As
Filed with the Securities and Exchange Commission on April 11,
2005
Registration Statement No. 333-
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
RITE AID CORPORATION
*And the Subsidiary Guarantors listed
below
(Exact name of registrant as specified in its
charter)
Delaware | 5912 | 26-1614034 | ||||||||
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification No.) |
||||||||
30 Hunter
Lane
Camp Hill, Pennsylvania 17011
(717) 761-2633
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Robert B.
Sari, Esq.
Senior Vice President, General Counsel and
Secretary
Rite Aid Corporation
30 Hunter Lane
Camp Hill,
Pennsylvania 17011
(717) 761-2633
(717) 760-7867
(facsimile)
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies of all communications to:
Stacy J. Kanter,
Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
4 Times
Square
New York, New York 10036
(212) 735-3000
(212)
735-2000 (facsimile)
Approximate
date of commencement of proposed sale to the public:
As soon as
practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
CALCULATION OF REGISTRATION FEE
Title
of Each Class of Securities to be Registered |
Amount to
Be Registered |
Proposed Maximum Offering Price Per Unit |
Proposed Maximum Aggregate Offering Price (1) |
Amount of Registration Fee |
||||||||||||||
7½% Senior Secured Notes Due 2015 | $200,000,000 | 100% | $200,000,000 | $23,540 | ||||||||||||||
Guarantees related to the 7½% Senior Secured Notes Due 2015 | N/A | N/A | N/A | N/A (2) | ||||||||||||||
(1) | Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f) promulgated under the Securities Act of 1933, as amended. |
(2) | No separate consideration is received for the guarantee and, therefore, no additional fee is required. |
The Registrants hereby amend this registration statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
TABLE OF ADDITIONAL REGISTRANTS
Name
of Additional Registrant* |
State or Other Jurisdiction of Incorporation or Formation |
Primary Standard Industrial Classification Code Number |
I.R.S Employer Identification Number |
|||||||||||
Ann & Government Streets–Mobile, Alabama, LLC | Delaware | 5912 | N/A | |||||||||||
Apex Drug Stores, Inc. | Michigan | 5912 | 38-2413448 | |||||||||||
Broadview and Wallings–Broadview Heights Ohio, Inc. | Ohio | 5912 | 25-1814215 | |||||||||||
Central Avenue & Main Street Petal-MS, LLC | Delaware | 5912 | N/A | |||||||||||
Eagle Managed Care Corp. | Delaware | 9995 | 25-1724201 | |||||||||||
Eighth and Water Streets– Urichsville, Ohio, LLC | Delaware | 5912 | N/A | |||||||||||
England Street–Asheland Corporation | Virginia | 5912 | 80-0052343 | |||||||||||
Fairground, L.L.C. | Virginia | 5912 | 54-1849788 | |||||||||||
GDF, Inc. | Maryland | 9995 | 34-1343867 | |||||||||||
Gettysburg and Hoover–Dayton, Ohio, LLC | Ohio | 5912 | N/A | |||||||||||
Harco, Inc. | Alabama | 5912 | 63-0522700 | |||||||||||
K&B, Incorporated | Delaware | 6749 | 51-0346254 | |||||||||||
K&B Alabama Corporation | Alabama | 5912 | 72-1011085 | |||||||||||
K&B Louisiana Corporation | Louisiana | 5912 | 72-1043860 | |||||||||||
K&B Mississippi Corporation | Mississippi | 5912 | 72-0983482 | |||||||||||
K&B Services, Incorporated | Louisiana | 5912 | 72-1245171 | |||||||||||
K&B Tennessee Corporation | Tennessee | 5912 | 62-1444359 | |||||||||||
K&B Texas Corporation | Texas | 5912 | 72-1010327 | |||||||||||
Keystone Centers, Inc. | Pennsylvania | 5912 | 23-1730114 | |||||||||||
Lakehurst and Broadway Corporation | New Jersey | 5912 | 23-2937947 | |||||||||||
Mayfield & Chillicothe Roads–Chesterland, LLC | Ohio | 5912 | N/A | |||||||||||
Munson & Andrews, LLC | Delaware | 5912 | N/A | |||||||||||
Name Rite, L.L.C. | Delaware | 6749 | N/A | |||||||||||
Northline & Dix–Toledo–Southgate, LLC | Michigan | 5912 | N/A | |||||||||||
PDS-1 Michigan, Inc. | Michigan | 5912 | 38-2935739 | |||||||||||
Patton
Drive and Navy Boulevard Property Corporation |
Florida | 5912 | 23-2870495 | |||||||||||
Paw
Paw Lake Road & Paw Paw Avenue–Coloma, Michigan, LLC |
Delaware | 5912 | N/A | |||||||||||
Perry Distributors, Inc. | Michigan | 4225 | 38-1718545 | |||||||||||
Perry Drug Stores, Inc. | Michigan | 5912 | 38-0947300 | |||||||||||
RDS Detroit, Inc. | Michigan | 5912 | 35-1799950 | |||||||||||
Ram–Utica, Inc. | Michigan | 9995 | 80-0052329 | |||||||||||
Read's Inc. | Maryland | 6719 | 80-0052330 | |||||||||||
Rite Aid Drug Palace, Inc. | Delaware | 5912 | 23-2325476 | |||||||||||
Rite Aid Hdqtrs. Corp. | Delaware | AUX1 | 23-2308342 | |||||||||||
Rite Aid Hdqtrs. Funding, Inc. | Delaware | 6719 | 73-3167335 | |||||||||||
Rite Aid of Alabama, Inc. | Alabama | 5912 | 23-2410761 | |||||||||||
Rite Aid of Connecticut, Inc. | Connecticut | 5912 | 23-1940645 | |||||||||||
Rite Aid of Delaware, Inc. | Delaware | 5912 | 23-1940646 | |||||||||||
Rite Aid of Florida, Inc. | Florida | 5912 | 23-2047226 | |||||||||||
Rite Aid of Georgia, Inc. | Georgia | 5912 | 23-2125551 | |||||||||||
Rite Aid of Illinois, Inc. | Illinois | 5912 | 23-2416666 | |||||||||||
Rite Aid of Indiana, Inc. | Indiana | 5912 | 23-2048778 | |||||||||||
Rite Aid of Kentucky, Inc. | Kentucky | 5912 | 23-2039291 | |||||||||||
Name
of Additional Registrant* |
State or Other Jurisdiction of Incorporation or Formation |
Primary Standard Industrial Classification Code Number |
I.R.S Employer Identification Number |
|||||||||||
Rite Aid of Maine, Inc. | Maine | 5912 | 01-0324725 | |||||||||||
Rite Aid of Maryland, Inc. | Maryland | 5912 | 23-1940941 | |||||||||||
Rite Aid of Massachusetts, Inc. | Massachusetts | 5912 | 23-1940647 | |||||||||||
Rite Aid of Michigan, Inc. | Michigan | 5912 | N/A | |||||||||||
Rite Aid of New Hampshire, Inc. | New Hampshire | 5912 | 23-2008320 | |||||||||||
Rite Aid of New Jersey, Inc. | New Jersey | 5912 | 23-1940648 | |||||||||||
Rite Aid of New York, Inc. | New York | 5912 | 23-1940649 | |||||||||||
Rite Aid of North Carolina, Inc. | North Carolina | 5912 | 23-1940650 | |||||||||||
Rite Aid of Ohio, Inc. | Ohio | 5912 | 23-1940651 | |||||||||||
Rite Aid of Pennsylvania, Inc. | Pennsylvania | 5912 | 23-1940652 | |||||||||||
Rite Aid of South Carolina, Inc. | South Carolina | 5912 | 23-2047222 | |||||||||||
Rite Aid of Tennessee, Inc. | Tennessee | 5912 | 23-2047224 | |||||||||||
Rite Aid of Vermont, Inc. | Vermont | 5912 | 23-1940942 | |||||||||||
Rite Aid of Virginia, Inc. | Virginia | 5912 | 23-1940653 | |||||||||||
Rite Aid of Washington, D.C., Inc. | Washington DC | 5912 | 23-2461466 | |||||||||||
Rite Aid of West Virginia, Inc. | West Virginia | 5912 | 23-1940654 | |||||||||||
Rite Aid Realty Corp. | Delaware | 6719 | 23-1725347 | |||||||||||
Rite Aid Rome Distribution Center, Inc. | New York | 4225 | 23-1887836 | |||||||||||
Rite Aid Services, L.L.C. | Delaware | 7363 | 02-0655440 | |||||||||||
Rite Aid Transport, Inc. | Delaware | 4210 | 25-1793102 | |||||||||||
Rite Fund, Inc. | Delaware | 6749 | 51-0273194 | |||||||||||
Rite Investments Corp. | Delaware | 6749 | 51-0273192 | |||||||||||
Rx Choice, Inc. | Delaware | 7359 | 25-1598207 | |||||||||||
Seven Mile and Evergreen–Detroit, LLC | Michigan | 5912 | N/A | |||||||||||
Silver Springs Road–Baltimore, Maryland/One, LLC | Delaware | 5912 | N/A | |||||||||||
Silver Springs Road–Baltimore, Maryland/Two, LLC | Delaware | 5912 | N/A | |||||||||||
State & Fortification Streets–Jackson, Mississippi, LLC | Delaware | 5912 | N/A | |||||||||||
State Street and Hill Road–Gerard, Ohio, LLC | Delaware | 5912 | N/A | |||||||||||
The Lane Drug Company | Ohio | 5912 | 53-0125212 | |||||||||||
The Muir Company | Ohio | 5912 | 38-0857390 | |||||||||||
Thrifty Corporation | California | 5912 | 95-1297550 | |||||||||||
Thrifty PayLess, Inc. | California | 5912 | 95-4391249 | |||||||||||
Tyler and Sanders Roads, Birmingham–Alabama, LLC | Delaware | 5912 | N/A | |||||||||||
Virginia Corporation | Delaware | 6749 | 51-0335659 | |||||||||||
112 Burleigh Avenue Norfolk, LLC | Virginia | 5912 | N/A | |||||||||||
537 Elm Street Corp. | Rhode Island | 5912 | 23-2962033 | |||||||||||
657–659 Broad St. Corp. | New Jersey | 5912 | 80-0052338 | |||||||||||
764 South Broadway–Geneva, Ohio, LLC | Ohio | 5912 | 23-1974076 | |||||||||||
1515 West State Street Boise, Idaho, LLC | Delaware | 5912 | N/A | |||||||||||
1740 Associates, L.L.C. | Michigan | 5912 | N/A | |||||||||||
3581 Carter Hill Road–Montgomery Corp. | Alabama | 5912 | 80-0052336 | |||||||||||
4042 Warrensville Center Road–Warrensville Ohio, Inc. | Ohio | 5912 | 25-1820507 | |||||||||||
5277 Associates, Inc. | Washington | 5912 | 23-2940919 | |||||||||||
5600 Superior Properties, Inc. | Ohio | 5912 | 80-0052337 | |||||||||||
* | Addresses and telephone numbers of principal executive offices are the same as those of Rite Aid Corporation. |
The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy, these securities in any state where the offer or sale is not permitted.
Subject to Completion, Dated April 11, 2005
PROSPECTUS
RITE AID CORPORATION
Offer to exchange $200 million aggregate principal amount of 7½% Senior Secured Notes due 2015 (which we refer to as the Restricted Bonds) for $200 million aggregate principal amount of 7½% Senior Secured Notes due 2015 (which we refer to as the Exchange Bonds) which have been registered under the Securities Act of 1933, as amended, and fully and unconditionally guaranteed by the subsidiary guarantors listed on the second page of this prospectus.
The exchange offer will expire at 5:00 p.m., New York City time, on , 2005, unless we extend the exchange offer in our sole and absolute discretion.
Terms of the exchange offer:
• | We will exchange Exchange Bonds for all outstanding Restricted Bonds that are validly tendered and not withdrawn prior to the expiration or termination of the exchange offer. |
• | You may withdraw tenders of Restricted Bonds at any time prior to the expiration or termination of the exchange offer. |
• | The terms of the Exchange Bonds are substantially identical to those of the outstanding Restricted Bonds, except that the transfer restrictions, registration rights and additional interest provisions relating to the Restricted Bonds do not apply to the Exchange Bonds. |
• | The exchange of Restricted Bonds for Exchange Bonds will not be a taxable transaction for United States federal income tax purposes, but you should see the discussion under the caption "Material United States Federal Income Tax Considerations" for more information |
• | We will not receive any proceeds from the exchange offer. |
• | We issued the Restricted Bonds 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 Restricted Bonds. |
Each broker-dealer that receives Exchange Bonds for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Bonds. 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 Exchange Bonds received in exchange for Restricted Bonds where such Restricted Bonds 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 90 days after the expiration date, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution".
There is no established trading market for the Exchange Bonds, although the Restricted Bonds currently trade on the Portal Market.
See "Risk Factors" beginning on page 14 for a discussion of risks you should consider prior to tendering your outstanding Restricted Bonds 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 , 2005.
TABLE OF CONTENTS
Page | ||||||
SUMMARY | 1 | |||||
SUMMARY DESCRIPTION OF THE EXCHANGE OFFER | 5 | |||||
CONSEQUENCES OF NOT EXCHANGING RESTRICTED BONDS | 9 | |||||
SUMMARY DESCRIPTION OF THE EXCHANGE BONDS | 10 | |||||
RISK FACTORS | 14 | |||||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS | 23 | |||||
USE OF PROCEEDS | 24 | |||||
RATIO OF EARNINGS TO FIXED CHARGES | 24 | |||||
SELECTED HISTORICAL FINANCIAL DATA | 25 | |||||
THE EXCHANGE OFFER | 27 | |||||
DESCRIPTION OF THE EXCHANGE BONDS | 34 | |||||
DESCRIPTION OF COLLATERAL AND INTERCREDITOR ARRANGEMENTS | 90 | |||||
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS | 94 | |||||
PLAN OF DISTRIBUTION | 95 | |||||
LEGAL MATTERS | 96 | |||||
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 96 | |||||
AVAILABLE INFORMATION | 96 | |||||
INCORPORATION BY REFERENCE | 97 | |||||
This prospectus incorporates by reference important business and financial information about us that is not included in or delivered with this document. Copies of this information are available, without charge to any person to whom this prospectus is delivered, upon written or oral request. Written requests should be sent to:
Rite Aid Corporation
30
Hunter Lane
Camp Hill, Pennsylvania 17011
Attention: Investor
Relations
Oral requests should be made by telephoning (717) 761-2633.
In order to obtain timely delivery, you must request the information no later than , 2005, which is five business days before the expiration date of the exchange offer.
i
Subsidiary Guarantors
Ann & Government Streets–Mobile,
Alabama, LLC
Apex Drug Stores, Inc.
Broadview and
Wallings–Broadview Heights Ohio, Inc.
Central Avenue &
Main Street Petal-MS, LLC
Eagle Managed Care Corp.
Eighth and
Water Streets–Urichsville, Ohio, LLC
England
Street–Asheland Corporation
Fairground, L.L.C.
GDF,
Inc.
Gettysburg and Hoover–Dayton, Ohio, LLC
Harco,
Inc.
K&B, Incorporated
K&B Alabama
Corporation
K&B Louisiana Corporation
K&B Mississippi
Corporation
K&B Services, Incorporated
K&B Tennessee
Corporation
K&B Texas Corporation
Keystone Centers,
Inc.
Lakehurst and Broadway Corporation
Mayfield &
Chillicothe Roads–Chesterland, LLC
Munson & Andrews,
LLC
Name Rite, L.L.C.
Northline &
Dix–Toledo–Southgate, LLC
PDS-1 Michigan,
Inc.
Patton Drive and Navy Boulevard Property Corporation
Paw
Paw Lake Road & Paw Paw Avenue–Coloma, Michigan,
LLC
Perry Distributors, Inc.
Perry Drug Stores, Inc.
RDS
Detroit, Inc.
Ram–Utica, Inc.
READ's Inc.
Rite
Aid Drug Palace, Inc.
Rite Aid Hdqtrs. Corp.
Rite Aid Hdqtrs.
Funding, Inc.
Rite Aid of Alabama, Inc.
Rite Aid of
Connecticut, Inc.
Rite Aid of Delaware, Inc.
Rite Aid of
Florida, Inc.
Rite Aid of Georgia, Inc.
Rite Aid of Illinois,
Inc.
Rite Aid of Indiana, Inc.
Rite Aid of Kentucky,
Inc.
Rite Aid of Maine, Inc.
Rite Aid of Maryland,
Inc.
Rite Aid of Massachusetts, Inc.
Rite Aid of Michigan,
Inc.
Rite Aid of New Hampshire, Inc.
Rite Aid of New Jersey,
Inc.
Rite Aid of New York, Inc.
Rite Aid of North Carolina,
Inc.
Rite Aid of Ohio, Inc.
Rite Aid of Pennsylvania,
Inc.
ii
Rite Aid of South Carolina, Inc.
Rite
Aid of Tennessee, Inc.
Rite Aid of Vermont, Inc.
Rite Aid of
Virginia, Inc.
Rite Aid of Washington, D.C., Inc.
Rite Aid of
West Virginia, Inc.
Rite Aid Realty Corp.
Rite Aid Rome
Distribution Center, Inc.
Rite Aid Services, L.L.C.
Rite Aid
Transport, Inc.
Rite Fund, Inc.
Rite Investments Corp.
Rx
Choice, Inc.
Seven Mile and Evergreen–Detroit, LLC
Silver
Springs Road–Baltimore, Maryland/One, LLC
Silver Springs
Road–Baltimore, Maryland/Two, LLC
State & Fortification
Streets–Jackson, Mississippi, LLC
State Street and Hill
Road–Gerard, Ohio, LLC
The Lane Drug Company
The Muir
Company
Thrifty Corporation
Thrifty PayLess, Inc.
Tyler and
Sanders Roads, Birmingham–Alabama, LLC
Virginia
Corporation
112 Burleigh Avenue Norfolk, LLC
537 Elm Street
Corp.
657–659 Broad St. Corp.
764 South
Broadway–Geneva, Ohio, LLC
1515 West State Street Boise,
Idaho, LLC
1740 Associates, L.L.C.
3581 Carter Hill
Road–Montgomery Corp.
4042 Warrensville Center
Road–Warrensville Ohio, Inc.
5277 Associates, Inc.
5600
Superior Properties, Inc.
iii
SUMMARY
The following information summarizes the detailed information and financial statements included elsewhere or incorporated by reference in this prospectus. We encourage you to read this entire prospectus carefully. Unless otherwise indicated or the context otherwise requires, dates in this prospectus that refer to a particular fiscal year (e.g., fiscal 2004) refer to the fiscal year ended on the Saturday closest to February 29 or March 1 of that year. The fiscal years ended February 28, 2004, March 1, 2003, March 2, 2002 and February 26, 2000 included 52 weeks. The fiscal year ended March 3, 2001 included 53 weeks.
Rite Aid Corporation
Our Business
We are the third largest retail drugstore chain in the United States based on revenues and number of stores. As of November 27, 2004, we operated 3,363 drugstores in 28 states across the country and in the District of Columbia. During fiscal 2004 and the thirty-nine week period ended November 27, 2004, we generated $16.6 billion and $12.5 billion in revenues, respectively. We believe we have the first or second market position in approximately 56% of the 151 major U.S. metropolitan markets in which we operate.
In our stores, we sell prescription drugs and a wide assortment of other merchandise, which we call "front-end" products. In fiscal 2004, our pharmacists filled more than 200 million prescriptions, which accounted for approximately 63.6% 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 24,000 front-end products, including over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, seasonal merchandise and numerous other everyday and convenience products, as well as photo processing, which accounted for the remaining 36.4% of our total sales in fiscal 2004. We distinguish our stores from other national chain drugstores, in part, through our private brands and our strategic alliance with General Nutrition Companies, Inc., a leading retailer of vitamin and mineral supplements. We offer approximately 2,100 front-end products under the Rite Aid private brand, which contributed approximately 11.4% of our front-end sales in the categories where private brands were offered in fiscal 2004.
Our Business Strategy
Our strategy is to continue to focus on improving the productivity of our existing store base. We believe that improving the sales of our existing stores is important to achieving profitability and improving cash flow. To achieve this objective, we are implementing the following strategies:
Grow Our Pharmacy Sales and Attract More Customers. We recently completed the implementation of our next generation pharmacy system in all of our stores and have implemented e-prescription applications in all of our stores, which will further enable our pharmacists to work directly with customers and doctors and adjudicate and fill prescriptions in a more efficient manner. We also drive pharmacy sales growth via our automatic refill program, prescription file buys, in-store immunization programs, fully integrated diabetes program, a specialty pharmacy program, a workers compensation program and several initiatives aimed at managed care providers and doctors. We believe these activities and our focus on generic prescription drugs and direct marketing efforts will attract new customers to our stores and increase profitability. We also continue to develop and implement programs designed to improve customer satisfaction. We believe that by executing our "With us, it's personal" program that is aimed at delivering more personalized service along with faster prescription delivery to our customers, our growth will continue. Although we are already an industry leader in dispensing generic drugs, which generally have a higher gross margin compared to
1
branded drugs, we continue to take additional steps to further improve our generic efficiency, including adding functionality to our proprietary pharmacy information system to aid our pharmacists in dispensing generic prescriptions whenever possible. We are working to increase customer loyalty by establishing a strong community presence through health expositions and not-for-profit activities, focusing on the attraction and retention of managed care customers, partnering with several Medicare endorsed card programs to provide discounts to senior citizens and participating in almost all Medicare endorsed prescription cards for senior citizens.
We have resumed our new store relocation and store remodeling program. We intend for the program to start out slowly and believe it will not have a significant impact on operating results or the profile of our store base. Our goal is to open or relocate between 25 and 30 stores by the end of fiscal 2005 and an additional 80 to 85 stores by the end of fiscal 2006, of which we expect that approximately 50% will be relocated stores and the remaining 50% will be new stores. The program is focused on our strongest existing markets and also includes a significant number of remodels. An integral part of the program is the development of a new prototype store and two pilot stores that we have recently constructed and opened. One of the pilot stores is a new 14,500 square foot prototype that is about 30% larger than our current prototype. The other pilot store utilizes the features of the new design to remodel a smaller store. We believe that this program over the longer term, along with the execution of the near term strategy of improving store productivity, will continue to increase our pharmacy sales.
Grow Front-End Sales. We intend to grow front-end sales through continued emphasis on core drugstore categories, a focus on seasonal and cross-merchandising, offering a wider selection of products and services to our customers and effective promotions in our weekly advertising circulars. Our focus for expanding our products and services includes a continued strengthening of our collaborative relationship with our suppliers, an emphasis on our Rite Aid brand products, which provide better value for our customers and higher margins for us, offering ethnic products targeted to selected markets and utilizing digital technology in our one-hour photo development. We believe that the new store and store relocation program described above will also contribute to an increase in our front-end sales.
Contain Expenses. We continue to execute our cost management programs. Our emphasis is on targeted expense areas that are subject to specific work plans for improvement that are continuously monitored. Some examples of targeted expense areas, include (i) workers compensation expense; (ii) utility expense and (iii) repair and maintenance expense. We plan to contain worker's compensation expense through improving workplace safety at our stores and distribution centers and actively managing open claims. We plan to contain utility expense through development and implementation of energy management procedures and systems and through analysis of energy data to facilitate lowest cost bidding for services. We plan to contain repair and maintenance expense by consolidating contracts where applicable, and consistently seeking out lowest cost bidders for preventive maintenance services.
Focus on Customers and Associates. Our "With us, it's personal" commitment encourages associates to provide customers with a superior customer service experience. We obtain feedback on our customer service performance by utilizing an automated survey system that collects store specific information from customers shortly after the point of sale, frequent customer surveys by an independent third party, and mystery shoppers. We also have several programs in place that enhance customer satisfaction, examples of which are the maintenance of a customer support center that centrally receives and processes all customer calls and our "never out of stock" program. We continue to develop and implement associate training programs to improve customer satisfaction and educate our associates about the products we offer. We have implemented programs that create compensatory and other incentives for associates who provide customers with excellent service and who improve our corporate culture. We believe that these steps further enable and motivate our associates to deliver superior customer service.
2
Recent Developments
March sales announcement
On April 5, 2005, we announced unaudited sales results for March 2005.
For the four weeks ended March 26, 2005, same store sales rose 1.6% over the prior-year period. Pharmacy same store sales decreased 0.8%, while front-end same store sales were up 6.3%. March same store sales were positively affected by a shift to a March Easter this year from an April Easter last year (March 27 this year as compared to April 11 last year).
Total drugstore sales for the four-week period rose 1.2% to $1.301 billion compared to $1.286 billion for the same period last year. Prescription revenue accounted for 64.2% of drugstore sales, and third party prescription revenue represented 93.8% of pharmacy sales.
Fiscal 2005 earnings announcement
On April 7, 2005, we announced financial results for the fourth quarter and fiscal year ended February 26, 2005.
Fourth Quarter Results for Fiscal 2005
Revenues for the 13-week fourth quarter were $4.34 billion versus revenues of $4.40 billion in the prior year fourth quarter. Revenues decreased 1.3 percent.
Same store sales decreased 0.9 percent during the fourth quarter as compared to the year-ago like period, consisting of a 1.1 percent pharmacy same store sales decrease and a 0.5 percent decrease in front-end same store sales. Prescription sales accounted for 61.9 percent of total sales, and third party prescription sales represented 93.6 percent of pharmacy sales.
Net income for the fourth quarter increased to $228.6 million or $.35 per diluted share compared to last year's fourth quarter net income of $59.4 million or $.09 per diluted share. The improvement was due primarily to a $179.5 million or $.29 per diluted share income tax benefit from the reduction of a valuation allowance for deferred tax assets.
In the fourth quarter, we opened four new stores, relocated four stores, acquired two stores, closed 13 stores and remodeled 18 stores. Stores in operation at the end of the quarter totaled 3,356.
Year End Results for Fiscal 2005
For the 52-week fiscal year ended February 26, 2005, we had revenues of $16.8 billion as compared to revenues of $16.6 billion for the prior year. Revenues increased 1.3%.
Same store sales increased 1.6 percent, consisting of a 1.6 percent pharmacy same store sales increase and a 1.6 percent increase in front-end same store sales. Prescription sales accounted for 63.6 percent of total sales, and third party prescription sales were 93.5 percent of pharmacy sales.
Net income for the year was $302.5 million, or $.47 per diluted share, compared to net income of $83.4 million or $.11 per diluted share for last year. The improvement in results was due primarily to a $38.8 million positive impact from a LIFO credit, a $17.8 million decrease in depreciation and amortization expense, an $18.6 million reduction in interest expense, a $16.1 million reduction in loss on debt modifications and retirements and a $119.8 million increase in an income tax benefit primarily from the reduction of a valuation allowance for deferred tax assets. The tax benefit increased net income by $179.5 million or $.32 per diluted share.
During the year, we reduced debt by $580 million to $3.3 billion from $3.9 billion.
For the year, we opened seven new stores, relocated 13 stores, acquired five stores, closed 38 stores and remodeled 172 stores. Stores in operation at the end of the year totaled 3,356.
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Election of New Director
On April 7, 2005, we announced that Philip G. Satre has been elected to our Board of Directors, effective as of April 6, 2005. Mr. Satre will initially not serve as a member of any committee of our Board of Directors. Mr. Satre's term will expire at our annual meeting in June 2005, at which time he will stand for election for a two year term.
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SUMMARY DESCRIPTION OF THE EXCHANGE OFFER
On January 11, 2005, we completed the private offering of $200.0 million aggregate principal amount of 7½% Senior Secured Notes due 2015, which we refer to as the "Restricted Bonds". As part of that offering, we entered into a registration rights agreement with the initial purchasers of those Restricted Bonds in which we agreed, among other things, to deliver a prospectus to you and to complete an exchange offer for the Restricted Bonds. Below is a summary of the exchange offer.
Restricted Bonds | $200.0 million principal amount of 7½% Senior Secured Notes due 2015. | |
Exchange Bonds | $200.0 million principal amount of 7½% Senior Secured Notes due 2015, the issuance of which has been registered under the Securities Act of 1933, as amended (the "Securities Act"). The form and terms of the Exchange Bonds are identical in all material respects to those of the Restricted Bonds, except that the transfer restrictions, registration rights and additional interest provisions relating to the Restricted Bonds do not apply to the Exchange Bonds. | |
Exchange Offer | We are offering to issue up to $200.0 million principal amount of Exchange Bonds, in exchange for a like principal amount of the Restricted Bonds, to satisfy our obligations under the registration rights agreement that we entered into when the Restricted Bonds were issued in reliance upon the exemption from registration provided by Rule 144A and Regulation S of the Securities Act. | |
Expiration Date; Tenders | The exchange offer will expire at 5:00 p.m., New York City time, on , 2005, unless extended in our sole and absolute discretion. By tendering your Restricted Bonds, you represent to us that: | |
• | you are not our "affiliate," as defined in Rule 405 under the Securities Act; | ||
• | you are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the Exchange Bonds; | ||
• | you are acquiring the Exchange Bonds in your ordinary course of business; and | ||
• | if you are a broker-dealer, you will receive the Exchange Bonds for your own account in exchange for Restricted Bonds 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 Exchange Bonds you receive. For further information regarding resales of the Exchange Bonds by participating broker-dealers, see the discussion under the caption "Plan of Distribution." | ||
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Withdrawal | You may withdraw any Restricted Bonds tendered in the exchange offer at any time prior to 5:00 p.m., New York City time, on , 2005. | |
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" for more information regarding the conditions to the exchange offer. | |
Procedures for Tendering
the Restricted Bonds |
Except as described in the section titled "The Exchange Offer—Procedures for Tendering Restricted Bonds," a tendering holder must, on or prior to the expiration date, transmit an agent's message to the exchange agent at the address listed in this prospectus. In order for your tender to be considered valid, the exchange agent must receive a confirmation of book entry transfer of your Restricted Bonds into the exchange agent's account at The Depository Trust Company ("DTC") prior to the expiration or termination of the exchange offer. | |
Special Procedures for Beneficial Owners | If you are a beneficial owner whose Restricted Bonds are registered in the name of the broker, dealer, commercial bank, trust company or other nominee, and you wish to tender your Restricted Bonds in the exchange offer, you should promptly contact the person in whose name the Restricted Bonds are registered and instruct that person to tender on your behalf. Any registered holder that is a participant in DTC's book-entry transfer facility system may make book-entry delivery of the Restricted Bonds by causing DTC to transfer the Restricted Bonds into the exchange agent's account. | |
Material Federal Income Tax Considerations |
The exchange of the Restricted Bonds for Exchange Bonds in the exchange offer will not be a taxable transaction for United States federal income tax purposes. See the discussion under the caption "Material United States Federal Income Tax Considerations" for more information regarding the tax consequences to you of the exchange offer. | |
Use of Proceeds | We will not receive any 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." | |
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Resales | Based on interpretations by the staff of the SEC, as detailed in a series of no-action letters issued to third parties, we believe that the Exchange Bonds issued in the exchange offer may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery requirements of the Securities Act as long as: | |
• | you are acquiring the Exchange Bonds in the ordinary course of your business; | ||
• | you are not participating, do not intend to participate and have no arrangement or understanding with any person to participate, in a distribution of the Exchange Bonds; and | ||
• | you are not an affiliate of ours. | ||
If you are an affiliate of ours, are engaged in or intend to engage in or have any arrangement or understanding with any person to participate in the distribution of the Exchange Bonds: | ||
• | you cannot rely on the applicable interpretations of the staff of the SEC; | ||
• | you will not be entitled to participate in the exchange offer; and | ||
• | you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. | ||
See the discussion below under the caption "The Exchange Offer—Consequences of Exchanging or Failing to Exchange Restricted Bonds" for more information. | ||
Broker-Dealer | Each broker or dealer that receives Exchange Bonds for its own account in exchange for Restricted Bonds that were acquired as a result of market-making or other trading activities must acknowledge that it will comply with the registration and prospectus delivery requirements of the Securities Act in connection with any offer to resell or other transfer of the Exchange Bonds issued in the exchange offer, including the delivery of a prospectus that contains information with respect to any selling holder required by the Securities Act in connection with any resale of the Exchange Bonds. | |
Furthermore, any broker-dealer that acquired any of its Restricted Bonds directly from us: | ||
• | may not rely on the applicable interpretation of the staff of the SEC's position contained in Exxon Capital Holdings Corp., SEC no-action letter (April 13, 1988), Morgan, Stanley & Co. Inc., SEC no-action letter (June 5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1993); and | ||
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• | must also be named as a selling bondholder in connection with the registration and prospectus delivery requirements of the Securities Act relating to any resale transaction. | ||
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 Exchange Bonds received in exchange for Restricted Bonds which were received by such broker-dealer as a result of market making activities or other trading activities. We have agreed that for a period of not less than 90 days after the consummation of the exchange offer, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution" for more information. | ||
Registration Rights Agreement | When we issued the Restricted Bonds in January 2005, we entered into a registration rights agreement with the initial purchasers of the Restricted Bonds. Under the terms of the registration rights agreement, we agreed to use our best efforts to file with the SEC and cause to become effective, a registration statement relating to an offer to exchange the Restricted Bonds for the Exchange Bonds. | |
If the registration statement of which this prospectus is a part, is not declared effective within 180 days of the date that we sold the Restricted Bonds (July 10, 2005), if we do not complete the exchange offer within 210 days of the date that we sold the Restricted Bonds (August 9, 2005), or if we fail to meet certain other conditions described under "Description of the Exchange Bonds – Additional Interest", the interest rate borne by the Restricted Bonds will be increased at a rate of 0.25% per annum every 90 days (but shall not exceed 0.50% per annum) until the condition which gave rise to the additional interest is cured. | ||
Under some circumstances set forth in the registration rights agreement, holders of Restricted Bonds, including holders who are not permitted to participate in the exchange offer or who may not freely sell Exchange Bonds received in the exchange offer, may require us to file and cause to become effective, a shelf registration statement covering resales of the Restricted Bonds by these holders. | ||
A copy of the registration rights agreement is incorporated by reference as an exhibit to the registration statement of which this prospectus is a part. See "Description of the Exchange Bonds—Registration Rights." | ||
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CONSEQUENCES OF NOT EXCHANGING RESTRICTED BONDS
If you do not exchange your Restricted Bonds in the exchange offer, your Restricted Bonds will continue to be subject to the restrictions on transfer currently applicable to the Restricted Bonds. In general, you may offer or sell your Restricted Bonds only:
• | if they are registered under the Securities Act and applicable state securities laws; |
• | if they are offered or sold under an exemption from registration under the Securities Act and applicable state securities laws; or |
• | 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 Restricted Bonds under the Securities Act. Under some circumstances, however, holders of the Restricted Bonds, including holders who are not permitted to participate in the exchange offer or who may not freely resell Exchange Bonds received in the exchange offer, may require us to file, and to cause to become effective, a shelf registration statement covering resales of Restricted Bonds by these holders. For more information regarding the consequences of not tendering your Restricted Bonds and our obligation to file a shelf registration statement, see "The Exchange Offer—Consequences of Exchanging or Failing to Exchange Restricted Bonds" and "Description of the Exchange Bonds—Registration Rights."
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SUMMARY DESCRIPTION OF THE EXCHANGE BONDS
The summary below describes the principal terms of the Exchange Bonds. Certain of the terms and conditions described below are subject to important limitations and exceptions. The "Description of the Exchange Bonds" section of this prospectus contains a more detailed description of the terms and conditions of the Exchange Bonds.
Issuer | Rite Aid Corporation, a Delaware corporation. | |
Exchange Bonds | $200.0 million aggregate principal amount of 7½% Senior Secured Notes due 2015 (which we refer to in this prospectus as the Exchange Bonds). | |
Maturity Date | January 15, 2015. | |
Interest | We will pay interest on the Exchange Bonds at the rate of 7½% per year, payable in cash, on January 15 and July 15 of each year, beginning on July 15, 2005. Interest will accrue from the issue date of the Restricted Bonds. | |
Subsidiary Guarantees | Our obligations under the Exchange Bonds will be fully and unconditionally guaranteed, jointly and severally, subject to certain limitations, by those of our subsidiaries that from time to time guarantee our obligations under our senior credit facility. Under certain circumstances, subsidiaries may be released from these guarantees without the consent of holders of the Exchange Bonds. The subsidiary guarantees will be subordinated to the subsidiary guarantees of our senior credit facility. | |
Security | The guarantees of the Exchange Bonds will be secured, subject to permitted liens, by shared second priority liens granted by our subsidiary guarantors on all of the assets that secure our obligations under the senior credit facility (other than cash or cash equivalents that may collateralize letter of credit obligations) which currently consist of substantially all of the inventory, accounts receivable (to the extent not included in our off balance sheet accounts receivable securitization program) and intellectual property of the subsidiary guarantors (which we collectively refer to in this prospectus as the collateral). Under certain circumstances, collateral may be released without the consent of the holders of the Exchange Bonds. | |
Ranking | The Exchange Bonds will be: | |
• | unsecured, unsubordinated obligations of Rite Aid Corporation; and | ||
• | equal in ranking with all of our existing and future unsecured, unsubordinated debt. Currently, all of our debt is senior debt. | ||
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The subordinated guarantees by the subsidiary guarantors will be secured, subject to permitted liens, by second priority liens on the collateral that share equally with other second priority debt in the distribution of proceeds of the collateral, except in limited circumstances. | ||
Our subsidiaries conduct substantially all our operations and have significant liabilities, including trade payables. If the subsidiary guarantees are invalid or unenforceable or the limitations under the guarantees are applied, the Exchange Bonds will be structurally subordinated to our substantial subsidiary liabilities and the liens on the collateral would be invalid or unenforceable. | ||
As of November 27, 2004, after giving effect to our offering of the Restricted Bonds and the application of the net proceeds therefrom; | ||
• | the total outstanding debt of us and the subsidiary guarantors (including current maturities and capital lease obligations, but excluding unused commitments, undrawn letters of credit and off balance sheet obligations under our accounts receivable securitization program) would have been approximately $3.2 billion; | ||
• | none of our or any subsidiary guarantor's debt would have been subordinated to the Restricted Bonds or the subsidiary guarantees; | ||
• | the total outstanding debt of us and the subsidiary guarantors that would be senior to the guarantees by the subsidiary guarantors and have the benefit of first priority liens on the collateral would have been approximately $560.0 million (not including $112.1 million outstanding letters of credit); and | ||
• | the total outstanding debt of us and the subsidiary guarantors that would have the benefit of pari passu subordinated guarantees from the subsidiary guarantors and share pari passu, subject to permitted liens, second priority liens on the collateral would have been approximately $995.4 million (including the Restricted Bonds but excluding unamortized discount of $6.6 million). | ||
Subject to permitted liens, the second priority liens will be shared equally and ratably with other second priority debt, including our 12.5% senior secured notes due 2006, our 8.125% senior secured notes due 2010 and our 9½% senior secured notes due 2011, that share equally with the Exchange Bonds in the distribution of the collateral, except in limited circumstances. Our senior credit facility is secured by a first priority lien on the collateral and those liens will be senior to the liens securing the Exchange Bonds. Pursuant to the indenture governing the Exchange | ||
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Bonds, the security agreements and a collateral trust and intercreditor agreement, additional debt secured by first priority liens and additional debt secured by second priority liens may be incurred without the consent of the holders of the Exchange Bonds. | ||
Pursuant to the security agreements and a collateral trust and intercreditor agreement, the holders of the first priority liens will, at all times, control all rights and remedies with respect to the collateral while our senior credit facility is outstanding. The second priority liens will not entitle holders of the Exchange Bonds to take any action whatsoever with respect to the collateral at any time when the first priority liens are outstanding. The holders of the first priority liens will receive all proceeds from any realization on the collateral until the obligations secured by the first priority liens are paid in full. | ||
The indenture for the Exchange Bonds provides that the holders of Exchange Bonds are deemed to have consented to various releases of collateral and subsidiary guarantees as well as various amendments to the second priority collateral documents that could be adverse to holders of Exchange Bonds. | ||
See "Description of the Exchange Bonds" and "Description of Collateral and Intercreditor Arrangements." | ||
Form and Denomination | The Exchange Bonds will be issued only in registered form. The Exchange Bonds will be issued in minimum denominations of $1,000. The Exchange Bonds will be represented by a single permanent global Exchange Bond in fully registered form, deposited with a custodian for and registered in the name of a nominee of The Depository Trust Company (which we refer to in this prospectus as DTC). Beneficial interests in the global Exchange Bond will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its participants. Except as described herein, Exchange Bonds in certificated form will not be issued in exchange for the global Exchange Bonds or interests therein. | |
Optional Redemption | Prior to January 15, 2010, we may redeem some or all of the Exchange Bonds by paying a "make-whole" premium based on U.S. Treasury rates. On or after January 15, 2010, we may redeem some or all of the Exchange Bonds at the redemption prices listed under the heading "Description of the Exchange Bonds—Optional Redemption," plus accrued and unpaid interest to the date of redemption. | |
In addition, at any time and from time to time, prior to January 15, 2008, we may redeem up to 35% of the original aggregate principal amounts of the Exchange Bonds and | ||
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the Restricted Bonds with the net proceeds of one or more of our equity offerings at a redemption price of 107.500% 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 amount of the Exchange Bonds remain issued and outstanding. | ||
Repurchase at Option of
Holders Upon a Change in Control |
In the event of a change in control (as defined under the heading "Description of the Exchange Bonds—Definitions"), each holder of Exchange Bonds may require us to repurchase its Exchange Bonds in whole or in part, at a repurchase price of 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date. See "Description of the Exchange Bonds —Repurchase at the Option of Holders Upon a Change of Control" and "Risk Factors—Risks Related to the Exchange Offer and Holding the Exchange Bonds—We may be unable to purchase the Exchange Bonds upon a change of control." | |
Certain Covenants | The indenture governing the Exchange Bonds will contain covenants that limit our ability and the ability of our restricted subsidiaries to, among other things: | |
• | incur additional debt; | ||
• | pay dividends or make other restricted payments; | ||
• | purchase, redeem or retire capital stock or subordinated debt; | ||
• | make asset sales; | ||
• | enter into transactions with affiliates; | ||
• | incur liens; | ||
• | enter into sale-leaseback transactions; | ||
• | provide subsidiary guarantees; | ||
• | make investments; and | ||
• | merge or consolidate with any other person. | ||
Risk Factors
You should carefully consider all of the information contained or incorporated by reference in this prospectus prior to participating in the exchange offer. In particular, we urge you to carefully consider the information set forth under "Risk Factors" beginning on page 14, for a discussion of risks and uncertainties relating to us, our subsidiaries, our business, the exchange offer and holding the Exchange Bonds.
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Our headquarters are located at 30 Hunter Lane, Camp Hill, Pennsylvania 17011, and our telephone number is (717) 761-2633. Our common stock is listed on the New York Stock Exchange and the Pacific Exchange under the trading symbol "RAD." We were incorporated in 1968 and are a Delaware corporation.
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RISK FACTORS
Participating in the exchange offer involves a number of risks. You should consider carefully the following information about these risks, together with the other information included and incorporated by reference in this prospectus before tendering your Restricted Bonds in the exchange offer. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, may also impair our business operations. We cannot assure you that any of the events discussed in the risk factors below will not occur. If they do, our business, financial condition or results of operations could be materially and adversely affected.
Risks Related to our Financial Condition
We are highly leveraged. Our substantial indebtedness could limit cash flow available for our operations and could adversely affect our ability to service debt or obtain additional financing if necessary.
We had, as of November 27, 2004, approximately $3.2 billion of outstanding indebtedness (after giving effect to our offering of the Restricted Bonds and the use of proceeds therefrom and including current maturities and capital lease obligations but not including unused commitments, undrawn letters of credit and off balance sheet obligations pursuant to our accounts receivable securitization program) and stockholders' equity of $83.6 million (after giving effect to the declaration and payment of a regularly scheduled dividend on our previously outstanding 8% Series D preferred stock in the amount of $8.9 million, which dividend was paid in additional shares of 8% Series D preferred stock in December 2004, to our issuance, in January 2005, of 2.5 million shares of 7% Series E Mandatory Convertible Preferred Stock, including the anticipated use of proceeds therefrom, and to our exchange of our remaining Series D preferred stock for Series F, G and H preferred stock). We also had additional borrowing capacity under our revolving credit facility of $738.9 million at that time, which is net of outstanding letters of credit of $112.1 million. Our debt obligations adversely affect our operations in a number of ways and, while we believe we have adequate sources of liquidity to meet our anticipated annual requirements for working capital, debt service and capital expenditures through fiscal year 2006, there can be no assurance that our cash flow from operations will be sufficient to service our debt, which may require us to borrow additional funds for that purpose, restructure or otherwise refinance our debt. Our earnings were insufficient to cover our fixed charges for fiscal 2004, by $2.6 million and by considerably higher amounts in prior fiscal years.
Our high level of indebtedness will continue to restrict our operations. Among other things, our indebtedness will:
• | limit our ability to obtain additional financing; |
• | limit our flexibility in planning for, or reacting to, changes in the markets in which we compete; |
• | place us at a competitive disadvantage relative to our competitors with less indebtedness; |
• | render us more vulnerable to general adverse economic and industry conditions; and |
• | require us to dedicate a substantial portion of our cash flow to service our debt. |
Our ability to make payments on our debt depends upon our ability to substantially improve our 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.
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Borrowings under our senior credit facility are based upon variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.
Approximately $549.0 million of our outstanding indebtedness as of November 27, 2004 bears an interest rate that varies depending upon LIBOR. If we borrow additional amounts under our senior credit facility, the interest 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. We currently do not maintain any hedging contracts that would limit our exposure to variable rates of interest.
The covenants in our outstanding indebtedness, including the indenture governing the Exchange Bonds, impose restrictions that may limit our operating and financial flexibility.
The covenants in the instruments that govern our outstanding indebtedness restrict our ability to:
• | incur liens and debt; |
• | pay dividends; |
• | make redemptions and repurchases of capital stock; |
• | make loans and investments |
• | prepay, redeem or repurchase debt; |
• | engage in mergers, consolidations, assets dispositions, sale-leaseback transactions and affiliate transactions; |
• | change our business; |
• | amend some of our debt and other material agreements; |
• | issue and sell capital stock of subsidiaries; |
• | restrict distributions from subsidiaries; and |
• | grant negative pledges to other creditors. |
In addition, if we have less than $300 million available under our revolving credit facility, we will be subject to certain financial covenant ratios. If we are unable to meet the terms of the financial covenant ratios 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 obtain modifications of our agreements or are required to obtain waivers of defaults, we may incur significant fees and transaction costs. In fiscal 2005, 2004, 2003, 2002 and 2001, we modified certain covenants contained in our then existing senior credit facility and loan agreements. In fiscal 2000, we obtained waivers of compliance contained in our then existing credit facilities and public indentures. In connection with obtaining these modifications and waivers, we paid significant fees and transaction costs.
Risks Related to our Operations
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.
We have not yet achieved the sales productivity level of our major competitors. We believe that improving the sales of existing stores is important to achieving profitability and continuing to improve
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operating cash flow. If we are not successful in implementing our strategy, or if our 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.
Our new store development program requires entering into construction and development commitments and occasionally purchasing land that will not be utilized for several years which may limit our financial flexibility.
We will enter into significant construction and development commitments as part of our new store development program. Also, we will occasionally make capital expenditures to acquire land that may not be used for several years. Even if there are significant negative economic or competitive developments in our industry, financial condition or the regions where we have made these commitments, we are obligated to fulfill these commitments. Further, if we subsequently dispose of property that we acquire, we may receive less than our purchase price or the net book value of such property, which may result in financial loss.
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 executive management team. The loss of 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.
There are currently pending both civil and criminal investigations by the United States Attorney. 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 currently pending both civil and criminal governmental investigations by the United States Attorney concerning our financial reporting and other matters. Settlement discussions have begun with the United States Attorney for the Middle District of Pennsylvania, who has proposed that the government would not institute any criminal proceeding against us if we enter into a consent judgment providing for a civil penalty payable over a period of years. The amount of the civil penalty has not been agreed to and there can be no assurance that a settlement will be reached or that the amount of such penalty will not have a material adverse effect on our financial condition and results of operations. We recorded an accrual of $20.0 million in fiscal 2003 in connection with the resolution of these matters; however, we may incur charges materially in excess of that amount and we are unable to estimate the possible range of loss. We will continue to evaluate our estimate and to the extent that additional information arises or our strategy changes, we will adjust our accrual accordingly.
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.
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.
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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 flow.
We obtain approximately 90% of our pharmaceutical products from a single supplier, McKesson Corp. ("McKesson"), pursuant to a contract that runs until March 2009. Pharmacy sales, which have been increasing as a percentage of our total sales, represented approximately 63.2%, 63.6% and 64.2% of our total sales during fiscal 2003, fiscal 2004 and the thirty-nine months period ended November 27, 2004, respectively, and, therefore, our relationship with McKesson is important to us. Any significant disruptions in our relationship with McKesson would make it difficult for us to continue to operate our business until we found a replacement supplier. There can be no assurance that we would be able to find a replacement supplier on a timely basis, or that such supplier would be able to fulfill our demand on similar terms, which would have a material adverse effect on our results of operations, financial condition and cash flows.
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, dollar stores and mail order pharmacies. Our industry also faces growing competition from companies who import drugs directly from other countries, such as Canada. 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. The ability of our stores to achieve profitability depends on their ability to achieve a critical mass of customers. 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 to compete effectively in our markets or increase our sales volume in response to further increased competition.
Another adverse trend for drugstore retailing has been the rapid growth in mail-order and internet based prescription processors. These prescription distribution methods have grown in market share relative to drugstores as a result of the rapid rise in drug costs experienced in recent years and are predicted to continue to rise. Mail-order prescription distribution methods are perceived by employers and insurers as being less costly than traditional distribution methods and are being encouraged, and, in some cases, required, by third party pharmacy benefit managers, employers and unions that administer benefits. As a result, some labor unions and employers are requiring, and others may encourage or require, that their members or employees obtain medications from mail-order pharmacies which offer drug prescriptions at prices lower than we are able to offer. For example, when we announced our third-quarter earnings, we disclosed that our sales continued to be negatively impacted by mandatory mail prescription programs, including the United Auto Workers' program. In addition to these forms of mail-order distribution, there has also been an increasing number of internet-based prescription distributors that specialize in offering certain high demand lifestyle drugs at deeply discounted prices. A number of these internet-based distributors operate outside the reach of regulations that govern legitimate drug retailers. Competition from Canadian imports has also been increasing significantly recently and also creates volume and pricing pressure. Imports from foreign countries may increase further if recently introduced legislation seeking to legalize the importation of drugs from Canada and other countries is eventually enacted. These alternate distribution channels have negatively affected sales for traditional chain drug retailers, including us, in the last few years and we expect such negative effect to continue in the future.
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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. Sales of prescription drugs represent approximately 64% of our sales and we are reimbursed by third-party payors for approximately 93% of all the prescription drugs that we sell. The top five third-party payors account for approximately 30% of our total sales the largest of which is approximately 10.5% 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, the passing in December 2003 of the Medicare Prescription Drug, Improvement and Modernization Act will grant a prescription drug benefit to participants. As a result of this benefit, we may be reimbursed for some prescription drugs at prices lower than our current reimbursement levels. Approximately 12% of our revenues are from state sponsored Medicaid agencies. There have been a number of recent proposals and enactments by various states to reduce Medicaid reimbursement levels in response to budget problems, some of which propose to reduce reimbursement levels in the applicable states significantly, and we expect other similar proposals in the future. If third-party payors reduce their reimbursement levels or if Medicare or state Medicaid programs cover prescription drugs at lower reimbursement levels, our margins on these sales would be reduced, and the profitability of our business and our results of operations, financial condition or 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 including suspension of payments from government programs; loss of required government certifications; loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; loss of licenses; significant fines or monetary penalties for anti-kickback law violations, submission of false claims or other failures to meet reimbursement program requirements 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, the passing of which could adversely affect our results of operations, financial condition and cash flows.
Our pharmacy business is subject to patient privacy and other obligations, including corporate, pharmacy and associate responsibility, imposed by the Health Insurance Portability and Accountability Act. As a covered entity, we are required to implement privacy standards, train our associates on the permitted uses and disclosures of protected health information, provide a notice of privacy practice to our pharmacy customers and permit pharmacy customers to access and amend their records and receive an accounting of disclosures of protected health information. Failure to properly adhere to these requirements could result in the imposition of civil as well as criminal penalties.
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. In addition, federal and state laws that require our pharmacists to offer counseling, without additional charge, to their customers about medication, dosage, delivery systems, common side effects and other information the pharmacists deem significant can impact our business. Our pharmacists may also have a duty to warn customers regarding any
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potential negative effects of a prescription drug if the warning could reduce or negate these effects. 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 be able to 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 to this challenge, 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.
We may be subject to significant liability should the consumption of any of our products cause injury, illness or death.
Products that we sell could become subject to contamination, product tampering, mislabeling or other damage requiring us to recall our private label products. In addition, errors in the dispensing and packaging of pharmaceuticals could lead to serious injury or death. Product liability claims may be asserted against us with respect to any of the products or pharmaceuticals we sell and we may be obligated to recall our private label products. A product liability judgment against us or a product recall could have a material, adverse effect on our business, financial condition or results of operations.
Risks Relating to the Exchange Offer and Holding the Exchange Bonds
The guarantees of the Exchange Bonds will be subordinated to the guarantees of our first priority debt, including our senior credit facility, and the guarantees of the Exchange Bonds are secured only to the extent that the first priority debt is oversecured; the terms of the Exchange Bonds permit, without the consent of holders of Exchange Bonds, various releases of collateral and subsidiary guarantees as well as various amendments to the second priority collateral documents that could be adverse to holders of Exchange Bonds.
Subject to some limitations, those of our subsidiaries that from time to time guarantee our obligations under our senior credit facility will guarantee our obligations under the Exchange Bonds. These guarantees will, however, be subordinated to the guarantees of our first priority debt, including our senior credit facility. The collateral that secures the guarantees of the Exchange Bonds will also secure the guarantees of certain existing and future indebtedness, including our senior credit facility and any refinancing of our senior credit facility, on a first priority basis, and the guarantees of the Exchange Bonds, our 12.5% senior secured notes due 2006 our 8.125% senior secured notes due 2010, our 9½% senior secured notes due 2011, and possible additional future indebtedness on a second priority basis. Any rights to payment and claims to the collateral by the holders of the Exchange Bonds will therefore be fully subordinated to any claims by our creditors under the senior credit facility with respect to distributions of collateral. In addition, other second priority debt may require the proceeds of collateral dispositions to be allocated to prepay, repurchase or provide for the prepayment or repurchase of other second priority debt when no such prepayment, repurchase or provision is required with respect to the Exchange Bonds. Our 12.5% senior secured notes, our 8.125% senior secured notes and our 9½% senior secured notes require such repurchase or provision for repurchase in certain circumstances, some of which would be prior to the time that we would be required to take such actions with respect to the Exchange Bonds.
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Only when our obligations under the senior credit facility and any other first priority debt are satisfied in full will the proceeds of the collateral be available, subject to other permitted liens, to satisfy obligations under guarantees of the Exchange Bonds and the other debt secured by the shared second priority lien. Even if the proceeds from the sale or liquidation of the collateral are sufficient to satisfy our obligations under the senior credit facility and any such additional first priority debt, if the amount of such remaining proceeds is less than the aggregate outstanding principal amount of debt secured by the shared second priority lien, we may be unable to fully satisfy our obligations under guarantees of the Exchange Bonds. As a result, our obligations that are secured, subject to permitted liens, by the shared second priority lien are secured only to the extent that (i) the senior credit facility and other first priority debt is oversecured, and (ii) the oversecured amount is sufficient, subject to other permitted liens, to secure the Exchange Bonds, the 12.5% senior secured notes, the 8.125% senior secured notes and the 9½% senior secured notes, and any other second priority debt. Pursuant to the indenture and the second priority collateral documents, substantial additional debt may share the second priority liens securing the subsidiary guarantees of the Exchange Bonds without the consent of holders of Exchange Bonds.
The lenders under the first priority debt, including the senior credit facility, will, at all times, control all remedies or other actions related to the collateral. In addition, if the lenders under the first priority debt release the liens securing the obligations under the first priority debt then, under the terms of the indenture governing the Exchange Bonds, the holders of the Exchange Bonds will be deemed to have given approval for the release of the liens securing the Exchange Bonds, subject to certain limitations. All collateral used, sold, transferred or otherwise disposed of in accordance with the terms of the second priority debt will automatically be released from the lien securing the subsidiary guarantees of the Exchange Bonds. Accordingly, any such sale, transfer or disposition in a transaction that does not violate the asset disposition covenant in the indenture governing the Exchange Bonds may result in a release of collateral. Because the asset disposition covenant of the indenture does not restrict transfers of assets by our subsidiaries to us, any transfer of collateral to us could result in such assets ceasing to constitute collateral. The liens securing guarantees of the Exchange Bonds may also be released pursuant to the directions from representatives of a majority of the second priority debt obligations, unless the release involves all or substantially all the collateral, in which case release shall require the consent of the holders of Exchange Bonds. The Exchange Bonds offered hereby do not and in the future may not represent a majority of the second priority debt obligations. Accordingly, substantial collateral may be released automatically without consent of the holders of Exchange Bonds or the trustee under the indenture. In addition, if the lenders under the first priority debt release any of the subsidiary guarantors securing the obligations under the first priority debt, then the holders of the Exchange Bonds will be deemed to have given approval for such release of any such subsidiary guarantor from its obligations under the subsidiary guarantee, subject to certain limitations. The second priority collateral documents may be amended with the consent of holders representing a majority of the second priority debt obligations. In addition, the terms of the Exchange Bonds permit various other releases of collateral and subsidiary guarantees as well as various amendments to the second priority collateral documents that could be adverse to holders of Exchange Bonds without the consent of holders of Exchange Bonds. See "Description of Exchange Bonds" and "Description of Collateral and Intercreditor Arrangements."
If the guarantees of the Exchange Bonds and the liens that secure these guarantees are held to be invalid or unenforceable or are limited in accordance with their terms, the Exchange Bonds would be unsecured and structurally subordinated to the debt 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 our debt or to make funds available to us for such payment. Accordingly, our debt that is not guaranteed by our subsidiaries is structurally subordinated to the debt and other liabilities of our subsidiaries.
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All of the subsidiaries that guarantee our obligations under our senior credit facility will initially guarantee our obligations on the Exchange Bonds. These guarantees will be secured, subject to permitted liens, by shared second priority liens on the collateral. The terms of these guarantees will provide that they are limited (and subject to reduction) to the extent necessary to prevent such guarantees and the guarantees of first priority debt from constituting fraudulent conveyances. However, the guarantees of first priority debt will only be limited (or reduced) after the subordinated guarantees for the Exchange Bonds and the other debt are extinguished.
Our creditors or the creditors of our subsidiaries could challenge these guarantees and these liens as fraudulent conveyances or on other grounds. The delivery of these guarantees and the grant of the shared second priority liens securing these guarantees could be found to be a fraudulent transfer and declared void if a court determined that: the subsidiary delivered the guarantee and granted the lien with the intent to hinder, delay or defraud its existing or future creditors; the subsidiary did not receive fair consideration for the delivery of the guarantee and the incurrence of the lien; or the subsidiary was insolvent at the time it delivered the guarantee and granted the lien. We cannot assure you that a court would not reach one of these conclusions. In the event that a court declares either these guarantees or these liens to be void, or in the event that the guarantees must be limited or voided in accordance with their terms, any claim you may make against us for amounts payable on the Exchange Bonds would be unsecured and effectively subordinated to the obligations of our subsidiaries, including trade payables and other liabilities that constitute indebtedness.
We may be unable to purchase the Exchange Bonds upon a change of control.
Upon a change of control event, we would be required to offer to purchase the Exchange Bonds for cash at a price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest, if any. The change of control provisions of the Exchange Bonds 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.
Our senior credit facility provides that the occurrence of certain events that would constitute a change in control for the purposes of the indenture governing the Exchange Bonds constitutes a default under such facility. Much of our other debt also requires us to repurchase such debt upon an event that would constitute a change in control for the purposes of the Exchange Bonds. Other future debt may contain prohibitions of events that would constitute a change in control or would require such debt to be repurchased upon a change in control. Moreover, the exercise by holders of Exchange Bonds of their right to require us to repurchase their Exchange Bonds could cause a default under our existing or future debt, even if the change in 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 Exchange Bonds 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 Exchange Bonds in connection with a change in control would result in a default under the indenture governing the Exchange Bonds. Such a default would, in turn, constitute a default under much of our existing debt, and may constitute a default under future debt as well.
There is no public market for the Exchange Bonds, and we do not know if a market will ever develop or, if a market does develop, whether it will be sustained.
The Exchange Bonds are a new issue of securities for which there is no existing trading market. Accordingly, we cannot assure you that a liquid market will develop for the Exchange Bonds, that you will be able to sell your Exchange Bonds at a particular time or that the prices that you receive when you sell the Exchange Bonds will be favorable.
We do not intend to apply for listing or quotation of any series of bonds on any securities exchange or stock market, although our Restricted Bonds trade on the Portal Market. The liquidity of any market for the Exchange Bonds will depend on a number of factors, including:
• | the number of holders of Exchange Bonds; |
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• | our operating performance and financial condition; |
• | our ability to complete the offer to exchange the Restricted Bonds for the Exchange Bonds; |
• | the market for similar securities; |
• | the interest of securities dealers in making a market in the Exchange Bonds; and |
• | prevailing interest rates. |
Holders of Restricted Bonds who fail to exchange their Restricted Bonds in the exchange offer will continue to be subject to restrictions on transfer.
If you do not exchange your Restricted Bonds for Exchange Bonds in the exchange offer, you will continue to be subject to the restrictions on transfer applicable to the Restricted Bonds. The restrictions on transfer of your Restricted Bonds arise because we issued the Restricted Bonds 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 Restricted Bonds 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 Restricted Bonds under the Securities Act. For further information regarding the consequences of tendering your Restricted Bonds in the exchange offer, see the discussion below under the caption "The Exchange Offer— Consequences of Exchanging or Failing to Exchange Restricted Bonds."
You must comply with the exchange offer procedures in order to receive new, freely tradable Exchange Bonds.
Delivery of Exchange Bonds in exchange for Restricted Bonds tendered and accepted for exchange pursuant to the exchange offer will be made only after timely receipt by the exchange agent of book-entry transfer of Restricted Bonds into the exchange agent's account at DTC, as depositary, including an agent's message (as defined herein). We are not required to notify you of defects or irregularities in tenders of Restricted Bonds for exchange. Restricted Bonds 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 Restricted Bonds" and "The Exchange Offer—Consequences of Exchanging or Failing to Exchange Restricted Bonds."
Some holders who exchange their Restricted Bonds may be deemed to be underwriters, and these holders will be required to comply with the registration and prospectus delivery requirements in connection with any resale transaction.
If you exchange your Restricted Bonds in the exchange offer for the purpose of participating in a distribution of the Exchange Bonds, 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.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes and incorporates by reference 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" 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:
• | our high level of indebtedness; |
• | our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our senior credit facility and other debt agreements, including the indenture governing the Exchange Bonds; |
• | our ability to improve the operating performance of our existing stores in accordance with our long term strategy; |
• | our ability to hire and retain pharmacists and other store personnel; |
• | the outcomes of pending lawsuits and governmental investigations; |
• | competitive pricing pressures and continued consolidation of the drugstore industry; and |
• | the efforts of third-party payors to reduce prescription drug reimbursements and encourage mail order, changes in state or federal legislation or regulations, the success of planned advertising and merchandising strategies, general economic conditions and inflation, interest rate movements, access to capital, and our relationships with our suppliers. |
We undertake no obligation to revise the forward-looking statements included or incorporated by reference 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 the section entitled "Risk Factors" included in this prospectus. In addition, you are advised to review any further disclosures we make on related subjects in reports we file with the SEC.
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USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. Any Restricted Bonds that are properly tendered and exchanged pursuant to the exchange offer will be retired and cancelled.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of earnings to fixed charges on a historical basis for each of the last five years ended February 26, 2000, March 3, 2001, March 2, 2002, March 1, 2003 and February 28, 2004 and for the thirty-nine weeks ended November 27, 2004 and November 29, 2003.
Year Ended | Thirty-Nine
Weeks Ended |
|||||||||||||||||||||||||||||
February
28, 2004 (52 Weeks) |
March 1, 2003 (52 Weeks) |
March 2, 2002 (52 Weeks) |
March
3, 2001 (53 Weeks) |
February 26, 2000 (52 Weeks) |
November 27, 2004 |
November 29, 2003 |
||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||
Fixed charges: | ||||||||||||||||||||||||||||||
Interest expense | $ | 313,498 | $ | 330,020 | $ | 396,064 | $ | 649,926 | $ | 542,028 | $ | 224,973 | $ | 236,085 | ||||||||||||||||
Interest portion of net rental expense (1) | 184,391 | 189,528 | 181,493 | 159,247 | 148,669 | 153,454 | 155,903 | |||||||||||||||||||||||
Fixed charges before capitalized interest and preferred stock dividend requirements | 497,889 | 519,548 | 577,557 | 809,173 | 690,697 | 378,427 | 391,988 | |||||||||||||||||||||||
Preferred stock dividend requirement (2) | 37,074 | 49,540 | 42,354 | 42,445 | 15,554 | 39,343 | 24,471 | |||||||||||||||||||||||
Capitalized interest | 133 | 301 | 806 | 1,836 | 5,292 | 160 | 106 | |||||||||||||||||||||||
Total fixed charges | $ | 535,096 | $ | 569,389 | $ | 620,717 | $ | 853,454 | $ | 711,543 | $ | 417,930 | $ | 416,565 | ||||||||||||||||
Earnings: | ||||||||||||||||||||||||||||||
Income (loss) from continuing operations before income taxes, and cumulative effect of accounting change | $ | 34,584 | $ | (154,482 | ) | $ | (837,385 | ) | $ | (1,283,602 | ) | $ | (1,129,036 | ) | $ | 85,025 | $ | (23,515 | ) | |||||||||||
Share of loss from equity method investees | — | — | 12,092 | 36,675 | 15,181 | — | — | |||||||||||||||||||||||
Preferred stock dividend requirement | (37,074 | ) | (49,540 | ) | (42,354 | ) | (42,445 | ) | (15,554 | ) | (39,343 | ) | (24,471 | ) | ||||||||||||||||
Fixed charges before capitalized interest | 534,963 | 569,088 | 619,911 | 851,618 | 706,251 | 417,770 | 416,459 | |||||||||||||||||||||||
Total adjusted earnings (loss) | 532,473 | 365,066 | (247,736 | ) | (437,754 | ) | (423,158 | ) | 463,452 | 368,473 | ||||||||||||||||||||
Earnings to fixed charges (deficiency) | $ | (2,623 | ) | $ | (204,323 | ) | $ | (868,453 | ) | $ | (1,291,208 | ) | $ | (1,134,701 | ) | $ | 45,522 | $ | (48,092 | ) | ||||||||||
Ratio
of earnings to fixed charges |
— | — | — | — | — | 1.11 | — | |||||||||||||||||||||||
(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. |
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SELECTED HISTORICAL FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and related notes and the interim condensed consolidated financial statements and related notes incorporated by reference into this prospectus. The selected consolidated financial data for the thirty-nine week periods ended November 27, 2004 and November 29, 2003 are unaudited and not necessarily indicative of the results to be expected for the full year. The following selected financial data does not give pro forma effect to our offering of the Restricted Bonds, our issuance of 2.5 million shares of 7% Series E Mandatory Convertible Preferred Stock, our exchange of our remaining shares of Series D preferred stock for Series F, G and H preferred stock or to the $37.5 million in proceeds from our December 15, 2004 sale and leaseback transaction described in Note 11 to our unaudited financial statements included in our quarterly report on Form 10-Q/A for the quarter ended November 27, 2004 and incorporated by reference in this prospectus.
Fiscal Year Ended | Thirty-Nine Week Period Ended |
|||||||||||||||||||||||||||||
February
28, 2004 (52 weeks) |
March 1, 2003 (52 weeks) |
March 2, 2002 (52 weeks) |
March 3, 2001 (53 weeks)(1) |
February 26, 2000 (52 weeks)(1) |
November 27, 2004 |
November 29, 2003 |
||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||
Operations Data: | ||||||||||||||||||||||||||||||
Revenues | $ | 16,600,449 | $ | 15,791,278 | $ | 15,166,170 | $ | 14,516,865 | $ | 13,338,947 | $ | 12,475,599 | $ | 12,204,103 | ||||||||||||||||
Costs and expenses: | ||||||||||||||||||||||||||||||
Cost
of goods sold, including occupancy costs |
12,568,729 | 12,036,003 | 11,695,871 | 11,152,285 | 10,219,168 | 9,388,222 | 9,261,318 | |||||||||||||||||||||||
Selling,
general and administrative expenses(2) |
3,624,226 | 3,476,379 | 3,406,492 | 3,458,307 | 3,607,810 | 2,748,014 | 2,694,884 | |||||||||||||||||||||||
Goodwill amortization(3) | — | — | 21,007 | 20,670 | 24,457 | — | — | |||||||||||||||||||||||
Store
closing and impairment charges |
22,074 | 135,328 | 251,617 | 388,078 | 139,448 | 11,263 | 299 | |||||||||||||||||||||||
Interest expense | 313,498 | 330,020 | 396,064 | 649,926 | 542,028 | 224,973 | 236,085 | |||||||||||||||||||||||
Interest rate swap contracts | — | 278 | 41,894 | — | — | — | — | |||||||||||||||||||||||
Loss (gain) on debt modifications and retirements, net(4) | 35,315 | (13,628 | ) | 221,054 | 100,556 | — | 19,425 | 35,315 | ||||||||||||||||||||||
Share
of loss from equity investments |
— | — | 12,092 | 36,675 | 15,181 | — | — | |||||||||||||||||||||||
Loss (gain) on sale of assets and investments, net | 2,023 | (18,620 | ) | (42,536 | ) | (6,030 | ) | (80,109 | ) | (1,323 | ) | (283 | ) | |||||||||||||||||
Total costs and expenses | 16,565,865 | 15,945,760 | 16,003,555 | 15,800,467 | 14,467,983 | 12,390,574 | 12,227,618 | |||||||||||||||||||||||
Income
(loss) from continuing operations before income taxes and cumulative effect of accounting change |
34,584 | (154,482 | ) | (837,385 | ) | (1,283,602 | ) | (1,129,036 | ) | 85,025 | (23,515 | ) | ||||||||||||||||||
Income tax (benefit) expense | (48,795 | ) | (41,940 | ) | (11,745 | ) | 148,957 | (8,375 | ) | 11,139 | (47,518 | ) | ||||||||||||||||||
Income
(loss) from continuing operations before cumulative effect of accounting change |
83,379 | (112,542 | ) | (825,640 | ) | (1,432,559 | ) | (1,120,661 | ) | 73,886 | 24,003 | |||||||||||||||||||
Income
(loss) from discontinued operations, net of income tax expense |
— | — | — | 11,335 | 9,178 | — | — | |||||||||||||||||||||||
Loss
on disposal of discontinued operations, net of income tax benefit |
— | — | — | (168,795 | ) | — | — | — | ||||||||||||||||||||||
Cumulative effect of accounting change, net of income tax benefit | — | — | — | — | (27,300 | ) | — | — | ||||||||||||||||||||||
Net income (loss) | $ | 83,379 | $ | (112,542 | ) | $ | (825,640 | ) | $ | (1,590,019 | ) | $ | (1,138,783 | ) | $ | 73,886 | $ | 24,003 | ||||||||||||
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Balance
Sheet Data (at end of period): |
||||||||||||||||||||||||||||||
Working capital | $ | 1,894,247 | $ | 1,676,889 | $ | 1,580,218 | $ | 1,955,877 | $ | 752,657 | $ | 1,183,721 | $ | 1,748,195 | ||||||||||||||||
Property,
plant and equipment, net |
1,882,763 | 1,867,830 | 2,095,552 | 3,040,790 | 3,445,863 | 1,776,943 | 1,903,148 | |||||||||||||||||||||||
Total assets | 6,245,634 | 6,132,766 | 6,491,281 | 7,913,693 | 9,845,601 | 5,676,696 | 6,337,190 | |||||||||||||||||||||||
Total debt(5) | 3,891,666 | 3,862,628 | 4,056,468 | 5,894,548 | 6,612,868 | 3,213,405 | 3,885,621 | |||||||||||||||||||||||
Stockholders' (deficit) equity | (8,277 | ) | (129,938 | ) | (7,527 | ) | (373,619 | ) | 414,120 | 83,072 | (77,032 | ) | ||||||||||||||||||
Other Data: | ||||||||||||||||||||||||||||||
Cash flows from continuing operations provided by (used in): | ||||||||||||||||||||||||||||||
Operating activities | $ | 227,515 | $ | 305,383 | $ | 16,343 | $ | (704,554 | ) | $ | (623,098 | ) | $ | 523,898 | $ | 100,310 | ||||||||||||||
Investing activities | (242,150 | ) | (72,214 | ) | 342,531 | 677,653 | (504,112 | ) | (81,679 | ) | (192,525 | ) | ||||||||||||||||||
Financing activities | (15,931 | ) | (211,903 | ) | (107,109 | ) | (64,324 | ) | 905,091 | (681,206 | ) | 1,334 | ||||||||||||||||||
Capital expenditures | 267,373 | 116,154 | 187,383 | 141,504 | 641,070 | 141,657 | 209,988 | |||||||||||||||||||||||
Number of retail drugstores | 3,382 | 3,404 | 3,497 | 3,648 | 3,802 | 3,363 | 3,386 | |||||||||||||||||||||||
Number of associates | 72,500 | 72,000 | 75,000 | 75,500 | 77,300 | 73,500 | 74,400 | |||||||||||||||||||||||
(1) | We acquired PCS Health Systems, Inc. (PCS) on January 22, 1999. On October 2, 2000, we sold PCS. Accordingly, our Pharmacy Benefit Management ("PBM") segment was reported as a discontinued operation in the fiscal years ended March 3, 2001 and February 26, 2000. |
(2) | Includes stock based compensation expense (benefit). Stock based compensation expense for the year ended February 28, 2004 was determined using the fair value method set forth in Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation". Stock based compensation expense (benefit) for the fiscal years ended March 1, 2003, March 2, 2002, March 3, 2001 and February 26, 2000 was determined using the intrinsic method set forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". |
(3) | We adopted SFAS 142 "Goodwill and Other Intangible Assets" effective March 3, 2002. SFAS No. 142 specifies that all goodwill shall no longer be amortized, and therefore, we recorded no goodwill amortization expense for the fiscal years ended February 28, 2004 and March 1, 2003. |
(4) | Amounts related to the early extinguishment of debt that were previously recognized as an extraordinary item outside of results from continuing operations were reclassified as a gain or loss on debt retirements and modifications, which is a component of income or loss from continuing operations. |
(5) | Includes capital lease obligations of $183.2 million as of February 28, 2004, $176.2 million as of March 1, 2003, $182.6 million as of March 2, 2002, $1.1 billion as of March 3, 2001, $1.1 billion as of February 26, 2000, $171.0 million as of November 27, 2004 and $177.9 million as of November 29, 2003. |
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THE EXCHANGE OFFER
Purpose of the Exchange Offer
When we sold the Restricted Bonds on January 11, 2005, we entered into a registration rights agreement with the placement agents of those Restricted Bonds. Under the registration rights agreement, we agreed to file a registration statement regarding the exchange of the Restricted Bonds for bonds of the same series that are registered under the Securities Act. We also agreed to use our best efforts to cause the registration statement to become effective with the SEC and to initiate this exchange offer as soon as practicable after the registration statement is declared effective. The registration rights agreement provides that we will be required to pay additional cash interest ("additional interest") to the holders of the Restricted Bonds if the registration statement of which this prospectus is a part, is not declared effective within 180 days of the date that we sold the Restricted Bonds (July 10, 2005), if the exchange offer is not consummated on or prior to August 9, 2005, or if certain other conditions described under "Description of the Exchange Bonds—Additional Interest" are not met. Under some circumstances set forth in the registration rights agreement, holders of Restricted Bonds, including holders who are not permitted to participate in the exchange offer or who may not freely sell Exchange Bonds received in the exchange offer, may require us to file and cause to become effective, a shelf registration statement covering resales of the Restricted Bonds by these holders.
Each broker-dealer that receives Exchange Bonds for its own account in exchange for Restricted Bonds, where the Restricted Bonds were acquired by it as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus that meets the requirements of the Securities Act in connection with any resale of the Exchange Bonds. 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. See "Plan of Distribution."
The exchange offer is not being made to holders of Restricted Bonds in any jurisdiction in which the exchange would not comply with the securities or blue sky laws of such jurisdiction. A copy of the registration rights agreement is incorporated by reference as an exhibit to the registration statement of which this prospectus is a part.
Terms of the Exchange Offer
Subject to the terms and the satisfaction or waiver of the conditions detailed in this prospectus, we will accept for exchange Restricted Bonds 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 , 2005. 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, $200.0 million aggregate principal amount of Restricted Bonds are outstanding. This prospectus is first being sent on or about the date hereof, to all holders of Restricted Bonds known to us.
We expressly reserve the right, at any time prior to the expiration of the exchange offer, to extend the period of time during which the exchange offer is open, and delay acceptance for exchange of any Restricted Bonds, by giving oral or written notice of such extension to holders thereof as described below. During any such extension, all Restricted Bonds previously tendered will remain subject to the exchange offer and may be accepted for exchange by us. Any Restricted Bonds not accepted for exchange for any reason will be returned without expense to an account maintained with DTC as promptly as practicable after the expiration or termination of the exchange offer.
Restricted Bonds 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 Restricted Bonds, upon the occurrence of any of the conditions of the exchange offer
27
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 Restricted Bonds 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 Restricted Bonds
You may only tender your Restricted Bonds by book-entry transfer of the Restricted Bonds into the exchange agent's account at DTC. The tender to us of Restricted Bonds by you, as set forth below, and our acceptance of the Restricted Bonds will constitute a binding agreement between us and you, upon the terms and subject to the conditions set forth in this prospectus. Except as set forth below, to tender Restricted Bonds for exchange pursuant to the exchange offer, you must transmit an agent's message to BNY Midwest Trust Company, as exchange agent, at the address listed below under the heading "—Exchange Agent." In addition, the exchange agent must receive, on or prior to the expiration date, a timely confirmation of book-entry transfer (a "book-entry confirmation") of the Restricted Bonds into the exchange agent's account at DTC.
The term "agent's message" means a message, transmitted to DTC and received by the exchange agent and forming a part of a book-entry transfer.
If you are a beneficial owner whose Restricted Bonds are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and wish to tender, you should promptly instruct the registered holder to tender on your behalf. Any registered holder that is a participant in DTC's book-entry transfer facility system may make book-entry delivery of the Restricted Bonds by causing DTC to transfer the Restricted Bonds into the exchange agent's account.
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 Restricted Bonds tendered for exchange. We reserve the absolute right to reject any and all tenders not properly tendered or to not accept any tender 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 individual tender before the expiration date (including the right to waive the ineligibility of any holder who seeks to tender Restricted Bonds in the exchange offer). Our or the exchange agent's interpretation of the term and conditions of the exchange offer as to any particular tender either before or after the expiration date will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Restricted Bonds 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 Restricted Bonds for exchange, and no one will be liable for failing to provide such notification.
By tendering Restricted Bonds, you represent to us that: (i) you are not our affiliate, (ii) you are not engaged in, and do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the Exchange Bonds to be issued in the exchange offer, (iii) you are acquiring the Exchange Bonds in your ordinary course of business and (iv) if you are a broker-dealer, you will receive the Exchange Bonds for your own account in exchange for Restricted Bonds 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 Exchange Bonds you receive. For further information regarding resales of the Exchange Bonds by participating broker-dealers, see the discussion under the caption "Plan of Distribution."
If any holder or other person is an "affiliate" of ours, as defined under Rule 405 of the Securities Act, or is engaged in, or intends to engage in, or has an arrangement or understanding with any person to participate in, a distribution of the Exchange Bonds, that holder or other person cannot rely on the applicable interpretations of the staff of the SEC, may not tender its Restricted Bonds in the exchange offer and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction.
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See "Plan of Distribution." Each broker-dealer that receives Exchange Bonds for its own account in exchange for Restricted Bonds, where the Restricted Bonds were acquired by it as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus that meets the requirements of the Securities Act in connection with any resale of the Exchange Bonds. 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.
Furthermore, any broker-dealer that acquired any of its Restricted Bonds directly from us:
• | may not rely on the applicable interpretation of the staff of the SEC's position contained in Exxon Capital Holdings Corp., SEC no-action letter (April 13, 1988), Morgan, Stanley & Co. Inc., SEC no-action letter (June 5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1993); and |
• | must also be named as a selling bondholder in connection with the registration and prospectus delivery requirements of the Securities Act relating to any resale transaction. |
By delivering an agent's message, a beneficial owner (whose Restricted Bonds are registered in the name of a broker, dealer, commercial bank, trust company or other nominee) or holder will be deemed to have irrevocably appointed the exchange agent as its agent and attorney-in-fact (with full knowledge that the exchange agent is also acting as an agent for us in connection with the exchange offer) with respect to the Restricted Bonds, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with in interest subject only to the right of withdrawal described in this prospectus), to receive for our account all benefits and otherwise exercise all rights of beneficial ownership of such Restricted Bonds, in accordance with the terms and conditions of the exchange offer.
Each beneficial owner or holder will also be deemed to have represented and warranted to us that it has authority to tender, exchange, sell, assign and transfer the Restricted Bonds it tenders and that, when the same are accepted for exchange, we will acquire good, marketable and unencumbered title to such Restricted Bonds, free and clear of all liens, restrictions, charges and encumbrances, and that the Restricted Bonds tendered are not subject to any adverse claims or proxies. Each beneficial owner and holder, by tendering its Restricted Bonds, also agrees that it will comply with its obligations under the registration rights agreement.
Acceptance of Restricted Bonds for Exchange; Delivery of Exchange Bonds
Upon satisfaction or waiver of all of the conditions to the exchange offer, we will accept, promptly after the expiration date, all Restricted Bonds properly tendered and will issue the Exchange Bonds promptly after acceptance of the Restricted Bonds. See "—Conditions to the Exchange Offer." For purposes of the exchange offer, we will be deemed to have accepted properly tendered Restricted Bonds for exchange if and when we give oral (confirmed in writing) or written notice to the exchange agent.
The holder of each Restricted Bond accepted for exchange will receive an Exchange Bond in the amount equal to the surrendered Restricted Bond. Holders of Exchange Bonds 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 Restricted Bonds or, if no interest has been paid, from the issue date of the Restricted Bonds. Holders of Exchange Bonds will not receive any payment in respect of accrued interest on Restricted Bonds 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 Exchange Bonds for Restricted Bonds that are accepted for exchange will be made only after timely receipt by the exchange agent of an agent's message and a timely confirmation of book-entry transfer of the Restricted Bonds into the exchange agent's account at DTC.
If any tendered Restricted Bonds are not accepted for any reason set forth in the terms and conditions of the exchange offer or if Restricted Bonds are submitted for a greater principal amount
29
than the holder desires to exchange, such unaccepted or non exchanged Restricted Bonds will be returned without expense to an account maintained with DTC promptly after the expiration or termination of the exchange offer.
Book–Entry Transfers
The exchange agent will make a request to establish an account for the Restricted Bonds at DTC for purposes of the exchange offer within two business days after the date of this prospectus. Any financial institution that is a participant in DTC's systems must make book-entry delivery of Restricted Bonds by causing DTC to transfer those Restricted Bonds into the exchange agent's account at DTC in accordance with DTC's procedure for transfer. This participant should transmit its acceptance to DTC on or prior to the expiration date. DTC will verify this acceptance, execute a book-entry transfer of the tendered Restricted Bonds into the exchange agent's account at DTC and then send to the exchange agent confirmation of this book-entry transfer. The transmission of the Restricted Bonds and agent's message to DTC and delivery by DTC to and receipt by the exchange agent of the related agent's message will be deemed to be a valid tender.
Withdrawal Rights
For a withdrawal of a tender of Restricted Bonds to be effective, the exchange agent must receive a valid withdrawal request through the Automated Tender Offer Program system from the tendering DTC participant before the expiration date. Any such request for withdrawal must include the VOI number of the tender to be withdrawn and the name of the ultimate beneficial owner of the related Restricted Bonds in order that such bonds may be withdrawn. Properly withdrawn Restricted Bonds may be re-tendered by following the procedures described under "—Procedures for Tendering Restricted Bonds" above at any time on or before 5:00 p.m., New York City time, on the expiration date.
We will determine all questions as to the validity, form and eligibility, including time of receipt, of notices of withdrawal. Any Restricted Bonds so withdrawn will be deemed not to have been validly tendered for exchange. No Exchange Bonds will be issued unless the Restricted Bonds so withdrawn are validly retendered.
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:
(a) | the exchange offer violates any applicable law or applicable interpretation of the staff of the SEC; or |
(b) | 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
30
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
(c) | 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 |
(d) | 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 Restricted Bonds tendered, and no Exchange Bonds will be issued in exchange for any such Restricted Bonds, 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.
Exchange Agent
We have appointed BNY Midwest Trust Company as the exchange agent for the exchange offer. Questions and requests for assistance, requests for additional copies of this prospectus or of other documents should be directed to the exchange agent addressed as follows:
BNY Midwest Trust Company, Exchange Agent
By Registered or Certified Mail, Overnight Delivery
after
4:30 p.m. on the Expiration Date:
BNY Midwest Trust Company
c/o Bank of New
York
Corporate Trust Operations
101 Barclay Street – 7
East
Reorganization Unit
New York, N.Y. 10286
Attn: Ms.
Evangeline Gonzales
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For Information Call:
(212)-815-3738
For
Facsimile Transmission
(for Eligible Institutions
only):
(212)-298-1915
Confirm by Telephone:
(212)-815-3738
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 registration and filing fees, fees and expenses of compliance with federal securities and state blue sky securities laws, printing expenses, messenger and delivery services and telephone, fees and disbursements to our counsel, application and filing fees and any fees and disbursement to our independent certified public accountants. 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 Exchange Bonds at the same carrying value as the Restricted Bonds, 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 Exchange Bonds.
Transfer Taxes
You will not be obligated to pay any transfer taxes in connection with the tender of Restricted Bonds in the exchange offer unless you instruct us to register Exchange Bonds in the name of, or request that Restricted Bonds 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 Restricted Bonds
The information below concerning specific interpretations of and positions taken by the staff of the SEC is not intended to constitute legal advice, and prospective purchasers should consult their own legal advisors with respect to those matters.
If you do not exchange your Restricted Bonds for Exchange Bonds in the exchange offer, your Restricted Bonds will continue to be subject to the provisions of the indenture regarding transfer and exchange of the Restricted Bonds and the restrictions on transfer of the Restricted Bonds imposed by the Securities Act and state securities law. These transfer restrictions are required because the Restricted Bonds were issued under an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Restricted Bonds 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 Restricted Bonds under the Securities Act.
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Based on interpretations by the staff of the SEC, as detailed in a series of no-action letters issued to third parties, we believe that the Exchange Bonds issued in the exchange offer may be offered for resale, resold or otherwise transferred by you without compliance with the registration and prospectus delivery requirements of the Securities Act as long as:
• | you are acquiring the Exchange Bonds in the ordinary course of your business; |
• | you are not participating, do not intend to participate and have no arrangement or understanding with any person to participate, in a distribution of the Exchange Bonds; and |
• | you are not an affiliate of ours. |
If you are an affiliate of ours, are engaged in or intend to engage in or have any arrangement or understanding with any person to participate in the distribution of the Exchange Bonds:
• | you cannot rely on the applicable interpretations of the staff of the SEC; |
• | you will not be entitled to participate in the exchange offer; and |
• | you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. |
We do not intend to seek our own interpretation regarding the exchange offer, and we cannot assure you that the staff of the SEC would make a similar determination with respect to the Exchange Bonds as it has in other interpretations to third parties.
Each holder of Restricted Bonds who wishes to exchange such Restricted Bonds for the related Exchange Bonds in the exchange offer represents that:
• | it is not our affiliate; |
• | it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Exchange Bonds to be issued in the exchange offer; |
• | it is acquiring the Exchange Bonds in its ordinary course of business; and |
• | if it is a broker-dealer, it will receive the Exchange Bonds for its own account in exchange for Restricted Bonds that were acquired by it as a result of its market-making or other trading activities and that it will deliver a prospectus in connection with any resale of the Exchange Bonds it receives. For further information regarding resales of the Exchange Bonds by participating broker-dealers, see the discussion under the caption "Plan of Distribution." |
As discussed above, in connection with resales of Exchange Bonds, any participating broker-dealer must deliver a prospectus meeting the requirements of the Securities Act. The staff of the SEC has taken the position that participating broker-dealers may fulfill their prospectus delivery requirements with respect to the Exchange Bonds, other than a resale of an unsold allotment from the original sale of the Restricted Bonds, with the prospectus contained in the exchange offer registration statement. Under the registration rights agreement, we have agreed, for a period of 90 days following the consummation of the exchange offer, to make available a prospectus meeting the requirements of the Securities Act to any participating broker-dealer for use in connection with any resale of any Exchange Bonds acquired in the exchange offer.
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DESCRIPTION OF THE EXCHANGE BONDS
You can find the definitions of terms used in this description under the subheading "Definitions." In this description, the words "Company" and "we," "us" and "our" refer only to Rite Aid Corporation and not to any of its subsidiaries, and the term Notes refers to the Restricted Bonds and the Exchange Bonds.
We will issue the Exchange Bonds under the indenture dated as of January 11, 2005 (the "Indenture"), among the Company, the Subsidiary Guarantors and BNY Midwest Trust Company, as trustee (the "Trustee"). This is the same Indenture under which the Restricted Bonds were issued.
We urge you to read the Indenture because it, and not this description, defines your rights as a holder of the Exchange Bonds. A copy of the proposed form of Indenture is available upon request to the Company at the address indicated under "Where You Can Find More Information."
We can issue an unlimited principal amount of additional Notes at later dates under the same Indenture. We can issue additional Notes as part of the same series or as an additional series. Any additional Notes that we issue in the future will be identical in all respects to the Exchange Bonds that we are issuing now, except that Notes issued in the future will have different issuance prices and issuance dates. We will issue Exchange Bonds or any additional Notes only in fully registered form without coupons, in denominations of $1,000 and integral multiples of $1,000.
Exchange Bonds versus Restricted Bonds
The terms of the Exchange Bonds are substantially identical to those of the outstanding Restricted Bonds, except that the transfer restrictions, registration rights and additional interest provisions relating to the Restricted Bonds do not apply to the Exchange Bonds.
Principal, Maturity and Interest
The Exchange Bonds will mature on January 15, 2015. We are issuing up to $200 million aggregate principal amount of Exchange Bonds for Restricted Bonds tendered in this exchange offer.
Interest on the Exchange Bonds will accrue at a rate of 7½% per annum and will be payable semi-annually in arrears on January 15 and July 15, commencing on July 15, 2005. We will pay interest to those persons who were holders of record on the January 1 or July 1 immediately preceding each interest payment date.
Interest on the Exchange Bonds will accrue from the date of original issuance of the Restricted Bonds or, if interest has already been paid, from the date it was most recently paid on the Restricted Bonds. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months.
Ranking
The Notes will be:
• | unsubordinated unsecured obligations of the Company; |
• | equal in ranking ("pari passu") with all existing and future unsubordinated unsecured debt of the Company; and |
• | guaranteed on a subordinated basis by the Subsidiary Guarantors and these guarantees will be secured by second priority liens (subject to Permitted Liens) on the Collateral shared with Second Priority Debt that shares equally with the Notes in distributions of Collateral, in each case, subject to provisions governing releases of those guarantees and the Collateral. |
As of November 27, 2004, after giving effect to the offering of Restricted Bonds, and the application of the net proceeds therefrom:
• | the total outstanding debt of the Company and the Subsidiary Guarantors, including current maturities and capital lease obligations, but excluding unused commitments, undrawn letters of credit made by lenders and off balance sheet obligations under our accounts receivable securitization program, would have been approximately $3.2 billion; |
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• | none of our or any Subsidiary Guarantor's debt would have been subordinated to the Notes or the Subsidiary Guarantees; |
• | the total outstanding debt of the Company and the Subsidiary Guarantors that would be senior to the subordinated guarantees by the Subsidiary Guarantors and have the benefit of first priority liens on the Collateral would have been approximately $560.0 million (not including $112.1 million of outstanding letters of credit); and |
• | the total outstanding debt of the Company and the Subsidiary Guarantors that would have the benefit of pari passu subordinated guarantees from the Subsidiary Guarantors and share pari passu second priority liens (subject to Permitted Liens) on the Collateral would have been approximately $995.4 million (including the notes offered hereby but excluding unamortized discount of $6.6 million). |
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 Exchange Bonds will only be creditors of the Company and of those Subsidiaries that are Subsidiary Guarantors. In the case of Subsidiaries that are not Subsidiary Guarantors, all of the existing and future liabilities of these Subsidiaries, including any claims of trade creditors and preferred stockholders, will be effectively senior to the Notes.
As our Subsidiaries conduct substantially all of our operations, our ability to service our debt, including the 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 laws restrict the ability of our Subsidiaries to pay us dividends or make loans and advances to us. If these restrictions are applied to Subsidiaries that are not Subsidiary Guarantors, then we would not be able to use the earnings of those Subsidiaries to make payments on the Notes. Furthermore, under certain circumstances, bankruptcy "fraudulent conveyance" laws or other similar laws could invalidate the Subsidiary Guarantees or the liens securing them. If this were to occur, we would also be unable to use the earnings of these Subsidiary Guarantors to the extent they face restrictions on distributing funds to us. Any of the situations described above could make it more difficult for us to service our debt.
As of November 27, 2004, the total balance sheet liabilities of the Subsidiary Guarantors, excluding intercompany liabilities and unused commitments and undrawn letters of credit made by lenders, was approximately $2.3 billion. This represented approximately 97% of the liabilities held by our Subsidiaries.
The Subsidiary Guarantors and our other Subsidiaries have other liabilities, including contingent liabilities, that may be significant. The Indenture contains limitations on the amount of additional Debt that we and the Restricted Subsidiaries may Incur. However, the amounts of this Debt could nevertheless be substantial and may be Incurred either by Subsidiary Guarantors or by our other Subsidiaries.
The Notes are unsecured obligations of the Company. Secured debt of the Company will be effectively senior to the Notes to the extent of the value of the assets securing this debt. While the Subsidiary Guarantees are secured, other secured debt of the Subsidiary Guarantors will be effectively senior to the Notes to the extent that this debt has any of the following:
(a) a higher priority lien on the Collateral securing the Subsidiary Guarantees of the Notes; or
(b) a lien on other Property that is not Collateral that secures the Subsidiary Guarantees of the Notes.
In either of the above cases, the other secured debt will be effectively senior to the Notes to the extent of either:
(a) the value of the assets securing the other secured Debt, or
(b) the amount of the other secured Debt, whichever is less.
See "Risk Factors—Risks Related to the Exchange Offer and Holding the Exchange Bonds".
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Subsidiary Guarantees
Our obligations under the Indenture, including the repurchase obligation resulting from a Change of Control, will be fully and unconditionally guaranteed, jointly and severally, on a subordinated basis, by our existing Subsidiaries that guarantee our senior secured credit facility, and these guarantees will be secured by shared second priority liens (subject to Permitted Liens) on the Collateral, in each case subject to provisions governing releases of these guarantees and the Collateral.
The Subsidiary Guarantors currently generate all of our revenue. As of November 27, 2004, our Subsidiaries that are Subsidiary Guarantors represented the following approximate percentages of the assets and revenues of the Company, on a consolidated basis:
99% | of our consolidated assets were represented by Subsidiaries that were Subsidiary Guarantors | |||||
100% | of our consolidated total revenues were represented by Subsidiaries that were Subsidiary Guarantors | |||||
If all of the Capital Stock of a Subsidiary Guarantor is sold, transferred or otherwise disposed of pursuant to a transaction permitted by the Second Priority Debt Documents, such Subsidiary Guarantor will be released from its obligations under the Second Priority Subsidiary Guarantee Agreement without further action.
Subject to any other consent required under the terms of the applicable Second Priority Collateral Documents, the holders of Notes will be deemed to have consented (including for purposes of determining actions of the Second Priority Instructing Group) to the release of a Subsidiary Guarantee of the Notes provided by a Subsidiary Guarantor, without any action required on the part of the Trustee or any holder of the Notes, upon such Subsidiary Guarantor ceasing to Guarantee or be an obligor in respect of, or to pledge any of its assets to secure, any Senior Obligations; provided, however, that after giving effect to such release (i) at least $300 million in aggregate principal amount of Senior Obligations under Credit Facilities will thereafter remain outstanding and (ii) such Subsidiary Guarantor ceases to Guarantee or be an obligor in respect of, or to pledge any of its assets to secure, any Secured Obligation.
In addition, a Subsidiary Guarantee of the Notes provided by a Subsidiary Guarantor may be released only in respect of the Notes:
(a) upon request of the Company without consent of any holder of the Notes unless, within 20 Business Days after written notice of the proposed release of such Subsidiary Guarantor is mailed to the Trustee and the holders of the Notes, holders of 25% of the outstanding principal amount of Notes deliver to the Company a written objection to such release; or
(e) with the written consent of the holders of at least a majority of the aggregate principal amount of the Notes then outstanding.
Under the circumstances described in clauses (a) and (b) above, holders of Notes (and the holders of 9½% Notes and 8.125% Notes pursuant to the respective terms of those notes) will also be deemed to have consented to such release for purposes of any consent required under the Second Priority Collateral Documents (including for purposes of determining actions of the Second Priority Instructing Group), subject to any other consent required under the applicable Second Priority Collateral Document.
At the request of the Company, the Trustee will execute and deliver any documents, instructions or instruments evidencing the consent of the holders of the Notes to any such release. The Indenture will also direct the Trustee, in its capacity as Second Priority Representative for holders of Notes, to take such action under the Second Priority Collateral Documents or otherwise as may be requested by the Company to give effect to any such release.
The Subsidiary Guarantee of any Subsidiary Guarantor may also be released as described under "—Defeasance."
In addition, the Subsidiary Guarantees (a) will terminate when all the Second Priority Debt Obligations have been paid in full and (b) will continue to be effective or be reinstated, as the case
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may be, if at any time payment, or any part thereof, of any Second Priority Debt Obligations is rescinded or must otherwise be restored by any Second Priority Debt Party or any Subsidiary Guarantor upon the bankruptcy or reorganization of the Company, any Subsidiary Guarantor or otherwise.
The obligations of each Subsidiary Guarantor under the Second Priority Subsidiary Guarantee Agreements (the "Second Priority Guarantee Obligations") are limited (and subject to automatic reduction) to the extent necessary to prevent the guarantees by a Subsidiary Guarantor and the guarantee by that Subsidiary Guarantor of the Senior Obligations from constituting fraudulent conveyances. However, the guarantees of the Senior Obligations will only be limited (or reduced) after the subordinated guarantees for the Notes and the other Second Priority Debt Obligations are extinguished.
The Second Priority Subsidiary Guarantee Agreement may be amended or otherwise modified by agreement of each Subsidiary Guarantor affected thereby and the Second Priority Collateral Trustee, with the written consent of the Second Priority Instructing Group unless the amendment adversely affects the rights of the holders of any particular Second Priority Debt Facility, in a manner materially different from its effect on the other Second Priority Debt Facilities, in which case the amendment requires the consent of a majority in principal amount of the holders of the Second Priority Debt Facility so adversely affected. Accordingly, the Second Priority Subsidiary Guarantee Agreement may, if the Notes do not represent a majority of the outstanding Second Priority Debt Obligations, be amended without the consent of the holders of Notes or the Trustee, unless the holders of Notes are adversely affected in a materially different manner. The Restricted Bonds represent approximately 20% of the outstanding Second Priority Debt Obligations. This percentage can increase or decrease as Second Priority Debt Obligations are Repaid or Incurred. The consent of holders of Notes to any such amendment or other modification will be deemed to have been given as described under "—Amendments and Waivers." The consent of holders of 9½% Notes and 8.125% Notes will also be deemed to have been given under similar circumstances, and the Notes, the 9½% Notes and the 8.125% Notes together represent approximately 86% of the outstanding Second Priority Debt Obligations.
Subordination of Subsidiary Guarantees
The obligations of the Subsidiary Guarantors under the Second Priority Subsidiary Guarantee Agreement will be subordinated in right of payment to the prior payment when due of the guarantees by such Subsidiary Guarantors of the Senior Bank Obligations and may become subordinated to any Additional Senior Debt Obligations. The terms of the Senior Credit Facility and the Indenture permit us to Incur a substantial amount of Additional Senior Debt Obligations.
Subject to any other consent required under the terms of the applicable Second Priority Debt Document, the holders of Notes will be deemed to have consented (including for purposes of determining actions of the Second Priority Instructing Group) to the amendment of the Second Priority Subsidiary Guarantee Agreement to subordinate, on comparable terms, the obligations of the Subsidiary Guarantors under the Second Priority Subsidiary Guarantee Agreement to the prior payment when due of the guarantees by such Subsidiary Guarantors of any Additional Senior Debt. If such an amendment is made, references to the Senior Bank Obligations and the Senior Credit Facility in the following description would include such Additional Senior Debt.
As a result of this subordination, no payment will be made on account of the Second Priority Guarantee Obligations of any Subsidiary Guarantor until (i) the Senior Bank Obligations have been paid in full, (ii) all lending commitments under the Senior Credit Facility have been terminated, and (iii) there are no outstanding letters of credit under the Senior Credit Facility other than such as have been fully collateralized.
Also:
(a) no direct or indirect payment or distribution on account of the Second Priority Guarantee Obligations may be made until the obligations of such Subsidiary Guarantors under the guarantees of the Senior Bank Obligations have been paid in full, and
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(b) no payment or distribution of cash, properties or securities of any kind or character may be made in respect of the Second Priority Guarantee Obligations of a Subsidiary Guarantor unless payment in full or provision for payment in full in cash or cash equivalents is made in respect of the obligations of such Subsidiary Guarantors under the guarantees of the Senior Bank Obligations,
including in any of the following situations or proceedings relating to such Subsidiary Guarantor:
• | liquidation, dissolution or winding up; |
• | reorganization (whether in bankruptcy, insolvency, receivership or similar proceedings); or |
• | assignments for the benefit of its creditors or otherwise. |
Until all of the obligations of a Subsidiary Guarantor under its guarantee of the Senior Bank Obligations are paid in full or provided for in cash or cash equivalents, if, notwithstanding the subordination provisions above, a payment or distribution is made to holders of Notes that, due to such subordination provisions, should not have been made to them, such holders are required to hold it in trust for the parties under the Senior Bank Obligations and pay it over to them as their interests may appear.
Following the payment in full in cash or cash equivalents or provision for payment in full in cash or cash equivalents of all obligations of any Subsidiary Guarantor under its guarantee in respect of the Senior Bank Obligations, the holders of the Notes will be subrogated to the rights of the parties under the Senior Bank Obligations to receive payments or distributions of assets in respect of the guarantees of such Subsidiary Guarantor in respect of such obligations until all amounts owing in respect of such obligations of such Subsidiary Guarantor have been paid in full.
Because of the subordination provisions contained in the Second Priority Subsidiary Guarantee Agreement, holders of Senior Bank Obligations and other creditors (including trade creditors) of the Company or the Subsidiary Guarantors may recover disproportionately more than the holders of the Notes recover in a bankruptcy or similar proceeding relating to us or a Subsidiary Guarantor. This could apply even if the Notes or the applicable Subsidiary Guarantee ranked pari passu with the other creditors' claims. In such a case, there may be insufficient assets, or no assets, remaining to pay the principal of or interest on the Notes.
See "Risk Factors—Risks Related to the Exchange Offer and Holding the Exchange Bonds—The guarantees of the notes will be subordinated to the guarantees of our first priority debt, including our senior credit facility, and the guarantees of the notes are secured only to the extent that the first priority debt is oversecured; the terms of the notes permit, without the consent of holders of notes, various releases of collateral and subsidiary guarantees as well as various amendments to the second priority collateral documents that could be adverse to holders of notes" and "Risk Factors—Risks Related to the Exchange Offer and Holding the Exchange Bonds—If the guarantees of the notes and the liens that secure these guarantees are held to be invalid or unenforceable or are limited in accordance with their terms, the notes would be unsecured and structurally subordinated to the debt of our subsidiaries."
Security for Subsidiary Guarantees
The Subsidiary Guarantees of the Notes will be secured by second priority liens (subject to Permitted Liens) granted by our Subsidiary Guarantors on the assets securing our Senior Credit Facility (other than any cash or cash equivalents collateralizing letter of credit obligations), which currently includes substantially all of their inventory and intellectual property. The Senior Credit Facility is also secured by the accounts receivable of the Subsidiary Guarantors but only to the extent such accounts receivable are not included in our off balance sheet accounts receivable securitization program. As of November 27, 2004, proceeds from the sale of accounts receivable in connection with this program totaled $335 million.
The second priority liens securing the Subsidiary Guarantees of the Notes will be shared equally and ratably (subject to Permitted Liens) with the holders of Second Priority Debt Obligations, which
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includes the 12.5% Notes, the 9½% Notes, the 8.125% Notes and any additional Second Priority Debt Obligations. In addition, other Second Priority Debt Documents may require the proceeds of Collateral Dispositions to be allocated to prepay, repurchase or provide for the prepayment or repurchase of other Second Priority Debt Obligations when no such prepayment, repurchase or provision is required with respect to the Notes. The 12.5% Notes, the 9½% Notes and the 8.125% Notes require such repurchase or provision for repurchase in certain circumstances. The guarantees of the Senior Credit Facility are secured by first priority liens on the Collateral, which liens will be senior to the liens securing the Notes. Pursuant to the Second Priority Collateral Documents, substantial additional Debt may have the benefit of first priority liens on the Collateral or may share the second priority liens securing the Subsidiary Guarantees of the Notes without the consent of holders of Notes. The lenders under the Senior Credit Facility will, at all times, control all remedies or other actions related to the Collateral so long as any Senior Bank Obligations remain outstanding. Subject to any other consent required under the terms of the applicable Second Priority Debt Documents, the holders of Notes (and the holders of the 9½% Notes and the 8.125% Notes pursuant to the terms of those notes) will be deemed to have consented (including for purposes of determining actions of the Second Priority Instructing Group) to an amendment of the Intercreditor Agreement to permit, on comparable terms, the lenders under any Senior Obligations to control all remedies or other actions related to the Collateral so long as any Senior Obligations remain outstanding.
All Collateral used, sold, transferred or otherwise disposed of in accordance with the terms of the Second Priority Debt Documents, including any waiver or amendment of these documents, will automatically be released from the Lien securing Subsidiary Guarantees of the Notes so that the use, sale, transfer or other disposition may be made free of such Lien. Accordingly, subject to the terms of the other Second Priority Debt Documents, any such sale, transfer or other disposition of Collateral in a transaction that does not violate the asset disposition covenant in the Indenture governing the Notes may result in a release of the Lien on such Collateral securing Subsidiary Guarantees of the Notes. Because the asset disposition covenant of the Indenture does not restrict transfers of assets by Subsidiaries of the Company to the Company, any transfer of Collateral to the Company could result in such assets ceasing to constitute Collateral and secure the Notes. In addition, the Liens securing Subsidiary Guarantees of the Notes may be released pursuant to directions from the Second Priority Instructing Group, unless the release involves all or substantially all the Collateral, in which case such release shall require the consent of the holders of the Notes. Accordingly, unless all or substantially all the Collateral is being released, substantial Collateral may be released without the consent of the holders of Notes or the Trustee. Furthermore, as described below, under certain circumstances the holders of Notes may be deemed to consent to a release of all or substantially all of the Collateral. See "Description of Collateral and Intercreditor Arrangements."
In addition, subject to any other consent required under the terms of the applicable Second Priority Debt Documents, the holders of Notes will be deemed to have consented (including for purposes of determining actions of the Second Priority Instructing Group) to the release of assets included in the Collateral from the Liens securing Subsidiary Guarantees of the Notes under any one or more of the following circumstances:
(a) if all other Liens on that asset securing the Senior Obligations (including all commitments thereunder) are released; provided, however, that after giving effect to the release (i) at least $300 million in aggregate principal amount of Senior Obligations under Credit Facilities will remain outstanding and (ii) there remains no Lien on such assets securing Secured Obligations;
(b) if we provide substitute collateral with at least an equivalent fair value, as determined in good faith by our Board of Directors (as evidenced by a resolution of the Board of Directors);
provided, however, that after giving effect to such substitution there remains no Lien on the released assets securing Secured Obligations; or
(c) if all of the Capital Stock of any of the Company's Subsidiaries that is pledged as Collateral is released or if any Subsidiary that is a Subsidiary Guarantor is released from its Subsidiary Guarantee, such Subsidiary's assets will also be released from the Liens securing its
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Subsidiary Guarantee of the Notes; provided, however, that after giving effect to the release there remains no Lien on such assets securing any Secured Obligations.
In addition, assets securing a Subsidiary Guarantee of the Notes may be released only in respect of the Notes:
(x) upon request of the Company without consent of any holder of the Notes unless, within 20 Business Days after written notice of the proposed release of such Collateral from the Liens securing Subsidiary Guarantees of the Notes is mailed to the Trustee and the holders of Notes, holders of 25% of the outstanding principal amount of Notes deliver to the Company a written objection to such release; or
(y) with the written consent of the holders of at least a majority of the aggregate principal amount of the Notes then outstanding.
Under the circumstances described in clauses (x) and (y) above, holders of Notes will also be deemed to have consented to such release for purposes of any consent required under the Second Priority Collateral Documents (including for purposes of determining actions of the Second Priority Instructing Group), subject to any other consent required under the Second Priority Collateral Documents.
At the request of the Company, the Trustee will execute and deliver any documents, instructions or instruments evidencing the consent of the holders of the Notes to such release. The Indenture will also direct the Trustee, in its capacity as Second Priority Representative for holders of Notes, to take such action under the Second Priority Collateral Documents or otherwise as may be requested by the Company to give effect to any such release.
Liens on Collateral securing Subsidiary Guarantees of the Notes may also be released as described under "—Defeasance". To the extent the Notes are ever secured directly by Liens on Collateral, such Liens could be released on a comparable basis to the release of Liens on Collateral securing Subsidiary Guarantees of the Notes.
The terms of the 9½% Notes and the 8.125% Notes contain similar deemed consents by holders of such notes (including for purposes of determining actions of the Second Priority Instructing Group).
Optional Redemption
The Company may choose to redeem the Notes at any time. If it does so, it may redeem all or any portion of the Notes, at once or over time, after giving the required notice under the Indenture.
To redeem the Notes prior to January 15, 2010, the Company must pay a redemption price equal to 100% of the principal amount of the 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 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 Note on any redemption date, the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess of (A) the present value at such redemption date of (1) the redemption price of such Note at January 15, 2010, (such redemption price being set forth in the table below) plus (2) all required interest payments due on such Note through January 15, 2010 (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 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
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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 January 15, 2010; provided, however, that if the period from the redemption date to January 15, 2010 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 January 15, 2010, the 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 Notes redeemed during the 12-month period commencing on January 15 of the years set forth below, and are expressed as percentages of principal amount:
Redemption Year | Price | |||||
2010 | 103.750 | % | ||||
2011 | 102.500 | % | ||||
2012 | 101.250 | % | ||||
2013 and thereafter | 100.000 | % | ||||
In addition, at any time and from time to time, prior to January 15, 2008, the Company may redeem up to a maximum of 35% of the original aggregate principal amount of the Notes (including additional Notes, if any) with the proceeds of one or more Equity Offerings, at a redemption price equal to 107.500% 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 Notes (including additional Notes, if any) remains outstanding. Any such 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 Notes shall be subject to redemption.
Sinking Fund
There will be no mandatory sinking fund payments for the Notes.
Repurchase at the Option of Holders Upon a Change of Control
Upon the occurrence of a Change of Control, each holder of Notes will have the right to require us to repurchase all or any part of such holder's 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 Notes shall be subject to redemption.
Within 30 days following any Change of Control, the Company 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 Notes, at such holder's address appearing in the register for the 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 Notes timely tendered will be accepted for payment;
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(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 Notes must follow in order to tender their Notes (or portions thereof) for payment, and the procedures that holders of Notes must follow in order to withdraw an election to tender 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 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, 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" the Company's 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 the Company disposes of less than all its assets by any of the means described above, the ability of a holder of Notes to require the Company to repurchase its Notes may be uncertain. In such a case, holders of the 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 constitute a Change of Control will constitute a default under such facility.
Other existing debt of the Company contains, and future debt of the Company 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 (including the 9½% Notes and 8.125% Notes). Moreover, the exercise by holders of Notes of their right to require us to repurchase their Notes could cause a default under existing or future debt of the Company, 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 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 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 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 Notes. See "—Amendments and Waivers."
Restrictive Covenants
Covenant Suspension. During any period of time that:
(a) the Notes have Investment Grade Ratings from both Rating Agencies and
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(b) no Default or Event of Default has occurred and is continuing under the Indenture,
the Company and the Restricted Subsidiaries will not be subject to the following provisions of the Indenture:
• | "—Limitation on Debt", |
• | "—Limitation on Restricted Payments", |
• | "—Limitation on Asset Sales and Specified Collateral Dispositions", |
• | "—Limitation on Restrictions on Distributions from Restricted Subsidiaries", |
• | "—Limitation on Transactions with Affiliates", |
• | clauses (a)(1) and (b) of "—Limitation on Sale and Leaseback Transactions", |
• | clause (x) of the fourth paragraph (and such clause (x) as referred to in the second paragraph) of "—Designation of Restricted and Unrestricted Subsidiaries", and |
• | clauses (e) of the first paragraph of "—Merger, Consolidation and Sale of Property" |
(collectively, the "Suspended Covenants"). Solely for the purpose of determining the amount of Permitted Liens under the "—Limitation on Liens" covenant during any Suspension Period (as defined below) and without limiting the Company's or any Restricted Subsidiary's ability to Incur Debt during any Suspension Period, to the extent that calculations in the "—Limitation on Liens" covenant refer to the "—Limitation on Debt" covenant, such calculations shall be made as though the "—Limitation on Debt" covenant remains in effect during the Suspension Period. In the event that the Company and the Restricted Subsidiaries are not subject to the Suspended Covenants for any period of time as a result of the preceding sentences and, on any subsequent date (the "Reversion Date"), one or both of the Rating Agencies withdraws its ratings or downgrades the ratings assigned to the Notes below the required Investment Grade Ratings or a Default or Event of Default occurs and is continuing, then the Company and the Restricted Subsidiaries will thereafter again be subject to the Suspended Covenants. The period of time between the Suspension Date and the Reversion Date is referred to in this description as the "Suspension Period." Notwithstanding that the Suspended Covenants may be reinstated, no Default will be deemed to have occurred as a result of a failure to comply with the Suspended Covenants during the Suspension Period. On the Reversion Date, all Debt Incurred during the Suspension Period will be classified to have been Incurred pursuant to clause (1) of the first paragraph or one of the clauses set forth in the second paragraph of the covenant described under "—Limitation on Debt" (to the extent such Debt would be permitted to be Incurred thereunder as of the Reversion Date and after giving effect to Debt Incurred prior to the Suspension Period and outstanding on the Reversion Date). To the extent such Debt would not be permitted to be Incurred pursuant to clause (1) of the first paragraph or one of the clauses set forth in the second paragraph of the covenant described under "—Limitation on Debt", such Debt will be deemed to have been outstanding on February 12, 2003, so that it is classified as permitted under clause (k) of the second paragraph of the covenant described under "—Limitation on Debt". Calculations made after the Reversion Date of the amount available to be made as Restricted Payments under the covenant described under "—Limitation on Restricted Payments" will be made as though the covenant described under "—Limitation on Restricted Payments" had been in effect during the entire period of time from February 12, 2003. Accordingly, Restricted Payments made during the Suspension Period will reduce the amount available to be made as Restricted Payments under the first paragraph of the covenant described under "—Limitation on Restricted Payments" following any Reversion Date, and the items specified in clauses (c)(1) through (c)(4) of the first paragraph of the covenant described under "—Limitation on Restricted Payments" will increase the amount available to be made under the first paragraph thereof following any Reversion Date. For purposes of determining compliance with the first five paragraphs of the covenant described under "—Limitation on Asset Sales and Specified Collateral Dispositions", on the Reversion Date, the Net Available Cash from all Asset Sales not applied in accordance with the covenant will be deemed to be reset to zero.
Limitation on Debt. The Company 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
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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:
(a) such Debt is Debt of the Company or a Subsidiary Guarantor and 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 2.00 to 1.00; or
(b) such Debt is Permitted Debt.
The term "Permitted Debt" is defined to include the following:
(a) Debt of the Company outstanding on the Issue Date and evidenced by the 9½% Notes and of Subsidiary Guarantors, including any future Guarantor, evidenced by guarantees relating to the 9½% Notes;
(b) Debt of the Company or a Subsidiary Guarantor (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 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 Notes or Repay other Debt, pursuant to the covenant described under "—Limitation on Asset Sales and Specified Collateral Dispositions" and (2) the sum of the amount equal to (A) 60% of the book value of the inventory (determined using the first-in-first-out method of accounting) of the Company and the Restricted Subsidiaries and (B) 85% of the book value of the accounts receivables of the Company and the Restricted Subsidiaries;
(c) [intentionally omitted]
(d) Debt of the Company outstanding on the Issue Date and evidenced by the 12.5% Notes and of Subsidiary Guarantors, including any future Guarantor, evidenced by guarantees relating to the 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 the Company 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 the Company 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 the Company or a Restricted Subsidiary for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company 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 the Company or a Restricted Subsidiary for the purpose of limiting currency exchange rate risks directly related to transactions entered into by the Company or such Restricted Subsidiary in the ordinary course of business and not for speculative purposes;
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(i) Debt under Commodity Price Protection Agreements entered into by the Company or a Restricted Subsidiary in the ordinary course of the financial management of the Company 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 the Company 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 February 12, 2003 not otherwise described in clauses (a) through (j) above or clauses (p) through (q) below;
(l) other Debt of the Company or a Subsidiary Guarantor (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 the Company or otherwise became a Restricted Subsidiary (other than Debt Incurred as 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 the Company or was otherwise acquired by the Company), provided that at the time that Restricted Subsidiary was acquired by the Company or otherwise became a Restricted Subsidiary and after giving effect to the Incurrence of that Debt, the Company 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) [intentionally omitted]
(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 the Company or a Subsidiary Guarantor 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 agreements of the Company or 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 the Company 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
45
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 the Company or such Restricted Subsidiary in connection with such disposition.
Notwithstanding anything to the contrary contained in this covenant, the Company shall not permit any Restricted Subsidiary that is not a Subsidiary Guarantor to Incur any Debt pursuant to this covenant if the proceeds thereof are used, directly or indirectly, to Refinance any Debt of the Company or any Subsidiary Guarantor. In addition, the Company shall not, and shall not permit any Subsidiary Guarantor to, Incur, directly or indirectly, any Senior Obligation that is subordinate or junior in right of payment to any other Debt of the Company or any Subsidiary Guarantor.
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, the Company, in its 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, (2) the Company 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 and (3) with respect to Debt permitted under clause (k) in respect of Sale and Leaseback Transactions that are not Capital Lease Obligations on February 12, 2003, any reclassification of such Debt as a Capital Lease Obligation shall not be deemed an Incurrence of such Debt; provided, however, that (u) all outstanding Debt evidenced by the 8.125% Notes will be deemed to have been incurred pursuant to clause (b) of the second paragraph of this covenant, (v) all outstanding Debt evidenced by the Receivables Facility will be deemed to have been incurred pursuant to clause (b) of the second paragraph of this covenant, (w) all outstanding Debt evidenced by the Restricted Bonds and of Subsidiary Guarantors evidenced by Subsidiary Guarantees relating to the Restricted Bonds immediately following the Issue Date will be deemed to have been Incurred pursuant to clause (b) of the second paragraph of this covenant, (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, (y) all outstanding Debt in respect of Sale and Leaseback Transactions involving real property owned by the Company on February 12, 2003 will be deemed to have been Incurred pursuant to clause (q) of the second paragraph of this covenant, and all outstanding Debt in respect of Sale and Leaseback Transactions involving property acquired by the Company after February 12, 2003 will be deemed to have been Incurred pursuant to clause (r) of the second paragraph of this covenant; and (z) any Permitted Debt may later be reclassified as having been Incurred pursuant to any other clause of the second paragraph 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. The Company 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) the Company 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 February 12, 2003 (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 February 12, 2003 occurs to the end of the most recent fiscal quarter for which financial statements have been filed with the Commission (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit); plus
46
(2) 100% of Capital Stock Sale Proceeds; plus
(3) the sum of:
(A) the aggregate net cash proceeds received by the Company or any Restricted Subsidiary from the issuance or sale after February 12, 2003 of convertible or exchangeable Debt that has been converted into or exchanged for Capital Stock (other than Disqualified Stock) of the Company; and
(B) the aggregate amount by which Debt (other than Subordinated Obligations) of the Company or any Restricted Subsidiary is reduced on the Company's consolidated balance sheet after February 12, 2003 upon the conversion or exchange of any Debt (other than convertible or exchangeable debt issued or sold after February 12, 2003) for Capital Stock (other than Disqualified Stock) of the Company;
excluding, in the case of clause (A) or (B):
(x) any such Debt issued or sold to the Company or 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; and
(y) the aggregate amount of any cash or other Property distributed by the Company 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 the Company or a Restricted Subsidiary resulting from dividends, repayments of loans or advances or other transfers of Property made after February 12, 2003 in each case to the Company or any Restricted Subsidiary from such Person less the cost of the disposition of such Investments; and
(B) the portion (proportionate to the Company's 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 that such designation occurs after February 12, 2003);
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 the Company or any Restricted Subsidiary in such Person.
Notwithstanding the foregoing limitation, the Company 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, if declared on or after February 12, 2003, 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 Capital Stock of the Company or Subordinated Obligations on or after February 12, 2003 in exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold 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); 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;
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(c) purchase, repurchase, redeem, legally defease, acquire or retire for value any Subordinated Obligations on or after February 12, 2003 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 D Preferred Stock, Class A Cumulative Preferred Stock, Class C Cumulative Preferred Stock and Class D Cumulative Preferred Stock outstanding on February 12, 2003 or issued after February 12, 2003 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 on or after February 12, 2003, of shares of or options to purchase shares of, Capital Stock of the Company or any of its Subsidiaries from employees, former employees, directors or former directors of the Company or any of its 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 the Company to make payments to holders of its Capital Stock in lieu of the issuance of fractional shares of its Capital Stock on or after February 12, 2003; provided, however, that such payments shall be included in the calculation of the amount of Restricted Payments; and
(g) make any other Restricted Payments on or after February 12, 2003 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. The Company 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 on February 12, 2003 or thereafter acquired, or any interest therein or any income or profits therefrom. If the Company or any Subsidiary Guarantor creates any additional Lien upon any Property to secure any Secured Obligations, it must concurrently grant a second priority Lien (subject to Permitted Liens) upon such Property as security for the Notes or Subsidiary Guarantees of the Notes such that the Property subject to such Lien becomes Second Priority Collateral subject to the Second Priority Liens, except (i) to the extent the terms of the 12.5% Notes as in effect on the Issue Date require, with respect to proceeds of Collateral Dispositions and (ii) to the extent such Property constitutes cash or cash equivalents required to secure only letter of credit obligations under Credit Facilities following a default under such Credit Facilities.
Notwithstanding anything in the preceding paragraph, (a) (i) the aggregate principal amount of all Secured Debt at any one time outstanding under clauses (a), (b), (l) and (s) (as it relates to clause (a)) of the second paragraph of the covenant described under "—Restrictive Covenants—Limitation on Debt" shall not exceed the aggregate amount of Debt that at such time may be outstanding at any one time under such clauses (b) and (l) and (ii) the aggregate principal amount of Senior Obligations constituting Debt and any other Debt secured by a Lien on the Collateral that shares in the distribution of proceeds of Collateral prior to the Notes, at any one time outstanding shall not exceed the sum of the aggregate amount of Debt that at such time may be outstanding at any one time under such clause (b) and $200 million; and (b) the Company will not, and will not permit any of its Subsidiaries to, create or suffer to exist any Lien upon any of the Collateral (including Collateral consisting of Capital Stock or Debt of any Subsidiary of the Company) now owned or hereafter
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acquired by it securing any Public Debt unless the holders of such Public Debt share in the distribution of proceeds from the foreclosure on Collateral either (A) on an equal and ratable basis with the holders of the Senior Obligations or (B) on an equal and ratable basis with the holders of the Notes (and any other obligations that share on an equal and ratable basis with the holders of the Notes).
Limitation on Asset Sales and Specified Collateral Dispositions. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless:
(a) the Company or such Restricted Subsidiary receives 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 the Company or such Restricted Subsidiary in connection with such Asset Sale is in the form of Qualified Consideration; and
(c) the Company delivers 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 and Specified Collateral Dispositions may be applied by the Company or a Restricted Subsidiary, to the extent the Company or such Restricted Subsidiary elects (or is required by the terms of any Debt):
(a) to Repay the Secured Obligations (or, to the extent required by the terms of the 12.5% Notes (but only to the extent the terms as in effect on February 12, 2003 would have so required) with respect to proceeds of Specified Collateral Dispositions, to provide for such Repayment) or any other Debt of the Company or any Restricted Subsidiary secured by a Lien on Property of the Company or any Restricted Subsidiary of the Company (excluding, in any such case, any Debt owed to the Company or an Affiliate of the Company); provided, however, that to the extent the proceeds from a Specified Collateral Disposition will be allocated pursuant to the terms of any other Second Priority Debt Obligations to Repay or provide for the Repayment of such Second Priority Debt Obligations, a pro rata portion of such proceeds must, to the extent not inconsistent with the terms of such other Second Priority Debt Obligations, be allocated to Repay the Notes pursuant to an Asset Sales Prepayment Offer and the full amount of such allocated portion (i) will be deemed Excess Proceeds and (ii) will, upon such Asset Sales Prepayment Offer, be deemed Allocable Excess Proceeds; 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 the Company or another Restricted Subsidiary); provided, however, that (i) the Net Available Cash (or any portion thereof) from Asset Sales from the Company to any Subsidiary must be reinvested in Additional Assets or Expansion Capital Expenditures of the Company and (ii) if the assets that were the subject of such Asset Disposition constituted Collateral, then such Net Available Cash must be reinvested in Additional Assets that are pledged at the time as Collateral to secure the Notes or Subsidiary Guarantees of the Notes, subject to the Collateral Documents, or in Expansion Capital Expenditures to improve assets that constitute Collateral securing the Notes or Subsidiary Guarantees of the Notes at the time.
Pending application of Net Available Cash pursuant to this covenant, which shall not be required in respect of an Asset Sale that is not a Specified Collateral Disposition 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 that is not a Specified Collateral Disposition 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 the general funds of the Company 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
49
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), the Company will be required to make an offer to purchase (the "Asset Sales Prepayment Offer") the 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 Notes have been given the opportunity to tender their Notes for purchase in accordance with the Indenture, the Company 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,
(1) the numerator of which is the aggregate principal amount of the Notes outstanding on the date of the Asset Sales Prepayment Offer; and
(2) the denominator of which is the sum of the aggregate principal amount of the Notes outstanding on the date of the Asset Sales Prepayment Offer and the aggregate principal amount of other Debt of the Company outstanding on the date of the Asset Sales Prepayment Offer that is pari passu in right of payment with the Notes and subject to terms and conditions in respect of Asset Sales similar in all material respects to the covenant described hereunder and requiring the Company to make an offer to purchase such Debt or otherwise repay such Debt at substantially the same time as the Asset Sales Prepayment Offer.
Within five Business Days after the Company is obligated to make an Asset Sales Prepayment Offer as described in the preceding paragraph, the Company will send a written notice, by first-class mail, to the holders of Notes, accompanied by such information regarding the Company and its Subsidiaries as the Company in good faith believes will enable such holders to make an informed decision with respect to such Asset Sales 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.
The Company 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 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, the Company 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. The Company 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:
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(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 the Company or any other Restricted Subsidiary;
(b) make any loans or advances to the Company or any other Restricted Subsidiary; or
(c) transfer any of its Property to the Company 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;
(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 the Company;
(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 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 Debt permitted pursuant to the covenant described under "—Limitation on Debt," provided that (i) the restriction is no less favorable to the holders of 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 good faith that such restrictions will not impair the ability of the Company to make payments of principal and interest on the 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 the Board of Directors of the Company, 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 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 the Company 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. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, conduct any business or enter into or suffer to exist any
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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 Affiliate of the Company (an "Affiliate Transaction"), unless:
(a) the terms of such Affiliate Transaction are:
(1) set forth in writing;
(2) in the best interest of the Company or such Restricted Subsidiary, as the case may be; and
(3) no less favorable to the Company 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 an Affiliate of the Company;
(b) if such Affiliate Transaction involves aggregate payments or value to the Affiliate in excess of $25.0 million in any 12-month period, 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 resolution of the Board of Directors 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, the Company obtains 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 the Company and the Restricted Subsidiaries, taken as a whole.
Notwithstanding the foregoing limitation, the Company or any Restricted Subsidiary may enter into or suffer to exist the following:
(a) any transaction or series of transactions between the Company 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 an Affiliate of the Company (other than a Restricted Subsidiary);
(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 the Company 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 the 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 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 the Company or any of its 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;
52
(g) if such Affiliate Transaction is with any Person solely in its capacity as a holder of Debt or Capital Stock of the Company or any of its Restricted Subsidiaries, where such Person is treated no more favorably than any other holder of such Debt or Capital Stock of the Company or any of its 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 Notes in any material respect).
Limitation on Sale and Leaseback Transactions. The Company shall not, and shall not permit any Restricted Subsidiary to, enter into any Sale and Leaseback Transaction with respect to any Property unless:
(a) the Company 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 Notes or the applicable Subsidiary Guarantee 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 and Specified Collateral Dispositions," provided that such Sale and Leaseback Transaction constitutes an Asset Sale.
Designation of Restricted and Unrestricted Subsidiaries. The Board of Directors may designate any Subsidiary of the Company 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, the Company or any other Restricted Subsidiary and is not required to be a Subsidiary Guarantor pursuant to the Indenture; 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 a Subsidiary of the Company.
Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company 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 the Company 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) the Company 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 resolution of the Board of Directors giving effect to such designation or redesignation and an Officers' Certificate that:
53
(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 the fiscal quarter of the Company in which such designation or redesignation is made (or, in the case of a designation or redesignation made during the last fiscal quarter of the Company's fiscal year, within 90 days after the end of such fiscal year).
Guarantees by Subsidiaries. (a) The Company shall cause each Subsidiary that becomes or is a Collateral Subsidiary Guarantor or an obligor with respect to any of the Secured Obligations (except a Foreign Subsidiary that becomes an obligor solely in respect of Debt or other obligations of itself or another Foreign Subsidiary), in each case, to become a Subsidiary Guarantor by becoming a party to the Second Priority Subsidiary Guarantee Agreement and the Intercreditor Agreement, if such Subsidiary is not already a Subsidiary Guarantor party thereto, and delivering evidence thereof to the Trustee at the time such Person becomes a Collateral Subsidiary Guarantor or such an obligor.
(b) The Company shall not permit any Restricted Subsidiary that is not a Subsidiary Guarantor to Guarantee the payment of any Debt or Capital Stock of the Company (other than Guarantees permitted pursuant to clauses (j) or (o) of the second paragraph of the covenant described under "—Limitation on Debt"), except that a Restricted Subsidiary that is not a Subsidiary Guarantor may Guarantee Debt of the Company, provided that:
(1) such Debt and the Debt represented by such Guarantee is permitted by the covenant described under "—Limitation on Debt;"
(2) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a Guarantee of payment of the Notes by such Restricted Subsidiary and such Guarantee of Debt of the Company:
(A) 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 Notes; and
(B) if such Debt is a Subordinated Obligation, shall be subordinated in right of payment to such Restricted Subsidiary's Guarantee with respect to the Notes.
(c) Upon any Subsidiary becoming a Subsidiary Guarantor as described above, such Subsidiary shall deliver to the Trustee an Opinion of Counsel to the effect that:
(1) such Guarantee of the Notes has been duly executed and authorized; and
(2) such Guarantee of the Notes constitutes a valid, binding and enforceable obligation of such Subsidiary, except insofar as enforcement thereof may be limited by 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.
In addition, no Subsidiary Guarantor shall Guarantee, directly or indirectly, (1) any Debt of the Company that is subordinate or junior in right of payment to any other Debt of the Company unless such Guarantee is expressly subordinate in right of payment to the Subsidiary Guarantee of such Subsidiary Guarantor or (2) any Debt of the Company other than Senior Obligations unless such Guarantee is expressly subordinate in right of payment to or ranks pari passu with, the Subsidiary Guarantee of such Subsidiary Guarantor.
Additional Security Documents. From and after the Issue Date, if the Company or any Subsidiary of the Company executes and delivers in respect of any Property of such Person any mortgages, deeds of trust, security agreements, pledge agreements or similar instruments to secure Debt or other obligations that at the time constitute Secured Obligations (except for a Foreign Subsidiary that does so solely in respect of Debt or other obligations of itself or another Foreign
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Subsidiary), then the Company will, or will cause such Subsidiary to, execute and deliver substantially identical mortgages, deeds of trust, security agreements, pledge agreements or similar instruments in order to vest in the Second Priority Collateral Trustee a perfected second priority security interest, subject only to Permitted Liens and the Intercreditor Agreement, in such Property for the benefit of the Second Priority Collateral Trustee on behalf of the holders of the Notes, among others, and thereupon all provisions of the Indenture relating to the Collateral will be deemed to relate to such Property to the same extent and with the same force and effect.
Merger, Consolidation and Sale of Property
The Company will not merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Restricted Subsidiary into the Company) 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) the Company will be the surviving Person (the "Surviving Person") or the Surviving Person (if other than the Company) 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 the Company) 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 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 the Company;
(c) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all the Property of the Company, 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) the Company 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) the Company 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 Company shall not permit any Subsidiary Guarantor to merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Restricted Subsidiary into such Subsidiary Guarantor, or a merger of a Subsidiary Guarantor into the Company or another Subsidiary Guarantor) 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) such Subsidiary Guarantor will be the Surviving Person or the Surviving Person (if other than such Subsidiary Guarantor) formed by such merger, consolidation or amalgamation or
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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 such Subsidiary Guarantor) expressly assumes, by a Subsidiary Guarantee or a supplement to the Second Priority Subsidiary Guarantee Agreement or a supplemental indenture in form satisfactory to the Trustee, executed and delivered to the Trustee by such Surviving Person, the due and punctual performance and observance of all the obligations of such Subsidiary Guarantor under its Subsidiary Guarantee;
(c) 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 (c), any Debt that becomes, or is anticipated to become, an obligation of the Surviving Person, the Company or any Restricted Subsidiary as a result of such transaction or series of transactions as having been Incurred by the Surviving Person, the Company 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; and
(d) the Company 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 such Subsidiary Guarantee, 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 foregoing provisions (other than clause (c)) shall not apply to (i) any transactions which do not constitute an Asset Sale if the Subsidiary Guarantor is otherwise being released from its Subsidiary Guarantee at the time of such transaction in accordance with the Indenture and the Second Priority Collateral Documents or (ii) any transactions which constitute an Asset Sale if the Company has complied with the covenant described under "—Restrictive Covenants—Limitation on Asset Sales and Specified Collateral Dispositions" and the Subsidiary Guarantor is released from its Subsidiary Guarantee at the time of such transaction in accordance with the Indenture and the Second Priority Collateral Documents.
The Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of the Company under the Indenture (or of the Subsidiary Guarantor under the Subsidiary Guarantee, as the case may be) 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 the assets of the Company as an entirety or virtually as an entirety); or