a holding company with no direct operations. Our principal assets are
the equity interests we hold in our operating subsidiaries. As a result, we
are dependent upon dividends and other payments from our subsidiaries to
generate the funds necessary to meet our financial obligations, including the
payment of principal of and interest on our outstanding debt. Our subsidiaries
are legally distinct from us and have no obligation to pay amounts due on the
Notes or to make funds available to us for such payment. As of September 1,
2001, we had approximately $3.4 billion of indebtedness to which the New Notes
would have been structurally subordinated in right of payment.
Because the obligations under our credit facility, our 10.5% senior notes
due 2002 and our 12.5% secured notes due 2006 are secured obligations,
guaranteed by substantially all of our subsidiaries, failure to comply with
those obligations or our inability to pay that indebtedness when due would
entitle those creditors immediately to foreclose on certain of our assets in
the case of our new credit facility, and substantially all of the assets of
our subsidiaries, which serve as collateral. In this event, those secured
lenders would be entitled to be repaid in full from the proceeds of the
liquidation of those assets before those assets would be available for
distribution to other creditors, and, lastly to the holders of capital stock
of our subsidiaries, including Rite Aid Corporation.
Holders of the New Notes will only be creditors of Rite Aid Corporation and
not of our subsidiaries. The ability of our creditors, including you, to
participate in any distribution of assets of any of our subsidiaries upon
liquidation or bankruptcy will be subject to the prior claims of that
subsidiary's creditors, including trade creditors, and any prior or equal
claim of any equity holder of that subsidiary. As a result, you may receive
less, proportionately, than our secured creditors and the creditors of our
subsidiaries.
We may be unable to purchase the New Notes upon a change of control.
Upon a change of control event, we would be required to offer to purchase
the New Notes for cash at a price equal to 101% of their aggregate principal
amount, plus accrued and unpaid interest, if any. The terms of the New Notes
may not protect you if we undergo a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction that may
adversely affect you unless the transaction is included within the definition
of a change of control.
A change of control under the terms of the New Notes is likely to constitute
an event of default under our new credit facility. If this occurs, then the
lenders under our new credit facility may declare their debt immediately due
and payable. The same could be true of any future debt incurred by our
subsidiaries pursuant to credit facilities with banks or other institutional
lenders. We cannot assure you that we will have the financial resources
necessary to repurchase the New Notes and satisfy other payment obligations
that could be triggered upon a change of control. If we do not have sufficient
financial resources to effect a change of control offer, we would be required
to seek additional financing from outside sources to repurchase the New Notes.
We cannot assure you that financing would be available to us on satisfactory
terms.
You may find it difficult to sell your notes.
There is no existing trading market for the New Notes. We do not intend to
apply for listing or quotation of the New Notes on any exchange. Therefore, we
do not know the extent to which investor interest will lead to the development
of a trading market or how liquid that market might be, nor can we make any
assurances regarding the ability of New Note holders to sell their New Notes,
the amount of New Notes to be outstanding following the exchange offer or the
price at which the New Notes might be sold. As a result, the market price of
the New Notes could be adversely affected. Historically, the market for non-
investment grade debt, such as the New Notes, has been subject to disruptions
that have caused substantial volatility in the prices of such securities. Any
such disruptions may have an adverse affect on holders of the New Notes.
15
Holders of the Old Notes participating in the exchange offer will not
recognize gain or loss in the exchange.
The exchange of Old Notes for New Notes in the exchange offer will not be a
taxable transaction to holders for U.S. federal income tax purposes. See the
discussion under the caption "Material Federal Income Tax Considerations".
Risks Related to Our Financial Condition
We are highly leveraged. Our substantial indebtedness will severely limit cash
flow available for our operations and could adversely affect our ability to
service debt or obtain additional financing if necessary.
After giving effect to the Refinancing, we had, as of September 1, 2001 $3.7
billion of outstanding indebtedness (including current maturities but
excluding letters of credit) and stockholders' equity of $453.2 million. We
also have additional borrowing capacity under our revolving credit facility of
$423.9 million. Our debt obligations will continue to adversely affect our
operations in a number of ways and our cash flow is insufficient to service
our debt, which may require us to borrow additional funds for that purpose,
restructure or otherwise refinance that debt. Our earnings were insufficient
to cover our fixed charges for fiscal 2001 by $1.2 billion. After giving
effect to the Refinancing on a pro forma basis, we estimate that our earnings
would have been insufficient to cover our fixed charges for fiscal 2001.
Our high level of indebtedness will continue to restrict our operations.
Among other things, our indebtedness will:
o limit our ability to obtain additional financing;
o limit our flexibility in planning for, or reacting to, changes in the
markets in which we compete;
o place us at a competitive disadvantage relative to our competitors with
less indebtedness;
o render us more vulnerable to general adverse economic and industry
conditions; and
o require us to dedicate substantially all of our cash flow to service our
debt.
In fiscal 2000 we experienced operational and financial difficulties,
resulting in disputes with suppliers and vendors. These disputes were based
primarily on our level of indebtedness and led to more restrictive vendor
contract terms. Although we believe that our prior disputes with suppliers and
vendors have been largely resolved, any future material deterioration in our
operational or our financial situation could again impact vendors' and
suppliers' willingness to do business with us. Our ability to make payments on
our debt, depends upon our ability to substantially improve our future
operating performance, which is subject to general economic and competitive
conditions and to financial, business and other factors, many of which we
cannot control. If our cash flow from our operating activities is
insufficient, we may take certain actions, including delaying or reducing
capital or other expenditures, attempting to restructure or refinance our
debt, selling assets or operations or seeking additional equity capital. We
may be unable to take any of these actions on satisfactory terms or in a
timely manner. Further, any of these actions may not be sufficient to allow us
to service our debt obligations or may have an adverse impact on our business.
Our existing debt agreements, limit our ability to take certain of these
actions. Our failure to earn enough to pay our debts or to successfully
undertake any of these actions could have a material adverse effect on us.
Some of our debt, including borrowings under our new credit facility, is based
upon variable rates of interest, which could result in higher interest expense
in the event of increases in interest rates.
Approximately $378.5 million of our outstanding indebtedness as of September
1, 2001, following the Refinancing, bears an interest rate that varies
depending upon LIBOR and is not covered by interest rate swap contracts that
expire in 2002. If we borrow additional amounts under our senior secured
facility, the interest
16
rate on those borrowings will vary depending upon LIBOR. If LIBOR rises, the
interest rates on this outstanding debt will also increase. Therefore an
increase in LIBOR would increase our interest payment obligations under these
outstanding loans and have a negative effect on our cash flow and financial
condition.
The covenants in our outstanding indebtedness impose restrictions that may
limit our operating and financial flexibility.
The covenants in the instruments governing our outstanding indebtedness,
including our credit facility, restrict our ability to incur liens and debt,
pay dividends, make redemptions and repurchases of capital stock, make loans,
investments and capital expenditures, prepay, redeem or repurchase debt,
engage in mergers, consolidations, asset dispositions, sale-leaseback
transactions and affiliate transactions, change our business, amend certain
debt and other material agreements, issue and sell capital stock of
subsidiaries, restrict distributions from subsidiaries and grant negative
pledges to other creditors.
Moreover, if we are unable to meet the terms of the financial covenants or
if we breach any of these covenants, a default could result under one or more
of these agreements. A default, if not waived by our lenders, could result in
the acceleration of our outstanding indebtedness and cause our debt to become
immediately due and payable. If acceleration occurs, we would not be able to
repay our debt and it is unlikely that we would be able to borrow sufficient
additional funds to refinance such debt. Even if new financing is made
available to us, it may not be available on terms acceptable to us.
If we were required to obtain waivers of defaults, we may incur significant
fees and transaction costs. In fiscal 2000, we were required to obtain waivers
of compliance with, and modifications to, certain of the covenants contained
in our senior credit and loan agreements and public indentures. In connection
with obtaining certain of such waivers and modifications, we paid significant
fees and transaction costs.
Risks Related to our Operations
Major lawsuits have been brought against us and certain of our subsidiaries,
and there are currently pending both civil and criminal investigations by the
U.S. Securities and Exchange Commission, the United States Attorney and an
investigation by the United States Department of Labor. In addition to any
fines or damages that we might have to pay, any criminal conviction against us
may result in the loss of licenses and contracts that are material to the
conduct of our business, which would have a negative effect on our results of
operations, financial condition and cash flows.
There are several major ongoing lawsuits and investigations in which we are
involved. These include, in addition to the investigations described below,
several class action lawsuits. While some of these lawsuits have been settled,
we are unable to predict the outcome of any of these matters at this time. If
any of these cases result in a substantial monetary judgment against us or is
settled on unfavorable terms, our results of operations, financial condition
and cash flows could be materially adversely affected.
There are currently pending both civil and criminal governmental
investigations by the SEC and the United States Attorney concerning our
financial reporting and other matters. In addition, an investigation has also
been commenced by the U.S. Department of Labor concerning our employee benefit
plans, including our principal 401(k) plan, which permitted employees to
purchase our common stock. Purchases of our common stock under the plan were
suspended in October 1999. In January 2001, we appointed an independent
trustee to represent the interests of these plans in relation to the company
and to investigate possible claims the plans may have against us. Both the
independent trustee and the Department of Labor have asserted that the plans
may have claims against us. These investigations are ongoing and we cannot
predict their outcomes. If we were convicted of any crime, certain licenses
and government contracts, such as Medicaid plan reimbursement agreements, that
are material to our operations may be revoked, which would have a material
adverse effect on our results of operations and financial condition. In
addition, substantial penalties, damages, or other monetary remedies assessed
against us could also have a material adverse effect on our results of
operations, financial condition and cash flows.
17
Given the size and nature of our business, we are subject from time to time
to various lawsuits which, depending on their outcome, may have a negative
impact on our results of operations, financial condition and cash flows.
We are substantially dependent on a single supplier of pharmaceutical products
to sell products to us on satisfactory terms. A disruption in this
relationship would have a negative effect on our results of operations,
financial condition and cash flows.
We obtain approximately 93% of our pharmaceutical supplies from a single
supplier, McKesson HBOC, Inc., pursuant to a long-term contract. Pharmacy
sales represented approximately 59.5% of our total sales during fiscal 2001,
and, therefore, our relationship with McKesson HBOC is important to us. Any
significant disruptions in our relationship with McKesson HBOC would make it
difficult for us to continue to operate our business, and would have a
material adverse effect on our results of operations, financial condition and
cash flows.
Our auditors have identified numerous "reportable conditions", which relate to
our internal accounting systems and controls, which systems and controls may
be insufficient. Improvements to our internal accounting systems and controls
could require substantial resources.
An audit of our financial statements for fiscal 1998 and fiscal 1999,
following a previous restatement, concluded in July 2000 and resulted in an
additional restatement of fiscal 1998 and fiscal 1999. Following its review of
our books and records, our management concluded that further steps were needed
to establish and maintain the adequacy of our internal accounting systems and
controls. In connection with the above audits of our financial statements,
Deloitte & Touche LLP advised us that it believed there were numerous
"reportable conditions" under the standards established by the American
Institute of Certified Public Accountants which relate to our accounting
systems and controls that could adversely affect our ability to record,
process, summarize and report financial data consistent with the assertions of
management in the financial statements. In order to address the reportable
conditions identified by Deloitte & Touche LLP, we are developing and
implementing comprehensive, adequate and reliable accounting systems and
controls. If, however, we determine that our internal accounting systems and
controls require additional improvements beyond those identified, or if the
changes we are implementing are inadequate, we may need to commit additional
substantial resources, including time from our management team, to implement
new systems and controls, which could affect the timeliness of our financial
or management reporting.
We need to continue to improve our operations in order to improve our
financial condition, but our operations will not improve if we cannot continue
to effectively implement our business strategy or if they are negatively
affected by general economic conditions.
Our operations during fiscal 2000 were adversely affected by a number of
factors, including our financial difficulties, inventory shortages,
allegations of violations of the law, including drug pricing issues, disputes
with suppliers and uncertainties regarding our ability to produce audited
financial statements. To improve operations, new management developed and in
fiscal 2001 began implementing and continues to implement, a business strategy
to improve our stores and enhance our relationships with our customers by
improving the pricing of products, providing more consistent advertising
through weekly circulars, eliminating inventory shortages and out-dated
inventory, resolving issues and disputes with our vendors, and developing
programs intended to provide better customer service and purchasing
prescription files and other means. If we are not successful in implementing
our business strategy, or if our business strategy is not effective, we may
not be able to continue to improve our operations. In addition, any adverse
change in general economic conditions can adversely affect consumer buying
practices and reduce our sales of front-end products, which are our higher
margin products, and cause a proportionately greater decrease in our
profitability. Failure to continue to improve operations or a decline in
general economic conditions would adversely affect our results of operations,
financial condition and cash flows and our ability to make principal or
interest payments on our debt.
18
We cannot assure you that management will be able to successfully manage our
business or successfully implement our strategic plan. This could have a
material adverse effect on our business and the results of our operations,
financial condition and cash flows.
In December 1999, we hired a new management team to address our business,
operational financial and accounting challenges. Our management team has
considerable experience in the retail industry. Nonetheless, we cannot assure
you that our management will be able successfully to manage our business or
successfully implement our strategic business plan. This could have a material
adverse effect on our results of operations, financial condition and cash
flows.
We are dependent on our management team, and the loss of their services could
have a material adverse effect on our business and the results of our
operations or financial condition.
The success of our business is materially dependent upon the continued
services of our chairman and chief executive officer, Robert G. Miller, and
the other members of our management team. The loss of Mr. Miller or other key
personnel could have a material adverse effect on the results of our
operations, financial condition and cash flows. Additionally, we cannot assure
you that we will be able to attract or retain other skilled personnel in the
future.
Risks Related to our Industry
The markets in which we operate are very competitive and further increases in
competition could adversely affect us.
We face intense competition with local, regional and national companies,
including other drugstore chains, independently owned drugstores,
supermarkets, mass merchandisers, discount stores and mail order pharmacies.
We may not be able to effectively compete against them because our existing or
potential competitors may have financial and other resources that are superior
to ours. In addition, we may be at a competitive disadvantage because we are
more highly leveraged than our competitors. Because many of our stores are
new, their ability to achieve profitability depends on their ability to
achieve a critical mass of customers. While customer growth is often achieved
through purchases of prescription files from existing pharmacies, our ability
to achieve this critical mass through purchases of prescription files could be
confined by liquidity constraints. Although in the recent past, our
competitiveness has been adversely affected by problems with inventory
shortages, uncompetitive pricing and customer service, we have taken steps to
address these issues. We believe that the continued consolidation of the
drugstore industry will further increase competitive pressures in the
industry. As competition increases, a significant increase in general pricing
pressures could occur which would require us to increase our sales volume and
to sell higher margin products and services in order to remain competitive. We
cannot assure you that we will be able to continue effectively to compete in
our markets or increase our sales volume in response to further increased
competition.
Changes in third-party reimbursement levels for prescription drugs could
reduce our margins and have a material adverse effect on our business.
Sales of prescription drugs, as a percentage of sales, and the percentage of
prescription sales reimbursed by third parties, have been increasing and we
expect them to continue to increase. In fiscal 2001, sales of prescription
drugs represented 59.5% of our sales and we were reimbursed by third-party
payors for approximately 90.3% of all of the prescription drugs that we sold.
In the first half of fiscal 2002, sales of prescription drugs represented
61.3% of our sales and we were reimbursed by third-party payors for
approximately 91.9% of all the prescription drugs that we sold. During fiscal
2001, the top five third-party payors accounted for approximately 26.4% of our
total sales. Any significant loss of third-party provider business could have
a material adverse effect on our business and results of operations. Also,
these third-party payors could reduce the levels at which they will reimburse
us for the prescription drugs that we provide to their members. Furthermore,
if Medicare is reformed to include prescription benefits, we may be reimbursed
for some prescription drugs at prices lower than our current retail prices. If
third-party payors reduce their reimbursement levels or if Medicare covers
prescription drugs at reimbursement levels lower than our current
19
retail prices, our margins on these sales would be reduced, and the
profitability of our business and our results of operations, financial
condition and cash flows could be adversely affected.
We are subject to governmental regulations, procedures and requirements; our
noncompliance or a significant regulatory change could adversely affect our
business, the results of our operations or our financial condition.
Our pharmacy business is subject to federal, state, and local regulation.
These include local registrations of pharmacies in the states where our
pharmacies are located, applicable Medicare and Medicaid regulations, and
prohibitions against paid referrals of patients. Failure to properly adhere to
these and other applicable regulations could result in the imposition of civil
and criminal penalties and could adversely affect the continued operation of
our business. Furthermore, our pharmacies could be affected by federal and
state reform programs, such as healthcare reform initiatives which could, in
turn, negatively affect our business. The passing of these initiatives or any
new federal or state programs could adversely affect our results of
operations, financial condition and cash flows.
Certain risks are inherent in the provision of pharmacy services; our
insurance may not be adequate to cover any claims against us.
Pharmacies are exposed to risks inherent in the packaging and distribution
of pharmaceuticals and other healthcare products, such as with respect to
improper filling of prescriptions, labeling of prescriptions and adequacy of
warnings. Although we maintain professional liability and errors and omissions
liability insurance from time to time, claims result in the payment of
significant amounts, some portions of which are not funded by insurance. We
cannot assure you that the coverage limits under our insurance programs will
be adequate to protect us against future claims, or that we will maintain this
insurance on acceptable terms in the future. Our results of operations,
financial condition or cash flows may be adversely affected if in the future
our insurance coverage proves to be inadequate or unavailable or there is an
increase in liability for which we self insure or we suffer reputational harm
as a result of an error or omission.
We will not be able to compete effectively if we are unable to attract, hire
and retain qualified pharmacists.
There is a nationwide shortage of qualified pharmacists. In response, we
have implemented improved benefits and training programs in order to attract,
hire and retain qualified pharmacists. However, we may not be able to attract,
hire and retain enough qualified pharmacists. This could adversely affect our
operations.
20
USE OF PROCEEDS
We will not receive any cash proceeds from the exchange offer. Any Old Notes
that are properly tendered and exchanged pursuant to the exchange offer will
be retired and cancelled.
RATIO OF EARNINGS TO FIXED CHARGES
We have calculated the ratio or earnings to fixed charges in the following
table by dividing earnings by fixed charges. For this purpose, earnings
include pre-tax income from continuing operations plus fixed charges. Fixed
charges include interest, whether expensed or capitalized, amortization of
debt expense, preferred stock dividend requirement and that portion of rental
expense which is representative of the interest factor in those rentals. The
ratio of earnings to fixed charges data is presented for four fiscal years. As
previously discussed in our Form 10-K dated May 21, 2001 and our Form 10-K/A
dated October 11, 2000, substantial time, effort and expense was required over
a six month period to review, assess, reconcile, prepare and audit our
financial statements for the 2000, 1999 and 1998 fiscal years. We believe it
would require an unreasonable effort and expense to conduct a similar process
related to the 1997 fiscal year.
Twenty-Six Week
Year Ended Period Ended
-------------------------------------------------------------------------- -----------------
March 3, 2001 February 27, 2000 February 27, 1999 February 28, 1998 September 1, 2001
(53 weeks) (52 weeks) (52 weeks) (52 weeks)
------------- ----------------- ----------------- ----------------- -----------------
(Dollars in thousands)
Fixed Charges:
Interest Expense ............ $ 649,926 $ 542,028 $ 274,826 $ 209,152 $ 231,066
Interest Portion of Net
Rental Expense (1)......... 159,066 146,852 139,104 121,694 93,236
----------- ----------- --------- --------- ---------
Fixed Charges Before
Capitalized Interest and
Preferred Stock Dividend
Requirements............... 808,992 688,880 413,930 330,846 324,302
Preferred Stock Dividend
Requirement (2)............ 42,445 15,554 965 -- 20,566
Capitalized Interest ........ 1,836 5,292 7,069 4,102 422
----------- ----------- --------- --------- ---------
Total Fixed Charges ......... $ 853,273 $ 709,726 $ 421,964 $ 334,948 $ 345,290
----------- ----------- --------- --------- ---------
Earnings:
Loss From Continuing
Operations Before Income
Taxes, Extraordinary Item
and Cumulative Effect of
Accounting Change.......... $(1,282,807) $(1,123,296) $(665,040) $(173,090) $(387,934)
Share of Loss From Equity
Method Investees........... 36,675 15,181 448 1,886 10,395
Fixed Charges Before
Capitalized Interest....... 851,437 704,434 414,895 330,846 344,868
----------- ----------- --------- --------- ---------
Total Adjusted Earnings
(Loss)..................... (394,695) (403,681) (249,697) 159,642 (32,671)
----------- ----------- --------- --------- ---------
Earnings to Fixed Charges,
Deficiency................. $(1,247,968) $(1,113,407) $(671,661) $(175,306) $(377,961)
=========== =========== ========= ========= =========
--------------------
(1) The Interest Portion of Net Rental Expense is estimated to be equal to one-
third of the minimum rental expense for the period.
(2) The Preferred Stock Dividend Requirement is computed as the pre-tax earnings
that would be required to cover preferred stock dividends.
21
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data should be read in
conjunction with the financial statements and related notes incorporated by
reference in this prospectus. Annual selected consolidated financial
information is presented for four fiscal years. The selected consolidated
financial data for the twenty-six week periods ended September 1, 2001 and
August 26, 2000 are unaudited and not necessarily indicative of the results to
be expected for the full year. The unaudited interim selected consolidated
financial data reflects all adjustments (consisting primarily of normal
recurring adjustments except as described in the footnotes to the interim
condensed consolidated financial statements) which are, in the opinion of our
management, necessary to present fairly the financial data for the interim
periods. As previously discussed in our Form 10-K dated May 21, 2001 and our
Form 10-K/A dated October 11, 2000, substantial time, effort and expense was
required over a six month period to review, assess, reconcile, prepare and
audit our financial statements for the 2000, 1999 and 1998 fiscal years. We
believe it would require an unreasonable effort and expense to conduct a
similar process related to the 1997 fiscal year. The following selected
consolidated financial information does not give pro forma effect to the
Refinancing.
Fiscal Year Ended
--------------------------------------------------------------------------
March 3, 2001 February 26, 2000 February 27, 1999 February 28, 1998
(53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)(1)
------------- ----------------- ----------------- -----------------
(Dollars in thousands, except per share amounts)
Operations Data:
Revenues ................................. $ 14,516,865 $ 13,338,947 $ 12,438,442 $ 11,352,637
Costs and expenses:
Cost of goods sold, including occupancy
costs ................................. 11,151,490 10,213,428 9,406,831 8,419,021
Selling, general and administrative
expenses .............................. 3,458,307 3,607,810 3,200,563 2,773,560
Goodwill amortization................... 20,670 24,457 26,055 26,169
Store closing and impairment charges
(credits) ............................. 388,078 139,448 195,359 155,024
Interest expense........................ 649,926 542,028 274,826 202,688
Interest rate swap contracts market
value adjustment ...................... -- -- -- --
Loss on debt and lease conversions and
modifications ......................... 100,556 -- -- --
Share of loss from equity investments... 36,675 15,181 448 1,886
(Gain) loss on sale of assets and
investments ........................... (6,030) (80,109) -- (52,621)
------------ ------------ ------------ ------------
Total costs and expenses ................. 15,799,672 14,462,243 13,104,082 11,525,727
------------ ------------ ------------ ------------
Loss from continuing operations before
income taxes, extraordinary item and
cumulative effect of accounting change (1,282,807) (1,123,296) (665,640) (173,090)
Income tax expense (benefit) ............. 148,957 (8,375) (216,941) (28,064)
------------ ------------ ------------ ------------
Loss from continuing operations before
extraordinary item and cumulative
effect of accounting change(2) ........ (1,431,764) (1,114,921) (448,699) (145,026)
Income (loss) from discontinued
operations, net(2)...................... 11,335 9,178 (12,823) (20,214)
Loss on disposal of discontinued
operations, net......................... (168,795) -- -- --
Extraordinary item, loss on early
extinguishment of debt, net............. -- -- -- --
Cumulative effect of accounting change,
net..................................... -- (27,300) -- --
------------ ------------ ------------ ------------
Net loss ................................ $ (1,589,224) $ (1,133,043) $ (461,522) $ (165,240)
============ ============ ============ ============
Basic and diluted (loss) income per
share:
Loss from continuing operations......... $ (5.15) $ (4.34) $ (1.74) $ (0.58)
Income (loss) from discontinued
operations ............................ (0.50) 0.04 (0.05) (0.08)
Loss from extraordinary item............ -- -- -- --
Cumulative effect of accounting change,
net ................................... -- (0.11) -- --
------------ ------------ ------------ ------------
Net loss per share .................... $ (5.65) $ (4.41) $ (1.79) $ (0.66)
============ ============ ============ ============
Balance Sheet Data (at end of period):
Working capital (deficit)............... $ 1,955,877 $ 752,657 $ (892,115) $ 1,258,580
Property, plant and equipment (net)..... 3,041,008 3,445,828 3,328,499 2,460,513
Total assets............................ 7,913,911 9,845,566 9,778,451 7,392,147
Total debt and capital lease
obligations(3) ........................ 5,894,548 6,612,868 5,922,504 3,132,894
Redeemable preferred stock.............. 19,457 19,457 23,559 --
Stockholders' equity (deficit).......... (354,435) 432,509 1,339,617 1,898,203
Other Data:
Cash flows from continuing operations
provided by (used in):
Operating activities .................. $ (704,554) $ (623,098) $ 276,855 $ 622,865
Investing activities .................. 677,653 (504,112) (2,705,043) (1,050,322)
Financing activities .................. (64,324) 905,091 2,660,341 535,066
Capital expenditures(4)................. 132,504 573,287 1,222,674 716,052
Cash dividends declared per common share 0 .3450 .4375 .4075
Basic weighted average shares........... 314,189,000 259,139,000 258,516,000 250,659,000
Ratio of earnings to fixed charges(5)... -- -- -- --
Number of retail drugstores............. 3,648 3,802 3,870 3,975
Number of employees..................... 75,500 77,300 89,900 83,000
Pharmacy sales as a percentage of sales. 59.5% 58.4% 54.2% 50.2%
Twenty-Six Week Period Ended
-----------------------------------
September 1, 2001 August 26, 2000
----------------- ---------------
(Dollars in thousands, except per
share amounts)
Operations Data:
Revenues ................................. $ 7,401,207 $ 6,881,655
Costs and expenses:
Cost of goods sold, including occupancy
costs ................................. 5,713,130 5,264,711
Selling, general and administrative
expenses .............................. 1,667,999 1,706,965
Goodwill amortization................... 10,623 11,701
Store closing and impairment charges
(credits) ............................. 21,741 104,437
Interest expense........................ 231,066 353,483
Interest rate swap contracts market
value adjustment ...................... 31,047 --
Loss on debt and lease conversions and
modifications ......................... 154,595 83,789
Share of loss from equity investments... 10,395 24,070
(Gain) loss on sale of assets and
investments ........................... (51,455) 16,526
------------ ------------
Total costs and expenses ................. 7,789,141 7,565,682
------------ ------------
Loss from continuing operations before
income taxes, extraordinary item and
cumulative effect of accounting change (387,934) (684,027)
Income tax expense (benefit) ............. 2,500 144,382
------------ ------------
Loss from continuing operations before
extraordinary item and cumulative
effect of accounting change(2) ........ (390,434) (828,409)
Income (loss) from discontinued
operations, net(2)...................... -- 11,335
Loss on disposal of discontinued
operations, net......................... -- (334,763)
Extraordinary item, loss on early
extinguishment of debt, net............. (66,589) --
Cumulative effect of accounting change,
net..................................... -- --
------------ ------------
Net loss ................................ $ (457,023) $ (1,151,837)
============ ============
Basic and diluted (loss) income per
share:
Loss from continuing operations......... $ (0.95) $ (3.48)
Income (loss) from discontinued
operations ............................ -- (1.12)
Loss from extraordinary item............ (0.15) --
Cumulative effect of accounting change,
net ................................... -- --
------------ ------------
Net loss per share .................... $ (1.10) $ (4.60)
============ ============
Balance Sheet Data (at end of period):
Working capital (deficit)............... $ 1,405,220 --
Property, plant and equipment (net)..... 2,313,772 --
Total assets............................ 6,834,284 --
Total debt and capital lease
obligations(3) ........................ 6,361,618 --
Redeemable preferred stock.............. 19,510 --
Stockholders' equity (deficit).......... 453,156 --
Other Data:
Cash flows from continuing operations
provided by (used in):
Operating activities .................. $ (48,321) $ (562,035)
Investing activities .................. 364,698 (20,230)
Financing activities .................. (299,527) 484,602
Capital expenditures(4)................. 127,300 59,930
Cash dividends declared per common share 0 0
Basic weighted average shares........... 432,390,000 288,093,000
Ratio of earnings to fixed charges(5)... -- --
Number of retail drugstores............. 3,594 --
Number of employees..................... 77,900 --
Pharmacy sales as a percentage of sales. 61.3% 59.6%
(Footnotes on next page)
22
---------------
(1) Includes the operations of K&B, Incorporated and Harco, Inc. from their
acquisition in August 1997.
(2) PCS was acquired on January 22, 1999 and sold on October 2, 2000 and
accordingly, reported as a discontinued operation for all periods
presented.
(3) Total debt includes capital lease obligations of $1.1 billion as of March
3, 2001, February 26, 2000, February 27, 1999, $0.6 billion as of February
28, 1998, and $0.2 billion as of September 1, 2001.
(4) Capital expenditures represent expenditures for property and equipment.
(5) Calculated by dividing earnings by fixed charges. For this purpose,
earnings include loss from continuing operations before income taxes,
extraordinary item and cumulative effect of accounting change plus fixed
charges. Fixed charges include interest, whether expensed or capitalized,
amortization of debt incurrence cost, preferred stock dividends and that
portion of rental expense which is representative of the interest factor in
those rentals. For fiscal 2001, fiscal 2000, fiscal 1999, fiscal 1998 and
the twenty-six week period ended September 1, 2001, earnings were
insufficient to cover fixed charges by approximately $1,248.0 million,
$1,113.4 million, $671.6 million, $175.3 million and $378.0 million,
respectively.
23
THE EXCHANGE OFFER
Terms of the Exchange Offer; Period for Tendering Old Notes
Subject to terms and conditions, we will accept for exchange Old Notes which
are properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on December 14, 2001. We may, however, in our sole
discretion, extend the period of time during which the exchange offer is open.
The term "Expiration Date" means the latest time and date to which the
exchange offer is extended.
As of the date of this prospectus, $150 million principal amount of Old
Notes are outstanding. This prospectus, together with the letter of
transmittal, is being sent to all holders of Old Notes known to us. Our
obligation to accept Old Notes for exchange pursuant to the exchange offer is
subject to certain obligations as set forth under "--Conditions to the
Exchange Offer."
We expressly reserve the right, at any time, to extend the period of time
during which the exchange offer is open, and delay acceptance for exchange of
any Old Notes, by giving oral or written notice of such extension to the
holders thereof as described below. During any such extension, all Old Notes
previously tendered will remain subject to the exchange offer and may be
accepted for exchange by us. Any Old Notes not accepted for exchange for any
reason will be returned without expense to the tendering holder as promptly as
practicable after the expiration or termination of the exchange offer.
Old Notes tendered in the exchange offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
We expressly reserve the right to amend or terminate the exchange offer, and
not to accept for exchange any Old Notes, upon the occurrence of any of the
conditions of the exchange offer specified under "--Conditions to the Exchange
Offer." We will give oral or written notice of any extension, amendment,
non-acceptance or termination to the holders of the Old Notes as promptly as
practicable. Such notice, in the case of any extension, will be issued by means
of a press release or other public announcement no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
Procedures for Tendering Old Notes
The tender to us of Old Notes by you as set forth below and our acceptance
of the Old Notes will constitute a binding agreement between us and you upon
the terms and subject to the conditions set forth in this prospectus and in
the accompanying letter of transmittal. Except as set forth below, to tender
Old Notes for exchange pursuant to the exchange offer, you must transmit a
properly completed and duly executed letter of transmittal, including all
other documents required by such letter of transmittal or, in the case of a
book-entry transfer, an agent's message in lieu of such letter of transmittal,
to BNY Midwest Trust Company, as exchange agent, at the address set forth
below under "Exchange Agent" on or prior to the Expiration Date. In addition,
either:
o certificates for such Old Notes must be received by the exchange agent
along with the letter of transmittal,
o a timely confirmation of a book-entry transfer (a "book-entry
confirmation") of such Old Notes, if such procedure is available, into the
exchange agent's account at DTC pursuant to the procedure for book-entry
transfer described beginning on page 26 must be received by the exchange
agent, prior to the Expiration Date, with the letter of transmittal or an
agent's message in lieu of such letter of transmittal, or
o the holder must comply with the guaranteed delivery procedures described
below.
The term "agent's message" means a message, transmitted by DTC to and
received by the exchange agent and forming a part of a book-entry
confirmation, which states that DTC has received an express acknowledgment
from the tendering participant stating that such participant has received and
agrees to be bound by the letter of transmittal and that we may enforce such
letter of transmittal against such participant.
24
The method of delivery of Old Notes, letters of transmittal and all other
required documents is at your election and risk. If such delivery is by mail,
it is recommended that you use registered mail, properly insured, with return
receipt requested. In all cases, you should allow sufficient time to assure
timely delivery. No letter of transmittal or Old Notes should be sent to us.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange are
tendered:
o by a holder of the Old Notes who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the
letter of transmittal or
o for the account of an Eligible Institution (as defined below)
In the event that signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, such guarantees must be by a firm
which is a member of the Securities Transfer Agent Medallion Program, the
Stock Exchanges Medallion Program or the New York Stock Exchange Medallion
Program (each such entity being hereinafter referred to as an "Eligible
Institution"). If Old Notes are registered in the name of a person other than
the signer of the letter of transmittal, the Old Notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as we or the
exchange agent determine in our sole discretion, duly executed by the
registered holders with the signature thereon guaranteed by an Eligible
Institution.
We or the exchange agent in our sole discretion will make a final and
binding determination on all questions as to the validity, form, eligibility
(including time of receipt) and acceptance of Old Notes tendered for exchange.
We reserve the absolute right to reject any and all tenders of any particular
old note not properly tendered or to not accept any particular old note which
acceptance might, in our judgment or our counsel's, be unlawful. We also
reserve the absolute right to waive any defects or irregularities or
conditions of the exchange offer as to any particular old note either before
or after the Expiration Date (including the right to waive the ineligibility
of any holder who seeks to tender Old Notes in the exchange offer). Our or the
exchange agent's interpretation of the terms and conditions of the exchange
offer as to any particular old note either before or after the Expiration Date
(including the letter of transmittal and the instructions thereto) will be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes for exchange must be cured within a
reasonable period of time, as we determine. We are not, nor is the exchange
agent or any other person, under any duty to notify you of any defect or
irregularity with respect to your tender of Old Notes for exchange, and no one
will be liable for failing to provide such notification.
If the letter of transmittal is signed by a person or persons other than the
registered holder or holders of Old Notes, such Old Notes must be endorsed or
accompanied by powers of attorney signed exactly as the name(s) of the
registered holder(s) that appear on the Old Notes.
If the letter of transmittal or any Old Notes or powers of attorneys are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing. Unless waived by us or
the exchange agent, proper evidence satisfactory to us of their authority to
so act must be submitted with the letter of transmittal.
By tendering Old Notes, you represent to us that the New Notes acquired
pursuant to the exchange offer are being obtained in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the holder and that neither the holder nor such other person has any
arrangement or understanding with any person, to participate in the
distribution of the New Notes. If you are our "affiliate," as defined under
Rule 405 under the Securities Act, and engage in or intend to engage in or
have an arrangement or understanding with any person to participate in a
distribution of such New Notes to be acquired pursuant to the exchange offer,
you or any such other person:
o could not rely on the applicable interpretations of the staff of the SEC
and
o must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction.
25
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. See "Plan of Distribution." The letter of transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the Expiration Date, all Old Notes properly
tendered and will issue the New Notes promptly after acceptance of the Old
Notes. See "--Conditions to the Exchange Offer." For purposes of the exchange
offer, we will be deemed to have accepted properly tendered Old Notes for
exchange if and when we give oral (confirmed in writing) or written notice to
the exchange agent.
The holder of each Old Note accepted for exchange will receive a new note in
the amount equal to the surrendered Old Note. Accordingly, registered holders
of New Notes on the relevant record date for the first interest payment date
following the consummation of the exchange offer will receive interest
accruing from the most recent date to which interest has been paid on the Old
Notes. Holders of New Notes will not receive any payment in respect of accrued
interest on Old Notes otherwise payable on any interest payment date, the
record date for which occurs on or after the consummation of the exchange
offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange will be made only after timely receipt by the exchange agent of:
o certificates for such Old Notes or a timely book-entry confirmation of
such Old Notes into the exchange agent's account at DTC,
o a properly completed and duly executed letter of transmittal or an agent's
message in lieu thereof, and
o all other required documents.
If any tendered Old Notes are not accepted for any reason set forth in the
terms and conditions of the exchange offer or if Old Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted
or non-exchanged Old Notes will be returned without expense to the tendering
holder (or, in the case of Old Notes tendered by book-entry transfer into the
exchange agent's account at DTC pursuant to the book-entry procedures
described below, such non-exchanged Old Notes will be credited to an account
maintained with DTC) as promptly as practicable after the expiration or
termination of the exchange offer.
Book-Entry Transfers
For purposes of the exchange offer, the exchange agent will request that an
account be established with respect to the Old Notes at DTC within two
business days after the date of this prospectus, unless the exchange agent
already has established an account with DTC suitable for the exchange offer.
Any financial institution that is a participant in DTC may make book-entry
delivery of Old Notes by causing DTC to transfer such Old Notes into the
exchange agent's account at DTC in accordance with DTC's procedures for
transfer. Although delivery of Old Notes may be effected through book-entry
transfer at DTC, the letter of transmittal or facsimile thereof or an agent's
message in lieu thereof, with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received by the
exchange agent at the address set forth under "--Exchange Agent" on or prior
to the Expiration Date or the guaranteed delivery procedures described below
must be complied with.
Guaranteed Delivery Procedures
If you desire to tender your Old Notes and your Old Notes are not
immediately available, or time will not permit your Old Notes or other
required documents to reach the exchange agent before the Expiration Date, a
tender may be effected if:
26
o the tender is made through an Eligible Institution,
o prior to the Expiration Date, the exchange agent received from such
Eligible Institution a notice of guaranteed delivery, substantially in the
form we provide (by telegram, telex, facsimile transmission, mail or hand
delivery), setting forth your name and address, the amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing
that within three New York Stock Exchange ("NYSE") trading days after the
date of execution of the notice of guaranteed delivery, the certificates
for all physically tendered Old Notes, in proper form for transfer, or a
book-entry confirmation, as the case may be, together with a properly
completed and duly executed appropriate letter of transmittal or facsimile
thereof or agent's message in lieu thereof, with any required signature
guarantees and any other documents required by the letter of transmittal
will be deposited by such Eligible Institution with the exchange agent,
and
o the certificates for all physically tendered Old Notes, in proper form for
transfer, or a book-entry confirmation, as the case may be, together with
a properly completed and duly executed appropriate letter of transmittal
or facsimile thereof or agent's message in lieu thereof, with any required
signature guarantees and all other documents required by the letter of
transmittal, are received by the exchange agent within three NYSE trading
days after the date of execution of the notice of guaranteed delivery.
Withdrawal Rights
You may withdraw your tender of Old Notes at any time prior to the
Expiration Date. To be effective, a written notice of withdrawal must be
received by the exchange agent at one of the addresses set forth under
"--Exchange Agent." This notice must specify:
o the name of the person having tendered the Old Notes to be withdrawn,
o the Old Notes to be withdrawn (including the principal amount of such Old
Notes), and
o where certificates for Old Notes have been transmitted, the name in which
such Old Notes are registered, if different from that of the withdrawing
holder.
If certificates for Old Notes have been delivered or otherwise identified to
the exchange agent, then, prior to the release of such certificates, the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an Eligible Institution, unless such holder is an Eligible
Institution. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn Old
Notes and otherwise comply with the procedures of DTC.
We or the exchange agent will make a final and binding determination on all
questions as to the validity, form and eligibility (including time of receipt)
of such notices. Any Old Notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the exchange offer. Any Old
Notes tendered for exchange but not exchanged for any reason will be returned
to the holder without cost to such holder (or, in the case of Old Notes
tendered by book-entry transfer into the exchange agent's account at DTC
pursuant to the book-entry transfer procedures described above, such Old Notes
will be credited to an account maintained with DTC for the Old Notes) as soon
as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering Old Notes"
above at any time on or prior to the Expiration Date.
Conditions to the Exchange Offer
Notwithstanding any other provision of the exchange offer, we are not
required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the exchange offer, if any of the
following events occur prior to acceptance of such Old Notes:
27
(a) there is threatened, instituted or pending any action or proceeding
before, or any injunction, order or decree has been issued by, any
court or governmental agency or other governmental regulatory or
administrative agency or commission,
(1) seeking to restrain or prohibit the making or consummation of
the exchange offer or any other transaction contemplated by the
exchange offer, or assessing or seeking any damages as a result
thereof, or
(2) resulting in a material delay in our ability to accept for
exchange or exchange some or all of the Old Notes pursuant to
the exchange offer;
or any statute, rule, regulation, order or injunction has been
sought, proposed, introduced, enacted, promulgated or deemed
applicable to the exchange offer or any of the transactions
contemplated by the exchange offer by any government or governmental
authority, domestic or foreign, or any action has been taken,
proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in our sole judgment
might, directly or indirectly, result in any of the consequences
referred to in clauses (1) or (2) above or, in our reasonable
judgment, might result in the holders of New Notes having
obligations with respect to resales and transfers of New Notes which
are greater than those described in the interpretation of the SEC
referred to on the cover page of this prospectus, or would otherwise
make it inadvisable to proceed with the exchange offer; or
(b) there has occurred:
(1) any general suspension of or general limitation on prices for,
or trading in, securities on any national securities exchange
or in the over-the-counter market,
(2) any limitation by a governmental agency or authority which may
adversely affect our ability to complete the transactions
contemplated by the exchange offer,
(3) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or any
limitation by any governmental agency or authority which
adversely affects the extension of credit, or
(4) a commencement of a war, armed hostilities or other similar
international calamity directly or indirectly involving the
United States, or, in the case of any of the foregoing existing
at the time of the commencement of the exchange offer, a
material acceleration or worsening thereof; or
(c) any change (or any development involving a prospective change) has
occurred or is threatened in our business, properties, assets,
liabilities, financial condition, operations, results of operations
or prospects and our subsidiaries taken as a whole that, in our
reasonable judgment, is or may be adverse to us, or we have become
aware of facts that, in our reasonable judgment, have or may have
adverse significance with respect to the value of the Old Notes or
the New Notes;
which in our reasonable judgment in any case, and regardless of the
circumstances (including any action by us) giving rise to any such condition,
makes it inadvisable to proceed with the exchange offer and/or with such
acceptance for exchange or with such exchange.
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any condition or may be waived
by us in whole or in part at any time in our reasonable discretion. Our
failure at any time to exercise any of the foregoing rights will not be deemed
a waiver of any such right and each such right will be deemed an ongoing right
which may be asserted at any time.
In addition, we will not accept for exchange any Old Notes tendered, and no
New Notes will be issued in exchange for any such Old Notes, if at such time
any stop order is threatened or in effect with respect to the Registration
Statement, of which this prospectus constitutes a part, or the qualification
of the indenture under the Trust Indenture Act.
28
Exchange Agent
BNY Midwest Trust Company has been appointed as the exchange agent for the
exchange offer. All executed letters of transmittal should be directed to the
exchange agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for notices of guaranteed delivery should be
directed to the exchange agent addressed as follows:
BNY Midwest Trust Company
c/o Bank of New York
The Bank of New York
20 Broad Street
One Lower Level
New York, NY 10286
Attn: Frank Driscoll
By Facsimile (for Eligible Institutions Only)
(914) 773-5045 or 5040
Carolle Montreuil
Confirm by telephone: (914) 773-5735
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER THAN
AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF
TRANSMITTAL.
Fees and Expenses
The principal solicitation is being made by mail by BNY Midwest Trust
Company, as exchange agent. We will pay the exchange agent customary fees for
its services, reimburse the exchange agent for its reasonable out-of-pocket
expenses incurred in connection with the provision of these services and pay
other registration expenses, including fees and expenses of the trustee under
the indenture relating to the notes, filing fees, blue sky fees and printing
and distribution expenses. We will not make any payment to brokers, dealers or
others soliciting acceptances of the exchange offer.
Additional solicitation may be made by telephone, facsimile or in person by
our and our affiliates' officers and regular employees and by persons so
engaged by the exchange agent.
Accounting Treatment
We will record the New Notes at the same carrying value as the Old Notes, as
reflected in our accounting records on the date of the exchange. Accordingly,
we will not recognize any gain or loss for accounting purposes. The expenses
of the exchange offer will be amortized over the term of the New Notes.
Transfer Taxes
You will not be obligated to pay any transfer taxes in connection with the
tender of Old Notes in the exchange offer unless you instruct us to register
New Notes in the name of, or request that Old Notes not tendered or not
accepted in the exchange offer be returned to, a person other than the
registered tendering holder. In those cases, you will be responsible for the
payment of any applicable transfer tax.
Consequences of Exchanging or Failing to Exchange Old Notes
If you do not exchange your Old Notes for New Notes in the exchange offer,
your Old Notes will continue to be subject to the provisions of the indenture
relating to the notes regarding transfer and exchange of the Old Notes and the
restrictions on transfer of the Old Notes described in the legend on your
certificates. These transfer restrictions are required because the Old Notes
were issued under an exemption from, or in
29
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold unless registered under the Securities Act, except under an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. We do not plan to register the Old Notes
under the Securities Act. Based on interpretations by the staff of the SEC, as
set forth in no-action letters issued to third parties, we believe that the
New Notes you receive in the exchange offer may be offered for resale, resold
or otherwise transferred without compliance with the registration and
prospectus delivery provisions of the Securities Act. However, you will not be
able to freely transfer the New Notes if:
o you are our "affiliate," as defined in Rule 405 under the Securities Act;
o you are not acquiring the New Notes in the exchange offer in the ordinary
course of your business,
o you have an arrangement or understanding with any person to participate in
the distribution, as defined in the Securities Act, of the New Notes you
will receive in the exchange offer, or
o you are a participating broker-dealer.
We do not intend to request the SEC to consider, and the SEC has not
considered, the exchange offer in the context of a similar no-action letter.
As a result, we cannot guarantee that the staff of the SEC would make a
similar determination with respect to the exchange offer as in the
circumstances described in the no-action letters discussed above. Each holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and
does not intend to engage in, a distribution of New Notes and has no
arrangement or understanding to participate in a distribution of New Notes. If
you are our affiliate, are engaged in or intend to engage in a distribution of
the New Notes or have any arrangement or understanding with respect to the
distribution of the New Notes you will receive in the exchange offer, you may
not rely on the applicable interpretations of the staff of the SEC and you
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction involving the New
Notes. If you are a participating broker-dealer, you must acknowledge that you
will deliver a prospectus in connection with any resale of the New Notes. In
addition, to comply with state securities laws, you may not offer or sell the
New Notes in any state unless they have been registered or qualified for sale
in that state or an exemption from registration or qualification is available
and is complied with. The offer and sale of the New Notes to "qualified
institutional buyers"--as defined in Rule 144A of the Securities Act--is
generally exempt from registration or qualification under state securities
laws. We do not plan to register or qualify the sale of the New Notes in any
state where an exemption from registration or qualification is required and
not available.
30
DESCRIPTION OF THE NEW NOTES
We will issue the New Notes under the Indenture, dated June 27, 2001, among
BNY Midwest Trust Company, the trustee, us and our subsidiaries that will
guarantee the New Notes. This is the same Indenture under which the Old Notes
were issued.
Several terms used in this description are defined as set forth under
"--Certain Definitions." In this description, the words "we," "us," "our" and
similar expressions refer only to Rite Aid Corporation and not to any of our
subsidiaries.
The following description is only a summary of the material provisions of
the Indenture. We urge you to read the Indenture because it, not this
description, defines your rights as holders of the New Notes. You may request
copies of the Indenture at our address set forth under the heading "Where You
Can Find More Information."
New Notes Versus Old Notes
The New Notes are substantially identical to the Old Notes, except that the
transfer restrictions and registration rights relating to the Old Notes do not
apply to the New Notes.
Principal, Maturity and Interest
The New Notes will mature on July 1, 2008. We are issuing $150.0 million
aggregate principal amount of New Notes now.
Interest on the New Notes will accrue at a rate of 11 1/4% per annum and will
be payable semi-annually in arrears on January 1 and July 1, commencing on
January 1, 2002. We will pay interest to those persons who were holders of
record on the June 15 or December 15 immediately preceding each interest payment
date.
Interest on the New Notes will accrue from the date of original issuance or,
if interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Ranking
The New Notes will be:
o our senior unsecured obligations; and
o equal in ranking ("pari passu") with all of our existing and future
unsubordinated, unsecured debt.
We only have a stockholder's claim in the assets of our subsidiaries. This
stockholder's claim is junior to the claims that creditors of our subsidiaries
have against our subsidiaries. Holders of the New Notes will only be our
creditors. Our Subsidiaries conduct substantially all of our operations and
own a substantial portion of our assets. All the existing and future
liabilities of these subsidiaries, including any claims of trade creditors and
preferred stockholders, will be effectively senior to the New Notes. Further,
because a significant portion of our debt is guaranteed by our Subsidiaries
and those guarantees are secured by the assets of our Subsidiaries, the
holders of that debt will be effectively senior to the New Notes.
Our subsidiaries have significant liabilities, including contingent
liabilities. As of September 1, 2001, after giving effect to the Refinancing
Transactions, we had approximately $3.4 billion of indebtedness to which the
New Notes would have been structurally subordinated in right of payment. This
amount includes the $1.7 billion of debt guaranteed by our Subsidiaries. The
Indenture contains limitations on the amount of additional Debt that we and
the Restricted Subsidiaries may Incur. However, the amounts of this additional
Debt could nevertheless be substantial and it may be Incurred by our
Subsidiaries.
The New Notes are our obligations exclusively. As our subsidiaries conduct
substantially all our operations, our ability to service our debt, including
the New Notes, is dependent upon the earnings of our subsidiaries, and their
ability to distribute those earnings as dividends, loans or other payments to
us. Certain
31
laws restrict the ability of our subsidiaries to pay us dividends or make
loans and advances to us. Any of the situations described above could make it
more difficult for us to service our debt.
The New Notes will be our unsecured obligations. Our Secured Debt will be
effectively senior to the New Notes to the extent of the value of the assets
securing this Debt.
See "Risk Factors--Risks related to the Exchange Offer and holding the New
Notes" and "Description of Other Indebtedness."
Optional Redemption
We may choose to redeem the New Notes at any time. If we do so, we may
redeem all or any portion of the New Notes, at once or over time, after giving
the required notice under the Indenture.
To redeem the New Notes prior to July 1, 2005, we must pay a redemption
price equal to 100% of the principal amount of the New Notes to be redeemed
plus the Applicable Premium as of, and accrued and unpaid interest, if any,
to, the redemption date (subject to the right of holders of record on the
relevant record date to receive interest due on the relevant interest payment
date). Any notice to holders of New Notes of such a redemption needs to
include the appropriate calculation of the redemption price, but does not need
to include the redemption price itself. The actual redemption price must be
set forth in an Officers' Certificate delivered to the Trustee no later than
two business days prior to the redemption date.
"Applicable Premium" means, with respect to any New Note on any redemption
date, the greater of (i) 1.0% of the principal amount of such New Note and
(ii) the excess of (A) the present value at such redemption date of (1) the
redemption price of such Note at July 1, 2005 (such redemption price being set
forth in the table below) plus (2) all required interest payments due on such
Note through July 1, 2005 (excluding accrued but unpaid interest), computed
using a discount rate equal to the Treasury Rate on such redemption date plus
75 basis points over (B) the principal amount of such New Note.
"Treasury Rate" means, as of any redemption date, the yield to maturity as
of such redemption date of United States Treasury securities with a constant
maturity (as compiled and published in the most recent Federal Reserve
Statistical Release H.15 (519) that has become publicly available at least two
business days prior to the redemption date (or, if such statistical release is
no longer published, any publicly available source of similar market data))
most nearly equal to the period from the redemption date to July 1, 2005;
provided, however, that if the period from the redemption date to July 1, 2005
is less than one year, the weekly average yield on actually traded United
States Treasury securities adjusted to a constant maturity of one year shall
be used.
Beginning on July 1, 2005, the New Notes may be redeemed at the redemption
prices set forth below, plus accrued and unpaid interest, if any, to the
redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date).
The following prices are for New Notes redeemed during the 12-month period
commencing on July 1 of the years set forth below, and are expressed as
percentages of principal amount:
REDEMPTION YEAR PRICE
--------------- --------
2005 105.625%
2006 102.813%
2007 and thereafter 100.000%
In addition, at any time and from time to time, prior to July 1, 2004, we
may redeem up to a maximum of 35% of the original aggregate principal amount
of the New Notes (including Additional Notes, if any) with the proceeds of one
or more Equity Offerings, at a redemption price equal to 111.25% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the redemption date (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date);
provided, however, that after giving effect to any such redemption, at least
65% of the original aggregate principal amount of the New Notes (including
Additional Notes, if any) remains outstanding. Any such
32
redemption shall be made within 75 days of the completion of such Equity
Offering upon not less than 30 nor more than 60 days' prior notice.
If the optional redemption date is on or after a record date and on or
before the relevant interest payment date, the accrued and unpaid interest, if
any, will be paid to the person or entity in whose name the Note is registered
at the close of business on that record date, and no additional interest will
be payable to holders whose New Notes shall be subject to redemption.
Sinking Fund
There will be no mandatory sinking fund payments for the New Notes.
Repurchase at the Option of Holders Upon a Change of Control
Upon the occurrence of a Change of Control, each holder of the New Notes
will have the right to require us to repurchase all or any part of such
holder's New Notes pursuant to the offer described below (the "Change of
Control Offer") at a purchase price (the "Change of Control Purchase Price")
equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the purchase date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date). If the purchase date is on or after a record date and
on or before the relevant interest payment date, the accrued and unpaid
interest, if any, will be paid to the person or entity in whose name the Note
is registered at the close of business on that record date, and no additional
interest will be payable to holders whose New Notes shall be subject to
redemption.
Within 30 days following any Change of Control, we shall:
(a) cause a notice of the Change of Control Offer to be sent at least
once to the Dow Jones News Service or similar business news service
in the United States; and
(b) send, by first-class mail, with a copy to the Trustee, to each
holder of the New Notes, at such holder's address appearing in the
register for the New Notes, a notice stating:
(1) that a Change of Control has occurred and a Change of Control
Offer is being made pursuant to the covenant entitled
"Repurchase at the Option of Holders Upon a Change of Control"
and that all New Notes timely tendered will be accepted for
payment;
(2) the Change of Control Purchase Price and the purchase date,
which shall be, subject to any contrary requirements of
applicable law, a business day no earlier than 30 days nor
later than 60 days from the date such notice is mailed;
(3) the circumstances and relevant facts regarding the Change of
Control (including, to the extent reasonably practicable,
information with respect to pro forma historical income, cash
flow and capitalization after giving effect to the Change of
Control); and
(4) the procedures that holders of the New Notes must follow in
order to tender their New Notes (or portions thereof) for
payment, and the procedures that holders of the New Notes must
follow in order to withdraw an election to tender the New Notes
(or portions thereof) for payment.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of the New Notes pursuant to a Change of
Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described above, we
will comply with the applicable securities laws and regulations and will not
be deemed to have breached our obligations under this covenant by virtue of
such compliance.
The Change of Control repurchase feature is a result of negotiations between
us and the Initial Purchasers. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that
we would decide to do so in the future. Subject to the covenants described
below, we could, in the future, enter into transactions, including
acquisitions, refinancings or other recapitalizations,
33
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of debt outstanding at such time or otherwise affect
our capital structure or credit ratings.
The definition of Change of Control includes a phrase relating to the sale,
transfer, assignment, lease, conveyance or other disposition of "all or
substantially all" our assets. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, if we dispose of
less than all our assets by any of the means described above, the ability of a
holder of the New Notes to require us to repurchase its New Notes may be
uncertain. In such a case, holders of the New Notes may not be able to resolve
this uncertainty without resorting to legal action.
The Senior Credit Facility provides that the occurrence of certain of the
events that would constitute a Change of Control would constitute a default
under such facility.
Other future debt we incur may contain prohibitions of events that would
constitute a Change of Control or that would require such debt to be
repurchased upon a Change of Control. Moreover, the exercise by holders of New
Notes of their right to require us to repurchase their New Notes could cause a
default under existing or future debt we incur, even if the Change of Control
itself does not result in a default under existing or future debt, due to the
financial effect of such repurchase on us. Finally, our ability to pay cash to
holders of New Notes upon a repurchase may be limited by our financial
resources at the time of such repurchase. Therefore, we cannot assure you that
sufficient funds will be available when necessary to make any required
repurchases. Our failure to purchase New Notes in connection with a Change of
Control would result in a default under the Indenture. Such a default would,
in turn, constitute a default under our existing debt, and may constitute a
default under future debt as well. Our obligation to make an offer to
repurchase the New Notes as a result of a Change of Control may be waived or
modified at any time prior to the occurrence of such Change of Control with
the written consent of the holders of a majority in aggregate principal amount
of the outstanding New Notes. See "--Amendments and Waivers."
Restrictive Covenants
Limitation on Debt. We will not, and will not permit any Restricted
Subsidiary to, Incur, directly or indirectly, any Debt unless, after giving
effect to the application of the proceeds thereof, no Default or Event of
Default would occur as a consequence of such Incurrence and no Default or
Event of Default would be continuing following such Incurrence and application
of proceeds and either:
(1) after giving effect to the Incurrence of such Debt and the
application of the proceeds thereof, the Consolidated Interest
Coverage Ratio would be greater than (i) if such Incurrence occurs
within two years of the Issue Date, 1.75 to 1.00 or (ii) if such
Incurrence occurs at any time thereafter, 2.00 to 1.00 provided
that, if such Debt is Debt of a Restricted Subsidiary then,
simultaneously with the Incurrence of such Debt, the Restricted
Subsidiary executes and delivers a supplemental indenture providing
for a full and unconditional Guarantee of payment of the New Notes
by such Restricted Subsidiary; or
(2) such Debt is Permitted Debt.
The term "Permitted Debt" is defined to include the following:
(a) Debt of the Company evidenced by the New Notes and of
Restricted Subsidiaries evidenced by guarantees relating to the
New Notes;
(b) Debt of the Company or a Restricted Subsidiary (including
Guarantees thereof) (i) under any Credit Facilities, (ii)
Incurred pursuant to a Real Estate Financing Transaction, a
Sale and Leaseback Transaction or an Equipment Financing
Transaction, (iii) Incurred in respect of Capital Lease
Obligations, (iv) Incurred pursuant to Debt Issuances or (v)
Incurred by a Receivables Entity in a Qualified Receivables
Transaction that is not recourse to the Company or any other
Restricted Subsidiary (except for Standard Securitization
Undertakings), provided that the aggregate principal amount of
all such Debt in clauses (i) through (v) hereof at any one time
outstanding together with the aggregate principal amount of all
Debt described in
34
clause (c) below shall not exceed the greater of (1) $2,500
million, which amount shall be permanently reduced by the
amount of Net Available Cash used to Repay Debt under the
Credit Facilities, and not subsequently reinvested in
Additional Assets or used to purchase New Notes or Repay other
Debt, pursuant to the covenant described under "--Limitation on
Asset Sales" and (2) the sum of the amount equal to (A) 60% of
the book value of our inventory (determined using the first-in-
first-out method of accounting) and that of the Restricted
Subsidiaries and (B) 85% of the book value of our accounts
receivables and those of the Restricted Subsidiaries, in each
case as of our most recently ended quarter of for which
financial statements have been filed with the SEC;
(c) Debt of the Company outstanding on the Issue Date after giving
effect to the Refinancing Transactions and evidenced by the
Existing 10.5% Notes and of Restricted Subsidiaries evidenced
by guarantees relating to the Existing 10.5% Notes;
(d) Debt of the Company evidenced by the New 12.5% Notes and of
Restricted Subsidiaries evidenced by guarantees relating to the
New 12.5% Notes;
(e) Debt Incurred after the Issue Date in respect of Purchase Money
Debt, provided that the aggregate principal amount of such Debt
does not exceed 80% of the Fair Market Value (on the date of
the Incurrence thereof) of the Property acquired, constructed,
developed or leased, including additions and improvements
thereto;
(f) Debt of the Company owing to and held by any consolidated
Restricted Subsidiary and Debt of a Restricted Subsidiary owing
to and held by us or any consolidated Restricted Subsidiary;
provided, however, that any subsequent issue or transfer of
Capital Stock or other event that results in any such
consolidated Restricted Subsidiary ceasing to be a consolidated
Restricted Subsidiary or any subsequent transfer of any such
Debt (except to us or a consolidated Restricted Subsidiary)
shall be deemed, in each case, to constitute the Incurrence of
such Debt by the issuer thereof;
(g) Debt under Interest Rate Agreements entered into by us or a
Restricted Subsidiary for the purpose of limiting interest rate
risk in the ordinary course of the financial management of us
or such Restricted Subsidiary and not for speculative purposes,
provided that the obligations under such agreements are
directly related to payment obligations on Debt otherwise
permitted by the terms of this covenant;
(h) Debt under Currency Exchange Protection Agreements entered into
by us or a Restricted Subsidiary for the purpose of limiting
currency exchange rate risks directly related to transactions
entered into by us or such Restricted Subsidiary in the
ordinary course of business and not for speculative purposes;
(i) Debt under Commodity Price Protection Agreements entered into
by us or a Restricted Subsidiary in the ordinary course of the
financial management of us or that Restricted Subsidiary and
not for speculative purposes;
(j) Debt in connection with one or more standby letters of credit,
banker's acceptance, performance or surety bonds or completion
guarantees issued by us or a Restricted Subsidiary in the
ordinary course of business or pursuant to self-insurance
obligations and not in connection with the borrowing of money
or the obtaining of advances or credit;
(k) Debt outstanding on the Issue Date not otherwise described in
clauses (a) through (j) above, excluding any Debt being
Refinanced in connection with the Refinancing Transactions but
including Debt Incurred in connection with the Refinancing
Transactions;
(l) other Debt of us or a Restricted Subsidiary (including
Guarantees thereof) in an aggregate principal amount
outstanding at any one time not to exceed $400 million;
(m) Debt of a Restricted Subsidiary outstanding on the date on
which that Restricted Subsidiary was acquired by us or
otherwise became a Restricted Subsidiary (other than Debt
Incurred as
35
consideration in, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or
series of transactions pursuant to which that Restricted
Subsidiary became a Subsidiary of us or was otherwise acquired
by us), provided that at the time that Restricted Subsidiary
was acquired by us or otherwise became a Restricted Subsidiary
and after giving effect to the Incurrence of that Debt, we
would have been able to Incur $1.00 of additional Debt pursuant
to clause (1) of the first paragraph of this covenant;
(n) Debt arising from the honoring by a bank or other financial
institution of a check or draft or other similar instrument
inadvertently drawn against insufficient funds in the ordinary
course of business, provided that such Debt is extinguished
within five business days of its Incurrence;
(o) endorsements of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of
business;
(p) Debt of us or a Restricted Subsidiary (including Guarantees
thereof) Incurred in respect of Synthetic Leases in an
aggregate principal amount outstanding at any one time not to
exceed $107 million;
(q) Debt in respect of Sale and Leaseback Transactions or Real
Estate Financing Transactions involving only real property (and
the related personal property) owned by us or a Restricted
Subsidiary on the Issue Date in an aggregate principal amount
outstanding at any one time not to exceed $150 million,
provided that such Sale and Leaseback Transactions or Real
Estate Financing Transactions may involve Property other than
real property (and the related personal property) owned on the
Issue Date to the extent the portion of the Debt related to
such Property is permitted by another provision of this
covenant at the time of Incurrence;
(r) Debt in respect of Sale and Leaseback Transactions that are not
Capital Lease Obligations Incurred to finance the acquisition,
construction and development of Property after the Issue Date,
including additions and improvements thereto, provided that any
reclassification of such Debt as a Capital Lease Obligation
shall be deemed an Incurrence of such Debt;
(s) Permitted Refinancing Debt Incurred in respect of Debt Incurred
pursuant to clause (1) of the first paragraph of this covenant
and clauses (a), (d), (e), (k) and (q) above; and
(t) Debt arising from our agreements or those of any Restricted
Subsidiary providing for indemnification, adjustment of
purchase price or similar obligations, in each case, Incurred
or assumed in connection with the disposition of any business,
assets or a Subsidiary, other than Guarantees of Debt incurred
by any Person acquiring all or any portion of such business,
assets or Restricted Subsidiary for the purpose of financing
such acquisition; provided that (a) such Debt is not reflected
on the balance sheet of us or any Restricted Subsidiary
(contingent obligations referred to in a footnote or footnotes
to financial statements and not otherwise reflected on the
balance sheet will not be deemed to be reflected on such
balance sheet for purposes of this clause (a)) and (b) the
maximum assumable liability in respect of such Debt will at no
time exceed the gross proceeds including non-cash proceeds (the
fair market value of such non-cash proceeds being measured at
the time received and without giving effect to any subsequent
changes in value) actually received by us or such Restricted
Subsidiary in connection with such disposition.
For purposes of determining compliance with this covenant, (1) in the event
that an item of Debt meets the criteria of more than one of the types of Debt
described herein, we, in our sole discretion, will classify such item of Debt
at the time of Incurrence and only be required to include the amount and type
of such Debt in one of the above clauses and (2) we will be entitled at the
time of such Incurrence to divide and classify an item of Debt in more than
one of the types of Debt described herein; provided, however, that (x) all
outstanding Debt under the Senior Credit Facility immediately following the
Issue Date will be deemed to have been incurred pursuant to clause (b) of the
second paragraph of this covenant and (y) any Permitted Debt may later be
reclassified as having been Incurred pursuant to any other clause of the
second paragraph
36
of this covenant to the extent such Debt could be Incurred pursuant to such
clause at the time of such reclassification.
Limitation on Restricted Payments. We will not make, and will not permit
any Restricted Subsidiary to make, directly or indirectly, any Restricted
Payment if at the time of, and after giving effect to, such proposed
Restricted Payment:
(a) a Default or Event of Default shall have occurred and be continuing;
(b) we could not Incur at least $1.00 of additional Debt pursuant to
clause (1) of the first paragraph of the covenant described under
"--Limitation on Debt;" or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made since the Issue Date (the
amount of any Restricted Payment, if made other than in cash, to be
based upon Fair Market Value) would exceed an amount equal to the
sum of:
(1) 50% of the aggregate amount of Consolidated Net Income accrued
during the period (treated as one accounting period) from the
beginning of the first fiscal quarter that commences after the
Issue Date occurs to the end of the most recent fiscal quarter
for which financial statements have been filed with the SEC (or
if the aggregate amount of Consolidated Net Income for such
period shall be a deficit, minus 100% of such deficit); plus
(2) 100% of Capital Stock Sale Proceeds; plus
(3) the sum of:
(A) the aggregate net cash proceeds received by us or any
Restricted Subsidiary from the issuance or sale after the
Issue Date of convertible or exchangeable Debt that has
been converted into or exchanged for Capital Stock (other
than Disqualified Stock) of us; and
(B) the aggregate amount by which Debt (other than
Subordinated Obligations) of us or any Restricted
Subsidiary is reduced on our consolidated balance sheet
after the Issue Date upon the conversion or exchange of
any Debt (other than convertible or exchangeable debt
issued or sold after the Issue Date) for our Capital Stock
(other than Disqualified Stock);
excluding, in the case of clause (A) or (B):
(x) any such Debt issued or sold to us or a Subsidiary of us or an
employee stock ownership plan or trust established by us or any such
Subsidiary for the benefit of their employees; and
(y) the aggregate amount of any cash or other Property distributed by us
or any Restricted Subsidiary upon any such conversion or exchange;
plus
(4) an amount equal to the sum of:
(A) the net reduction in Investments in any Person other than
us or a Restricted Subsidiary resulting from dividends,
repayments of loans or advances or other transfers of
Property, in each case to us or any Restricted Subsidiary
from such Person less the cost of the disposition of such
Investments; and
(B) the portion (proportionate to our equity interest in such
Unrestricted Subsidiary) of the Fair Market Value of the
net assets of an Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum
shall not exceed, in the case of any Person, the amount of
Investments previously made (and treated as a Restricted
Payment) by us or any Restricted Subsidiary in such
Person.
37
Notwithstanding the foregoing limitation, we may:
(a) pay dividends on its Capital Stock within 60 days of the declaration
thereof if, on said declaration date, such dividends could have been
paid in compliance with the Indenture; provided, however, that at
the time of such payment of such dividend, no other Default or Event
of Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments;
(b) purchase, repurchase, redeem, legally defease, acquire or retire for
value our Capital Stock or Subordinated Obligations in exchange for,
or out of the proceeds of the substantially concurrent sale of, our
Capital Stock (other than Disqualified Stock and other than Capital
Stock issued or sold to any of our Subsidiaries of the Company or an
employee stock ownership plan or trust established by us or any such
Subsidiary for the benefit of their employees); provided, however,
that:
(1) such purchase, repurchase, redemption, legal defeasance,
acquisition or retirement shall be excluded in the calculation
of the amount of Restricted Payments; and
(2) the Capital Stock Sale Proceeds from such exchange or sale
shall be excluded from the calculation pursuant to clause
(c)(2) above;
(c) purchase, repurchase, redeem, legally defease, acquire or retire for
value any Subordinated Obligations in exchange for, or out of the
proceeds of the substantially concurrent sale of, Permitted
Refinancing Debt; provided, however, that such purchase, repurchase,
redemption, legal defeasance, acquisition or retirement shall be
excluded in the calculation of the amount of Restricted Payments;
(d) so long as no Default or Event of Default shall have occurred or be
continuing, declare and pay dividends to the holders of Series B
Preferred Stock, Series C Preferred Stock, Class A Cumulative
Preferred Stock, Class C Cumulative Preferred Stock and Class D
Cumulative Preferred Stock outstanding on the Issue Date or issued
after the Issue Date solely in payment of dividends on the same
class of stock; provided, however, that such dividends shall be
included in the calculation of the amount of Restricted Payments;
(e) so long as no Default or Event of Default has occurred and is
continuing the repurchase or other acquisition of shares of or
options to purchase shares of, Capital Stock of us or any of our
Subsidiaries from employees, former employees, directors or former
directors of us or any of our Subsidiaries (or permitted transferees
of such employees, former employees, directors or former directors),
pursuant to the terms of the agreements (including employment
agreements) or plans (or amendments thereto) approved by the Board
of Directors under which such individuals purchase or sell or are
granted the option to purchase or sell, shares of such Capital
Stock; provided, however, that the aggregate amount of such
repurchases and other acquisitions shall not exceed $10 million;
provided further, however, that such repurchases and other
acquisitions shall be included in the calculation of the amount of
Restricted Payments;
(f) make payments not to exceed $1 million in the aggregate to enable us
to make payments to holders of our Capital Stock in lieu of the
issuance of fractional shares of our Capital Stock; provided,
however, that such payments shall be included in the calculation of
the amount of Restricted Payments; and
(g) make any other Restricted Payments not to exceed an aggregate amount
of $25 million; provided, however, that such payments shall be
included in the calculation of the amount of Restricted Payments.
Limitation on Liens. We will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, Incur or suffer to exist, any Lien
(other than Permitted Liens) upon any of its Property (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, or any interest therein or any income or profits therefrom, unless
we have made or will make effective provision whereby the New Notes will be
secured by such Lien equally and ratably with (or prior to) all of our other
Debt or any Restricted Subsidiary secured by such Lien.
38
Limitation on Asset Sales. We will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, consummate any Asset Sale unless:
(a) we or such Restricted Subsidiary receive consideration at the time
of such Asset Sale at least equal to the Fair Market Value of the
Property subject to such Asset Sale;
(b) at least 75% of the consideration paid to us or such Restricted
Subsidiary in connection with such Asset Sale is in the form of
Qualified Consideration; and
(c) we deliver an Officers' Certificate to the Trustee certifying that
such Asset Sale complies with the foregoing clauses (a) and (b).
The Net Available Cash (or any portion thereof) from Asset Sales may be
applied by us or a Restricted Subsidiary, to the extent we or such Restricted
Subsidiary elect (or is required by the terms of any Debt):
(a) to Repay the Credit Facilities, the Existing 10.5% Notes, the New
12.5% Notes or any other Debt of us or any Restricted Subsidiary
secured by a Lien on our Property or any of our Restricted
Subsidiaries of (excluding, in any such case, any Debt owed to of
our or any of our Affiliates ); or
(b) to reinvest in Additional Assets or Expansion Capital Expenditures
(including by means of an Investment in Additional Assets or
Expansion Capital Expenditures by a Restricted Subsidiary with Net
Available Cash received by us or another Restricted Subsidiary);
provided, however, that the Net Available Cash (or any portion
thereof) from Asset Sales from us to any Subsidiary must be
reinvested in Additional Assets or Expansion Capital Expenditures of
us.
Pending application of Net Available Cash pursuant to this covenant, which
shall not be required in respect of an Asset Sale if the Net Available Cash
from such Asset Sale is less than $1 million, such Net Available Cash shall be
invested in Temporary Cash Investments or applied to temporarily reduce
revolving credit indebtedness. If the Net Available Cash from an Asset Sale
equals or exceeds $1 million, any Net Available Cash from such Asset Sale not
applied in accordance with the preceding paragraph within 270 days from the
date of the receipt of such Net Available Cash or that is not segregated from
our general funds for investment in identified Additional Assets in respect of
a project that shall have been commenced, and for which binding contractual
commitments have been entered into, prior to the end of such 270-day period
and that shall not have been completed or abandoned shall constitute "Excess
Proceeds;" provided, however, that the amount of any Net Available Cash that
ceases to be so segregated as contemplated above and any Net Available Cash
that is segregated in respect of a project that is abandoned or completed
shall also constitute "Excess Proceeds" at the time any such Net Available
Cash ceases to be so segregated or at the time the relevant project is so
abandoned or completed, as applicable; provided further, however, that the
amount of any Net Available Cash that continues to be segregated for
investment and that is not actually reinvested within 24 months from the date
of the receipt of such Net Available Cash shall also constitute "Excess
Proceeds."
When the aggregate amount of Excess Proceeds exceeds $20.0 million (taking
into account income earned on such Excess Proceeds, if any), we will be
required to make an offer to purchase (the "Prepayment Offer") the New Notes
which offer shall be in the amount of the Allocable Excess Proceeds, on a pro
rata basis according to principal amount at maturity, at a purchase price
equal to 100% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the purchase date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), in accordance with the procedures (including prorating
in the event of oversubscription) set forth in the Indenture. To the extent
that any portion of the amount of Net Available Cash remains after compliance
with the preceding sentence and provided that all holders of the New Notes
have been given the opportunity to tender their New Notes for purchase in
accordance with the Indenture, we or such Restricted Subsidiary may use such
remaining amount for any purpose permitted by the Indenture and the amount of
Excess Proceeds will be reset to zero.
The term "Allocable Excess Proceeds" will mean the product of:
(a) the Excess Proceeds; and
(b) a fraction,
39
(1) the numerator of which is the aggregate principal amount of the
New Notes outstanding on the date of the Prepayment Offer; and
(2) the denominator of which is the sum of the aggregate principal
amount of the New Notes outstanding on the date of the
Prepayment Offer and the aggregate principal amount of our
other Debt outstanding on the date of the Prepayment Offer that
is pari passu in right of payment with the New Notes and
subject to terms and conditions in respect of Asset Sales
similar in all material respects to the covenant described
hereunder and requiring us to make an offer to purchase such
Debt or otherwise repay such Debt at substantially the same
time as the Prepayment Offer.
Within five business days after we are obligated to make a Prepayment Offer
as described in the preceding paragraph, we will send a written notice, by
first-class mail, to the holders of New Notes, accompanied by such information
regarding the Company and its Subsidiaries as we in good faith believe will
enable such holders to make an informed decision with respect to such
Prepayment Offer. Such notice shall state, among other things, the purchase
price and the purchase date, which shall be, subject to any contrary
requirements of applicable law, a business day no earlier than 30 days nor
later than 60 days from the date such notice is mailed.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of New Notes pursuant to the covenant described
hereunder. To the extent that the provisions of any securities laws or
regulations conflict with provisions of the covenant described hereunder, we
will comply with the applicable securities laws and regulations and will not
be deemed to have breached its obligations under the covenant described
hereunder by virtue thereof.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. We will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist any
consensual restriction on the right of any Restricted Subsidiary to:
(a) pay dividends, in cash or otherwise, or make any other distributions
on or in respect of its Capital Stock, or pay any Debt or other
obligation owed, to us or any other Restricted Subsidiary;
(b) make any loans or advances to us or any other Restricted Subsidiary;
or
(c) transfer any of its Property to us or any other Restricted
Subsidiary.
The foregoing limitations will not apply:
(1) with respect to clauses (a), (b) and (c), to restrictions:
(A) in effect on the Issue Date including those under the
Refinancing Transactions;
(B) relating to Debt of a Restricted Subsidiary and existing
at the time it became a Restricted Subsidiary if such
restriction was not created in connection with or in
anticipation of the transaction or series of transactions
pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by us;
(C) that result from the Refinancing of Debt Incurred pursuant
to an agreement referred to in clause (1)(A) or (B) above
or in clause (2)(A) or (B) below, provided such
restriction is no less favorable to the holders of New
Notes in any material respect, as reasonably determined by
the Board of Directors (as evidenced by a resolution of
the Board of Directors), than those under the agreement
evidencing the Debt so Refinanced;
(D) resulting from the Incurrence of any Permitted Debt
described in the second paragraph of the covenant
described under "--Limitation on Debt," provided that (i)
the restriction is no less favorable to the holders of New
Notes in any material respect, as reasonably determined by
the Board of Directors (as evidenced by a resolution of
the Board of Directors), than the restrictions of the same
type contained in the Indenture and (ii) the Board of
Directors determines (as evidenced by a resolution of the
Board of Directors) in
40
good faith that such restrictions will not impair the
ability of us to make payments of principal and interest
on the New Notes when due;
(E) existing by reason of applicable law; or
(F) any contractual requirements incurred with respect to
Qualified Receivables Transactions relating exclusively to
a Receivables Entity that, in the good faith determination
of our Board of Directors, are customary for Qualified
Receivables Transactions; and
(2) with respect to clause (c) only, to restrictions:
(A) relating to Debt that is permitted to be Incurred and
secured without also securing the New Notes pursuant to
the covenants described under "--Limitation on Debt" and
"--Limitation on Liens" that limit the right of the debtor
to dispose of the Property securing such Debt;
(B) encumbering Property at the time such Property was
acquired by us or any Restricted Subsidiary, so long as
such restriction relates solely to the Property so
acquired and was not created in connection with or in
anticipation of such acquisition;
(C) resulting from customary provisions restricting subletting
or assignment of leases or customary provisions in other
agreements that restrict assignment of such agreements or
rights thereunder; or
(D) customary restrictions contained in agreements relating to
the sale or other disposition of Property limiting the
transfer of such Property pending the closing of such
sale.
Limitation on Transactions with Affiliates. We will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, conduct any
business or enter into or suffer to exist any transaction or series of
transactions (including the purchase, sale, transfer, assignment, lease,
conveyance or exchange of any Property or the rendering of any service) with,
or for the benefit of, any of our Affiliates (an "Affiliate Transaction"),
unless:
(a) the terms of such Affiliate Transaction are:
(1) set forth in writing;
(2) in the best interest of us or such Restricted Subsidiary, as
the case may be; and
(3) no less favorable to us or such Restricted Subsidiary, as the
case may be, than those that could be obtained in a comparable
arm's-length transaction with a Person that is not one of our
an Affiliates;
(b) if such Affiliate Transaction involves aggregate payments or value
in excess of $25.0 million, the Board of Directors (including a
majority of the disinterested members of the Board of Directors)
approves such Affiliate Transaction and, in its good faith judgment,
believes that such Affiliate Transaction complies with clauses
(a)(2) and (3) of this paragraph as evidenced by a Board Resolution
promptly delivered to the Trustee; and
(c) if such Affiliate Transaction involves aggregate payments or value
to the Affiliate in excess of $50.0 million in any 12-month period,
we obtain a written opinion from an Independent Financial Advisor to
the effect that the consideration to be paid or received in
connection with such Affiliate Transaction is fair, from a financial
point of view, to us and the Restricted Subsidiaries, taken as a
whole.
Notwithstanding the foregoing limitation, we or any Restricted Subsidiary
may enter into or suffer to exist the following:
(a) any transaction or series of transactions between us and one or more
Restricted Subsidiaries or between two or more Restricted
Subsidiaries in the ordinary course of business, provided that no
more than 5% of the total voting power of the Voting Stock (on a
fully diluted basis) of any such Restricted Subsidiary is owned by
any of our Affiliates (other than a Restricted Subsidiary);
41
(b) any Restricted Payment permitted to be made pursuant to the covenant
described under "--Limitation on Restricted Payments" or any Permitted
Investment (other than pursuant to clauses (a)(iii), (b), (g), (h),
(i), (k) or (l) of the definition of "Permitted Investment");
(c) the payment of compensation (including amounts paid pursuant to
employee benefit plans) for the personal services of and related
indemnities provided to officers, directors, consultants and
employees of us or any of the Restricted Subsidiaries, so long as
the Board of Directors in good faith shall have approved the terms
thereof and deemed the services theretofore or thereafter to be
performed for such compensation to be fair consideration therefor;
(d) loans and advances to employees made in the ordinary course of
business and consistent with our past practices or those of such
Restricted Subsidiary, as the case may be, provided that such loans
and advances do not exceed $25 million in the aggregate at any one
time outstanding;
(e) any transaction effected as part of a Qualified Receivables
Transaction or any transaction involving the transfer of accounts
receivable of the type specified in the definition of "Credit
Facilities" and permitted under clause (b) of the second paragraph
of the covenant described under "--Limitation on Debt;"
(f) payments of customary fees by us or any of our Restricted
Subsidiaries to Leonard Green & Partners L.P. or any of its
Affiliates made for any corporate advisory services or financial
advisory, financing, underwriting or placement services or in
respect of other investment banking activities including, without
limitation, in connection with acquisitions or divestitures, which
are approved by a majority of the Board of Directors in good faith;
(g) if such Affiliate Transaction is with any Person solely in its
capacity as a holder of Debt or Capital Stock of us or any of our
Restricted Subsidiaries, where such Person is treated no more
favorably than any other holder of such Debt or Capital Stock of us
or any of our Restricted Subsidiaries; and
(h) any agreement as in effect on the Issue Date or any amendment
thereto (so long as such amendment is not disadvantageous to the
holders of the New Notes in any material respect) or any transaction
contemplated thereby.
Limitation on Sale and Leaseback Transactions. We shall not, and shall not
permit any Restricted Subsidiary to, enter into any Sale and Leaseback
Transaction with respect to any Property unless:
(a) we or such Restricted Subsidiary would be entitled to:
(1) Incur Debt in an amount equal to the Attributable Debt with
respect to such Sale and Leaseback Transaction pursuant to the
covenant described under "--Limitation on Debt;" and
(2) create a Lien on such Property securing such Attributable Debt
without also securing the New Notes pursuant to the covenant
described under "--Limitation on Liens," and
(b) such Sale and Leaseback Transaction is effected in compliance with
the covenant described under "--Limitation on Asset Sales," provided
that such Sale and Leaseback Transaction constitutes an Asset Sale.
Designation of Restricted and Unrestricted Subsidiaries. The Board of
Directors may designate any of our Subsidiaries to be an Unrestricted
Subsidiary if:
(a) the Subsidiary to be so designated does not own any Capital Stock or
Debt of, or own or hold any Lien on any Property of, us or any other
Restricted Subsidiary; and
(b) either:
(1) the Subsidiary to be so designated has total assets of $1,000
or less; or
(2) such designation is effective immediately upon such entity
becoming one of our Subsidiaries.
42
Unless so designated as an Unrestricted Subsidiary, any Person that becomes
one of our Subsidiaries will be classified as a Restricted Subsidiary;
provided, however, that such Subsidiary shall not be designated a Restricted
Subsidiary and shall be automatically classified as an Unrestricted Subsidiary
if either of the requirements set forth in clauses (x) and (y) of the second
immediately following paragraph will not be satisfied after giving pro forma
effect to such classification as a Restricted Subsidiary or if such Person is
a Subsidiary of an Unrestricted Subsidiary.
Except as provided in the first sentence of the preceding paragraph, no
Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. In
addition, neither we nor any Restricted Subsidiary shall at any time be
directly or indirectly liable for any Debt that provides that the holder
thereof may (with the passage of time or notice or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
Stated Maturity upon the occurrence of a default with respect to any Debt,
Lien or other obligation of any Unrestricted Subsidiary (including any right
to take enforcement action against such Unrestricted Subsidiary).
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary if, immediately after giving pro forma effect to such
designation, (x) we could Incur at least $1.00 of additional Debt pursuant to
clause (1) of the first paragraph of the covenant described under "--
Limitation on Debt," and (y) no Default or Event of Default shall have
occurred and be continuing or would result therefrom.
Any such designation or redesignation by the Board of Directors will be
evidenced to the Trustee by filing with the Trustee a Board Resolution giving
effect to such designation or redesignation and an Officers' Certificate that:
(a) certifies that such designation or redesignation complies with the
foregoing provisions; and
(b) gives the effective date of such designation or redesignation,
such filing with the Trustee to occur within 45 days after the end of our
fiscal quarter in which such designation or redesignation is made (or, in the
case of a designation or redesignation made during the last fiscal quarter of
our fiscal year, within 90 days after the end of such fiscal year).
Limitation on Guarantees by Restricted Subsidiaries. We shall not permit
any Restricted Subsidiary to Guarantee the payment of any of our Debt or
Capital Stock (other than Guarantees of Debt incurred under clause (a), (b),
(c), (d) or (l) of the second paragraph of the covenant described under
"Restrictive Covenants--Limitation on Debt" or Guarantees permitted pursuant
to clause (j) of such second paragraph or Guarantees permitted by clause (s)
of such second paragraph as it relates to clause (d) of such second
paragraph), except that a Restricted Subsidiary may Guarantee our Debt
provided that:
(a) such Debt and the Debt represented by such Guarantee is permitted by
the covenant described under "Restrictive Covenants--Limitation on
Debt;"
(b) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the indenture providing for a Guarantee of
payment of the New Notes by such Restricted Subsidiary and such
Guarantee of our Debt:
(1) unless such Debt is a Subordinated Obligation, shall be pari
passu (or subordinate) in right of payment to and on
substantially the same terms as (or less favorable to such Debt
than) such Restricted Subsidiary's Guarantee with respect to
the New Notes; and
(2) if such Debt is a Subordinated Obligation, shall be
subordinated in right of payment to such Restricted
Subsidiary's Guarantee with respect to the New Notes to at
least the same extent as such Debt is subordinated to the New
Notes; and
(c) such Restricted Subsidiary shall deliver to the trustee an Opinion
of Counsel to the effect that:
(1) such Guarantee of the New Notes has been duly executed and
authorized; and
(2) such Guarantee of the New Notes constitutes a valid, binding
and enforceable obligation of such Restricted Subsidiary,
except insofar as enforcement thereof may be limited by
43
bankruptcy, insolvency or similar laws (including, without
limitation, all laws relating to fraudulent transfers) and
except insofar as enforcement thereof is subject to general
principles of equity.
Merger, Consolidation and Sale of Property
We will not merge, consolidate or amalgamate with or into any other Person
(other than a merger of a Wholly Owned Restricted Subsidiary into us) or sell,
transfer, assign, lease, convey or otherwise dispose of all or substantially
all its Property in any one transaction or series of transactions unless:
(a) we will be the surviving Person (the "Surviving Person") or the
Surviving Person (if other than us) formed by such merger,
consolidation or amalgamation or to which such sale, transfer,
assignment, lease, conveyance or disposition is made will be a
corporation organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia;
(b) the Surviving Person (if other than us) expressly assumes, by
supplemental indenture in form satisfactory to the Trustee, executed
and delivered to the Trustee by such Surviving Person, the due and
punctual payment of the principal of, and premium, if any, and
interest on, all the New Notes, according to their tenor, and the
due and punctual performance and observance of all the covenants and
conditions of the Indenture to be performed by us;
(c) in the case of a sale, transfer, assignment, lease, conveyance or
other disposition of all or substantially all of our Property, such
Property shall have been transferred as an entirety or virtually as
an entirety to one Person;
(d) immediately before and after giving effect to such transaction or
series of transactions on a pro forma basis (and treating, for
purposes of this clause (d) and clause (e) below, any Debt that
becomes, or is anticipated to become, an obligation of the Surviving
Person or any Restricted Subsidiary as a result of such transaction
or series of transactions as having been Incurred by the Surviving
Person or such Restricted Subsidiary at the time of such transaction
or series of transactions), no Default or Event of Default shall
have occurred and be continuing;
(e) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, either (i) we or the Surviving
Person, as the case may be, would be able to Incur at least $1.00 of
additional Debt under clause (1) of the first paragraph of the
covenant described under "--Restrictive Covenants--Limitation on Debt"
or (ii) the Surviving Person would have a Consolidated Interest
Coverage Ratio which is not less than the Consolidated Interest
Coverage Ratio of the Company immediately prior to such transaction or
series of transactions; and
(f) we shall deliver, or cause to be delivered, to the Trustee, in form
and substance reasonably satisfactory to the Trustee, an Officers'
Certificate and an Opinion of Counsel, each stating that such
transaction and the supplemental indenture, if any, in respect
thereto comply with this covenant and that all conditions precedent
herein provided for relating to such transaction have been
satisfied.
The Surviving Person shall succeed to, and be substituted for, and may
exercise every right and power of us under the Indenture, but the predecessor
Company in the case of:
(a) a sale, transfer, assignment, conveyance or other disposition
(unless such sale, transfer, assignment, conveyance or other
disposition is of all of our assets as an entirety or virtually as
an entirety); or
(b) a lease,
shall not be released from any obligation to pay the principal of, premium, if
any, and interest on, the New Notes.
SEC Reports
Notwithstanding that we may not be subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, we will file with the Commission and
provide the Trustee and holders of New Notes with
44
such annual reports and such information, documents and other reports as are
specified in Sections 13 and 15(d) of the Exchange Act and applicable to a
U.S. corporation subject to such Sections, such information, documents and
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections; provided,
however, that we will not be so obligated to file such information, documents
and reports with the Commission if the Commission does not permit such
filings.
Events of Default
Events of Default in respect of the New Notes include:
(1) failure to make the payment of any interest on the New Notes when
the same becomes due and payable, and such failure continues for a
period of 30 days;
(2) failure to make the payment of any principal of, or premium, if any,
on, any of the New Notes when the same becomes due and payable at
its Stated Maturity, upon acceleration, redemption, optional
redemption, required repurchase or otherwise;
(3) failure to comply with the covenant described under "--Merger,
Consolidation and Sale of Property;"
(4) failure to comply with any other covenant or agreement in the New
Notes or in the Indenture (other than a failure that is the subject
of the foregoing clause (1), (2) or (3)) and such failure continues
for 30 days after we are given written notice as provided below;
(5) a default under any Debt by us or any Restricted Subsidiary that
results in acceleration of the final maturity of such Debt, or
failure to pay any such Debt at final maturity (giving effect to
applicable grace periods), in an aggregate amount greater than $35
million or its foreign currency equivalent at the time (the "cross
acceleration provisions");
(6) any judgment or judgments for the payment of money in an aggregate
amount in excess of $35 million (or its foreign currency equivalent
at the time) that shall be rendered against us or any Restricted
Subsidiary and that shall not be waived, satisfied or discharged for
any period of 30 consecutive days during which a stay of enforcement
shall not be in effect (the "judgment default provisions"); and
(7) certain events involving bankruptcy, insolvency or reorganization of
us or any Significant Subsidiary (the "bankruptcy provisions").
A Default under clause (4) is not an Event of Default until the Trustee or
the holders of not less than 25% in aggregate principal amount of the New
Notes then outstanding notify us of the Default and we do not cure such
Default within the time specified after receipt of such notice. Such notice
must specify the Default, demand that it be remedied and state that such
notice is a "Notice of Default."
We shall deliver to the Trustee, within 30 days after the occurrence
thereof, written notice in the form of an Officers' Certificate of any event
that with the giving of notice and the lapse of time would become an Event of
Default, its status and what action we are taking or propose to take with
respect thereto.
If an Event of Default with respect to the New Notes (other than an Event of
Default resulting from certain events involving bankruptcy, insolvency or
reorganization with respect to us) shall have occurred and be continuing, the
Trustee or the registered holders of not less than 25% in aggregate principal
amount of the New Notes then outstanding may declare to be immediately due and
payable the principal amount at maturity of all the New Notes then
outstanding, plus accrued but unpaid interest to the date of acceleration. In
case an Event of Default resulting from certain events of bankruptcy,
insolvency or reorganization with respect to us shall occur, such amount with
respect to all the New Notes shall be due and payable immediately without any
declaration or other act on the part of the Trustee or the holders of the New
Notes. After any such acceleration, but before a judgment or decree based on
acceleration is obtained by the Trustee, the registered holders of a majority
in aggregate principal amount of the New Notes then outstanding may, under
certain
45
circumstances, rescind and annul such acceleration if all Events of Default,
other than the nonpayment of accelerated principal, premium or interest, have
been cured or waived as provided in the Indenture.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders of the
New Notes, unless such holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the holders of a majority in aggregate principal amount of the New Notes then
outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to the New
Notes.
No holder of New Notes will have any right to institute any proceeding with
respect to the Indenture, or for the appointment of a receiver or trustee, or
for any remedy thereunder, unless:
(a) such holder has previously given to the Trustee written notice of a
continuing Event of Default;
(b) the registered holders of at least 25% in aggregate principal amount
of the New Notes then outstanding have made written request and
offered reasonable indemnity to the Trustee to institute such
proceeding as trustee; and
(c) the Trustee shall not have received from the registered holders of a
majority in aggregate principal amount of the New Notes then
outstanding a direction inconsistent with such request and shall
have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a holder of
any Note for enforcement of payment of the principal of, and premium, if any,
or interest on, such Note on or after the respective due dates expressed in
such Note.
Amendments and Waivers
Subject to exceptions, the Indenture may be amended with the consent of the
registered holders of a majority in aggregate principal amount of the New
Notes then outstanding (including consents obtained in connection with a
tender offer or exchange offer for the New Notes) and any past default or
compliance with any provisions may also be waived (except a default in the
payment of principal, premium or interest and certain covenants and provisions
of the Indenture which cannot be amended without the consent of each holder of
an outstanding Note) with the consent of the registered holders of at least a
majority in aggregate principal amount of the New Notes then outstanding.
However, without the consent of each holder affected thereby, no amendment
may, among other things:
(1) reduce the amount of New Notes whose holders must consent to an
amendment or waiver;
(2) reduce the rate of or extend the time for payment of interest on any
Note;
(3) reduce the principal of or extend the Stated Maturity of any Note;
(4) make any Note payable in money other than that stated in the Note;
(5) impair the right of any holder of the New Notes to receive payment
of principal of and interest on such holder's New Notes on or after
the due dates therefor or to institute suit for the enforcement of
any payment on or with respect to such holder's New Notes;
(6) subordinate the New Notes to any of our other obligations;
(7) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed, as described under "--
Optional Redemption;"
(8) reduce the premium payable upon a Change of Control or, at any time
after a Change of Control has occurred amend the definition of
Change of Control or change the time at which the Change of
46
Control Offer relating thereto must be made or at which the New
Notes must be repurchased pursuant to such Change of Control Offer;
and
(9) at any time after the Company is obligated to make a Prepayment
Offer with the Excess Proceeds from Asset Sales, change the time at
which such Prepayment Offer must be made or at which the New Notes
must be repurchased pursuant thereto.
Without the consent of any holder of the New Notes, we and the Trustee may
amend the Indenture to:
o cure any ambiguity, omission, defect or inconsistency;
o provide for the assumption by a successor corporation of our obligations
under the Indenture;
o provide for uncertificated New Notes in addition to or in place of
certificated New Notes (provided that the uncertificated New Notes are
issued in registered form for purposes of Section 163(f) of the Code, or
in a manner such that the uncertificated New Notes are described in
Section 163(f)(2)(B) of the Code);
o add Guarantees with respect to the New Notes;
o secure the New Notes, add to our covenants for the benefit of the holder
of the New Notes or surrender any right or power conferred upon us;
o make any change that does not adversely affect the rights of any holder
of the New Notes; or
o make any change to comply with any requirement of the Commission in
connection with the qualification of the Indenture under the Trust
Indenture Act.
The consent of the holders of the New Notes is not necessary to approve the
particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment becomes
effective, we are required to mail to each registered holder of the New Notes
at such holder's address appearing in the Security Register a notice briefly
describing such amendment. However, the failure to give such notice to all
holders of the New Notes, or any defect therein, will not impair or affect the
validity of the amendment.
Defeasance
We may at any time terminate all its obligations under the New Notes and the
Indenture ("legal defeasance"), except for certain obligations, including
those respecting the defeasance trust and obligations to register the transfer
or exchange of the New Notes, to replace mutilated, destroyed, lost or stolen
New Notes and to maintain a registrar and paying agent in respect of the New
Notes.
We may at any time terminate:
(1) our obligations under the covenants described under "--Repurchase at
the Option of Holders Upon a Change of Control" and "--Restrictive
Covenants;"
(2) the operation of the cross acceleration provisions, the judgment
default provisions, and the bankruptcy provisions with respect to
Significant Subsidiaries described under "--Events of Default"
above; and
(3) the limitations contained in clause (e) under the first paragraph of
"--Merger, Consolidation and Sale of Property" above ("covenant
defeasance").
We may exercise our legal defeasance option notwithstanding our prior
exercise of the covenant defeasance option.
If we exercise our legal defeasance option, payment of the New Notes may not
be accelerated because of an Event of Default. If we exercise our covenant
defeasance option, payment of the New Notes may not be accelerated because of
an Event of Default specified in clause (4) (with respect to the covenants
described
47
under "--Restrictive Covenants"), (5), (6) or (7) (with respect only to
Significant Subsidiaries), under "--Events of Default" above or because of our
failure to comply with clause (e) under the first paragraph of "--Merger,
Consolidation and Sale of Property" above.
The legal defeasance option or the covenant defeasance option may be
exercised only if:
(a) we irrevocably deposit in trust with the Trustee money or U.S.
Government Obligations for the payment of principal of and interest
on the New Notes to maturity or redemption, as the case may be;
(b) we deliver to the Trustee a certificate from a nationally recognized
firm of independent certified public accountants expressing their
opinion that the payments of principal and interest when due and
without reinvestment on the deposited U.S. Government Obligations
plus any deposited money without investment will provide cash at
such times and in such amounts as will be sufficient to pay
principal and interest when due on all the New Notes to maturity or
redemption, as the case may be;
(c) 123 days pass after the deposit is made and during the 123-day
period no Default described in clause (7) under "--Events of
Default" occurs with respect to us or any other Person making such
deposit which is continuing at the end of the period;
(d) no Default or Event of Default has occurred and is continuing on the
date of such deposit and after giving effect thereto;
(e) such deposit does not constitute a default under any other agreement
or instrument binding on us;
(f) we deliver to the Trustee an Opinion of Counsel to the effect that
the trust resulting from the deposit does not constitute, or is
qualified as, a regulated investment company under the Investment
Company Act of 1940;
(g) in the case of the legal defeasance option, we deliver to the
Trustee an Opinion of Counsel stating that:
(1) we have received from the Internal Revenue Service a ruling; or
(2) since the date of the Indenture there has been a change in the
applicable Federal income tax law, to the effect, in either
case, that, and based thereon such Opinion of Counsel shall
confirm that, the holders of the New Notes will not recognize
income, gain or loss for Federal income tax purposes as a
result of such defeasance and will be subject to Federal income
tax on the same amounts, in the same manner and at the same
time as would have been the case if such defeasance has not
occurred;
(h) in the case of the covenant defeasance option, we deliver to the
Trustee an Opinion of Counsel to the effect that the holders of the
New Notes will not recognize income, gain or loss for Federal income
tax purposes as a result of such covenant defeasance and will be
subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
covenant defeasance had not occurred; and
(i) we deliver to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that all conditions precedent to the
defeasance and discharge of the New Notes have been complied with as
required by the Indenture.
Registration Rights Agreement
We have filed the registration statement of which this prospectus forms a
part and are conducting the exchange offer in accordance with our obligations
under a registration rights agreement between us, the Trustee and the Initial
Purchaser of the Old Notes. Holders of the New Notes will not be entitled to
any registration rights with respect to the New Notes.
48
Governing Law
The Indenture and the New Notes are governed by the laws of the State of New
York without reference to principles of conflicts of law.
The Trustee
BNY Midwest Trust Company is the Trustee under the Indenture.
Except during the continuance of an Event of Default, the Trustee will
perform only such duties as are specifically set forth in the Indenture.
During the existence of an Event of Default, the Trustee will exercise such of
the rights and powers vested in it under the Indenture and use the same degree
of care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
Definitions
Set forth below is a summary of the defined terms used in the Description of
New Notes above. Reference is made to the Indenture for the full definition of
all such terms as well as any other capitalized terms used herein for which no
definition is provided. Unless the context otherwise requires, an accounting
term not otherwise defined has the meaning assigned to it in accordance with
GAAP.
"Additional Assets" means:
(a) any Property (other than cash, cash equivalents and securities) to
be owned by the Company or any Restricted Subsidiary and used in a
Related Business; or
(b) Capital Stock of a Person that becomes a Restricted Subsidiary as a
result of the acquisition of such Capital Stock by the Company or
another Restricted Subsidiary from any Person other than the Company
or an Affiliate of the Company; provided, however, that, in the case
of clause (b), such Restricted Subsidiary is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means:
(a) any other Person directly or indirectly controlling or controlled by
or under direct or indirect common control with such specified
Person; or
(b) any other Person who is a director or executive officer of:
(1) such specified Person;
(2) any Subsidiary of such specified Person; or
(3) any Person described in clause (a) above.
For the purposes of this definition, "control" when used with respect to any
Person means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Annualized EBITDA" and "Annualized Interest Expense" means, as of any date
of determination:
(a) if the most recent fiscal quarter for which financial statements
have been filed with the SEC is the Company's fourth fiscal quarter
of 2001, the product of EBITDA or Consolidated Interest Expense, as
the case may be, for that fiscal quarter multiplied by four;
(b) if the most recent fiscal quarter for which financial statements
have been filed with the SEC is the Company's first fiscal quarter
of 2002, the product of the aggregate amount of EBITDA or
Consolidated Interest Expense, as the case may be, for the most
recent two consecutive quarters multiplied by two;
(c) if the most recent fiscal quarter for which financial statements
have been filed with the SEC is the Company's second fiscal quarter
of 2002, the product of the aggregate amount of EBITDA or
49
Consolidated Interest Expense, as the case may be, for the most
recent three consecutive fiscal quarters multiplied by 4/3; and
(d) if the most recent fiscal quarter for which financial statements
have been filed with the SEC is any subsequent fiscal quarter of the
Company, the aggregate amount of EBITDA or Consolidated Interest
Expense, as the case may be, for the most recent four consecutive
fiscal quarters ending on the last day of the most recent fiscal
quarter for which financial statements have been filed with the SEC.
"Asset Sale" means any sale, lease, transfer, issuance or other disposition
(or series of related sales, leases, transfers, issuances or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means
of a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of:
(a) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares); or
(b) any other assets of the Company or any Restricted Subsidiary outside
of the ordinary course of business of the Company or such Restricted
Subsidiary,
in the case of either clause (a) or clause (b) above, whether in a single
transaction or a series of related transactions, (i) that have a Fair Market
Value in excess of $10 million or (ii) for aggregate consideration in excess
of $10 million, other than, in the case of clause (a) or (b) above:
(1) any disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Wholly Owned
Restricted Subsidiary;
(2) any disposition that constitutes a Permitted Investment or
Restricted Payment permitted by the covenant described under
"--Restrictive Covenants--Limitation on Restricted Payments;"
(3) any disposition effected in compliance with the first paragraph
of the covenant described under "--Merger, Consolidation and
Sale of Property");
(4) a sale of accounts receivable and related assets of the type
specified in the definition of "Qualified Receivables
Transaction" to a Receivables Entity;
(5) a transfer of accounts receivable and related assets of the
type specified in the definition of "Qualified Receivables
Transaction" (or a fractional undivided interest therein) by a
Receivables Entity in connection with a Qualified Receivables
Transaction; or
(6) a sale by the Company or a Restricted Subsidiary of Property by
way of a Sale and Leaseback Transaction but only if (A) such
Property was owned by the Company or a Restricted Subsidiary on
the Issue Date, (B) the requirements of clause (a) of the
covenant described under "Restrictive Covenants--Limitation on
Sale and Leaseback Transactions" are satisfied with respect to
such Sale and Leaseback Transaction, (C) the requirements of
clauses (a), (b) and (c) of the first paragraph of the covenant
described under "Restrictive Covenants--Limitation on Asset
Sales" are satisfied as though such Sale and Leaseback
Transaction constituted an Asset Sale and (D) the aggregate
Fair Market Value of such Property, when added to the Fair
Market Value of all other sales of Property pursuant to this
clause (6) since the Issue Date, does not exceed $150 million.
"Attributable Debt" in respect of a Sale and Leaseback Transaction or
Synthetic Lease means, at any date of determination:
(a) if such Sale and Leaseback Transaction is a Capital Lease
Obligation, the amount of Debt represented thereby according to the
definition of "Capital Lease Obligation," and
(b) in all other instances, the greater of:
(1) the Fair Market Value of the Property subject to such Sale and
Leaseback Transaction or Synthetic Lease; and
50
(2) the present value (discounted at the interest rate borne by the
New Notes, compounded annually) of the total obligations of the
lessee for rental payments during the remaining term of the
lease included in such Sale and Leaseback Transaction or such
Synthetic Lease (in each case including any period for which
such lease has been extended).
"Average Life" means, as of any date of determination, with respect to any
Debt or Preferred Stock, the quotient obtained by dividing:
(a) the sum of the product of the numbers of years (rounded to the
nearest one-twelfth of one year) from the date of determination to
the dates of each successive scheduled principal payment of such
Debt or redemption or similar payment with respect to such Preferred
Stock multiplied by the amount of such payment by
(b) the sum of all such payments.
"Board of Directors" means the board of directors of the Company or any duly
authorized and constituted committee thereof.
"Capital Lease Obligations" means any obligation under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP; and the amount of Debt represented by such obligation shall be the
capitalized amount of such obligations 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. For
purposes of "--Restrictive Covenants--Limitation on Liens," a Capital Lease
Obligation shall be deemed secured by a Lien on the Property being leased.
"Capital Stock" means, with respect to any Person, any shares or other
equivalents (however designated) of any class of corporate stock or
partnership interests or any other participations, rights, warrants, options
or other interests in the nature of an equity interest in such Person,
including Preferred Stock, but excluding any debt security convertible or
exchangeable into such equity interest.
"Capital Stock Sale Proceeds" means the aggregate cash proceeds received by
the Company from the issuance or sale (other than to a Subsidiary of the
Company or an employee stock ownership plan or trust established by the
Company or any such Subsidiary for the benefit of their employees) by the
Company of its Capital Stock (other than Disqualified Stock) after the Issue
Date (and excluding any issuance or sale as part of the Refinancing
Transactions), net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees actually incurred in connection with such issuance or sale and net
of taxes paid or payable as a result thereof.
"Change of Control" means the occurrence of any of the following events:
(a) if any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act or any successor provisions to either
of the foregoing), including any group acting for the purpose of
acquiring, holding, voting or disposing of securities within the
meaning of Rule 13d-5(b)(1) under the Exchange Act (other than one
or more Permitted Holders), becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 40% or more of the total voting power of the Voting
Stock of the Company (for purposes of this clause (a), such person
or group shall be deemed to beneficially own any Voting Stock of a
corporation held by any other corporation (the "parent corporation")
so long as such person or group beneficially owns, directly or
indirectly, in the aggregate a majority of the total voting power of
the Voting Stock of such parent corporation); or
(b) the sale, transfer, assignment, lease, conveyance or other
disposition, directly or indirectly, of all or substantially all the
assets of the Company and the Restricted Subsidiaries, considered as
a whole (other than a disposition of such assets as an entirety or
virtually as an entirety to a Wholly Owned Restricted Subsidiary)
shall have occurred, or the Company merges, consolidates or
amalgamates with or into any other Person or any other Person
merges, consolidates or amalgamates with or into the Company, in any
such event pursuant to a transaction in which the outstanding Voting
Stock of
51
the Company is reclassified into or exchanged for cash, securities
or other Property, other than any such transaction where:
(1) the outstanding Voting Stock of the Company is reclassified
into or exchanged for other Voting Stock of the Company or for
Voting Stock of the surviving corporation; and
(2) the holders of the Voting Stock of the Company immediately
prior to such transaction own, directly or indirectly, not less
than a majority of the Voting Stock of the Company or the
surviving corporation immediately after such transaction and in
substantially the same proportion as before the transaction; or
(c) during any period of two consecutive years commencing after June 30,
2001, individuals who at the beginning of such period constituted
the Board of Directors (together with any new directors whose
election or appointment by such Board or whose nomination for
election by the shareholders of the Company was approved by a vote
of not less than three-fourths 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
(d) the shareholders of the Company shall have approved any plan of
liquidation or dissolution of the Company.
"Class A Cumulative Preferred Stock" means Rite Aid Lease Management
Company's Preferred Stock, par value $100.00 per share, designated as Class A
Cumulative.
"Class C Cumulative Preferred Stock" means the Rite Aid Risk Management
Corp.'s Preferred Stock, par value $1.00 per share, designated as Class C
Cumulative Participating Voting.
"Class D Cumulative Preferred Stock" means the Rite Aid Risk Management
Corp.'s Preferred Stock, par value $100.00 per share, designated as Class D
Cumulative Participating Voting.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Price Protection Agreement" means, in respect of a Person, any
forward contract, commodity swap agreement, commodity option agreement or
other similar agreement or arrangement designed to protect such Person against
fluctuations in commodity prices.
"Consolidated Interest Coverage Ratio" means, as of any date of
determination, the ratio of:
(a) Annualized EBITDA; to
(b) Annualized Interest Expense;
provided, however, that:
(1) if
(A) since the beginning of the period used to calculate
Annualized EBITDA and Annualized Interest Expense the
Company or any Restricted Subsidiary has Incurred any Debt
that remains outstanding or Repaid any Debt; or
(B) the transaction giving rise to the need to calculate the
Consolidated Interest Coverage Ratio is an Incurrence or
Repayment of Debt,
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to such Incurrence or Repayment as if such Debt
was Incurred or Repaid on the first day of such period, provided that, in the
event of any such Repayment of Debt, EBITDA for such period shall be
calculated as if the Company or such Restricted Subsidiary had not earned any
interest income actually earned during such period in respect of the funds
used to Repay such Debt, and
52
(2) if
(A) since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Sale or an
Investment (by merger or otherwise) in any Restricted
Subsidiary (or any Person which becomes a Restricted
Subsidiary) or an acquisition of Property which
constitutes all or substantially all of an operating unit
of a business;
(B) the transaction giving rise to the need to calculate the
Consolidated Interest Coverage Ratio is such an Asset
Sale, Investment or acquisition; or
(C) since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged
with or into the Company or any Restricted Subsidiary
since the beginning of such period) shall have made such
an Asset Sale, Investment or acquisition,
EBITDA for such period shall be calculated after giving pro forma effect to
such Asset Sale, Investment or acquisition as if such Asset Sale, Investment
or acquisition occurred on the first day of such period.
If any Debt bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Debt shall be calculated as if the base
interest rate in effect for such floating rate of interest on the date of
determination had been the applicable base interest rate for the entire period
(taking into account any Interest Rate Agreement applicable to such Debt if
such Interest Rate Agreement has a remaining term in excess of 12 months). In
the event the Capital Stock of any Restricted Subsidiary is sold during the
period, the Company shall be deemed, for purposes of clause (1) above, to have
Repaid during such period the Debt of such Restricted Subsidiary to the extent
the Company and its continuing Restricted Subsidiaries are no longer liable
for such Debt after such sale.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries (excluding
the non-cash interest expense related to (x) litigation reserves, (y) closed
store liability reserves and (z) self-insurance reserves), plus, to the extent
not included in such total interest expense, and to the extent Incurred by the
Company or its Restricted Subsidiaries, and without duplication:
(a) interest expense attributable to Capital Lease Obligations;
(b) amortization of debt discount and debt issuance cost, including
commitment fees;
(c) capitalized interest;
(d) non-cash interest expense other than expenses under clauses (x), (y)
and (z) above;
(e) commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing;
(f) net costs associated with Hedging Obligations (including
amortization of fees but excluding costs associated with forward
contracts for inventory in the ordinary course of business);
(g) Disqualified Stock Dividends;
(h) Preferred Stock Dividends;
(i) interest Incurred in connection with Investments in discontinued
operations;
(j) interest accruing on any Debt of any other Person to the extent such
Debt is Guaranteed by the Company or any Restricted Subsidiary; and
(k) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan
or trust to pay interest or fees to any Person (other than the
Company) in connection with Debt Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income:
53
(a) any net income (loss) of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that:
(1) subject to the exclusion contained in clause (d) below, the
Company's equity in the net income of any such Person for such
period shall be included in such Consolidated Net Income up to
the aggregate amount of cash distributed by such Person during
such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a
dividend or other distribution to a Restricted Subsidiary, to
the limitations contained in clause (c) below); and
(2) the Company's equity in a net loss of any such Person other
than an Unrestricted Subsidiary for such period shall be
included in determining such Consolidated Net Income;
(b) for purposes of the covenant described under "--Restrictive
Covenants--Limitation on Restricted Payments" only, any net income
(loss) of any Person acquired by the Company or any of its
consolidated Subsidiaries in a pooling of interests transaction for
any period prior to the date of such acquisition;
(c) any net income (loss) of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of
distributions, directly or indirectly, to the Company, except that:
(1) subject to the exclusion contained in clause (d) below, the
Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash
distributed by such Restricted Subsidiary during such period to
the Company or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution to another Restricted Subsidiary, to the
limitation contained in this clause); and
(2) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining
such Consolidated Net Income;
(d) any gain or loss realized upon the sale or other disposition of any
Property of the Company or any of its consolidated Subsidiaries
(including pursuant to any Sale and Leaseback Transaction) that is
not sold or otherwise disposed of in the ordinary course of
business;
(e) any extraordinary gain or loss;
(f) the cumulative effect of a change in accounting principles;
(g) any non-cash compensation expense realized for grants of performance
shares, stock options or other rights to officers, directors and
employees of the Company or any Restricted Subsidiary, provided that
such shares, options or other rights can be redeemed at the option
of the holder only for Capital Stock of the Company (other than
Disqualified Stock);
(h) store closing costs;
(i) non-cash charges or credits that relate to use of the last-in-first-
out method of accounting for inventory; and
(j) loss on debt modifications.
Notwithstanding the foregoing, for purposes of the covenant described under
"--Restrictive Covenants--Limitation on Restricted Payments" only, there shall
be excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Company or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (c)(4) thereof.
"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt or commercial paper facilities with banks or
other institutional lenders (including the Senior Credit Facilities),
providing for revolving credit loans, term loans, receivables or inventory
financing (including through the sale
54
of receivables or inventory to such lenders or to special purpose, bankruptcy
remote entities formed to borrow from such lenders against such receivables or
inventory), Synthetic Leases or trade letters of credit, in each case together
with Refinancings thereof on any basis so long as such Refinancing constitutes
Debt.
"Currency Exchange Protection Agreement" means, in respect of a Person, any
foreign exchange contract, currency swap agreement, currency option or other
similar agreement or arrangement designed to protect such Person against
fluctuations in currency exchange rates.
"Debt" means, with respect to any Person on any date of determination
(without duplication):
(a) the principal of and premium (if any) in respect of:
(1) debt of such Person for money borrowed; and
(2) debt evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible
or liable;
(b) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale and Leaseback Transactions and Synthetic
Leases entered into by such Person;
(c) all obligations of such Person issued or assumed as the deferred
purchase price of Property, all conditional sale obligations of such
Person and all obligations of such Person under any title retention
agreement (but excluding trade accounts payable arising in the
ordinary course of business);
(d) all obligations of such Person for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (a)
through (c) above) entered into in the ordinary course of business
of such Person to the extent such letters of credit are not drawn
upon or, if and to the extent drawn upon, such drawing is reimbursed
no later than the third Business Day following receipt by such
Person of a demand for reimbursement following payment on the letter
of credit);
(e) the amount of all obligations of such Person with respect to the
Repayment of any Disqualified Stock or, with respect to any
Subsidiary of such Person, any Preferred Stock (but excluding, in
each case, any accrued dividends);
(f) all obligations of the type referred to in clauses (a) through (e)
of other Persons and all dividends of other Persons for the payment
of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise,
including by means of any Guarantee;
(g) all obligations of the type referred to in clauses (a) through (f)
of other Persons secured by any Lien on any Property of such Person
(whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value
of such Property or the amount of the obligation so secured; and
(h) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Debt of any Person at any date shall be the outstanding balance
at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date. The amount of Debt
represented by a Hedging Obligation shall be equal to:
(1) zero if such Hedging Obligation has been Incurred pursuant to
clause (g) or (h) of the second paragraph of the covenant
described under "--Restrictive Covenants--Limitation on Debt;"
or
(2) the notional amount of such Hedging Obligation if not Incurred
pursuant to such clauses.
"Debt Issuances" means, with respect to the Company or any Restricted
Subsidiary, one or more issuances of Debt evidenced by notes, debentures,
bonds or other similar securities or instruments.
55
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable, in either case at the option of
the holder thereof) or otherwise:
(a) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(b) is or may become redeemable or repurchaseable at the option of the
holder thereof, in whole or in part; or
(c) is convertible or exchangeable at the option of the holder thereof
for Debt or Disqualified Stock;
on or prior to, in the case of clause (a), (b) or (c), the first anniversary
of the Stated Maturity of the New Notes.
"Disqualified Stock Dividends" means all dividends with respect to
Disqualified Stock of the Company held by Persons other than a Wholly Owned
Restricted Subsidiary. The amount of any such dividend shall be equal to the
quotient of such dividend divided by the difference between one and the
maximum statutory federal income tax rate (expressed as a decimal number
between 1 and 0) then applicable to the Company.
"EBITDA" means, for any period, an amount equal to, for the Company and its
consolidated Restricted Subsidiaries:
(a) the sum of Consolidated Net Income for such period, plus the
following to the extent reducing Consolidated Net Income for such
period:
(1) the provision for taxes based on income or profits or utilized
in computing net loss;
(2) Consolidated Interest Expense and non-cash interest expense
related to litigation reserves, closed store liability reserves
and self-insurance reserves, to the extent excluded from
Consolidated Interest Expense;
(3) depreciation;
(4) amortization of intangibles;
(5) non-cash impairment charges;
(6) non-cash losses relating to the Investment in drugstore.com
resulting from accounting for drugstore.com on the equity
method of accounting, except to the extent such losses relate
to Investments made after the Issue Date;
(7) charges relating to the investigations of the Company pending
on the Issue Date by the United States Attorney and by the U.S.
Department of Labor and amounts paid in satisfaction of any
judgment, fine or settlement resulting therefrom; and
(8) any other non-cash items (other than any such non-cash item to
the extent that it represents an accrual of or reserve for cash
expenditures in any future period), minus
(b) all non-cash items increasing Consolidated Net Income for such
period (other than any such non-cash item to the extent that it will
result in the receipt of cash payments in any future period).
Notwithstanding the foregoing clause (a), the provision for taxes and the
depreciation, amortization and non-cash items of a Restricted Subsidiary shall
be added to Consolidated Net Income to compute EBITDA only to the extent (and
in the same proportion) that the net income of such Restricted Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Restricted Subsidiary without prior approval (that has not
been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Restricted Subsidiary or its shareholders.
56
"Equipment Financing Transaction" means any arrangement (together with any
Refinancing thereof) with any Person pursuant to which the Company or any
Restricted Subsidiary Incurs Debt secured by a Lien on equipment or equipment
related property of the Company or any Restricted Subsidiary.
"Equity Offering" means (i) an underwritten offering of common stock of the
Company by the Company pursuant to an effective registration statement under
the Securities Act or (ii) so long as the Company's common stock is, at the
time, listed or quoted on a national securities exchange (as such term is
defined in the Securities Exchange Act of 1934), an offering of common stock
by the Company in a transaction exempt from or not subject to the registration
requirements of the Securities Act.
"Event of Default" has the meaning set forth under "--Events of Default."
"Exchange Act" means the Securities Exchange Act of 1934.
"Existing 5.25% Convertible Notes" means the Company's 5.25% Convertible
Subordinated Notes Due 2002 issued under the indenture dated as of September
10, 1997 between the Company and Harris Trust and Savings Bank as trustee.
"Existing 10.5% Notes" means the Company's 10.50% Senior Secured Notes Due
2002 issued under the indenture dated as of June 14, 2000, among the Company,
the subsidiary guarantors named therein and State Street Bank and Trust
Company, as trustee, and the Exchange Notes (as defined therein) that may be
issued in exchange therefore.
"Expansion Capital Expenditure" means any capital expenditure incurred by
the Company or any Restricted Subsidiary in developing, relocating, remodeling
and refurbishing a warehouse, distribution center, store or other facility
(other than ordinary course maintenance) for carrying on the business of the
Company and its Restricted Subsidiaries that the Board of Directors determines
in good faith will enhance the income generating ability of the warehouse,
distribution center, store or other facility.
"Fair Market Value" means, with respect to any Property, the price that
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value shall be
determined, except as otherwise provided:
(a) if such Property has a Fair Market Value equal to or less than $25
million, by any Officer of the Company; or
(b) if such Property has a Fair Market Value in excess of $25 million,
by a majority of the Board of Directors and evidenced by a Board
Resolution, dated within 30 days of the relevant transaction,
delivered to the Trustee.
"GAAP" means United States generally accepted accounting principles as in
effect on the Issue Date, including those set forth:
(a) in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants;
(b) in the statements and pronouncements of the Financial Accounting
Standards Board;
(c) in such other statements by such other entity as approved by a
significant segment of the accounting profession; and
(d) the rules and regulations of the Commission governing the inclusion
of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff
accounting bulletins and similar written statements from the
accounting staff of the Commission.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
57
(a) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt of such other Person (whether arising by
virtue of partnership arrangements, or by agreements to keep-well,
to purchase assets, goods, securities or services, to take-or-pay or
to maintain financial statement conditions or otherwise); or
(b) entered into for the purpose of assuring in any other manner the
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include:
(1) endorsements for collection or deposit in the ordinary course
of business; or
(2) a contractual commitment by one Person to invest in another
Person for so long as such Investment is reasonably expected to
constitute a Permitted Investment under clause (b) of the
definition of "Permitted Investment."
The term "Guarantee" used as a verb has a corresponding meaning. The term
"Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligation" of any Person means any obligation of such Person
pursuant to any Interest Rate Agreement, Currency Exchange Protection
Agreement, Commodity Price Protection Agreement or any other similar agreement
or arrangement.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by merger, conversion, exchange or otherwise),
extend, assume, Guarantee or become liable in respect of such Debt or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Debt or obligation on the balance sheet of such Person (and "Incurrence"
and "Incurred" shall have meanings correlative to the foregoing); provided,
however, that a change in GAAP that results in an obligation of such Person
that exists at such time, and is not theretofore classified as Debt, becoming
Debt shall not be deemed an Incurrence of such Debt; provided further,
however, that any Debt or other obligations of a Person existing at the time
such Person becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at
the time it becomes a Subsidiary; and provided further, however, that solely
for purposes of determining compliance with "--Restrictive Covenants--
Limitation on Debt," amortization of debt discount shall not be deemed to be
the Incurrence of Debt, provided that in the case of Debt sold at a discount,
the amount of such Debt Incurred shall at all times be the aggregate principal
amount at Stated Maturity.
"Independent Financial Advisor" means an investment banking firm of national
standing or any third party appraiser of national standing, provided that such
firm or appraiser is not an Affiliate of the Company.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or
other similar agreement designed to protect against fluctuations in interest
rates.
"Investment" by any Person means any direct or indirect loan (other than
advances to customers in the ordinary course of business that are recorded as
accounts receivable on the balance sheet of such Person), advance or other
extension of credit or capital contribution (by means of transfers of cash or
other Property to others or payments for Property or services for the account
or use of others, or otherwise) to, or Incurrence of a Guarantee of any
obligation of, or purchase or acquisition of Capital Stock, bonds, notes,
debentures or other securities or evidence of Debt issued by, any other
Person. For purposes of the covenant described under "--Restrictive
Covenants--Limitation on Restricted Payments," "--Restrictive Covenants--
Designation of Restricted and Unrestricted Subsidiaries" and the definition of
"Restricted Payment," "Investment" shall include the portion (proportionate to
the Company's equity interest in such Subsidiary) of the Fair Market Value of
the net assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided, however, that
upon a redesignation of such Subsidiary as a Restricted Subsidiary, the
Company shall be deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary of an amount (if positive) equal to:
(a) the Company's "Investment" in such Subsidiary at the time of such
redesignation; less
58
(b) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the Fair Market Value of the net assets of such
Subsidiary at the time of such redesignation.
In determining the amount of any Investment made by transfer of any Property
other than cash, such Property shall be valued at its Fair Market Value at the
time of such Investment.
"Issue Date" means the date on which the New Notes are initially issued.
"Lien" means, with respect to any Property of any Person, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement,
security interest, lien, charge, easement (other than any easement not
materially impairing usefulness or marketability), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind
or nature whatsoever on or with respect to such Property (including any
Capital Lease Obligation, conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing or any
Sale and Leaseback Transaction).
"Moody's" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
"Net Available Cash" from any Asset Sale means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received, but excluding any other consideration received in the
form of assumption by the acquiring Person of Debt or other obligations
relating to the Property that is the subject of such Asset Sale or received in
any other non-cash form), in each case net of:
(a) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial,
foreign and local taxes required to be accrued as a liability under
GAAP, as a consequence of such Asset Sale;
(b) all payments made on any Debt that is secured by any Property
subject to such Asset Sale, in accordance with the terms of any Lien
upon or other security agreement of any kind with respect to such
Property, or which must by its terms, or in order to obtain a
necessary consent to such Asset Sale, or by applicable law, be
repaid out of the proceeds from such Asset Sale;
(c) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of
such Asset Sale; and
(d) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated
with the Property disposed in such Asset Sale and retained by the
Company or any Restricted Subsidiary after such Asset Sale.
"New 12.5% Notes" means the Company's 12.5% Senior Secured Notes Due 2006 to
be issued as part of the Refinancing Transactions in exchange for a portion of
the Existing 10.5% Notes, and the exchange notes that may be issued in
exchange therefor pursuant to the terms thereof.
"Officer" means the Chief Executive Officer, the President, the Chief
Financial Officer or any Executive Vice President of the Company.
"Officers' Certificate" means a certificate signed by two Officers of the
Company, at least one of whom shall be the principal executive officer or
principal financial officer of the Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Permitted Holder" means Leonard Green & Partners L.P. or any of its
Affiliates.
"Permitted Investment" means any Investment by the Company or a Restricted
Subsidiary in:
(a) (i) the Company, (ii) any Restricted Subsidiary or (iii) any Person
that will, upon the making of such Investment, become a Restricted
Subsidiary;
59
(b) any Person if as a result of such Investment such Person is merged
or consolidated with or into, or transfers or conveys all or
substantially all its Property to, the Company or a Restricted
Subsidiary;
(c) cash and Temporary Cash Investments;
(d) receivables owing to the Company or a Restricted Subsidiary, if
created or acquired in the ordinary course of business and payable
or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade
terms as the Company or such Restricted Subsidiary deems reasonable
under the circumstances;
(e) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary
course of business;
(f) loans and advances to employees made in the ordinary course of
business consistent with past practices of the Company or such
Restricted Subsidiary, as the case may be, provided that such loans
and advances do not exceed $25 million at any one time outstanding;
(g) stock, obligations or other securities received in settlement of
debts created in the ordinary course of business and owing to the
Company or a Restricted Subsidiary or in satisfaction of judgments;
(h) any Person to the extent such Investment represents the non-cash
portion of the consideration received in connection with an Asset
Sale consummated in compliance with the covenant described under "--
Restrictive Covenants--Limitation on Asset Sales;"
(i) Hedging Obligations permitted under clause (g), (h) or (i) of the
covenant described under "--Restrictive Covenants--Limitation on
Debt;"
(j) any Person if the Investments are outstanding on the Issue Date and
not otherwise described in clauses (a) through (i) above;
(k) Investments in Unrestricted Subsidiaries or joint venture entities
(including purchasing cooperatives) that do not exceed $10 million
outstanding at any one time in the aggregate;
(l) other Investments that do not exceed $5 million outstanding at any
one time in the aggregate; and
(m) Investments in any entity, formed by the Company or a Restricted
Subsidiary, organized under Section 501(c)(3) of the Code, that do
not exceed an aggregate amount of $5 million in any fiscal year.
"Permitted Liens" means:
(a) Liens to secure Debt permitted to be Incurred under clause
(b),(c),(d) or (l) of the second paragraph of the covenant described
under "--Restrictive Covenants--Limitation on Debt;"
(b) Liens to secure Debt permitted to be Incurred under clause (e), (p),
(q) or (r) of the second paragraph of the covenant described under
"--Restrictive Covenants--Limitation on Debt," provided that (i) any
such Lien may not extend to any Property of the Company or any
Restricted Subsidiary, other than the Property acquired, developed,
constructed or leased with the proceeds of such Debt and any
improvements or additions to such Property;
(c) Liens for taxes, assessments or governmental charges or levies on
the Property of the Company or any Restricted Subsidiary if the same
shall not at the time be delinquent or thereafter can be paid
without penalty, or are being contested in good faith and by
appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision
that shall be required in conformity with GAAP shall have been made
therefor;
(d) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens and other similar Liens, on the Property of the
Company or any Restricted Subsidiary arising in the ordinary course
of business and securing payment of obligations that are not more
than 60 days past due or are being contested in good faith and by
appropriate proceedings;
60
(e) Liens on the Property of the Company or any Restricted Subsidiary
Incurred in the ordinary course of business to secure performance of
obligations with respect to statutory or regulatory requirements,
performance or return-of-money bonds, surety bonds or other
obligations of a like nature and Incurred in a manner consistent
with industry practice, in each case which are not Incurred in
connection with the borrowing of money, the obtaining of advances or
credit or the payment of the deferred purchase price of Property and
which do not in the aggregate impair in any material respect the use
of Property in the operation of the business of the Company and the
Restricted Subsidiaries taken as a whole;
(f) Liens on Property at the time the Company or any Restricted
Subsidiary acquired such Property, including any acquisition by
means of a merger or consolidation with or into the Company or any
Restricted Subsidiary; provided, however, that any such Lien may not
extend to any other Property of the Company or any Restricted
Subsidiary; provided further, however, that such Liens shall not
have been Incurred in anticipation of or in connection with the
transaction or series of transactions pursuant to which such
Property was acquired by the Company or any Restricted Subsidiary;
(g) Liens on the Property of a Person at the time such Person becomes a
Restricted Subsidiary; provided, however, that any such Lien may not
extend to any other Property of the Company or any other Restricted
Subsidiary that is not a direct Subsidiary of such Person; provided
further, however, that any such Lien was not Incurred in
anticipation of or in connection with the transaction or series of
transactions pursuant to which such Person became a Restricted
Subsidiary;
(h) pledges or deposits by the Company or any Restricted Subsidiary
under workmen's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Debt) or leases to
which the Company or any Restricted Subsidiary is party, or deposits
to secure public or statutory obligations of the Company or any
Restricted Subsidiary, or deposits for the payment of rent, in each
case Incurred in the ordinary course of business;
(i) utility easements, building restrictions and such other encumbrances
or charges against real Property as are of a nature generally
existing with respect to properties of a similar character;
(j) Liens arising out of judgments or awards against the Company or a
Restricted Subsidiary with respect to which the Company or the
Restricted Subsidiary shall then be proceeding with an appeal or
other proceeding for review and which do not give rise to an Event
of Default;
(k) leases or subleases of real property granted by the Company or a
Restricted Subsidiary to any other Person in the ordinary course of
business and not materially impairing the use of the real property
in the operation of the business of the Company or the Restricted
Subsidiary;
(l) Liens existing on the Issue Date not otherwise described in clauses
(a) through (k) above;
(m) Liens on the Property of the Company or any Restricted Subsidiary to
secure any Refinancing, in whole or in part, of any Debt secured by
Liens referred to in clause (a) (but only to the extent it relates
to clause (d) referred to therein), (b) (other than Liens securing
Debt Incurred pursuant to clause (p) or (r) referred to therein),
(f), (g), or (l) above; provided, however, that any such Lien shall
be limited to all or part of the same Property that secured the
original Lien (together with improvements and accessions to such
Property) and the aggregate principal amount of Debt that is secured
by such Lien shall not be increased to an amount greater than the
sum of:
(1) the outstanding principal amount, or, if greater, the committed
amount, of the Debt secured by Liens described under clause (b)
(except as referred to above), (f), (g), or (l) above, as the
case may be, at the time the original Lien became a Permitted
Lien under the Indenture; and
(2) an amount necessary to pay any fees and expenses, including
premiums and defeasance costs, incurred by the Company or such
Restricted Subsidiary in connection with such Refinancing; and
61
(n) Liens not otherwise permitted by clauses (a) through (m) above
encumbering assets that have an aggregate Fair Market Value not in
excess of $2 million.
"Permitted Refinancing Debt" means any Debt that Refinances any other Debt,
including any successive Refinancings, so long as:
(a) such Debt is in an aggregate principal amount (or if Incurred with
original issue discount, an aggregate issue price) not in excess of
the sum of:
(1) the aggregate principal amount (or if Incurred with original
issue discount, the aggregate accreted value) then outstanding
of the Debt being Refinanced; and
(2) an amount necessary to pay any fees and expenses, including
premiums and defeasance costs, related to such Refinancing;
(b) the Average Life of such Debt is equal to or greater than the
Average Life of the Debt being Refinanced;
(c) the Stated Maturity of such Debt is no earlier than the Stated
Maturity of the Debt being Refinanced; and
(d) the new Debt shall not be senior in right of payment to the Debt
that is being Refinanced;
provided, however, that Permitted Refinancing Debt shall not include: (x) Debt
of a Subsidiary that Refinances Debt of the Company, or (y) Debt of the
Company or a Restricted Subsidiary that Refinances Debt of an Unrestricted
Subsidiary.
"Person" means any individual, corporation, company (including any limited
liability company), association, partnership, joint venture, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to the payment
of dividends, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such Person, over shares of any
other class of Capital Stock issued by such Person.
"Preferred Stock Dividends" means all dividends with respect to Preferred
Stock of Restricted Subsidiaries held by Persons other than the Company or a
Wholly Owned Restricted Subsidiary. The amount of any such dividend shall be
equal to the quotient of such dividend divided by the difference between one
and the maximum statutory federal income rate (expressed as a decimal number
between 1 and 0) then applicable to the issuer of such Preferred Stock.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms hereof, a calculation performed in accordance with
Article 11 of Regulation S-X promulgated under the Securities Act, as
interpreted in good faith by the Board of Directors after consultation with
the independent certified public accountants of the Company, or otherwise a
calculation made in good faith by the Board of Directors after consultation
with the independent certified public accountants of the Company, as the case
may be.
"Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, including Capital Stock in, and other securities of, any other
Person. For purposes of any calculation required pursuant to the Indenture,
the value of any Property shall be its Fair Market Value.
"Purchase Money Debt" means Debt Incurred to finance the acquisition,
development, construction or lease by the Company or a Restricted Subsidiary
of Property, including additions and improvements thereto, where the maturity
of such Debt does not exceed the anticipated useful life of the Property being
financed; provided, however, that such Debt is Incurred within 24 months after
the acquisition, development construction or lease of such Property by the
Company or such Restricted Subsidiary.
62
"Qualified Consideration" means, with respect to any Asset Sale (or any
other transaction or series of related transactions required to comply with
clause (b) of the first paragraph of the covenant described under "--
Restrictive Covenants--Limitation on Asset Sales"), any one or more of (a)
cash or cash equivalents, (b) notes or obligations that are converted into
cash (to the extent of the cash received) within 90 days of such Asset Sale,
(c) equity securities listed on a national securities exchange (as such term
is defined in the Securities Exchange Act of 1934) or quoted on the Nasdaq
National Market and converted into cash (to the extent of the cash received)
within 120 days of such Asset Sale, (d) the assumption by the purchaser of
liabilities of the Company or any Restricted Subsidiary (other than
liabilities that are by their terms subordinated to the New Notes) as a result
of which the Company and the Restricted Subsidiaries are no longer obligated
with respect to such liabilities, (e) Additional Assets or (f) other Property,
provided that the aggregate Fair Market Value of all Property received since
the Issue Date by the Company and its Restricted Subsidiaries pursuant to
Asset Sales (or such other transactions) that is used to determine Qualified
Consideration pursuant to this clause (f) does not exceed $100 million.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Company or any of its
Subsidiaries pursuant to which the Company or any of its Subsidiaries may
sell, convey or otherwise transfer to:
(a) a Receivables Entity (in the case of a transfer by the Company or
any of its Subsidiaries); and
(b) any other Person (in the case of a transfer by a Receivables
Entity),
or may grant a security interest in, any accounts receivable (whether now
existing or arising in the future) of the Company or any of its Subsidiaries,
and any assets related thereto including, without limitation, all collateral
securing those accounts receivable, all contracts and all Guarantees or other
obligations in respect of those accounts receivable, proceeds of those
accounts receivable and other assets which are customarily transferred or in
respect of which security interests are customarily granted in connection with
asset securitization transactions involving accounts receivable; provided
that:
(1) if the transaction involves a transfer of accounts receivable
with Fair Market Value equal to or greater than $25.0 million,
the Board of Directors shall have determined in good faith that
the Qualified Receivables Transaction is economically fair and
reasonable to the Company and the Receivables Entity;
(2) all sales of accounts receivable and related assets to or by
the Receivables Entity are made at Fair Market Value; and
(3) the financing terms, covenants, termination events and other
provisions thereof shall be market terms (as determined in good
faith by the Board of Directors).
"Rating Agencies" means Moody's and S&P.
"Real Estate Financing Transaction" means any arrangement with any Person
pursuant to which the Company or any Restricted Subsidiary Incurs Debt secured
by a Lien on real property of the Company or any Restricted Subsidiary and
related personal property together with any Refinancings thereof.
"Receivables Entity" means a Wholly Owned Subsidiary of the Company (or
another Person formed for the purposes of engaging in a Qualified Receivables
Transaction with the Company in which the Company or any Subsidiary of the
Company makes an Investment and to which the Company or any Subsidiary of the
Company transfers accounts receivable and related assets) which engages in no
activities other than in connection with the financing of accounts receivable
of the Company and its Subsidiaries, all proceeds thereof and all rights
(contractual or other), collateral and other assets relating thereto, and any
business or activities incidental or related to that business, and (with
respect to any Receivables Entity formed after the Issue Date) which is
designated by the Board of Directors (as provided below) as a Receivables
Entity and:
(a) no portion of the Debt or any other obligations (contingent or
otherwise) of which:
(1) is Guaranteed by the Company or any Subsidiary of the Company
(excluding Guarantees of obligations (other than the principal
of, and interest on, Debt) pursuant to Standard Securitization
Undertakings);
63
(2) is recourse to or obligates the Company or any Subsidiary of
the Company in any way other than pursuant to Standard
Securitization Undertakings; or
(3) subjects any property or asset of the Company or any Subsidiary
of the Company, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to
Standard Securitization Undertakings;
(b) with which neither the Company nor any Subsidiary of the Company has
any material contract, agreement, arrangement or understanding other
than on terms which the Company reasonably believes to be no less
favorable to the Company or the Subsidiary than those that might be
obtained at the time from Persons that are not Affiliates of the
Company; and
(c) to which neither the Company nor any Subsidiary of the Company has
any obligation to maintain or preserve the entity's financial
condition or cause the entity to achieve certain levels of operating
results other than pursuant to Standard Securitization Undertakings.
Any designation of this kind by the Board of Directors shall be evidenced to
the Trustee by filing with the Trustee a certified copy of the resolution of
the Board of Directors giving effect to the designation and an Officers'
Certificate certifying that the designation complied with the foregoing
conditions.
"Refinance" means, in respect of any Debt, to refinance, extend, renew,
refund, repay, prepay, repurchase, redeem, defease or retire, or to issue
other Debt, in exchange or replacement for, such Debt. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Transactions" has the meaning given to the term "Refinancing"
in this Offering Memorandum.
"Related Business" means any business that is related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date.
"Repay" means, in respect of any Debt, to repay, prepay, repurchase, redeem,
legally defease or otherwise retire such Debt. "Repayment" and "Repaid" shall
have correlative meanings. For purposes of the covenant described under "--
Restrictive Covenants--Limitation on Asset Sales" and the definition of
"Consolidated Interest Coverage Ratio," Debt shall be considered to have been
Repaid only to the extent the related loan commitment, if any, shall have been
permanently reduced in connection therewith.
"Restricted Payment" means:
(a) any dividend or distribution (whether made in cash, securities or
other Property) declared or paid on or with respect to any shares of
Capital Stock of the Company or any Restricted Subsidiary (including
any payment in connection with any merger or consolidation with or
into the Company or any Restricted Subsidiary), except for any
dividend or distribution that is made solely to the Company or a
Restricted Subsidiary (and, if such Restricted Subsidiary is not a
Wholly Owned Restricted Subsidiary, to the other shareholders of
such Restricted Subsidiary on a pro rata basis or on a basis that
results in the receipt by the Company or a Restricted Subsidiary of
dividends or distributions of greater value than it would receive on
a pro rata basis) or any dividend or distribution payable solely in
shares of Capital Stock (other than Disqualified Stock) of the
Company;
(b) the purchase, repurchase, redemption, acquisition or retirement for
value of any Capital Stock of the Company or any Restricted
Subsidiary (other than from the Company or a Restricted Subsidiary)
or any securities exchangeable for or convertible into any such
Capital Stock, including the exercise of any option to exchange any
Capital Stock (other than for or into Capital Stock of the Company
that is not Disqualified Stock);
(c) the purchase, repurchase, redemption, acquisition or retirement for
value, prior to the date for any scheduled maturity, sinking fund or
amortization or other installment payment, of any Subordinated
Obligation (other than the purchase, repurchase or other acquisition
of any Subordinated Obligation purchased in anticipation of
satisfying a scheduled maturity, sinking fund or amortization or
other installment obligation, in each case due within one year of
the date of acquisition);
64
(d) any Investment (other than Permitted Investments) in any Person; or
(e) the issuance, sale or other disposition of Capital Stock of any
Restricted Subsidiary to a Person other than the Company or another
Restricted Subsidiary if the result thereof is that such Restricted
Subsidiary shall cease to be a Restricted Subsidiary, in which event
the amount of such "Restricted Payment" shall be the Fair Market
Value of the remaining interest, if any, in such former Restricted
Subsidiary held by the Company and the other Restricted
Subsidiaries.
Notwithstanding the foregoing, no payment or other transaction permitted by
clause (c) or (f) under the caption "Limitation on Transactions with
Affiliates" will be considered a Restricted Payment.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Service or any successor to the rating
agency business thereof.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
relating to Property now owned or hereafter acquired whereby the Company or a
Restricted Subsidiary transfers such Property to another Person and the
Company or a Restricted Subsidiary leases it from such Person.
"Securities Act" means the Securities Act of 1933.
"Senior Credit Facility" means the Senior Credit Agreement dated as of June
27, 2001 (as amended, modified, supplemented or Refinanced from time to time),
among the Company, the Banks as defined therein, Citicorp USA, Inc. as senior
administrative agent, Citicorp USA, Inc. as senior collateral agent, and the
Chase Manhattan Bank, Credit Suisse First Boston and Fleet Retail Finance Inc.
as the syndication agents.
"Series B Preferred Stock" means the Company's Preferred Stock, par value
$1.00 per share, designated as Series B.
"Series C Preferred Stock" means the Company's Preferred Stock, par value
$1.00 per share, designated as Series C.
"Significant Subsidiary" means any Subsidiary that would be a "Significant
Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-
X promulgated by the Commission.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Company or any Subsidiary of the
Company which are customary in an accounts receivable securitization
transaction involving a comparable company.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Debt of the Company (whether outstanding
on the Issue Date or thereafter Incurred) that is subordinate or junior in
right of payment to the New Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, in respect of any Person, any corporation, company
(including any limited liability company), association, partnership, joint
venture or other business entity of which a majority of the total voting power
of the Voting Stock is at the time owned or controlled, directly or
indirectly, by:
(a) such Person;
(b) such Person and one or more Subsidiaries of such Person; or
(c) one or more Subsidiaries of such Person.
"Synthetic Lease" means a lease which is treated as an operating lease under
generally accepted accounting principles but as ownership of the leased asset
by the lessee for purposes of the Internal Revenue Code of 1986, as amended,
or any successor statute.
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"Temporary Cash Investments" means any of the following:
(a) Investments in U.S. Government Obligations maturing within 365 days
of the date of acquisition thereof;
(b) Investments in time deposit accounts, certificates of deposit, money
market deposits maturing within 90 days of the date of acquisition
thereof issued by a bank or trust company organized under the laws
of the United States of America or any state thereof having capital,
surplus and undivided profits aggregating in excess of $500 million
and whose long-term debt is rated "A-3" or "A-" or higher according
to Moody's or S&P (or such similar equivalent rating by at least one
"nationally recognized statistical rating organization" (as defined
in Rule 436 under the Securities Act));
(c) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (a) entered
into with:
(1) a bank meeting the qualifications described in clause (b)
above; or
(2) any primary government securities dealer reporting to the
Market Reports Division of the Federal Reserve Bank of New
York;
(d) Investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than
an Affiliate of the Company) organized and in existence under the
laws of the United States of America with a rating at the time as of
which any Investment therein is made of "P-1" (or higher) according
to Moody's or "A-1" (or higher) according to S&P (or such similar
equivalent rating by at least one "nationally recognized statistical
rating organization" (as defined in Rule 436 under the Securities
Act));
(e) direct obligations (or certificates representing an ownership
interest in such obligations) of any state of the United States of
America (including any agency or instrumentality thereof) for the
payment of which the full faith and credit of such state is pledged
and which are not callable or redeemable at the issuer's option,
provided that:
(1) the long-term debt of such state is rated "A-3" or "A-" or
higher according to Moody's or S&P (or such similar equivalent
rating by at least one "nationally recognized statistical
rating organization" (as defined in Rule 436 under the
Securities Act)); and
(2) such obligations mature within 180 days of the date of
acquisition thereof; and
(f) money market funds at least 95% of the assets of which constitute
Temporary Cash Equivalents of the kinds described in clauses (a)
through (e) of this definition.
"Unrestricted Subsidiary" means:
(a) any Subsidiary of the Company that is designated after the Issue
Date as an Unrestricted Subsidiary as permitted or required pursuant
to the covenant described under "--Restrictive Covenants--
Designation of Restricted and Unrestricted Subsidiaries" and is not
thereafter redesignated as a Restricted Subsidiary as permitted
pursuant thereto; and
(b) any Subsidiary of an Unrestricted Subsidiary.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable or redeemable at the issuer's option.
"Voting Stock" of any Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding
and normally entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof.
"Wholly Owned Restricted Subsidiary" means, at any time, a Restricted
Subsidiary all the Voting Stock of which (except directors' qualifying shares)
is at such time owned, directly or indirectly, by the Company and its other
Wholly Owned Subsidiaries.
66
Book-Entry System
The New Notes will be initially issued in the form of one or more Global
Securities registered in the name of The Depository Trust Company ("DTC") or
its nominee.
Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of Persons holding through it with the respective principal amounts
of the New Notes represented by such Global Security purchased by such Persons
in the Offering. Such accounts shall be designated by the Initial Purchasers.
Ownership of beneficial interests in a Global Security will be limited to
Persons that have accounts with DTC ("participants") or Persons that may hold
interests through participants. Any Person acquiring an interest in a Global
Security through an offshore transaction in reliance on Regulation S of the
Securities Act may hold such interest through Cedel or Euroclear. Ownership of
beneficial interests in a Global Security will be shown on, and the transfer
of that ownership interest will be effected only through, records maintained
by DTC (with respect to participants' interests) and such participants (with
respect to the owners of beneficial interests in such Global Security other
than participants). The laws of some jurisdictions require that certain
purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
Payment of principal of and interest on New Notes represented by a Global
Security will be made in immediately available funds to DTC or its nominee, as
the case may be, as the sole registered owner and the sole holder of the New
Notes represented thereby for all purposes under the Indenture. The Company
has been advised by DTC that upon receipt of any payment of principal of or
interest on any Global Security, DTC will immediately credit, on its book-
entry registration and transfer system, the accounts of participants with
payments in amounts proportionate to their respective beneficial interests in
the principal or face amount of such Global Security as shown on the records
of DTC. Payments by participants to owners of beneficial interests in a Global
Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held
for customer accounts registered in "street name" and will be the sole
responsibility of such participants.
A Global Security may not be transferred except as a whole by DTC or a
nominee of DTC to a nominee of DTC or to DTC. A Global Security is
exchangeable for certificated New Notes only if:
(a) DTC notifies the Company that it is unwilling or unable to continue
as a depositary for such Global Security or if at any time DTC
ceases to be a clearing agency registered under the Exchange Act;
(b) the Company in its discretion at any time determines not to have all
the New Notes represented by such Global Security; or
(c) there shall have occurred and be continuing a Default or an Event of
Default with respect to the New Notes represented by such Global
Security.
Any Global Security that is exchangeable for certificated New Notes pursuant
to the preceding sentence will be exchanged for certificated New Notes in
authorized denominations and registered in such names as DTC or any successor
depositary holding such Global Security may direct. Subject to the foregoing,
a Global Security is not exchangeable, except for a Global Security of like
denomination to be registered in the name of DTC or any successor depositary
or its nominee. In the event that a Global Security becomes exchangeable for
certificated New Notes,
(a) certificated New Notes will be issued only in fully registered form
in denominations of $1,000 or integral multiples thereof;
(b) payment of principal of, and premium, if any, and interest on, the
certificated New Notes will be payable, and the transfer of the
certificated New Notes will be registerable, at the office or agency
of the Company maintained for such purposes; and
(c) no service charge will be made for any registration of transfer or
exchange of the certificated New Notes, although the Company may
require payment of a sum sufficient to cover any tax or governmental
charge imposed in connection therewith.
67
So long as DTC or any successor depositary for a Global Security, or any
nominee, is the registered owner of such Global Security, DTC or such
successor depositary or nominee, as the case may be, will be considered the
sole owner or holder of the New Notes represented by such Global Security for
all purposes under the Indenture and the New Notes. Except as set forth above,
owners of beneficial interests in a Global Security will not be entitled to
have the New Notes represented by such Global Security registered in their
names, will not receive or be entitled to receive physical delivery of
certificated New Notes in definitive form and will not be considered to be the
owners or holders of any New Notes under such Global Security. Accordingly,
each Person owning a beneficial interest in a Global Security must rely on the
procedures of DTC or any successor depositary, and, if such Person is not a
participant, on the procedures of the participant through which such Person
owns its interest, to exercise any rights of a holder under the Indenture. The
Company understands that under existing industry practices, in the event that
the Company requests any action of holders or that an owner of a beneficial
interest in a Global Security desires to give or take any action which a
holder is entitled to give or take under the Indenture, DTC or any successor
depositary would authorize the participants holding the relevant beneficial
interest to give or take such action and such participants would authorize
beneficial owners owning through such participants to give or take such action
or would otherwise act upon the instructions of beneficial owners owning
through them.
DTC has advised us that DTC is a limited-purpose trust company organized
under the Banking Law of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered under the Exchange
Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include securities
brokers and dealers (which may include the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations some of whom
(or their representatives) own DTC. Access to DTC's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies, that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. None of the Company, the
Trustee or the Initial Purchasers will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
68
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
Exchange Offer
The exchange of an Old Note for a New Note pursuant to the exchange offer
will not consitute a "significant modification" of the Old Note for U.S.
federal income tax purposes and, accordingly, the New Note received will be
treated as a continuation of the Old Note in the hands of such holder. As a
result, there will be no U.S. federal income tax consequences to a Holder who
exchanges an Old Note for a New Note pursuant to the exchange offer and any
such holder will have the same adjusted tax basis and holding period in the
New Note as it had in the Old Note immediately before the exchange. A holder
who does not exchange its Old Notes for New Notes pursuant to the exchange
offer will not recognize any gain or loss, for U.S federal income tax
purposes, upon consummation of the exchange offer.
Certain United States Federal Income Tax Considerations for Non-United States
Holders
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of New
Notes by an owner of New Notes that, for United States federal income tax
purposes, is not a United States person (a "Non-U.S. Holder"). This discussion
is based upon the United States federal tax law now in effect, which is
subject to change, possibly retroactively. For purposes of the following
discussion a Non-U.S. Holder is:
o an individual that is not a citizen or resident of the United States;
o a corporation or other entity treated as a corporation for United States
federal income tax purposes organized or created under non-United States
law; or
o an estate or trust that is not taxable in the United States on its
worldwide income.
The tax treatment of the holders of the New Notes may vary depending upon
their particular situations. United States persons acquiring New Notes are
subject to rules different from those discussed below. In addition, certain
other holders (including insurance companies, tax exempt organizations,
financial institutions, broker-dealers, banks making a loan in the ordinary
course of business, holders of 10% of the voting power in us, and holders who
are "controlled foreign corporations" with respect to us) may be subject to
special rules not discussed below. Prospective investors are urged to consult
their tax advisors regarding the United States federal tax consequences of
acquiring, holding, and disposing of New Notes as well as any tax consequences
that may arise under the laws of any foreign, state, local, or other taxing
jurisdiction.
Withholding Taxes
Generally, payments of principal and interest on the New Notes will not be
subject to United States withholding taxes.
However, for the exemption from withholding taxes to apply to you, one of
the following requirements must be met.
o You provide a completed Form W-8BEN (or substitute form) to the bank,
broker or other intermediary who holds the Notes. The Form W-8BEN
contains your name, address and a statement that you are the beneficial
owner of the New Notes and that you are not a United States Holder.
o You hold your New Notes directly through a "qualified intermediary", and
the qualified intermediary has sufficient information in its files
indicating that you are not a United States Holder. A qualified
intermediary is a bank, broker or other intermediary that (1) is either a
U.S. or non-U.S. entity, (2) is acting out of a non-U.S. branch or office
and (3) has signed an agreement with the United States Internal Revenue
Service providing that it will administer all or part of the United
States withholding rules under specified procedures.
69
o You are entitled to an exemption from withholding tax on interest under a
tax treaty between the United States and your country of residence. To
claim this exemption, you must generally complete Form W-8BEN and claim
this exemption on the form. In some cases, you may instead be permitted
to provide documentary evidence of your claim to the intermediary, or a
qualified intermediary may already have some or all of the necessary
evidence in its files.
o The interest income on the New Notes is effectively connected with the
conduct of your trade or business in the United States, and is not exempt
from United States tax under a tax treaty. To claim this exemption, you
must complete Form W-8ECI.
Even if you meet one of the above requirements, interest paid to you will be
subject to withholding tax under any of the following circumstances:
o The withholding agent or an intermediary knows or has reason to know that
you are not entitled to an exemption from withholding tax. Specific rules
apply for this test.
o The United States Internal Revenue Service notifies the withholding agent
that information that you or an intermediary provided concerning your
status is false.
o An intermediary through which you hold the New Notes fails to comply with
the procedures necessary to avoid withholding taxes on the New Notes. In
particular, an intermediary is generally required to forward a copy of
your Form W-8BEN (or other documentary information concerning your
status) to the withholding agent for the New Notes. However, if you hold
your New Notes through a qualified intermediary-or if there is a
qualified intermediary in the chain of title between yourself and the
withholding agent for the New Notes-the qualified intermediary will not
generally forward this information to the withholding agent.
Interest payments made to you will generally be reported to the IRS and to
you on Form 1042-S. However, this reporting does not apply to you if one of
the following conditions applies:
o You hold your New Notes directly through a qualified intermediary and the
applicable procedures are complied with.
o You file Form W-8ECI.
The rules regarding withholding are complex and vary depending on your
individual situation. They are also subject to change. In addition, special
rules apply to certain types of Holders, including partnerships, trusts, and
other entities treated as pass-through entities for United States federal
income tax purposes. We suggest that you consult with your tax advisor
regarding the specific methods for satisfying these requirements.
Sale or Retirement of Notes
If you sell a New Note or it is redeemed, you will not be subject to federal
income tax on any gain unless one of the following applies:
o The gain is connected with a trade or business that you conduct in the
United States.
o You are an individual, you are present in the U.S. for at least 183 days
during the year in which you dispose of the New Note, and certain other
conditions are satisfied.
o The gain represents accrued interest, in which case the rules for
interest would apply.
U.S. Trade or Business
If you hold your New Note in connection with a trade or business that you
are conducting in the United States:
o Any interest on the New Note, and any gain from disposing of the New
Note, generally will be subject to income tax as if you were a United
States Holder.
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o If you are a corporation, you may be subject to the "branch profits tax"
on your earnings that are connected with your U.S. trade or business,
including earnings from the New Note. This tax is 30%, but may be reduced
or eliminated by an applicable income tax treaty.
Estate Taxes
If you are an individual, your New Notes will not be subject to U.S. estate
tax when you die. However, this rule only applies if, at your death, payments
on the New Notes were not connected to a trade or business that you were
conducting in the United States.
Information Reporting and Backup Withholding
Information reporting and backup withholding apply to Non-United States
Holders as follows:
o Principal and interest payments you receive will be automatically exempt
from the usual rules if you are a Non-United States Holder exempt from
withholding tax on interest, as described above. The exemption does not
apply if the withholding agent or an intermediary knows or has reason to
know that you should be subject to the usual information reporting or
backup withholding rules. In addition, as described above, interest
payments made to you may be reported to the Internal Revenue Service on
Form 1042-S.
o Sale proceeds you receive on a sale of your New Notes through a broker
may be subject to information reporting and/or backup withholding if you
are not eligible for an exemption. In particular, information reporting
and backup withholding may apply if you use the United States office of a
broker, and information reporting (but not backup withholding) may apply
if you use the foreign office of a broker that has certain connections to
the United States. We suggest that you consult your tax advisor
concerning information reporting and backup withholding on a sale.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
expiration of the exchange offer, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale.
We will not receive any proceeds from any sale of New Notes by broker-
dealers. New Notes received by broker-dealers for their own account pursuant
to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of New Notes and any commission or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 180 days after the expiration of the exchange offer, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that request such documents
in the letter of transmittal. We have agreed to pay all expenses incident to
the exchange offer (including the expenses of one counsel for the holders of
the Old Notes) other than commissions or concessions of any broker-dealer and
will indemnify the holders of the Old Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Notes offered by this prospectus will be passed upon
for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Nancy
A. Lieberman, a partner of Skadden, Arps, Slate, Meagher & Flom LLP, is a
director and stockholder of Rite Aid.
EXPERTS
The consolidated financial statements and related financial statement
schedule of the Company and its consolidated subsidiaries, except PCS Holding
Corporation and subsidiaries which has been included in discontinued
operations in such consolidated financial statements, as of March 3, 2001 and
February 26, 2000, and for each of the three years in the period ended March
3, 2001 incorporated in this prospectus by reference from our Annual Report on
Form 10-K for the year ended March 3, 2001 have been audited by Deloitte &
Touche LLP as stated in their reports, which are incorporated by reference
herein. The financial statements of PCS Holding Corporation and subsidiaries
for the year ended February 26, 2000 and the thirty-six days ended February
27, 1999, not separately included herein or elsewhere in the registration
statement have been audited by Ernst & Young LLP, as stated in their report,
which is incorporated by reference herein. Such financial statements and
related financial statement schedule of the Company and its consolidated
subsidiaries are incorporated by reference herein in reliance upon the
respective reports of such firms given upon their authority as experts in
accounting and auditing. All of the foregoing firms are independent auditors.
72