**Exhibit 10.5**

 

**EXECUTION COPY**

 

SERVICES AGREEMENT

 

SERVICES AGREEMENT (this “Agreement”), dated as of July 30,2004, by and between Oak Hill Capital Management, Inc., a Delaware corporation(“OHCMI”), and Duane Reade Acquisition Corp. (formerly known as RexCorner Acquisition Corp.), a Delaware corporation (the “Company”).

 

WITNESSETH:

 

WHEREAS, the Company has entered into the Agreement and Plan of Merger,dated as of December 22, 2003, by and among the Company, Duane ReadeShareholders, LLC (formerly known as Rex Corner Holdings, LLC) and Duane ReadeInc. (“Duane Reade”), as amended by Amendment No. 1 on June 10,2004, Amendment No. 2 on June 13, 2004 and Amendment No. 3 onJune 18, 2004 (as amended, the “Merger Agreement”), pursuant towhich the Company will merge with and into Duane Reade, and Duane Reade willcontinue as the surviving corporation;

 

WHEREAS, OHCMI provides certain management services to Oak Hill CapitalPartners, L.P. (“OHCP”), Oak Hill Capital Management Partners, L.P. (“OHCMP”)and OHCP DR Co-Investors, LLC (“OHCP DR”), including, withoutlimitation, procuring the Duane Reade investment opportunity, analyzing andevaluating the business, operations and financial position of Duane Reade,negotiating the Merger Agreement, obtaining the debt and equity financing andconsummating the transactions contemplated by the Merger Agreement(collectively, the “Transaction Services”);

 

WHEREAS, in connection with the Closing (as defined in the MergerAgreement), OHCP, OHCMP and OHCP DR will provide the equity financing necessaryin connection with the Merger; and

 

WHEREAS, following the Closing, the Company wishes that OHCMI provideit with certain ongoing advisory and management services, and OHCMI wishes torender such services to the Company, on the terms and conditions set forth inthis Agreement.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreementsset forth herein, the parties hereto agree as follows:

 

SECTION 1.        Transaction Services.

 

In consideration of the Transaction Services provided by OHCMI, theCompany shall pay, or cause to be paid, to OHCMI a Transaction Services fee of$8,000,000 (eight million dollars), to be paid by wire transfer of immediatelyavailable funds upon the Closing.  TheTransaction Services fee represents (i) an amount equal to $4,008,000(four million eight thousand dollars) with respect to OHCP’s indirect equityinvestment in the Company (the “OHCP Equity Portion”), (ii) anamount equal to

 

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$104,000 (one hundred and four thousand dollars) with respect toOHCMP’s indirect equity investment in the Company (the “OHCMP Equity Portion”)and (iii) an amount equal to $3,888,000 (three million eight hundred andeighty-eight thousand dollars) with respect to OHCP DR’s indirect equityinvestment in the Company (the “OHCP DR Equity Portion”).

 

SECTION 2.        Management Services.

 

(a)                                  Duringthe term of this Agreement, OHCMI shall provide such advisory and managementservices to the Company and its subsidiaries as the Board of Directors of theCompany shall reasonably request.  Suchservices may be performed at OHCMI’s offices or at such other location asdetermined by OHCMI.

 

(b)                                 Inconsideration of the services to be provided in accordance with clause (a)above, the Company shall pay, or cause to be paid, to OHCMI an annualmanagement fee of $1,250,000 (one million two hundred fifty thousand dollars),to be paid in equal quarterly installments in arrears, by wire transfer ofimmediately available funds within 30 days after the end of each fiscal quarterof the Company.  The annual managementfee represents (i) an amount equal to $626,250 (six hundred and twenty-sixthousand two hundred and fifty dollars) with respect to the OHCP EquityPortion, (ii) an amount equal to $16,250 (sixteen thousand two hundred andfifty dollars) with respect to the OHCMP Equity Portion and (iii) anamount equal to $607,500 (six hundred and seven thousand five hundred dollars)with respect to the OHCP DR Equity Portion.

 

SECTION 3.        Indemnification.

 

(a)                                  Noneof OHCMI, any of its affiliates or any of their respective partners, officers,directors, stockholders, agents or employees (an “Indemnified Party”)shall have any liability to the Company for any services provided pursuant tothis Agreement, except as may result from such Indemnified Party’s grossnegligence or willful misconduct.

 

(b)                                 Tothe fullest extent permitted by law, the Company shall indemnify and holdharmless each Indemnified Party from and against any losses, claims, damages,actions, demands, deficiencies, judgments or causes of action or liabilities,including, without limitation, reasonable legal fees or other expenses incurredin investigating or defending against any such losses, claims, damages orliabilities based upon, arising out of or otherwise in respect of the servicesprovided pursuant to this Agreement, except as may result from such IndemnifiedParty’s gross negligence or willful misconduct. The provisions of this Section 3 shall survive the termination ofthis Agreement.

 

SECTION 4.        Reimbursement.

 

The Company shall promptly upon request, reimburse OHCMI and itsaffiliates for all out-of-pocket costs and expenses (including, withoutlimitation, travel and reasonable attorney’s fees and expenses) incurred inconnection with the performance of the services contemplated by this Agreement.

 

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SECTION 5.        Termination.

 

(a)                                  ThisAgreement (i) shall terminate upon a Change in Control or (ii) may beterminated by OHCMI at any time upon written notice to the Company.  The provisions of Section 3 shallsurvive the termination of this Agreement.

 

(b)                                 Asused in this Section 5, the following term has the meaning specifiedbelow.

 

“Change in Control” means theoccurrence of any one of the following events: (i) any person, as such term is used in Sections 13(d) and 14(d) ofthe Securities Exchange Act of 1934, as amended (the “1934 Act”), otherthan OHCMI or its affiliates, is or becomes the beneficial owner, as defined in1934 Act Rules 13d-3 and 13d-5 (except that for purposes of this clause (i)such person shall be deemed to have beneficial ownership of all shares thatsuch person has the right to acquire, whether such right is exercisableimmediately or only after the passage of time) directly or indirectly, of a majorityof the total voting power of the Company’s voting stock; (ii) during any periodof two consecutive years, individuals who at the beginning of such periodconstituted the Company’s board of directors, together with any new directorswhose election by the Company’s board of directors or whose nomination forelection by the Company’s stockholders was approved by a vote of a majority ofthe Company’s directors then still in office who were either directors at thebeginning of such period or whose election or nomination for election waspreviously so approved, cease for any reason to constitute a majority of theCompany’s board of directors then in office; (iii) the merger or consolidationof the Company with or into another person or the merger of another person withor into the Company, other than the transactions contemplated by the MergerAgreement or a transaction following which the holders of securities thatrepresented 100% of the aggregate voting power of the voting stock of theCompany immediately prior to such transaction own, directly or indirectly, atleast a majority of the aggregate voting power of the voting stock of thesurviving person immediately after such transaction in substantially the sameproportion that such holders held the aggregate voting power of the votingstock of the Company immediately prior to such transaction; or (iv) the sale ofall or substantially all of the Company’s assets to another person.

 

SECTION 6.        Assignment.

 

This Agreement may not be assigned by any party hereto without thewritten consent of the other party; provided, however, that OHCMIshall be entitled to assign this Agreement to any person that is an affiliateof OHCMI or that otherwise assumes or is a successor to substantially all ofthe assets and liabilities of OHCMI.

 

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SECTION 7.        Notices.

 

All notices, requests, demands and other communications provided for bythis Agreement shall be in writing and shall be deemed to have been given threebusiness days after mailed when mailed by registered or certified mail, returnreceipt requested, or given by facsimile or other electronic means, or whendelivered if given in person, to the following addresses of the parties heretoor to such other address as such party may have specified for notice pursuantto this Section 7:

 

(a)                                  ifto OHCMI:

 

Oak Hill Capital Management, Inc.

65 E. 55th Street, 36th Floor

New York, NY 10022

Attn:     John R. Monsky, Esq.

Facsimile: (212) 758-3572

 

(b)                                 ifto the Company:

 

Duane Reade Acquisition Corp.

c/o Oak Hill Capital Partners, L.P.

201 Main Street, Suite 3100

Fort Worth, TX 76102

Attn:     Ray Pinson

Facsimile: (817) 338-2067

 

or to such other persons, addresses or facsimile numbers as may bedesignated in writing by the person entitled to receive such communication asprovided above.

 

SECTION 8.        Modification.

 

This Agreement may not be modified or amended in any manner other thanby a written instrument signed by both parties hereto, or their respectivesuccessors or assigns.

 

SECTION 9.        Entire Agreement.

 

This Agreement constitutes the entire agreement between the partieswith respect to the subject matter hereof and supersedes any prior agreement orunderstanding among them with respect to such subject matter.

 

SECTION 10.  Severability.

 

If any provision of this Agreement, or the application of suchprovision to any person or circumstance, shall be held invalid, the remainderof this Agreement or the application of such provision to other persons orcircumstances shall not be affected thereby.

 

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SECTION 11.  Governing Law; Submission to Jurisdiction.

 

THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED INACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TOTHE CONFLICT OF LAWS PRINCIPLES OR RULES OF SUCH STATE.  THE PARTIES TO THIS AGREEMENT (A) IRREVOCABLYSUBMIT TO THE EXCLUSIVE JURISDICTION OF THE STATE OR FEDERAL COURTS OF THEUNITED STATES OF AMERICA LOCATED IN THE STATE OF NEW YORK AND (B) WAIVE ANYCLAIM OF IMPROPER VENUE OR ANY CLAIM THAT THOSE COURTS ARE AN INCONVENIENTFORUM.  THE PARTIES TO THIS AGREEMENTAGREE THAT MAILING OF PROCESS OR OTHER PAPERS IN CONNECTION WITH ANY SUCHACTION OR PROCEEDING IN THE MANNER PROVIDED IN SECTION 7 OR IN SUCH OTHERMANNER AS MAY BE PERMITTED BY APPLICABLE LAWS, SHALL BE VALID AND SUFFICIENTSERVICE THEREOF.

 

SECTION 12.  Successors and Assigns.

 

Except as herein otherwise specifically provided, this Agreement shallbe binding upon and inure to the benefit of the parties and their successorsand assigns.

 

SECTION 13.  Counterparts.

 

This Agreement may be executed in several counterparts, each of whichshall be deemed an original but all of which shall constitute one and the sameinstrument.  It shall not be necessaryfor all parties to execute the same counterpart hereof.

 

SECTION 14.  Headings.

 

Captions contained in this Agreement are inserted only as a matter ofconvenience and in no way define, limit or extend the scope or intent of thisAgreement or any provision hereof.

 

SECTION 15.  Interpretation.

 

Wherever from the context it appears appropriate, each term stated ineither the singular or the plural shall include the singular and the plural,and pronouns stated in the masculine, the feminine or neuter gender shallinclude the masculine, the feminine and the neuter.

 

SECTION 16.  Waivers.

 

No provision of this Agreement shall be deemed to have been waivedunless such waiver is in writing and signed by or on behalf of the partygranting the waiver.  No failure or delayin exercising any right, power, or privilege under this Agreement shall operateas a waiver thereof, nor shall any single or partial exercise thereof precludeany other or further exercise thereof or the exercise of any right, power, orprivilege under this Agreement.  Neithershall the waiver, invalidity or

 

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unenforceability of any provision of this Agreement affect the validityor enforceability of any other provision of this Agreement, all of which shallremain in full force and effect.

 

 

[Remainder of PageIntentionally Left Blank]

 

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IN WITNESS WHEREOF, the parties hereto have caused this ServicesAgreement to be executed by their representatives thereunto duly authorized asof the day and year first above written.

 

 
|   | OAK HILL CAPITAL MANAGEMENT, INC. |
|--------|-----------------------------------|
|   |                              |
|   |                              |
|   | By:                               | /s/ Andrew J. Nathanson |   |
|   |                              | Name: | Andrew J. Nathanson |
|   |                              | Title: | Managing Partner |
|   |                              |
|   |                              |
|   | DUANE READE ACQUISITION CORP.     |
|   |                              |
|   |                              |
|   | By:                               | /s/ Andrew J. Nathanson |   |
|   |                              | Name: | Andrew J. Nathanson |
|   |                              | Title: | Vice President |
|        |                                   |  |  |  |

 

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