Document:

Exhibit 10.27

 

EXECUTION COPY

 

PREEMPTIVE RIGHTS
AGREEMENT

 

Preemptive Rights
Agreement (this “Agreement”), dated as of July 30, 2004, by and
among Oak Hill Capital Partners, L.P., a Delaware limited partnership, Oak Hill
Capital Management Partners, L.P., a Delaware limited partnership, OHCP DR
Co-Investors, LLC, a Delaware limited liability company, (collectively, the “Class
A Members”), Duane Reade Shareholders, LLC (formerly known as Rex Corner
Holdings, LLC), a Delaware limited liability company (“Parent”), Duane
Reade Holdings, Inc. (formerly known as Rex Corner Holdings, Inc.), a Delaware
corporation (“Holdings”), Duane Reade Inc., a Delaware corporation and
wholly-owned subsidiary of Holdings (the “Company”), Anthony J.
Cuti (the “Chairman”) and certain other members of the management of the
Company listed on Schedule 1 hereto (as such Schedule may be updated
from time to time and together with the Chairman, the “Management
Stockholders”).

 

WHEREAS, on December 22,
2003, Duane Reade Acquisition Corp. (formerly known as Rex Corner Acquisition
Corp.), Parent and the Company entered into an Agreement and Plan of Merger (as
amended, the “Merger Agreement”), pursuant to which Duane Reade
Acquisition will merge into the Company, a Delaware corporation, with the
Company as the surviving corporation;

 

WHEREAS, immediately
following consummation of the transactions contemplated by the Merger
Agreement, the members of Parent will be the Class A Members and the Class B
Member;

 

WHEREAS, immediately
following consummation of the transactions contemplated by the Merger
Agreement, the Management Stockholders will be granted options to purchase
Common Stock (“Options”) pursuant to the Duane Reade Holdings 2004
Management Stock Option Plan (the “Option Plan”) and certain other
members of management will be awarded shares of phantom stock (the “Phantom
Stock” and each holder of Phantom Stock, a “Phantom Stockholder”)
pursuant to the Company Phantom Stock Plan;

 

WHEREAS, the parties wish
to afford the Management Stockholders certain preemptive rights in order to preserve the relative rights
afforded in (a) the Amended and Restated Limited Liability Company
Operating Agreement of Parent, dated as of the date hereof, by and among Oak
Hill Capital Partners, L.P., Oak Hill Capital Management Partners, L.P., OHCP DR
Co-Investors, LLC and the Chairman (the “LLC Agreement”) and the
(b) Stockholders and Registration Rights Agreement, dated as of date
hereof, by and among Holdings, Parent and the Management Stockholders (the “Stockholders
Agreement”), all as more fully set forth herein.

 

NOW, THEREFORE, in
consideration of the agreements and obligations set forth herein and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties to this Agreement hereby agree as follows:

 

 

ARTICLE I 

DEFINITIONS

 

1.1                                 Definitions.  As used in this Agreement, and unless the
context requires a different meaning, the following terms have the meanings
indicated:

 

“Agreement” shall
have the meaning set forth in the Preamble.

 

“Board of Directors”
shall mean the Board of Directors of the Issuing Party, as applicable.

 

“Business Day”
shall have the meaning set forth in the Stockholders Agreement.

 

“Chairman’s Percentage
Interest” shall mean the sum of (a) the Chairman Transfer Percentage plus
(b) a quotient obtained by dividing (i) the number of shares of Common Stock
owned by the Chairman, by (ii) the aggregate number of issued and outstanding
Shares.

 

“Chairman Transfer
Percentage” shall have the meaning set forth in the Stockholders Agreement.

 

“Chosen Court”
shall have the meaning set forth in Section 3.6.

 

“Class A Members”
shall have the meaning set forth in the Preamble.

 

“Class B Member”
shall have the meaning set forth in the LLC Agreement.

 

“Class A
Representative” shall have the meaning set forth in the LLC Agreement.

 

“Class A Units”
shall have the meaning set forth in the LLC Agreement.

 

“Class B Units”
shall have the meaning set forth in the LLC Agreement.

 

“Common Stock”
shall have the meaning set forth in the Stockholders Agreement.

 

“Employment Agreement”
shall have the meaning set forth in the LLC Agreement.

 

“Governmental
Authority” shall have the meaning set forth in the Stockholders Agreement.

 

“IPO Effectiveness
Date” shall have the meaning set forth in the Stockholders Agreement.

 

2

 

“Issuing Party”
shall mean the Company, Holdings, Parent or any Subsidiary of Parent as the
issuer of Subject Securities.

 

“LLC Agreement”
shall have the meaning set forth in the Recitals.

 

“Management Committee”
shall mean the Management Committee of the Issuing Party, as applicable.

 

“Management
Stockholders” shall have the meaning set forth in the Preamble.

 

“Merger Agreement”
shall have the meaning set forth in the Recitals.

 

“Notice of Proposed
Issuance” shall have the meaning set forth in Section 2.3.

 

“Option Plan” has
the meaning set forth in the Recitals.

 

“Options” has the
meaning set forth in the Recitals.

 

“Percentage Interest”
shall (a) as to any Management Stockholder other than the Chairman, have the
meaning set forth in the Stockholders Agreement and (b) as to the Chairman,
mean the Chairman Percentage Interest.

 

“Person” shall
have the meaning set forth in the Stockholders Agreement.

 

“Phantom Stock”
shall have the meaning set forth in the Recitals.

 

“Phantom Stockholder”
shall have the meaning set forth in the Recitals and shall refer to the
individuals listed on Schedule 2 hereof.

 

“Securities Act”
shall mean the United States Securities Act of 1933 and the rules and
regulations of the Securities and Exchange Commission (or any similar agency
then having jurisdiction to enforce the Securities Act) promulgated thereunder.

 

“Subject Securities”
means (a) Shares of the capital of the Company, Holdings, Parent or any
Subsidiary of Parent or debt instruments convertible into such Shares or (b)
Units that are equivalent or senior to the rights and preferences of the Class
A Units or Class B Units or debt instruments convertible into Units that are
equivalent or senior to the rights and preferences of the Class A Units or
Class B Units.

 

“Shares” shall
have the meaning set forth in the Stockholders Agreement.

 

“Stockholders
Agreement” shall have the meaning set forth in the Recitals.

 

“Subscription Election”
shall have the meaning set forth in Section 2.4.

 

3

 

“Subsidiary” shall
have the meaning set forth in the LLC Agreement.

 

“Ten Day Period”
shall have the meaning set forth in Section 2.4.

 

“Units” shall have
the meaning set forth in the LLC Agreement.

 

1.2                                 Usage
Generally.  The definitions in this Article I
shall apply equally to both the singular and plural forms of the terms
defined.  Whenever the context may
require, any pronoun shall include the corresponding masculine, feminine and
neuter forms.  All references herein to
Articles, Sections and Schedules shall be deemed to be references to Articles
and Sections of, and Schedules to, this Agreement unless the context shall
otherwise require.  All
Schedules attached hereto shall be deemed incorporated herein as if set
forth in full herein and, unless otherwise defined therein, all terms used in
any Schedule shall have the meaning ascribed to such term in this
Agreement.  The words “include,” “includes”
and “including” shall be deemed to be followed by the phrase “without
limitation.”  The words “hereof,” “herein”
and “hereunder” and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement.  Unless otherwise expressly
provided herein, any agreement, instrument or statute defined or referred to
herein or in any agreement or instrument that is referred to herein shall mean
such agreement, instrument or statute as from time to time amended, modified or
supplemented, including (in the case of agreements or instruments) by waiver or
consent and (in the case of statutes) by succession of comparable successor
statutes and references to all attachments thereto and instruments incorporated
therein.

 

ARTICLE II 

PREEMPTIVE RIGHTS

 

2.1                                 General.  None of the Company, Holdings, Parent or any
Subsidiary of Parent shall issue any Subject Securities to the Class A Members
except in accordance with this Article II. 
For the avoidance of doubt, there shall be no restriction on the
issuance of Subject Securities to any Person other than the Class A Members or
of any other debt or equity securities to any Person, including the Class A
Members; provided, however, that any such issuance of equity
securities must (a) dilute the then existing Percentage Interest (as defined in
the LLC Agreement) of the Class A Members and the Class B Members on the same
basis and (b) dilute the then existing Shares held by Parent and the Management
Stockholders (in their capacity as stockholders of Holdings) on the same basis.

 

2.2                                 Review
of Financial Alternatives.  Prior to
an issuance of Subject Securities to the Class A Members, the Issuing Party
shall (a) review its and the Company’s available financing alternatives
and the cost effectiveness thereof with a nationally recognized investment bank
selected by the Parent, (b) determine, based upon the reasonable judgment
of the Board of Directors or the Management Committee of the Issuing Party, as
applicable, and, if the Chairman is not a member of the Board of Directors or
the Management Committee of such Issuing Party, in consultation with the

 

4

 

Chairman, that such Subject
Securities are the most favorable (from the Issuing Party’s point of view)
source of financing readily available to the Issuing Party, taking into account
the needs of such Issuing Party, the facts and circumstances as of such time
and the likely terms of alternative financing, and (c) obtain, at the
Company’s sole expense, an opinion from such investment bank that such Subject
Securities are fair, from a financial point of view, to the Issuing Party.

 

2.3                                 Notice
of Proposed Issuance.  Prior to an
issuance of Subject Securities to the Class A Members, the Issuing Party shall
provide written notice to the Management Stockholders (the “Notice of
Proposed Issuance”) specifying the aggregate principal amount of such Subject
Securities and the principal terms thereof, and stating that the Management
Stockholders shall have the right to purchase a portion of such Subject
Securities on the terms and conditions set forth in Sections 2.4 and 2.5.

 

2.4                                 Notice
of Subscription Election.  Not later
than ten (10) Business Days following delivery to the Management Stockholders
of the Notice of Proposed Issuance (the “Ten Day Period”), the
Management Stockholders shall have the right (but not the obligation) to
deliver a notice to the Issuing Party pursuant to which the Management
Stockholders elect to purchase a portion of such Subject Securities at the same
price per Subject Security and upon the same terms and conditions specified in
the Notice of Proposed Issuance (the “Subscription Election”).  The Subscription Election shall be
irrevocable and must be received by the Issuing Party prior to the expiration
of the Ten Day Period.  The failure of any
of the Management Stockholders to deliver a Subscription Election within the
Ten Day Period shall be deemed a waiver by such Management Stockholder of his
or her right to purchase such Subject Securities.  If the Subject Securities are being offered
as a part of an investment unit together with other instruments, any
Subscription Election (or the absence of such an election) by each Management
Stockholder to purchase such Subject Securities shall also constitute an
election (or the waiver of such Management Stockholder’s right) to purchase a
like portion of such other instruments.

 

2.5                                 Percentage
Interest Purchase.  In connection
with the Issuance of Subject Securities to the Class A Members, each Management
Stockholder shall, pursuant to Section 2.4 and subject to delivery of a
Subscription Election, have the right (but not the obligation) to purchase from
the Issuing Party a percentage of such Subject Securities (based on the cash
value of such Subject Securities on the date of its issuance) equal to such
Management Stockholder’s Percentage Interest as of such time.  The portion of the Subject Securities to be
purchased by the Management Stockholders pursuant to a Subscription Election
shall reduce the amount of the Subject Securities to be purchased by the Class
A Members (based on the cash value of such Subject Securities on their date of
issuance).  Any such purchase by the
Management Stockholders shall be consummated upon the later to occur of
(x) forty-five (45) calendar days following delivery of the Notice of
Proposed Issuance to the Management Stockholders and (y) the effective
date of the issuance of such Subject Securities to the Class A Members.

 

5

 

ARTICLE III 

MISCELLANEOUS

 

3.1                                 Notices.  Wherever provision is made in this Agreement
for the giving of any notice, such notice shall be in writing and shall be
delivered personally to such party, or sent by facsimile transmission or
overnight courier:

 

(a)                                  if
to Holdings:

 

Duane Reade Holdings, Inc.  

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

201 Main Street

Fort Worth, TX  76102

Facsimile:  (817) 339-7350 

Attention:  Ray Pinson

 

with a copy to:

 

Oak Hill Capital Management, Inc.

Park Avenue Tower

65 East 55th Street, 36 Floor

New York, NY  10022

Facsimile:  (212) 758-3572

Attention:  John R. Monsky, Esq.

 

and

 

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, NY  10019-6064

Facsimile: (212) 757-3990

Attention:  Robert B. Schumer, Esq.

 

(b)                                 if
to the Class A Members:

 

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

201 Main Street

Fort Worth, TX  76102

Facsimile:  (817) 339-7350 

Attention:  Ray Pinson

 

6

 

with a copy to:

 

Oak Hill Capital Management, Inc.

Park Avenue Tower

65 East 55th Street, 36 Floor

New York, NY  10022

Facsimile:  (212) 758-3572

Attention:  John R. Monsky, Esq.

 

with a copy to:

 

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, NY  10019-6064

Facsimile: (212) 757-3990

Attention:  Robert B. Schumer, Esq.

 

(c)                                  if
to the Chairman:

 

Anthony J. Cuti

c/o Duane Reade Inc.

440 Ninth Avenue, 6th Floor

New York, NY  10001

Facsimile:  (212) 244-6525

 

and

 

Shearman & Sterling LLP

599 Lexington Avenue

New York, NY 
10022-6069

Facsimile: 
(212) 848-7179

Attention: 
Kenneth J. Laverriere, Esq.

 

(d)                                 if
to any other Management Stockholder, at its address as it appears on the record
books of Holdings, with a copy to:

 

Shearman & Sterling LLP

599 Lexington Avenue

New York, NY 
10022-6069

Facsimile: 
(212) 848-7179

Attention: 
Kenneth J. Laverriere, Esq.

 

or to such other address, in any such case, as any
party hereto shall have last designated by notice to the other party.  Notice shall be deemed to have been given on
the day that it is so delivered personally or sent by facsimile transmission
and the appropriate confirmation of successful transmission is received.  If sent by overnight courier, notice shall be
deemed to have been given the next Business Day after such communication is

 

7

 

sent to the specified
address.  Any party may change its
address for notices by giving written notice of such change to the other parties.

 

3.2                                 Entire
Agreement.  This Agreement, together
with the schedule hereto and documents incorporated by reference herein,
constitutes the entire agreement of the parties hereto and supersedes any prior
understandings or written or oral agreements between the parties with respect
to the subject matter hereof. 
Notwithstanding the foregoing, this Agreement shall in no way supersede
the terms of the Employment Agreement (other than those contained in Exhibit
III to the Employment Agreement) or interfere with any rights of the Chairman
pursuant to the Employment Agreement (other than pursuant to Exhibit III
to the Employment Agreement).  To the
extent any of the rights and/or obligations herein are duplicative of any
rights and/or obligations in the Stockholders Agreement or the LLC Agreement
then this Agreement, the Stockholders Agreement and the LLC Agreement shall be
interpreted and construed to eliminate any such duplication.

 

3.3                                 Amendment.  Any amendment, supplement or modification of
or to any provision of this Agreement, any waiver of any provision of this
Agreement, and any consent to any departure by any party from the terms of any
provision of this Agreement, shall be effective only if it is made or given in
writing and signed by (i) Holdings, (ii) Parent, (iii) the Class A
Representative, (iv) the Chairman and (v) the Management Stockholders (including
the Chairman) holding a majority of the voting power of the Shares held by the
Management Stockholders.

 

3.4                                 No
Waivers.  No delay on the part of any
party in exercising any right hereunder shall operate as a waiver thereof, nor
shall any waiver, express or implied, by any party of any right hereunder or of
any failure to perform or breach hereof by any other party constitute or be
deemed a waiver of any other right hereunder or of any other failure to perform
or breach hereof by the same or any other party, whether of a similar or
dissimilar nature thereof.

 

3.5                                 Applicable
Law.  This Agreement shall be
governed by and construed in accordance with the laws of the State of Delaware,
without regard to the principles of conflicts of law thereof.

 

3.6                                 SUBMISSION
TO JURISDICTION; WAIVER OF JURY TRIAL; SELECTION OF FORUM.  EACH PARTY HERETO AGREES THAT IT SHALL BRING
ANY ACTION OR PROCEEDING IN RESPECT OF ANY CLAIM ARISING OUT OF OR RELATED TO
THIS AGREEMENT OR THE TRANSACTIONS CONTAINED IN OR CONTEMPLATED BY THIS
AGREEMENT, WHETHER IN TORT OR CONTRACT OR AT LAW OR IN EQUITY, EXCLUSIVELY IN
(A) THE FEDERAL OR STATE COURTS LOCATED IN NEW YORK, NEW YORK OR (B) IN
THE EVENT THAT SUCH COURT LACKS JURISDICTION TO HEAR THE CLAIM, IN THE FEDERAL
OR STATE COURTS LOCATED IN WILMINGTON, DELAWARE (ANY SUCH COURT, THE “CHOSEN
COURT”) AND (I) IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF
THE CHOSEN COURTS, (II) WAIVES, TO THE EXTENT PERMITTED BY

 

8

 

APPLICABLE LAW ANY
OBJECTION TO LAYING VENUE IN ANY SUCH ACTION OR PROCEEDING IN THE CHOSEN
COURTS, (III) WAIVES ANY OBJECTION THAT ANY CHOSEN COURT IS AN
INCONVENIENT FORUM OR DOES NOT HAVE JURISDICTION OVER ANY PARTY HERETO,
(IV) IRREVOCABLY WAIVES ANY AND ALL RIGHT TO A JURY TRIAL AND
(V) AGREES THAT SERVICE OF PROCESS UPON SUCH PARTY IN ANY SUCH ACTION OR
PROCEEDING SHALL BE EFFECTIVE IF NOTICE IS GIVEN IN ACCORDANCE WITH SECTION 3.1
OF THIS AGREEMENT.

 

3.7                                 Further
Assurances.  Each of the parties
hereby agrees, at the request of any other party, to execute and deliver all
such other and additional instruments and documents and to do such other acts
and things as may be reasonably necessary or appropriate to carry out the
intent and purposes of this Agreement.

 

3.8                                 Assignment
of Contracts and Rights.  No party to
this Agreement may assign any of its rights or remedies or delegate any of its
obligations under this Agreement without the prior written consent of the Board
of Directors or the Management Committee, as applicable.

 

3.9                                 No
Third-Party Rights.  This Agreement
is made solely and specifically between and for the benefit of the parties
hereto, and their respective successors and assigns (subject to the express
provisions hereof relating to successors and assigns), and is not intended to
confer any benefits upon, or create any rights in favor of, any Person other
than the parties hereto.

 

3.10                           Successors
and Assigns.  Except as otherwise
provided herein, this Agreement shall be binding upon and inure to the benefit
of and be enforceable by the parties hereto and their respective heirs,
personal representatives, successors and permitted assignees under this
Agreement.  Any Subsidiary of Parent
shall automatically become a party to this Agreement.

 

3.11                           Severability.  If any provision of this Agreement shall be
declared by a court of competent jurisdiction to be invalid, illegal or
unenforceable, such provision shall survive to the extent it is not so
declared, and the validity, legality and enforceability of the other provisions
hereof shall not in any way be affected or impaired thereby, unless such action
would substantially impair the benefits to either party of the remaining
provisions of this Agreement.

 

3.12                           Remedies
Not Exclusive.  Except as otherwise
provided herein, no remedy herein conferred or reserved is intended to be
exclusive of any other available remedy or remedies, and each and every remedy
shall be cumulative and shall be in addition to every remedy under this
Agreement now or hereafter existing at law or in equity or by statute.

 

3.13                           Representation
by Counsel.  Each of the parties has
been represented by and has had an opportunity to consult legal counsel in connection
with the negotiation and execution of this Agreement.  No provision of this Agreement shall be

 

9

 

construed against or
interpreted to the disadvantage of any party by any court or arbitrator or any
Governmental Authority by reason of such party having drafted or being deemed
to have drafted such provision.

 

3.14                           Counterparts.  This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which together
shall constitute one and the same instrument. 
This Agreement shall be binding when one or more counterparts,
individually or taken together, bear the signatures of each of the parties
reflected herein as signatories.

 

3.15                           Table
of Contents and Headings.  The table
of contents and headings in this Agreement are solely for convenience of
reference and shall not affect the interpretation or construction of any of the
provisions hereof.

 

3.16                           Rules
of Construction.  Unless the context
otherwise requires, references to sections or subsections refer to sections or
subsections of this Agreement.

 

3.17                           Term
of Agreement.  This Agreement shall
become effective upon the execution hereof and shall terminate upon the earlier
of (a) the IPO Effectiveness Date or (b) the twentieth anniversary of
the date hereof.

 

3.18                           Fees.  The Company agrees to pay the reasonable
legal fees and related expenses incurred by the Management Stockholders through
the date hereof in connection with the drafting, negotiation and execution of
this Agreement.

 

[Remainder of Page Intentionally Left Blank]

 

10

 

IN WITNESS WHEREOF, the
undersigned have executed, or have caused to be executed, this Preemptive
Rights Agreement on the date first written above.

 

	
   

  	
  OAK HILL CAPITAL
  PARTNERS, L.P.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  OHCP Gen Par, L.P., its
  General

  
	
   

  	
   

  	
  Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  OHCP MPG, LLC, its
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
             /s/
  Andrew J. Nathanson

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Andrew J. Nathanson

  
	
   

  	
   

  	
  Title:

  	
  Managing Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  OAK HILL CAPITAL
  MANAGEMENT

  PARTNERS, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By: 

  	
  OHCP Gen Par, L.P., its
  General

  Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  OHCP MPG, LLC, its
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
             /s/
  Andrew J. Nathanson

  	
   

  
	
   

  	
   

  	
  Name: 

  	
  Andrew J. Nathanson

  
	
   

  	
   

  	
  Title:

  	
  Managing Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  OHCP DR CO-INVESTORS,
  LLC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  OHCP Gen Par, L.P., its
  Managing

  Member

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  OHCP MPG, LLC, its
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
             /s/
  Andrew J. Nathanson

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Andrew J. Nathanson

  
	
   

  	
   

  	
  Title:

  	
  Managing Partner

  
					

 

11

 

	
   

  	
  DUANE READE HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
             /s/
  Andrew J. Nathanson

  	
   

  
	
   

  	
   

  	
  Name: 

  	
  Andrew J. Nathanson

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  DUANE READE SHAREHOLDERS, LLC

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
             /s/
  Andrew J. Nathanson

  	
   

  
	
   

  	
   

  	
  Name: 

  	
  Andrew J. Nathanson

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  DUANE READE INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
             /s/
  Michelle D. Bergman

  	
   

  
	
   

  	
  Name: 

  	
  Michelle D. Bergman

  
	
   

  	
  Title:

  	
  Vice President and Secretary

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  /s/ Anthony J. Cuti

  	
   

  
	
   

  	
  Anthony J. Cuti

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Gary Charboneau

  	
   

  
	
   

  	
  Gary Charboneau

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Timothy R. LaBeau

  	
   

  
	
   

  	
  Timothy R. LaBeau

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ John K. Henry

  	
   

  
	
   

  	
  John K. Henry

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Jerry M. Ray

  	
   

  
	
   

  	
  Jerry M. Ray

  
							

 

12

 

Schedule 1

 

Management Stockholders

 

1.                                       Anthony
J. Cuti

 

2.                                       Gary
Charboneau

 

3.                                       Timothy
R. LaBeau

 

4.                                       John
K. Henry

 

5.                                       Jerry
M. Ray

 

1

 

Schedule 2

Phantom Stockholders

 

1.                                       Gary
Charboneau

 

2.                                       Timothy
R. LaBeau

 

3.                                       John
K. Henry

 

4.                                       Jerry
M. Ray

 

 

1

 

Table of Contents

 

	
  ARTICLE I
  DEFINITIONS

  	
   

  
	
   

  	
  1.1

  	
  Definitions

  	
   

  
	
   

  	
  1.2

  	
  Usage Generally

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II
  PREEMPTIVE RIGHTS

  	
   

  
	
   

  	
  2.1

  	
  General

  	
   

  
	
   

  	
  2.2

  	
  Review of Financial
  Alternatives

  	
   

  
	
   

  	
  2.3

  	
  Notice of Proposed Issuance

  	
   

  
	
   

  	
  2.4

  	
  Notice of Subscription
  Election

  	
   

  
	
   

  	
  2.5

  	
  Percentage Interest
  Purchase

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III
  MISCELLANEOUS

  	
   

  
	
   

  	
  3.1

  	
  Notices

  	
   

  
	
   

  	
  3.2

  	
  Entire Agreement

  	
   

  
	
   

  	
  3.3

  	
  Amendment

  	
   

  
	
   

  	
  3.4

  	
  No Waivers

  	
   

  
	
   

  	
  3.5

  	
  Applicable Law

  	
   

  
	
   

  	
  3.6

  	
  SUBMISSION
  TO JURISDICTION; WAIVER OF JURY TRIAL; SELECTION OF FORUM

  	
   

  
	
   

  	
  3.7

  	
  Further Assurances

  	
   

  
	
   

  	
  3.8

  	
  Assignment of
  Contracts and Rights

  	
   

  
	
   

  	
  3.9

  	
  No Third-Party Rights

  	
   

  
	
   

  	
  3.10

  	
  Successors and Assigns

  	
   

  
	
   

  	
  3.11

  	
  Severability

  	
   

  
	
   

  	
  3.12

  	
  Remedies Not Exclusive

  	
   

  
	
   

  	
  3.13

  	
  Representation by Counsel

  	
   

  
	
   

  	
  3.14

  	
  Counterparts

  	
   

  
	
   

  	
  3.15

  	
  Table of Contents and
  Headings

  	
   

  
	
   

  	
  3.16

  	
  Rules of Construction

  	
   

  
	
   

  	
  3.17

  	
  Term of Agreement

  	
   

  
	
   

  	
  3.18

  	
  Fees.
  The Company agrees to pay the reasonable legal fees and related expenses
  incurred by the Management Stockholders through the date hereof in connection
  with the drafting, negotiation and execution of this Agreement.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  SCHEDULES

  	
   

  
	
  1

  	
   

  	
  Schedule of
  Management Stockholders

  	
   

  
	
   

  	
   

  	
   

  
	
  2

  	
   

  	
  Schedule of
  Phantom Stockholders

  	
   

  
						

 

 

 

 

PREEMPTIVE RIGHTS AGREEMENT

 

by and among

 

OAK HILL CAPITAL PARTNERS, L.P.

OAK HILL CAPITAL MANAGEMENT PARTNERS, L.P.

OHCP DR CO-INVESTORS, LLC

DUANE READE HOLDINGS, INC.

DUANE READE SHAREHOLDERS, LLC 

ANTHONY J. CUTI

AND 

THE MANAGEMENT STOCKHOLDERS 

LISTED HEREIN

 

 

 

Dated:  July 30,
2004Exhibit 10.28

 

EXECUTION COPY

 

DUANE READE HOLDINGS, INC.

 

2004 MANAGEMENT STOCK OPTION PLAN

 

NONQUALIFIED STOCK OPTION AGREEMENT

 

THIS OPTION AGREEMENT
(the “Agreement”), dated as of July 30, 2004, is made by and between Duane
Reade Holdings, Inc., a Delaware corporation (the “Company”) and ___________ (“Optionee”).

WHEREAS, the Company
adopted the Duane Reade Holdings 2004 Management Stock Option Plan (the “Plan”),
pursuant to which stock options may be granted to purchase Common Stock of the
Company; and

WHEREAS, the Company
desires to grant the Optionee a Nonqualified Stock Option to purchase the
number of shares of the Common Stock provided for herein.

NOW, THEREFORE, in
consideration of the recitals and the mutual agreements herein contained, the
parties hereto agree as follows:

1.             Grant of Option.

(a)           The Company hereby grants to the
Optionee an option (“Option”) to purchase __________ shares of Common Stock of
the Company (such shares, the “Option Shares”) on the terms and conditions set
forth in this Agreement and as otherwise provided in the Plan.  This Option is not intended to be treated as
an Incentive Stock Option, as such term is defined in Section 422 of the
Internal Revenue Code of 1986, as amended.0

(b)           Incorporation by Reference, Etc.  The provisions of the Plan are hereby
incorporated herein by reference.  Except
as otherwise expressly set forth herein, this Agreement shall be construed in
accordance with the provisions of the Plan and any capitalized terms not
otherwise defined in this Agreement shall have the meaning set forth in the
Plan.

2.             Terms and Conditions.

(a)           Purchase Price.  The price at which the Optionee shall be
entitled to purchase Option Shares upon the exercise of all or any portion of
this Option shall be $100.00 per Option Share.

(b)           Expiration Date.  The Option shall expire at 11:59 p.m. Eastern
Standard Time on the tenth anniversary of the Effective Date (the “Expiration
Date”).

 

 

(c)           Exercisability of Option.  Except as provided in Sections 2(d) and 2(f)
hereof, subject to the Optionee’s continued employment with the Company or its
Affiliates, twenty percent (20%) of the shares of Common Stock
underlying the Option shall vest on each of the first, second, third, fourth
and fifth anniversaries of the Effective Date.

(d)           Change In Control.  Notwithstanding Section 2(c) hereof,
immediately prior to a Change in Control (as defined below), occurring prior to
the IPO, the Option shall become vested and exercisable to the extent necessary
for the Optionee (i) to exercise his rights pursuant to a Tag-Along Sale (as
defined in the Stockholders Agreement) (the “Tag-Along Right”) and (ii) to
satisfy the Company’s rights with respect to a Drag-Along Sale (as defined in
the Stockholders Agreement) (the “Drag-Along Right”), in each case, as provided
in the Stockholders Agreement. 
Accordingly, the Option shall vest (in addition to the portion vested
pursuant to Section 2(c) hereof) in the case of a Drag-Along Sale in an amount
such that after giving effect to such acceleration, the Option shall be vested
in the aggregate as to the same percent as the Parent Transfer Percentage
Interest proposed to be transferred pursuant to such Drag-Along Sale.  Similarly, the Option shall vest (in addition
to the portion vested pursuant to Section 2(c) hereof) in the case of a
Tag-Along Sale in an additional amount such that after giving effect to such
acceleration, the Option shall be vested in the aggregate as to the excess,
if any, of (A) the number of shares of Common Stock to be acquired through
the exercise of the Option equal to the product of (x) the Optionee’s Percentage
Interest as of such date (the numerator of such Percentage Interest to be
calculated only as to the Optionee’s Option and not shares of Common Stock held
by the Optionee) multiplied by (y) the number of shares of Common
Stock proposed to be transferred by the Parent Stockholders (or the Parent
Transfer Units in the case of a Parent Tag-Along Sale) over (B) the
number of shares of Common Stock underlying the vested portion of the Option
(without regard to this section) as of the date of such Tag-Along Sale.

                                For purposes of
this Agreement, the terms “Parent Stockholders,” “Percentage Interest,” “Parent
Transfer Percentage Interest,” “Parent Transfer Units” and “Parent Tag-Along Sale”
shall have the meaning ascribed such terms in the Stockholders Agreement.

(i)            For purposes of this Agreement the
term “Change in Control” shall mean the first of any of the following events to
occur after the Effective Date:

A.            any independent third party (which
shall exclude, without limitation, the OH Affiliates, DRS, LLC and any
Subsidiary of DRS, LLC) (x) by merger or otherwise is or becomes the beneficial
owner directly or indirectly, of securities of Duane Reade Inc., a wholly owned
subsidiary of the Company (“DRI”), representing 50% or more of the combined
voting power of DRI’s then outstanding securities, and (y) has the right to
appoint a majority of the members of the Board in each case other than by a
merger or other transaction in which the shareholders of 

 

2

 

DRI immediately prior to
the merger own a majority of the surviving entity or its parent;

B.            any stockholder of DRI (other than
DRS, LLC or any Subsidiary of DRS, LLC) (x) acquires a greater voting interest
in DRI’s outstanding Common Stock than the OH Investor Group and (y) has the
authority to appoint a majority of the members of the Board;

C.            DRI adopts a plan of complete
liquidation (other than a liquidation into DRS, LLC or any Subsidiary of DRS,
LLC) of DRI or consummates an agreement for the sale or disposition by DRI of
all or substantially all of DRI’s assets to an independent third party;

D.            at any time prior to the IPO, the
failure by OH to designate one or more OH related persons to serve as its
directors (it being understood that if DRI is required to appoint independent
directors by law or inter-dealer quotation system or exchange rules, or OH’s
designee is otherwise prevented from serving, OH may designate non-OH related
persons to serve as such); or

E.             at any time prior to the IPO, the
failure of OH to retain and utilize its power to appoint more than 51% of the
directors appointable by the OH Investor Group (for example, if the OH Investor
Group has the right to appoint five directors, OH shall appoint at least three
directors and such directors shall be OH related persons or, if necessary,
independent directors).

(e)           Method of Exercise.  The Option may be exercised only by written
notice, in a form to be provided by the Committee, and delivered by the
Optionee in person or sent by mail in accordance with Section 4(a) hereof
and, in either case, accompanied by payment therefor.  The Option Price shall be payable (i) in cash
and/or shares of Stock valued at the Fair Market Value at the time the Option
is exercised (including by means of attestation of ownership of a sufficient
number of shares of Stock in lieu of actual delivery of such shares to the
Company); provided, however, that such shares are not subject to
any pledge or other security interest and have either been held by the Optionee
for six months, previously acquired by the Optionee on the open market or meet
such other requirements as the Committee may determine necessary in order to
avoid an accounting earnings charge in respect of the Option), (ii) by means of
a cashless exercise whereby the number of shares of Common Stock of the Company
to be received by the Optionee shall equal the difference between (A) the
number of shares of Common Stock that would be received by the Optionee upon
such exercise had the Optionee paid the Exercise Price in respect of the
underlying shares in cash less (B) a number of shares of Common Stock of the
Company, the aggregate fair market value of which is equal to the aggregate
Exercise Price that would have been paid as determined pursuant to the
immediately preceding clause (A) (provided, however, that this
clause (ii) shall only apply in connection with the IPO, or the exercise of a
Tag-Along Right or Drag-Along Right, unless the Company elects or has elected
to account for stock options in 

 

3

 

accordance with FAS 123), (iii) in the discretion of
the Committee, either (A) in other property having a fair market value on the
date of exercise equal to the Option Price or (B) if there shall be a public
market for the Stock, by delivering to the Committee a copy of irrevocable
instructions to a stockbroker to deliver promptly to the Company an amount of
loan proceeds, or proceeds of the sale of the Stock subject to the Option,
sufficient to pay the Option Price or (iv) by such other method as the
Committee may allow.  Notwithstanding the
foregoing, in no event shall the Optionee be permitted to exercise an Option in
the manner described in clause (ii) of the preceding sentences if the Committee
determines that exercising an Option in such manner would violate applicable
law, or the applicable rules and regulations of the Securities and Exchange
Commission and the applicable rules and regulations of any securities exchange
or inter-dealer quotation system on which the securities of the Company or any
of its affiliates are listed or traded.

(f)            Exercise Upon Termination of
Employment.  In the event that the
Optionee ceases to be employed by the Company and its Affiliates the Option
held by the Optionee (to the extent then outstanding) shall terminate as
follows:

(i)            Without
Cause or With Good Reason.

A.            If
the Company or its Affiliates terminates the Optionee’s employment without
Cause or the Optionee resigns for Good Reason (as defined below) at any time
prior to the first anniversary of the Effective Date, then 20% of the shares of
Common Stock underlying the Option shall become fully vested and exercisable
and shall remain exercisable until a period of ninety (90) days following such
termination of employment, and shall thereafter terminate; provided,  however,
that if the Optionee dies prior to the expiration of such ninety (90) day
period, the Optionee’s estate shall have an additional 120 days from the
Optionee’s death to exercise the Option and upon the expiration of such period
the Option shall thereafter terminate. 
For purposes of this Agreement, the terms “Cause” and “Good Reason” have
the meanings set forth in the Optionee’s employment agreement with DRI in
effect on the Effective Date regardless of whether or not such agreement is in effect
on the applicable date.  The Option to
the extent not vested and exercisable shall terminate and expire on the date of
such termination of employment without further consideration to the Optionee.

B.            If the Company or its Affiliates
terminate the Optionee’s employment without Cause or the Optionee resigns for
Good Reason at any time on or after the first anniversary of the Effective Date
the Option to the extent vested shall remain exercisable until the earlier of
(x) the Expiration Date or (y) a period of ninety (90) days following
such termination of employment; provided,  however, that if the Optionee
dies prior to the expiration of such ninety (90) day period, the Optionee’s
estate shall have an additional 120 days from the Optionee’s death to exercise
the Option, and upon the expiration of such period the Option shall 

 

4

 

thereafter
terminate.  The Option to the extent not
vested and exercisable shall terminate and expire on the date of such termination
of employment without further consideration to the Optionee.

(ii)           For Cause or Without Good Reason.  If the Optionee’s employment is terminated by
the Company or its Affiliates for Cause or the Optionee resigns without Good
Reason, then the Option whether or not exercisable at the time of the Optionee’s
termination of employment shall terminate and expire on the date of such
termination of employment, without further consideration to the Optionee.

(iii)          Death.  If the Optionee’s employment with the Company
or its Affiliates is terminated by reason of his death, then (x) the Option to
the extent not exercisable at the time of the Optionee’s death shall terminate
and expire on the date of his death without further consideration to the
Optionee or his estate and (y) the Option to the extent vested shall be subject
to the following provisions:

A.            If the Optionee’s employment with
the Company or its Affiliates is terminated by reason of his death after the
IPO then (1) the Option to extent not exercisable at the time of the
Optionee’s death shall terminate and expire on the date of his death without
further consideration to the Optionee or his estate and (2) the Option to
the extent vested shall remain exercisable through the first anniversary of his
death.

B.            If the Optionee’s employment with
the Company or its Affiliates is terminated by reason of his death prior to the
IPO, the Optionee’s estate shall have the right, in accordance with this
Section 2(f)(iii), to have the Option to the extent vested as of the date
of the Optionee’s death purchased by the Company (the “Repurchase Right”).  The purchase price payable pursuant to the
Repurchase Right (the “Repurchase Price”) with respect to such Option shall
equal the excess, if any, of the Fair Market Value (determined in accordance
with the immediately following sentence) of the shares of Common Stock
underlying the vested portion of the Option over the aggregate Exercise Price
of the vested portion of such Option. 
Notwithstanding anything herein or in the Plan to the contrary, Fair
Market Value of a share of Common Stock of the Company solely for purposes of
computing the Repurchase Price shall be determined in good faith by the Board,
in its sole and reasonable discretion based on the value of the Company as a
whole, on a fully diluted basis, taking into account the number of shares of
Common Stock then outstanding and issuable upon the exercise of the Options on
a cashless exercise basis, without any control premium and without any discount
for lack of transferability or minority position.  The Repurchase Price shall be determined in
accordance with this Section 2(f)(iii)B either as of (x) the date of the
Optionee’s death, provided that his estate provides the Company with a
Repurchase Notice (as defined below) 

 

5

 

no later than 120 days
following such death and in such notice irrevocably elects to have the
Repurchase Price determined as of the date of the Optionee’s death or (y) if
the estate does not make the election provided in clause (x) of this sentence
then as of the fifth anniversary of the Effective Date.  For the avoidance of doubt, if the estate
fails to provide a Repurchase Notice within 120 days following the Optionee’s
death, but provides a Repurchase Notice at a later date prior to the Lapse Date
(as such term is defined in Section 2(f)(iii)(C)) then the Repurchase Price
shall be determined as of the fifth anniversary of the Effective Date.

C.            The Repurchase Right shall be
effective following the Optionee’s death, but no payment shall be due or owing prior
to the fifth anniversary of the Effective Date and the estate of the deceased
Optionee may exercise the Repurchase Right by providing the Company with a
written notice of exercise of the Repurchase Right (the “Repurchase Notice”)
through the later of (x) six months following the fifth anniversary of
the Effective Date or (y) six months following the death of the Optionee (such
later date, the “Lapse Date”).  If the
Optionee dies prior to the fifth anniversary of the Effective Date, his estate shall
retain the Repurchase Right through the Lapse Date.  Notwithstanding anything to the contrary
herein, the Repurchase Right shall expire upon the IPO.

D.            If the deceased Optionee’s estate
does not provide the Company with a Repurchase Notice prior to the Lapse Date
then the Repurchase Right shall expire on the Lapse Date.  If the Optionee’s estate provides the Company
with a Repurchase Notice on or prior to the Lapse Date, then, subject to
limitations set forth in Section 2(f)(iii)(E) the Company shall pay the
Repurchase Price to the Optionee’s estate not later than 30 days following
receipt by the Company of the Repurchase Notice.

E.             Notwithstanding anything to the
contrary contained herein, the Company shall not be required to pay the
Repurchase Price to the Optionee’s estate, and no interest shall accrue to such
estate, where (x) the delivery of the Repurchase Price would violate (or
is reasonably likely to cause a violation of ) the Company’s, DRI’s or DRS, LLC’s
credit agreements, indentures or other financing agreements or (y) if the
Company’s or DRI’s “Consolidated Debt” to “EBITDA” (as each such term is
defined in the Employment Agreement entered into by and between Anthony J. Cuti,
DRI, the Company and DRS, LLC dated March 16, 2004, as amended) ratio is
greater than four to one (collectively, the “Financing Limitations”).  If at the time the Company receives the
Repurchase Notice the Company is subject to any Financing Limitation, the
obligation of the Company to pay the Repurchase Price shall continue to be
outstanding and shall not expire during any delay in payment caused by a
Financing Limitation and shall be reinstated and satisfied by the Company
promptly after such Financing Limitation ceases to apply.

 

6

 

F.             If the deceased Optionee’s estate
does not provide the Company with a Repurchase Notice, or the Repurchase Right
expires upon the IPO, the Option to the extent vested shall, as of the date of
the Optionee’s death remain exercisable until 90 days following the earlier
of the date the IPO becomes effective and the Lapse Date but in no event
earlier than six months following the date of death.

G.            Notwithstanding anything to the
contrary, the provisions of this Section 2(f)(iii) hereof shall not
apply in the event the Optionee’s employment with the Company or its Affiliates
is terminated for any reason prior to death.

(iv)          Disability.  If the Optionee’s employment with the Company
or its Affiliates is terminated by reason of his Disability, then the Option to
the extent vested and exercisable shall remain exercisable until the earlier of
(x) the Expiration Date or (y) a period of one year following such
termination of employment and shall thereafter terminate and expire without
further consideration to the Optionee. 
The Option to the extent not vested on the date of such termination
shall terminate and expire without further consideration to the Optionee.

(g)           Transferability.  Other than as provided in Section 2.2 of the
Stockholders Agreement or Section 8(h) of the Plan, the Option may not be
assigned, alienated, pledged, attached, sold or otherwise transferred or
encumbered by the Optionee other than by will or by the laws of descent and
distribution, and any such purported assignment, alienation, pledge,
attachment, sale, transfer or encumbrance shall be void and unenforceable
against the Company; provided, that, the designation of a
beneficiary shall not constitute an assignment, alienation, pledge, attachment,
sale, transfer or encumbrance.  No such
permitted transfer of the Option to heirs or legatees of the Optionee shall be
effective to bind the Company unless the Committee shall have been furnished
with written notice thereof and a copy of such evidence as the Committee may
deem necessary to establish the validity of the transfer and the acceptance by
the transferee or transferees of the terms and conditions hereof.  During the Optionee’s lifetime, the Option is
exercisable only by the Optionee, his or her legal representative or a
Permitted Transferee.  For purposes of
this Agreement, Permitted Transferee shall have the meaning set forth in both the
Plan and Section 2.2 of the Stockholders Agreement.

(h)           Rights as Stockholder.  The Optionee shall not be deemed for any
purpose to be the owner of any of the Option Shares subject to this Option
unless, until and to the extent that (i) the Option shall have been
exercised pursuant to its terms and (ii) the Company shall have issued and
delivered to the Optionee the Option Shares. 
The Option Shares shall be subject to the terms and conditions set forth
in the Stockholders Agreement.

(i)            Drag-Along, Tag Along,
Registration and Related Rights. 
Notwithstanding anything herein to the contrary, the vested portion of
the Option and all of the Option Shares acquired upon the exercise of the
Option shall be subject to all 

 

7

 

applicable provisions of the Stockholders Agreement
and the Preemptive Rights Agreement, dated as of July 30, 2004, by and
among OH, DRS, LLC, the Company and Anthony J. Cuti and certain other members
of the management of DRI (the “Preemptive Rights Agreement”).

(i)            In connection with the IPO, the
Optionee may elect to convert the Option into an option to purchase an Equity
Security of the IPO Entity, with the terms of such Option (including its Option
Price) being equitably adjusted by the Committee in accordance with Section 9
of the Plan (the “Converted Option”).

(ii)           Within a reasonable time following the
IPO, the applicable IPO Entity, shall use its commercially reasonable efforts
to register under the Securities Act, the Equity Securities of the applicable
IPO Entity to be acquired upon the exercise of the Converted Option, or the
shares of Common Stock sufficient to cover the Option, as applicable, by filing
a Registration Statement on Form S-8 (or any successor or similar forms
thereto); unless in the reasonable judgment of the Board or the Board of
Directors of the applicable IPO Entity (or of the managing underwriter in the
IPO) such a registration could reasonable be expected to have an adverse effect
on the market for the securities being registered in the IPO; provided, however,
that the resale of any shares of Common Stock distributed pursuant to an Award
shall be restricted as if the volume and manner of sale restrictions of Rule
144 (without regard to Rule 144 (k)) were applicable.

(iii)          In connection with a Drag-Along Sale
(as defined in the Stockholders Agreement), the Company may require the
Optionee to, and the Optionee in such event shall, exercise (pursuant to the
method or methods that may be elected by the Optionee pursuant to Section 2(e)
hereof) the vested portion of the Option (after giving effect to Section 2(d)
hereof) to the extent necessary to satisfy the Company’s Drag-Along Right as
set forth in Sections 2.3 and 2.6 of the Stockholders Agreement.

(iv)          In connection with a
Tag-Along Sale (as defined in the Stockholders Agreement) if the Optionee
delivers the Tag-Along Exercise Notice (as defined in the Stockholders
Agreement) then he shall exercise (pursuant to the method or methods he so
elects pursuant to Section 2(e) hereof) the vested portion of the Option (after
giving effect to Section 2(d) hereof) to the extent necessary to satisfy his
participation in the Tag-Along Sale as provided in Sections 2.4 and 2.6 of the
Stockholders Agreement.

(j)            Withholding Taxes.  Prior to the delivery of a certificate or
certificates representing the Option Shares, and immediately following the
exercise of the Option, the Optionee must pay to the Company any amount that
the Company determines it is required to withhold under applicable federal,
state or local tax laws in respect of the exercise of the Option or the
transfer of Option Shares. 
Notwithstanding the foregoing, the Optionee may satisfy such withholding
obligation by any other method described in 

 

8

 

Section 8(d) of the Plan or any combination of methods
described in Section 8(d) of the Plan; provided, however, that
such other method does not violate the terms of any credit agreement to which
the Company, or any of its Affiliates is a party or cause a default thereunder.

3.             Purchase for Investment; Other Representations of
Optionee.

(a)           Investment Intent.  In the event that the offering of Option
Shares with respect to which the Option is being exercised is not registered
under the Securities Act, but an exemption is available that requires an
investment representation or other representation, the Optionee, if electing to
purchase Option Shares, will be required to represent that such Option Shares
are being acquired for investment and not with a view to distribution thereof,
and to make such other reasonable and customary representations regarding
matters relevant to compliance with applicable securities laws as are deemed
necessary by counsel to the Company. 
Stock certificates evidencing such unregistered Option Shares that are
acquired upon exercise of the Options shall bear restrictive legends as are
required or advisable under the provisions of any applicable laws or in the
Stockholders Agreement.

(b)           Other Representations.  The Optionee hereby represents and warrants
to the Company as follows:

(i)            Access to Information.  Because of the Optionee’s business
relationship with the Company and with the management of the Company, the
Optionee has had access to all material and relevant information concerning the
Company, thereby enabling the Optionee to make an informed investment decision
with respect to his investment in the Company, and all pertinent data and
information requested by the Optionee from the Company or its representatives
concerning the business and financial condition of the Company and the terms
and conditions of this Agreement have been furnished.  The Optionee acknowledges that the Optionee
has had the opportunity to ask questions of and receive answers from and to
obtain additional information from the Company and its representatives
concerning the present and proposed business and financial condition of the
Company.

(ii)           Financial Sophistication.  The Optionee has such knowledge and
experience in financial and business matters that the Optionee is capable of
evaluating the merits and risks of investing in the Option Shares.

(iii)          Understanding the Investment Risks.  The Optionee understands that:

A.            An investment in the Option Shares
represents a highly speculative investment, and there can be no assurance as to
the success of the Company in its business; and

B.            There is at present no market for
the Option Shares and there can be no assurance that a market will develop in
the future.

 

9

 

(iv)          Understanding of the Nature of the
Option Shares.  The Optionee
understands and agrees that:

A.            Other than as reflected herein or in
the Stockholders Agreement, there can be no assurance that the Option Shares
will be registered under the Securities Act or any state securities laws and if
they are not so registered, they will only be issued and sold in reliance upon
certain exemptions contained in the Securities Act and applicable state
securities laws, and the representations and warranties of the Optionee
contained herein, which will have to be renewed as to the Option Shares at the
times of exercise of the Option, are essential to any claim of exemption by the
Company under the Securities Act and such state laws.  It is understood that the Company’s intent is
that the purchase of the Option Shares pursuant to an exercise of the Option not
be covered by Rule 701 under the Securities Act, and that another exemption, if
necessary, will need to be found in respect of the exercise of the Option;
provided that the Company may determine at time of the exercise of the Option
(which determination must be in writing) that Rule 701 does apply to such
exercise;

B.            If the Option Shares are not so
registered, the Option Shares will be “restricted securities” as that term is
defined in Rule 144 promulgated under the Securities Act;

C.            The Option cannot be exercised and
the Option Shares will not be sold to the Optionee and the Optionee cannot
resell or transfer the Option Shares without registration under the Securities
Act and applicable state securities laws unless the Company receives an opinion
of counsel acceptable to it (as to both counsel and the opinion) that such
registration is not necessary, the cost of such opinion to be borne by the
Company;

D.            Only the Company can register the
Option Shares under the Securities Act and applicable state securities laws;

E.             Other than as provided in the
Stockholders Agreement and Section 2(i) hereof, the Company has not made any
representations to the Optionee that the Company will register the Option
Shares under the Securities Act or any applicable state securities laws, or
with respect to compliance with any exemption therefrom;

F.             The Optionee is aware of the
conditions for the Optionee’s obtaining an exemption for the resale of the
Option Shares under the Securities Act and any applicable state securities
laws; and

G.            The Company may, from time to time,
make stop transfer notations in its transfer records to ensure compliance with
the 

 

10

 

Securities Act and any
applicable state securities laws, and any additional restrictions imposed by
state securities administrators.

4.             Miscellaneous.

(a)           Notices.  Any and all notices, designations, consents,
offers, acceptances and any other communications provided for herein shall be
given in writing and shall be delivered either personally or by registered or
certified mail, postage prepaid, which shall be addressed, in the case of the
Company to the Secretary of the Company at the principal office of the Company
and, in the case of the Optionee, to Optionee’s address appearing on the books
of the Company or to Optionee’s residence or to such other address as may be
designated in writing by the Optionee.

(b)           No Right to Continued Employment.  Nothing in the Plan or in this Agreement
shall confer upon the Optionee any right to continue in the employ of the
Company or its Affiliates shall interfere with or restrict in any way the right
of the Company or its Affiliates, which are hereby expressly reserved, to
remove, terminate or discharge the Optionee at any time for any reason whatsoever.

(c)           Bound by Plan.  By signing this Agreement, the Optionee
acknowledges that he has received a copy of the Plan and has had an opportunity
to review the Plan and agrees to be bound by all the terms and provisions of
the Plan.

(d)           Adjustment.  Notwithstanding any provision of the Plan or
this Agreement to the contrary, in connection with a dividend or distribution
prior to an IPO, the Option Price shall be equitably reduced to the extent
appropriate and, if not appropriate, then such Option shall be equitably
adjusted by such other means as reasonably determined by the Committee in
accordance with to Section 9 of the Plan.

(e)           Successors.  The terms of this Agreement shall be binding
upon and inure to the benefit of the Company, its successors and assigns, and
of the Optionee and the beneficiaries, executors, administrators, heirs and
successors of the Optionee.

(f)            Invalid Provision.  The invalidity or unenforceability of any
particular provision hereof shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provision had been omitted.

(g)           Modifications.  No change, modification or waiver of any
provision of this Agreement shall be valid unless the same be in writing and
signed by the parties hereto.

(h)           Entire Agreement.  This Agreement, the Plan, the Stockholders
Agreement and the Preemptive Rights Agreement, including all exhibits thereto,
contain the entire agreement and understanding of the parties hereto with
respect to the subject matter contained herein and therein and supersede all
prior communications, representations and negotiations in respect thereto.

 

11

 

(i)            Governing Law.  This Agreement and the rights of the Optionee
hereunder shall be construed and determined in accordance with the laws of the
State of New York.

(j)            Headings.  The headings of the Sections hereof are
provided for convenience only and are not to serve as a basis for
interpretation or construction, and shall not constitute a part, of this
Agreement.

(k)           Counterparts.  This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

[Remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, this
Agreement has been executed and delivered by the parties hereto on the first
set forth above.

 

 

 

	
   

  	
  DUANE READE HOLDINGS,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
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