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As filed with the Securities and Exchange Commission on December 23, 1999
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-1
Registration Statement Under
The Securities Act of 1933
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DOLLAR EXPRESS, INC.
(formerly known as DE&S Holding Co.)
(Exact Name of Registrant as Specified in Its Charter)
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Pennsylvania 5331 23-2989081
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(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
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1700 Tomlinson Road
Philadelphia, Pennsylvania 19116-3848
(215) 969-7888
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------
Bernard Spain
Chief Executive Officer
Dollar Express, Inc.
1700 Tomlinson Road
Philadelphia, Pennsylvania 19116-3848
(215) 969-7888
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
------------------------
COPIES TO:
Barry M. Abelson, Esquire Valerie Ford Jacob, Esquire
Bruce K. Fenton, Esquire Fried, Frank, Harris, Shriver & Jacobson
Pepper Hamilton LLP One New York Plaza
3000 Two Logan Square New York, New York 10004-1980
18th and Arch Streets (212) 859-8000
Philadelphia, PA 19103-2799
(215) 981-4000
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, 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(c) 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. [_] _______________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered Proposed Maximum Aggregate Offering Price (1)(2) Amount of Registration Fee
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Common Stock, $.01 par value $63,000,000 $16,632
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(1) Includes shares that the underwriters will have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457(o) under the Securities Act.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
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 Commission, acting pursuant to Section 8(a), may
determine.
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EXPLANATORY NOTE
The registrant's name historically has been DE&S Holding Co. However,
the registrant has filed Articles of Amendment with the Secretary of State of
the Commonwealth of Pennsylvania changing its name to Dollar Express, Inc.
Similarly, the registrant's wholly-owned operating subsidiary has filed Articles
of Amendment with the Secretary of State of the Commonwealth of Pennsylvania
changing its name from Dollar Express, Inc. to Dollar Express Stores, Inc.
Accordingly, the preliminary prospectus contained in this registration statement
uses the name Dollar Express, Inc. to refer to the registrant and uses the name
Dollar Express Stores, Inc. to refer to the registrant's wholly-owned operating
subsidiary.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities 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
Preliminary Prospectus dated December 23, 1999
PROSPECTUS
Shares
------------
[Dollar Express logo]
Common Stock
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This is Dollar Express, Inc.'s initial public offering of common stock.
We are selling ________ of the shares and our shareholders are selling _______
of the shares. We will not receive any proceeds from the shares being sold by
our shareholders.
We expect the initial public offering price to be between $_______ and
$_______ per share. Currently, no public market exists for the shares. After the
pricing of this offering, we expect that the common stock will be quoted on the
Nasdaq National Market under the symbol "DLRX."
Investing in our common stock involves risks that are described in the
"Risk Factors" section beginning on page ___ of this prospectus.
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Per Share Total
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Public offering price........................... $ $
Underwriting discount........................... $ $
Proceeds, before expenses, to Dollar Express.... $ $
Proceeds to the selling shareholders............ $ $
The underwriters may also purchase up to an additional ____ shares from
our selling shareholders at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New
York on or about , 2000.
------------------
Merrill Lynch & Co.
Prudential Securities
U.S. Bancorp Piper Jaffray
First Union Securities, Inc.
Legg Mason Wood Walker
Incorporated
------------------
The date of this prospectus is , 2000.
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[Depicted in the inside front cover are photographs
of the Dollar Express stores]
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TABLE OF CONTENTS
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Page
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Prospectus Summary........................................................................... 5
Risk Factors.................................................................................. 12
Forward-Looking Statements.................................................................... 18
Use of Proceeds............................................................................... 18
Dividend Policy............................................................................... 19
Capitalization................................................................................ 20
Dilution...................................................................................... 22
Selected Financial Data....................................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of Operations......... 25
Business...................................................................................... 36
Management.................................................................................... 50
Certain Relationships and Related Transactions................................................ 58
Principal and Selling Shareholders............................................................ 61
Description of Capital Stock.................................................................. 63
Shares Eligible for Future Sale............................................................... 67
Material U.S. Tax Considerations Applicable to Non-U.S. Holders of Common Stock............... 70
Underwriting ................................................................................. 74
Legal Matters................................................................................. 78
Experts....................................................................................... 78
Change in Principal Accountants............................................................... 78
Where You Can Find More Information........................................................... 80
Index to Financial Statements.................................................................F-1
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You should rely only on the information contained in this prospectus.
We have not, and the underwriters have not, authorized any other person to
provide you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
DOLLAR EXPRESS(R), DOLLAR EXPRES$(TM), DOLLAR EXPRES$ EVERYTHING $1.00
and Design(R) and Today's Home and Design(R) are trademarks and of our company
and are federally registered or the subject of a pending federal trademark
application. All other trademarks or service marks appearing in this prospectus
are trademarks or service marks of the companies that utilize them.
3
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes appearing elsewhere in this
prospectus.
Unless we indicate otherwise, the information in this prospectus
assumes that:
o the over-allotment option granted to the underwriters by the
selling shareholders is not exercised;
o the conversion of our outstanding Series A convertible preferred
stock into common stock on a one-for-one basis and the
cancellation of warrants to purchase common stock occurs prior to
the completion of this offering; and
o a ______-for-one split of our common stock is effected immediately
before this offering.
The terms "Dollar Express," "our" and "we," as used in this prospectus,
refer to Dollar Express, Inc. and its wholly-owned subsidiaries, Dollar Express
Stores, Inc., Dollar Express Royalties, Inc. and DE&S Finance Company. However,
the term "Dollar Express stores" refers only to our dollar stores and not to our
Spain's Cards & Gifts stores.
Our Company
Our Dollar Express Stores
We are a leading operator of fixed $1.00 price point stores in the
United States. Our Dollar Express stores operate in the deep discount segment of
the discount retail industry, which is among the fastest growing segments in the
$420 billion mass market retail industry. We offer our customers a wide
assortment of regularly available merchandise, such as housewares, food and
other consumable items, giftware, health and beauty care items and toys. We
supplement this merchandise with ever-changing seasonal and first quality
closeout offerings. This merchandise mix is selected to create a "treasure hunt"
shopping experience. Our products include national brand name merchandise, which
is prominently displayed in our stores, as well as our own and other private
label products. Almost all of our products are sold at our fixed $1.00 price
point and are intended to exceed customers' expectations of the range and
quality of items that can be purchased at this price.
We believe we distinguish ourselves from our competition in the
following ways:
o we balance our merchandising mix between regularly available
consumables and variety merchandise and a changing combination of
seasonal and closeout products;
o we emphasize seasonal and holiday merchandise throughout the year
in our ever-changing product mix;
o we focus attention on the selection and presentation of our
merchandise, considering fashion and color, and emphasize the
design and packaging of those items over which we have control,
particularly our Today's Home private label line;
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o we have established a style and look to our stores that we believe
is more upscale than that of other retailers in our segment of the
retail industry; and
o our stores are typically larger than those of many of our direct
competitors, averaging 8,700 square feet.
We believe these features attract customers to our stores, encourage repeat
visits, and generate greater spending.
Each of our founders, Bernard Spain and Murray Spain, has more than 40
years of experience in retail. In addition, the five other members of our senior
management team average more than 20 years of retail experience. Most of these
executives have spent their entire business careers working for us.
In 1998, our Dollar Express stores generated net sales of $111.6
million, representing a compound annual growth rate of 24.9% over the last three
years. In 1998, our Dollar Express stores that were open the entire year
averaged $1.4 million in net sales and had net sales per estimated selling
square foot of $240. Our stores opened in 1998 generated an average first year
pre-tax cash-on-cash return on investment in excess of 100%, and we believe that
historically, our new stores have become profitable during their first full year
of operation.
We currently operate 99 Dollar Express stores in six states:
Pennsylvania, New Jersey, Maryland, Delaware, New York and Virginia. We plan to
increase our Dollar Express store count by approximately 25% per year, and
believe that we could operate up to 250 stores within our current 250 mile
distribution radius.
Our Spain's Cards & Gifts Stores
We are one of the largest specialty greeting card vendors in the
Philadelphia metropolitan area. Our Spain's Cards & Gifts stores offer our
customers a wide selection of greeting cards, moderately priced giftware, fad
and novelty products, candy and other consumer items. We believe that the
merchandise mix in our Spain's stores allows us to quickly recognize new trends
in merchandising, which we can take advantage of in our Dollar Express stores.
Our Spain's stores have a dedicated management team and buying staff and are run
separately from our Dollar Express stores.
During 1998, our Spain's stores generated net sales of $19.2 million.
We currently operate 25 Spain's stores, primarily in the Philadelphia
metropolitan area. We do not anticipate significant growth in the number of
Spain's stores, but will take advantage of attractive opportunities for new
stores as they arise.
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We are a Pennsylvania corporation formed in 1998. Our Dollar Express
Stores, Inc. operating subsidiary was formed in 1992 as the successor to the
partnership formed by Bernard and Murray Spain in 1959. Our executive offices
are located at 1700 Tomlinson Road, Philadelphia, Pennsylvania 19116-3848. Our
telephone number is (215) 969-7888.
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Our Operating Strategy
Our goal is to enhance our position as a leader in the fixed $1.00
price point store segment of the retail industry. The strategies that we employ
in our Dollar Express stores to help us achieve this goal include:
Carry a Broad and Value-Oriented Merchandise Mix. We offer our
customers a wide assortment of regularly available, seasonal and closeout
merchandise. Our products are intended to exceed our customers' expectations of
the range and quality of items that can be purchased at our fixed $1.00 price
point.
Focus on Product Merchandising. We are proud of our products and how we
merchandise them. We pay careful attention to how our products appear to our
customers. These details include the location of the products in the store, the
grouping of individual products, the manner in which products are displayed, and
the appearance of each product's packaging.
Use Our Large Format Stores to Create a Customer-Friendly Shopping
Environment. Our large format stores, which are typically larger than other
dollar stores, are designed to display more merchandise and to provide our
customers with a comfortable and visually appealing shopping experience.
Maintain Flexibility in Selecting Sites for New Locations. Our stores
are successful in a wide range of sizes and formats. We believe that this allows
us to consider more potential store sites and at times negotiate more favorable
lease terms than less flexible retailers.
Operate in an Efficient, Low Cost Manner. Our fixed $1.00 price point
requires us to focus on controlling the cost of our operations. We maintain a
disciplined cost control program, focusing on our major expenses, including
merchandise and payroll.
Our Growth Strategy
We believe that our growth will come from our Dollar Express stores. In
order to continue our revenue and income growth for these stores in the future,
we intend to pursue the following strategies:
Continue Opening Large Format Stores in our Current Distribution
Radius. Our future growth will primarily result from new store openings. We
operate 99 stores within our current 250 mile distribution radius and we believe
that we can operate up to 250 stores within this geographic region.
We plan to open 25 new Dollar Express stores in 2000.
Support Our Growth with Strong New Store Economics. We have strong new
store economics. Our stores opened in 1998 generated an average first year
pre-tax cash-on-cash return on investment in excess of 100%, and we believe that
historically, our new stores have become profitable within their first full year
of operation. Our strong new store economics contribute to the capital required
to implement our store opening plan.
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Increase Variety and Number of Products Offered. We continuously strive
to offer exciting new products at our fixed $1.00 price point. These products
include new items within our existing range of product categories, as well as
items in categories not previously carried in our stores.
Convert Smaller Stores to Larger Stores and Older Stores to Modern
Stores. We believe that large format stores are more attractive to customers and
therefore are more competitive than smaller stores. We currently have 37 small
format stores. We continue to evaluate converting these smaller stores into
large format stores on an opportunistic basis. Approximately 25 of our stores
continue to use their original fixtures. We intend to convert these stores to
newer fixtures by the end of 2001.
Acquisitions. Although we have no short-term plans regarding potential
acquisitions, we intend to consider potential acquisitions as we continuously
evaluate our position within our industry.
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The Offering
Common stock offered:
By us .................................... shares
By our selling shareholders............... shares
Total shares offered ................ shares
Common stock to be outstanding after this
offering ................................ shares(1)
Use of proceeds .............................. We estimate that the net
proceeds to be received by us
from this offering will be
approximately $_________
million. We intend to use these
net proceeds:
o to repay the approximately
$19.5 million that we
anticipate will be
outstanding under our $20.0
million term loan facility
upon completion of this
offering;
o to repay the approximately
$7.0 million we anticipate
will be outstanding under
our revolving credit
facility upon completion of
this offering;
o to help fund the opening of
the 25 new Dollar Express
stores we plan to open in
2000; and
o for general corporate
purposes.
We will not receive any
proceeds from the sale of
shares of common stock by our
selling shareholders.
Proposed NASDAQ National Market
symbol.................................... DLRX
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(1) Does not include:
o ________shares of common stock issuable upon exercise of
options granted under our 1999 Stock Option Plan at a weighted
average exercise price of $________ per share;
o ________ shares of common stock reserved for issuance upon the
exercise of options that will be granted under our 1999 Stock
Option Plan on the date of this prospectus at the initial
public offering price; and
o ________ shares of common stock issuable upon exercise of
options reserved for future grants under our 1999 Stock Option
Plan.
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Summary Financial Information
The following table sets forth certain of our financial data for the
periods indicated. The statement of operations data for the years ended December
31, 1996, 1997 and 1998 are derived from, and are qualified by reference to, our
audited financial statements included elsewhere in this prospectus. The
statement of operations data for the nine months ended September 30, 1998 and
the thirty nine weeks ended September 30, 1999, and the balance sheet data as of
September 30, 1999, have been derived from, and are qualified by reference to,
our unaudited financial statements included elsewhere in this prospectus, which
in our opinion, include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and results of operations. The results of operations for the thirty
nine weeks ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the full fiscal year ending December 30, 1999
or any other future period. Operating data pertains only to our Dollar Express
stores. Average annual net sales per store and average annual net sales per
estimated selling square foot include data only for stores open for the entire
year. The change in comparable store net sales includes data only for stores
open for at least 15 months. Effective January 1, 1999, we adopted a 52/53 week
fiscal year. You should read the data set forth below together with
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and related
notes included elsewhere in this prospectus.
The pro forma amounts give effect to the conversion of all outstanding
shares of our Series A convertible preferred stock into __________ shares of our
common stock, as well as the application of an effective tax rate of 40% to
reflect our conversion from an S to a C corporation as if this conversion had
occurred on January 1, 1996. Prior to February 5, 1999, we were treated as an S
corporation for federal and most state income tax purposes. The pro forma, as
adjusted amounts additionally reflect the application of the estimated net
proceeds of this offering. See "Use of Proceeds" and "Capitalization."
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Nine Months Thirty Nine
Year Ended December 31, Ended Weeks Ended
-------------------------------- September 30, September 30,
1996 1997 1998 1998 1999
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(Dollars in thousands, except per share data)
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Statement of Operations Data:
Net sales........................................... $ 88,362 $103,030 $130,802 $ 86,290 $ 100,438
Gross profit........................................ 22,617 25,716 38,495 24,091 29,141
Operating profit.................................... 4,279 4,696 10,949 5,344 5,939
Interest expense, net............................... 156 277 283 195 1,640
Income before income taxes.......................... 4,259 4,677 10,853 5,313 4,112
Income taxes (benefit).............................. 35 28 50 26 (333)
Net income ......................................... 4,224 4,649 10,803 5,287 4,445
Net income (loss) available to common shareholders.. 4,224 4,649 10,803 5,287 (639)
Net income (loss) per common share:
Basic......................................... $ $ $ $ $
Diluted....................................... $ $ $ $ $
Pro forma net income per common share:
Basic......................................... $ $ $ $ $
Diluted....................................... $ $ $ $ $
Pro forma, as adjusted net income per common share:
Basic......................................... $ $
Diluted....................................... $ $
Weighted average number of common shares and common
share equivalents outstanding (in thousands):
Basic.........................................
Diluted.......................................
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Nine Months Thirty Nine
Year Ended December 31, Ended Weeks Ended
-------------------------------- September 30, September 30,
1996 1997 1998 1998 1999
---------- --------- --------- ------------- ------------
(Dollars in thousands, except per share data)
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Dollar Express Stores Operating Data:
Number of stores at end of period............................... 63 70 82 78 93
Average annual net sales per store ............................. $ 1,243 $ 1,303 $ 1,430 N/A N/A
Change in comparable store net sales............................ 10.7% 0.5% 2.8% 1.4% 2.6%
Average annual net sales per estimated selling square foot...... $ 245 $ 232 $ 240 N/A N/A
Estimated selling square footage at period end.................. 341,252 406,586 531,263 483,350 670,115
September 30, 1999
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Pro Forma
Actual Pro Forma As Adjusted
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Consolidated Balance Sheet Data:
Working capital..................................... $ (647)
Total assets........................................ 43,590
Total debt, including current portion............... 35,994
Common stock warrants............................... 4,294
Redeemable convertible preferred stock.............. 31,295
Total common shareholders' (deficit) equity......... (44,578)
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RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in Dollar Express. Your investment will be subject to the risks
inherent in our business. The price of our common stock may decline. You should
consider carefully the following factors as well as other information contained
in this prospectus before deciding to invest in shares of our common stock.
If we have difficulty obtaining enough quality merchandise to sell at our fixed
$1.00 price point, our business may suffer
Our future success depends upon our ability to purchase and sell an
interesting mix of quality merchandise while maintaining our fixed $1.00 price
point. We do not have continuing contracts for the purchase of merchandise for
our Dollar Express stores and must continuously seek out buying opportunities
from both our existing suppliers and new sources. We compete with mass
merchandisers, discount stores, closeout stores and other dollar stores for
merchandise. Even though we consider our relationships with our suppliers to be
strong, we may still experience disruptions in our ability to obtain
merchandise. Any disruptions in the availability of quality, affordable
merchandise in sufficient quantities to maintain our current operations or
support our continued growth could have a material adverse effect on our
business, financial condition and results of operations.
If we are unable to successfully open new stores, our future growth will suffer
Our sales have grown significantly over the past several years,
primarily as a result of opening new stores. We intend to continue to pursue an
aggressive growth strategy for the foreseeable future, and our future operating
results will depend largely on our ability to open and operate new stores
successfully and to manage a larger business profitably. We plan to open 25
Dollar Express stores in 2000. Over the next several years we intend to increase
the number of Dollar Express stores that we operate at a rate of approximately
25% per year.
A number of factors could adversely affect our ability to successfully
open new stores on a timely basis. These factors could also adversely affect the
ability of any newly opened stores to achieve sales and profitability levels
comparable to those of our existing stores or to become profitable at all.
These factors include:
o our ability to identify appropriate new store sites and negotiate
acceptable leases for those sites;
o the amount of time a landlord may need to complete the work we
require prior to our taking possession of new store sites;
o our ability to hire, train and retain personnel to operate and
manage new stores;
o the ability of our distribution, operational and management systems
to support new stores; and
o our ability to obtain sufficient amounts of merchandise to supply
the new stores.
We cannot assure you that we will be able to continue to achieve our
planned expansion on a timely or a profitable basis or that we will be able to
achieve results in our new stores similar to those we have historically achieved
in our existing stores. Further, we cannot be certain that any newly opened
stores will not adversely affect the revenues and profitability of our current
stores. If we are unable to successfully open new stores on a timely basis and
integrate them into our operations, our future growth could suffer.
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We depend on a single distribution and office facility and any interruption at
that facility could adversely affect our business
Almost all of the merchandise offered in our Dollar Express stores is
delivered to our distribution center in Philadelphia, Pennsylvania. The orderly
operation of this facility is critical to our success. Any delays or disruptions
in deliveries, distribution or shipping could have a material adverse effect on
our business, financial condition and results of operations.
In addition, because all of our distribution operations, management and
supporting services are centralized at one location, any natural or other
disaster such as a fire, explosion, hurricane, tornado, flood or earthquake at
this location could have a material adverse effect on our business. Although we
maintain business interruption, property and casualty insurance, any natural or
other disaster at this facility could cause losses that are not covered by
insurance.
Our current distribution system will not be adequate to support our anticipated
growth
Our planned store growth will place significant demands on our
distribution system. At December 15, 1999, our current distribution center
supported 99 Dollar Express stores, and we believe that it can support the
approximately 40 additional stores that we intend to open prior to the planned
opening of our new distribution center in early 2001. However, we cannot be
certain whether our distribution center will be able to service all of these
stores in a cost efficient manner. The failure of our distribution center to
efficiently support our anticipated growth could have a material adverse effect
on our business, financial condition and results of operations.
Our current growth plans will require us to replace our distribution
center in early 2001. If we are unable to successfully open our new distribution
center by that time, we may not be able to achieve our growth plans. Even if our
planned new distribution center is open by early 2001, we may experience
difficulties in transferring our distribution functions to the new facility.
Failure to open and transfer functions to our new facility could have a material
adverse effect on our ability to distribute merchandise to our Dollar Express
stores in a timely and cost efficient manner.
We may in the future open new Dollar Express stores in areas that our
current distribution center will not be able to service in a cost efficient
manner. If we experience difficulties in opening and operating new distribution
centers to support those stores, we may not be able to continue to add
additional stores in those areas.
Adverse economic factors could affect our ability to profitably maintain our
current fixed price point strategy
Our ability to profitably provide high-quality merchandise to our
customers at our fixed $1.00 price point is subject to a variety of economic
factors beyond our control, including inflation and the minimum wage. We cannot
assure you that these factors will remain favorable. An increase in the rate of
inflation or in the minimum wage could have a material adverse effect on our
business, financial condition and results of operations, particularly given our
fixed $1.00 price point.
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Trade restrictions, import duties and foreign government regulations could
affect the cost and availability of our merchandise
We estimate that we imported 18.0% of our merchandise during the first
nine months of 1999 and 12.0% of our merchandise during all of 1998. Most of
this merchandise was imported from China. In addition, many of the products that
we purchased from domestic sources were imported by these sources. Our ability
to purchase imported merchandise is subject to a number of risks, including:
o import duties and quotas may increase;
o China may lose its "normal trade relation" (NTR) status;
o the U.S. government may impose trade restrictions in retaliation
against foreign practices;
o foreign governments may change their regulations in a manner that
would adversely affect U.S. importers;
o there may be work stoppages in our exporting countries;
o our exporting countries may experience economic crises, such as
those experienced by the countries of Southeast Asia in 1998;
o our exporting countries may experience political unrest; and
o our exporting countries may not be adequately prepared for the year
2000 problem, which could result in disruptions in their
manufacturing processes.
We believe that we could find alternative sources for merchandise in
response to factors that increase the cost, or restrict the availability, of
goods from our foreign suppliers. However, the transition to alternative sources
may not occur in a timely manner. In addition, products from alternative sources
may be of lesser quality and/or more expensive than those we currently purchase.
The result could have a material adverse effect on our business, financial
condition and results of operations.
China is currently accorded NTR status by the United States. Loss of
this status by China or the imposition of trade restrictions such as punitive
tariffs or duties would result in significantly higher purchasing costs for us.
Although no punitive import duties are currently in place, these duties could
equal as much as 100% of the costs of certain Chinese goods. China's NTR status
automatically expires on July 3 of each year unless the United States Congress
receives a presidential determination to extend NTR status to China for another
12 months. If China's NTR status were not extended for any reason, our business,
financial condition and results of operations could be materially adversely
affected.
Because substantially all of our stores are located in the mid-Atlantic region
of the United States, our business could be negatively impacted by factors
related to this region of the country
Substantially all of our stores are located in the mid-Atlantic region
of the United States. Consequently, our financial results are subject to
regional economic trends and other regional factors that impact retail spending,
such as adverse weather conditions and natural disasters, both of which may have
a dramatic impact on retail spending. In the event any of these regional factors
decrease retail spending, our business, financial condition and results of
operations may suffer.
14
<PAGE>
Because a significant portion of our sales and net income are realized in the
fourth quarter, poor fourth quarter sales or net income could materially
adversely affect our annual financial results
Historically, our highest sales and net income occur during the fourth
calendar quarter. During 1998, the fourth quarter accounted for 34.0% of our net
sales and 51.2% of our net income. Accordingly, any adverse trend in sales and
profits for the fourth quarter of any year could have a material adverse effect
on our business, financial condition and results of operations for the entire
year.
Our quarterly results could fluctuate significantly
Our quarterly financial results may fluctuate significantly based on
such factors as:
o the timing of new store openings;
o the amount of net sales contributed by new and existing stores;
o the timing of Easter, sales for which may occur primarily in the
first quarter of the year or may occur primarily in the second
quarter of the year;
o changes in our merchandise;
o general economic, industry and weather conditions that affect
consumer spending; and
o actions of our competitors.
The loss of any of our executive officers or key employees could adversely
affect our business
Our future growth and profitability will be largely dependent on the
efforts and abilities of our Chief Executive Officer, Bernard Spain, our
President, Murray Spain, and our other executive officers and key employees. We
do not carry "key man" life insurance on any of our executives. The employment
contracts of each of Bernard Spain and Murray Spain expire on February 4, 2003.
Although they have both indicated that they plan to remain with us after the
expiration of their employment agreements, we cannot assure you that they will
do so. The loss of the services of any executive officer or key employee could
have a material adverse effect on our business, financial condition and results
of operations.
We may not continue to compete effectively with our competition
Our business is highly competitive, and we expect competition to
intensify in the future. We compete in both the purchase and sale of quality
merchandise. Our competitors include mass merchandisers, discount stores,
closeout stores, other dollar stores and cards and gifts stores, some of which
are owned by national or regional chains. Many of our current and future
competitors are likely to enjoy substantial competitive advantages over us,
including:
o greater financial resources;
o longer operating histories; and
o greater name recognition.
If we cannot continue to compete successfully with existing or future
competitors, our business, financial condition and results of operations will
suffer.
15
<PAGE>
Difficulties with labor negotiations may adversely affect our business
All of our truck drivers belong to a labor union. Our collective
bargaining agreement with this union expires on February 8, 2002. Any failure to
renew this collective bargaining agreement, or any job action by this union,
could disrupt deliveries from our distribution center to our stores. If either
of these occurred, we would most likely ship merchandise to our stores by common
carrier, which would be more expensive and could result in a less flexible
delivery schedule.
In addition, a union is currently attempting to unionize our warehouse
employees and may do so again in the future. If any of these efforts are
successful, we would have to enter into a collective bargaining agreement
covering additional employees, which could increase our costs or limit our
operating flexibility. We cannot predict the effect, if any, that any future
actions by unions will have on our business and financial results.
Failure of our management information systems could disrupt our operations
Our business is supported by a customized inventory control system and
a standard accounting and financial reporting system. We depend on the
information from these systems to make timely and accurate business decisions.
We believe that our current systems will adequately provide for our current
operations and planned growth. However, any failure or destruction of, or
disruptions in, these systems could jeopardize our ability to manage our
existing operations or continue our growth, and could materially adversely
affect our business, financial condition and results of operations.
Our existing shareholders will continue to control our management and affairs
Upon the completion of this offering, Bernard Spain, Murray Spain and
Advent International Corporation will collectively beneficially own
approximately __% of our outstanding common stock, or __% if the underwriters
exercise their over-allotment option. As a result, if these shareholders act
together, they will be able to control the outcome of all matters submitted for
shareholder action, including the election of members to our board of directors
and the approval of significant transactions, effectively giving these
shareholders control over our management and operations. These shareholders may
also be able to delay or prevent a change-in-control transaction that may be
favored by our other shareholders. The interests of any of these shareholders
may conflict with the interests of other holders of our common stock.
Our charter and bylaws will contain, and Pennsylvania law contains, provisions
that would make it difficult for us to be acquired if our board of directors did
not support the acquisition, even if the acquisition were beneficial to our
shareholders
Our charter and bylaws will contain, and Pennsylvania law contains,
provisions that would make it difficult for us to be acquired if our board of
directors did not support the acquisition, even if the acquisition were
beneficial to our shareholders, including:
o a provision of Pennsylvania law prohibiting, under most
circumstances, a person who has acquired 20% of our stock from
acquiring us for five years after the acquisition of 20% of our
stock;
16
<PAGE>
o a provision of Pennsylvania law permitting directors to consider
the effects an acquisition would have on our employees, suppliers,
customers, creditors and communities in determining whether an
acquisition was in our best interests;
o a provision in our charter permitting us to issue preferred stock
with rights that may discourage a person from acquiring us;
o a provision in our bylaws providing that our directors serve
staggered terms and can only be removed for cause; and
o provisions in our bylaws providing that our shareholders can only
call a special meeting at the request of shareholders owning at
least 50% of our stock and that our shareholders may only take
action at a shareholders meeting or by the unanimous written
consent of all shareholders in lieu of a meeting.
As a result, even if our shareholders supported an acquisition, it would be
difficult for a third party to acquire us if our board did not approve the
acquisition. Additionally, these provisions could have a depressive effect on
our stock price. See "Description of Capital Stock - Preferred Stock" and
"-Anti-Takeover Effects of Provisions of Our Charter, Our Bylaws and
Pennsylvania Law."
Our common stock has not been traded publicly and its market price may fluctuate
widely after this offering
No public market has existed for our common stock prior to this
offering. The initial public offering price for our common stock will be
determined by negotiations among us, the selling shareholders and the
underwriters' representatives. This price may not be indicative of prices that
will prevail for our common stock in the trading market. We also cannot predict
the extent to which investor interest in us will lead to the development of a
trading market for our common stock or how liquid that market might become. Our
common stock price could be subject to wide fluctuations in response to several
factors, including:
o quarterly fluctuations in our operating results;
o changes in earnings estimates or recommendations by equity research
analysts;
o variations between our operating results and analyst or investor
expectations; and
o general market conditions or market conditions specific to our
industry.
Many of these factors are not in our control, and may adversely affect our stock
price, regardless of our operating performance.
New investors in this offering will experience immediate and substantial
dilution
New investors purchasing shares of our common stock in this offering
will experience immediate and substantial dilution of $________ per share. Sales
of additional shares of common stock in the future as well as the exercise of
outstanding stock options or options granted in the future may result in further
dilution to purchasers in this offering. See "Dilution."
Future sales of additional shares into the market could lower the market price
of our common stock
Significant sales of our common stock in the public market after this
offering, or even the perception that such sales could occur, could materially
and adversely affect our stock price or impair our
17
<PAGE>
ability to obtain capital through a common stock offering. After this offering,
we will have _________ shares of common stock outstanding. As of December 15,
1999, we also had reserved ________ shares of common stock for issuance under
our 1999 Stock Option Plan, of which options to purchase _______ of these shares
were outstanding and _________ were exercisable. Options to purchase an
additional ____ shares will be granted as of the date of this prospectus.
The shares of common stock being sold in this offering will be freely
transferable under the securities laws immediately after issuance, except for
any shares held by our "affiliates." Our shareholders, pursuant to a "lock-up"
agreement, have each agreed not to sell any shares for a period of 180 days from
the date of this prospectus. These shareholders may be released from these
lock-up agreements at any time with the consent of Merrill Lynch, Pierce,
Fenner & Smith, Incorporated, with or without public notice of such release.
Upon the expiration of this lock-up agreement, the ___________ shares of common
stock owned by these shareholders will be eligible for sale if registered with
the SEC or on a restricted basis under the federal securities laws.
We have granted registration rights to our principal shareholders. At
any time, one or more of these shareholders may demand that we file a
registration statement under the Securities Act covering all or a portion of our
securities held by them. However, each of these shareholders has agreed not to
demand registration for 180 days after the date of this prospectus without the
prior written consent of the underwriters. After that period, if one or more of
these shareholders were to cause a large number of shares to be registered and
sold in the public market, those sales could adversely affect the market price
for our common stock. See "Description of Capital Stock - Registration Rights"
and "Shares Eligible for Future Sale."
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements regarding our
performance, strategy, plans, objectives, expectations, beliefs and intentions.
When used in this prospectus, the words "intend," "anticipate," "believe,"
"estimate," "plan," and "expect," and similar expressions as they relate to us,
are included to identify forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. The actual outcome of the events described in these
forward-looking statements could differ materially. Therefore, this prospectus,
and especially the sections entitled "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
contains a discussion of some of the factors and risks that could contribute to
those differences.
USE OF PROCEEDS
Based on an assumed initial public offering price of $_____ per share,
the mid-point of the range set forth on the cover page of this prospectus, our
net proceeds from the sale of _______________ shares of common stock will be
approximately $_____ million, after deducting the underwriting discount and our
estimated offering expenses. We will not receive any proceeds from the sale of
shares of common stock by our selling shareholders.
We intend to use the net proceeds from this offering:
o To repay the approximately $19.5 million that we anticipate will be
outstanding under our term loan facility upon the completion of
this offering. Our term debt consists of a $20.0 million term
18
<PAGE>
loan facility, all of which was outstanding at December 15, 1999.
Borrowings under our term loan facility bear interest at a variable
rate. The interest rate at December 15, 1999 was 8.13%. Our term
loan facility expires on December 31, 2003.
Our term debt was incurred in connection with our recapitalization
in order to fund, in part, dividends to Bernard Spain and Murray
Spain. See "Certain Relationships and Related Transactions - The
Recapitalization."
o To repay the approximately $7.0 million that we anticipate will be
outstanding under our revolving credit facility upon the completion
of this offering. Our revolving debt consists of a $20.0 million
revolving credit facility, $15.8 million of which was outstanding
at December 15, 1999. Borrowings under our revolving credit
facility bear interest at a variable rate. The weighted average
interest rate at December 15, 1999 was 7.70%. Our revolving credit
facility expires on December 31, 2003.
Our revolving debt was incurred in connection with our
recapitalization in order to repay our then existing indebtedness
for borrowed money, and pay costs associated with our
recapitalization. See "Certain Relationships and Related
Transactions - The Recapitalization."
o To help fund the opening of the 25 new Dollar Express stores that
we plan to open in 2000.
o For general corporate purposes, including working capital.
When the opportunity arises, we may use a portion of the net proceeds
to acquire or invest in complementary businesses. From time to time, in the
ordinary course of business, we expect to evaluate potential acquisitions of
businesses. However, we have no present understandings, commitments or
agreements with respect to any acquisition or investment.
Pending use of the net proceeds for the purposes listed above, we
intend to invest these funds in short-term, interest-bearing, investment-grade
securities.
DIVIDEND POLICY
We do not anticipate paying any cash dividends on our common stock in
the foreseeable future. We currently intend to retain future earnings, if any,
to finance operations and for the expansion of our business. Our credit
facilities prohibit us from paying cash dividends on our common stock.
19
<PAGE>
CAPITALIZATION
The following table sets forth our total capitalization as of September
30, 1999, as follows (share amounts do not give effect to the ___-for-one split
that will occur immediately before this offering):
o on an actual basis;
o on a pro forma basis to give effect to the conversion of all of the
outstanding shares of our Series A convertible preferred stock into
common stock on a one-for-one basis and the cancellation of
warrants to purchase 416,667 shares of our common stock; and
o on a pro forma, as adjusted basis to give effect to the conversion
of all of the outstanding shares of our Series A convertible
preferred stock into common stock on a one-for-one basis, the
cancellation of warrants to purchase 416,667 shares of our common
stock, and to reflect the application of the net proceeds from this
offering.
You should read this information together with the sections of this
prospectus entitled "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------- ------------- -------------
(In thousands)
<S> <C>
Current debt:
Current portion of long-term debt............................... $ 1,623 $ $
Line of credit ................................................. 15,750
----------- ------------- -------------
Total current debt.......................................... $ 17,373 $ $
=========== ============= =============
Long-term debt, less current portion................................. $ 18,621 $ $
Common stock warrants................................................ 4,294
Series A cumulative convertible redeemable preferred stock,
par value $0.01; 3,530,000 shares issued and outstanding,
actual; none issued or outstanding, pro forma or pro forma,
as adjusted....................................................... 31,295
Common shareholders' equity (deficit):
Common stock, par value $0.01; 75,000,000 shares
authorized, 6,470,000 shares issued and outstanding, actual;
_______ shares issued and outstanding, pro forma;
_______ shares issued and outstanding, pro forma, as
adjusted..................................................... 65
Additional paid-in capital...................................... 2,465
Accumulated deficit............................................. (47,108)
----------- ------------- -------------
Total common shareholders' equity (deficit)............... (44,578)
----------- ------------- -------------
Total capitalization...................................... $ 27,005 $ $
=========== ============= =============
</TABLE>
The data presented in the above table excludes:
o _______ shares of common stock issuable upon exercise of options
granted under our 1999 Stock Option Plan at a weighted average
exercise price of $______ per share;
20
<PAGE>
o _______ shares of common stock reserved for issuance upon the
exercise of options that will be granted under our 1999 Stock
Option Plan on the date of this prospectus at the initial public
offering price; and
o _______shares of common stock issuable upon exercise of options
reserved for future grants under our 1999 Stock Option Plan.
21
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
$_____ million, or $___ per share of common stock. We determined our pro forma
net tangible book value per share by subtracting our total liabilities from our
total tangible assets and dividing that number by ________ pro forma shares of
our common stock outstanding as of September 30, 1999. This pro forma basis
gives effect to the conversion of all of the outstanding shares of our Series A
convertible preferred stock into _______ shares of common stock.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the as adjusted pro forma net tangible book
value per share of our common stock immediately following this offering.
Assuming an initial offering price of $_____ per share, the mid-point of the
range set forth on the cover page of this prospectus, after giving effect to our
sale of shares of common stock in this offering and after deducting the
underwriting discount and our estimated offering expenses, our as adjusted pro
forma net tangible book value as of September 30, 1999 would have been
$_______________, or $______ per share of common stock. This represents an
immediate increase in pro forma net tangible book value of $______ per share to
our existing shareholders and an immediate dilution of $______ per share to new
shareholders purchasing shares of our common stock in this offering. The
following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C>
Assumed initial public offering price per share......................................... $______
Pro forma net tangible book value per share as of September 30, 1999............... $
Increase per share attributable to new shareholders................................ ______
As adjusted pro forma net tangible book value per share after this offering............. ______
Dilution per share to new shareholders.................................................. $______
</TABLE>
The following table summarizes the difference between the existing
shareholders and new shareholders with respect to the number of shares of common
stock purchased from us, the total consideration paid to us, and the average
price per share paid. The information is presented as of ____________, 1999. The
information presented is based on an assumed initial public offering price of
$______ per share, the mid-point of the range set forth on the cover page of
this prospectus, after giving effect to our sale of shares of common stock in
this offering and after deducting the underwriting discount and our estimated
offering expenses.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------ ------------------------ Average Price
Number Percent Amount Percent Per Share
----------- ----------- ----------- ----------- ----------------
<S> <C> <C>
Existing shareholders.......................... % $ % $
New shareholders............................... % %
----------- ----------- ----------- ----------- ----------------
Total................................. 100.0% $ 100.0%
=========== =========== =========== =========== ================
</TABLE>
The discussion and tables above assume no exercise of any stock options
outstanding as of September 30, 1999. As of September 30, 1999, options were
outstanding to purchase a total of ________ shares of our common stock at a
weighted average exercise price of $______ per share and ________ shares were
reserved for future grant under our 1999 Stock Option Plan. To the extent that
any of these options are exercised, there will be further dilution to new
shareholders. In addition, the second table does not reflect the sale of _____
shares by the selling shareholders. See "Capitalization," "Management --
Employee Benefit Plans" and Note 8 to our audited annual financial statements.
22
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below have been derived from our
financial statements. The selected financial data as of and for the nine months
ended September 30, 1998 and as of and for the thirty nine weeks ended September
30, 1999 have been derived from, and are qualified by reference to, our
unaudited financial statements included elsewhere in this prospectus, which, in
our opinion, include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and results of operations. The results of operations for the thirty
nine weeks ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the full fiscal year ending December 30, 1999
or any other future period. Operating data pertains only to our Dollar Express
stores. Average annual net sales per store and average annual net sales per
estimated selling square foot include data only for stores open for the entire
year. The change in comparable store net sales includes data only for stores
open for at least 15 months. Effective January 1, 1999, we adopted a 52/53 week
fiscal year. You should read the data set forth below together with
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and related
notes included elsewhere in this prospectus.
Prior to February 5, 1999, we were treated as an S corporation for
federal and most state income tax purposes. The presentation for all periods
reflects a pro forma provision for income taxes, as if we had been a C
corporation, at an assumed effective rate of 40%.
<TABLE>
<CAPTION>
Nine Months Thirty Nine
Year Ended December 31, Ended Weeks Ended
---------------------------------------------- September 30, September 30,
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales................................ $ 60,492 $ 72,248 $ 88,362 $103,030 $130,802 $ 86,290 $ 100,438
Cost of sales, including
warehousing, distribution,
and store occupancy
costs (1).............................. 37,140 44,821 65,745 77,314 92,307 62,199 71,297
-------- -------- -------- -------- -------- --------- ----------
Gross profit............................. 23,352 27,427 22,617 25,716 38,495 24,091 29,141
Operating and administrative
expenses............................... 20,917 25,361 18,338 21,020 27,546 18,747 23,202
-------- -------- -------- -------- -------- --------- ----------
Operating profit......................... 2,435 2,066 4,279 4,696 10,949 5,344 5,939
Interest expense, net.................... 222 184 156 277 283 195 1,640
Accretion of common stock warrants to
fair value............................. -- -- -- -- -- -- 282
Other income, net........................ 22 22 136 258 187 164 95
-------- -------- -------- -------- -------- --------- ----------
Income before income taxes............... 2,235 1,904 4,259 4,677 10,853 5,313 4,112
Income taxes............................. 12 8 35 28 50 26 1,757
Deferred income tax benefit resulting from
conversion from S to C Corporation..... -- -- -- -- -- -- (2,090)
-------- -------- -------- -------- -------- --------- ----------
Net income............................... $ 2,223 $ 1,896 $ 4,224 $ 4,649 $ 10,803 $ 5,287 $ 4,445
======== ======== ======== ======== ======== ========= ==========
Net income (loss) available to common
shareholders........................... $ 2,223 $ 1,896 $ 4,224 $ 4,649 $ 10,803 $ 5,287 $ (639)
======== ======== ======== ======== ======== ========= ==========
Net income (loss) per common share (2)
Basic.............................. $ 0.34 $ 0.29 $ 0.65 $ 0.72 $ 1.67 $ 0.82 $ (0.10)
======== ======== ======== ======== ======== ========= ==========
Diluted............................ $ 0.34 $ 0.29 $ 0.65 $ 0.72 $ 1.67 $ 0.82 $ (0.10)
======== ======== ======== ======== ======== ========= ==========
Pro forma net income $ 1,341 $ 1,142 $ 2,555 $ 2,806 $ 6,512 $ 3,188 $ 2,467
======== ======== ======== ======== ======== ========= ==========
Pro forma net income (loss) available to
common shareholders................... $ 1,341 $ 1,142 $ 2,555 $ 2,806 $ 6,512 $ 3,188 $ (2,617)
======== ======== ======== ======== ======== ========= ==========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Nine Months Thirty Nine
Year Ended December 31, Ended Weeks Ended
---------------------------------------------- September 30, September 30,
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ---------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Pro forma net income (loss) per common
share (2):
Basic.............................. $ 0.21 $ 0.18 $ 0.39 $ 0.43 $ 1.01 $ 0.49 $ (0.40)
======== ======== ======== ======== ======== ========= ========
Diluted............................ $ 0.21 $ 0.18 $ 0.39 $ 0.43 $ 1.01 $ 0.49 $ (0.40)
======== ======== ======== ======== ======== ========= ========
Weighted average number of common shares
and common share equivalents
outstanding (in thousands) (2):
Basic.............................. 6,470 6,470 6,470 6,470 6,470 6,470 6,470
Diluted............................ 6,470 6,470 6,470 6,470 6,470 6,470 6,470
Dollar Express Stores Operating Data:
Number of stores at end of period........ 47 55 63 70 82 78 93
Average annual net sales per store....... $ 957 $ 1,074 $ 1,243 $ 1,303 $ 1,430 N/A N/A
Change in comparable store net sales .... N/A 5.7% 10.7% 0.5% 2.8% 1.4% 2.6%
Average annual net sales per estimated
selling square foot ................... $ 216 $ 234 $ 245 $ 232 $ 240 N/A N/A
Estimated selling square footage at
period end............................. 222,196 269,488 341,252 406,586 531,263 483,350 670,115
December 31, September 30,
---------------------------------------------- --------------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ------------- ------------
Balance Sheet Data:
Working capital.......................... $ 2,995 $ 3,985 $ 5,031 $ 5,323 $ 8,673 $ 12,802 $ (647)
Total assets............................. 11,439 14,495 18,632 21,583 31,581 28,627 43,590
Total debt, including current portion.... 95 30 20 1,456 4,333 5,362 35,994
Common stock warrants.................... -- -- -- -- -- -- 4,294
Redeemable convertible preferred stock... -- -- -- -- -- -- 31,295
Total common shareholders' equity (deficit) 6,658 7,951 8,580 9,723 15,587 14,008 (44,578)
</TABLE>
- ----------------------
(1) Cost of sales for the years ended December 31, 1994 and 1995 exclude
warehousing, distribution and store occupancy costs because the components
of these costs are not available to reclassify for comparability. These
amounts are included in operating and administrative expenses.
(2) Share and per share amounts do not give effect to the ____ -for-one split
of our common stock that will occur immediately before this offering.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the related notes included elsewhere in this prospectus. This
discussion contains forward looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
discussed in these forward looking statements. See "Risk Factors."
Overview
Through our Dollar Express stores, we are a leading operator of fixed
$1.00 price point stores in the United States. These stores offer customers a
wide assortment of regularly available merchandise, such as housewares, food and
other consumable items, giftware, health and beauty care items and toys. We
supplement this merchandise with ever-changing seasonal and first quality
closeout offerings. We also operate Spain's Cards & Gifts stores, which is one
of the largest specialty greeting card vendors in the Philadelphia metropolitan
area. For the thirty nine weeks ended September 30, 1999, our Dollar Express
stores generated 87.6% of our net sales, while our Spain's stores generated the
remaining 12.4%.
Two major factors tend to affect our net sales trends. The first is our
ability to successfully open new stores. The second is that net sales at our
existing stores change from one year to the next. We refer to this as a change
in "comparable store net sales." We begin including net sales from stores in the
calculation of comparable store net sales at the beginning of the location's
sixteenth month of operation, and then compare only subsequent store net sales
to those of the comparable prior period.
Most retailers can increase the price of their merchandise as well as sell
more merchandise in order to increase their comparable store net sales. In our
fixed $1.00 price point Dollar Express stores, our business strategy limits our
ability to raise our prices, so our comparable store net sales generally will
only increase if we sell more merchandise.
We anticipate that future net sales growth will come mostly from our
Dollar Express stores. We believe this growth will be predominately from new
store openings. We plan to open 25 Dollar Express stores in 2000. We also expect
our average store size to increase, which we believe will result in a decrease
in our average annual net sales per estimated selling square foot. While we plan
to open one Spain's store in 2000, we do not anticipate significant growth in
the number of Spain's stores.
In calculating our cost of sales, in addition to the cost of merchandise,
we also include costs associated with our warehousing and distribution operation
as well as store occupancy costs.
Effective January 1, 1999 we adopted a 52/53 week fiscal year. As such,
our fiscal quarters will end on the Thursday closest to each of March 31, June
30 and September 30, and our fiscal year end will be the Thursday closest to
December 31.
25
<PAGE>
Results of Operations
The following table presents our financial data expressed as a percentage
of net sales for the periods indicated:
<TABLE>
<CAPTION>
Nine Thirty Nine
Months Weeks
Year Ended December 31, Ended Ended
---------------------------------------------- September 30, September 30,
1996 1997 1998 1998 1999
------------ ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales, including warehousing,
distribution, and store occupancy
costs........................................ 74.4 75.0 70.6 72.1 71.0
------------ ------------ ------------ -------------- --------------
Gross profit.................................... 25.6 25.0 29.4 27.9 29.0
Operating and administrative expenses........... 20.8 20.4 21.0 21.7 23.1
------------ ------------ ------------ -------------- --------------
Operating profit................................ 4.8 4.6 8.4 6.2 5.9
Interest expense, net........................... 0.2 0.3 0.2 0.2 1.6
Accretion of common stock warrants
to fair value................................ -- -- -- -- 0.3
Other income, net............................... 0.2 0.2 0.1 0.2 0.1
------------ ------------ ------------ -------------- --------------
Income before income taxes...................... 4.8 4.5 8.3 6.2 4.1
Income taxes.................................... -- -- -- -- 1.8
Deferred income tax benefit resulting from
conversion from S to C corporation........... -- -- -- -- (2.1)
------------ ------------ ------------ -------------- --------------
Net income...................................... 4.8% 4.5% 8.3% 6.2% 4.4%
============ ============ ============ ============== ==============
Pro forma net income (1)........................ 2.9% 2.7% 5.0% 3.7% 2.5%
============ ============ ============ ============== ==============
</TABLE>
- --------------
(1) In February 1999, we converted from an S to a C corporation and therefore
became subject to federal and all applicable state income taxes. Pro forma
net income for all periods assumes an effective income tax rate of 40%.
Thirty Nine Weeks Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Net sales
Dollar Express
Net sales increased $15.4 million, or 21.1%, to $88.0 million for the 1999
period, from $72.6 million for the 1998 period. Of this increase, $13.3 million,
or 18.3%, was attributable to net sales that were not included in our comparable
store net sales calculation. We opened 12 stores and closed one store during the
1999 period, and opened eight stores and closed one store during the 1998
period. The remaining $2.1 million of the increase was primarily due to a 2.6%
increase in comparable store net sales during the period. The increase in
comparable store net sales was primarily due to an increase in our individual
average transaction size versus the prior period, which we attribute to an
increase in our offering of consumable products. The average number of customers
visiting our stores also increased versus the 1998 period.
26
<PAGE>
Spain's
Net sales decreased $1.2 million, or 8.9%, to $12.4 million for the 1999
period, from $13.6 million for the 1998 period. This decrease was due to a $1.4
million decline in net sales attributable to an 11.3% decrease in comparable
store net sales. The decrease in comparable store net sales was primarily due to
reduced demand for Beanie Babies products and the incremental items that had
been purchased by customers seeking Beanie Babies products while shopping in our
Spain's stores. This decrease was offset by a $0.2 million increase in net sales
attributable to net sales from the one store opened in 1998 that was not
included in our comparable store net sales calculation.
Gross profit
Dollar Express
Gross profit increased $5.8 million, or 28.0%, to $26.4 million for the
1999 period, from $20.6 million for the 1998 period. This represents an increase
in gross profit margin to 30.0% for the 1999 period, from 28.4% for the 1998
period. The increase in gross profit margin was primarily due to the continued
increase in the proportion of imported merchandise in our product offering,
partially offset by the continued increase in the proportion of national name
brand consumable items. Imported items typically have higher gross profit
margins than products that we purchase domestically. National name brand
consumable items, which we believe carry a greater level of customer appeal and
generate increased customer traffic, typically have lower gross profit margins
than private label items. Additionally, we believe that economies of scale
resulting from our increased buying capacity improved our ability to negotiate
more favorable terms with our merchandise vendors.
Spain's
Gross profit decreased $0.7 million, or 21.0%, to $2.7 million for the
1999 period, from $3.5 million for the 1998 period. This represents a decrease
in gross profit margin to 22.0% for the 1999 period, from 25.4% for the 1998
period. The decrease in gross profit margin was due to a decrease in net sales
of Spain's without a commensurate decrease in the relatively fixed components of
our store occupancy costs.
Operating and administrative expenses
Operating and administrative expenses increased $4.5 million, or 23.8%, to
$23.2 million for the 1999 period, from $18.7 million for the 1998 period. This
represents an increase in operating and administrative expenses as a percentage
of net sales to 23.1% for the 1999 period, from 21.7% for the 1998 period. The
increase as a percentage of net sales was primarily due to payroll and benefit
costs for key management personnel who were hired to support the current and
planned growth of our Dollar Express stores.
Interest expense, net
Interest expense, net increased $1.4 million to $1.6 million for the 1999
period, from $0.2 million for the 1998 period. This increase is due to an
increase in our weighted average borrowings resulting from our recapitalization.
See "Certain Relationships and Related Transactions - The Recapitalization."
27
<PAGE>
Accretion of common stock warrants to fair value
The accretion of common stock warrants to fair value represents the pro
rata portion of the change in fair value of the common stock warrants issued in
connection with our recapitalization from their initial value at the date of
issuance, to September 30, 1999. The fair value adjustment is being recognized
over a five year period from the date of issuance. Upon completion of the
offering, these common stock warrants will be canceled and any further accretion
will cease as of the cancellation date. See "Certain Relationships and Related
Transactions - The Recapitalization."
Deferred income tax benefit
Deferred income tax benefit relates to the effect of our change in tax
status from an S to a C corporation arising from our recapitalization. See
"Certain Relationships and Related Transactions - The Recapitalization."
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales
Dollar Express
Net sales increased $25.3 million, or 29.4%, to $111.6 million for 1998,
from $86.3 million for 1997. Of this increase, $23.4 million, or 27.2%, was
attributable to net sales that were not included in our comparable store net
sales calculation. We opened 13 stores and closed one store during 1998, and
opened ten stores and closed three stores during 1997. The remaining $1.9
million of the increase is primarily due to a 2.8% increase in comparable store
net sales during 1998. The increase in comparable store net sales was primarily
due to improvements in the quality and variety of our merchandise offerings.
Spain's
Net sales increased $2.4 million, or 14.5%, to $19.2 million for 1998,
from $16.8 million for 1997. Of this increase, $1.9 million was due to an 11.7%
increase in comparable store net sales. The remaining $0.5 million increase was
due to an increase in sales from our wholesale business, which represents a
small portion of our Spain's business. We opened one store during 1998 and
closed one store during 1997. The increase in comparable store sales was
primarily due to increased sales of Beanie Babies products and the incremental
items purchased by customers seeking Beanie Babies products while shopping in
our Spain's stores.
Gross profit
Dollar Express
Gross profit increased $10.9 million, or 49.5%, to $32.9 million for 1998,
from $22.0 million for 1997. This represents an increase in gross profit margin
to 29.5% for 1998, from 25.5% for 1997. We believe the increase in gross profit
margin was primarily due to an increase in the proportion of imported
merchandise in our product offering, partially offset by the continued increase
in the proportion of national name brand consumable items. Additionally, we
believe that economies of scale resulting from
28
<PAGE>
our increased buying capacity improved our ability to negotiate more favorable
terms with our merchandise vendors.
Spain's
Gross profit increased $1.9 million, or 50.5%, to $5.6 million for 1998,
from $3.7 million for 1997. This represents an increase in gross profit margin
to 29.3% for 1998, from 22.3% for 1997. The increase in gross profit margin was
primarily due to increased sales of Beanie Babies products, which have higher
gross profit margins than other items sold in Spain's.
Operating and administrative expenses
Operating and administrative expenses increased $6.5 million, or 31.0%, to
$27.5 million for 1998, from $21.0 million for 1997. This represents an increase
in operating and administrative expenses as a percentage of net sales to 21.1%
for 1998, from 20.4% for 1997. This increase as a percentage of net sales was
due primarily to increases in corporate payroll costs and professional services
expenses to support our current and future growth as well as higher insurance
costs as a result of increased claim experience compared to 1997.
Interest expense, net
Interest expense, net remained consistent with the prior year due to
similar average borrowing levels and interest rates during the periods.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales
Dollar Express
Net sales increased $12.1 million, or 16.4%, to $86.3 million for 1997,
from $74.1 million for 1996. Of this increase, $11.8 million, or 15.9%, was
attributable to net sales that were not included in our comparable store net
sales calculation. We opened ten stores and closed three stores during 1997, and
opened ten stores and closed two stores in 1996. The remaining $0.3 million of
the increase represents a 0.5% increase in comparable store net sales during the
period.
Spain's
Net sales increased $2.5 million, or 17.7%, to $16.8 million for 1997,
from $14.2 million for 1996. Of this increase, $2.2 million, or 15.5%, was
attributable to a 16.8% increase in comparable store net sales. The increase in
comparable store sales was primarily due to the completion, in early 1997, of
the conversion to a new supplier of greeting cards. This process began in April
1996 and resulted in reduced 1996 sales while stores were being converted.
Additionally, $0.4 million, or 3.0%, of this increase was attributable to net
sales that were not included in our comparable store net sales calculation. We
closed one store during 1997, and opened one and closed two stores during 1996.
The net sales increase was offset by a $0.1 million decrease in the net sales of
our wholesale business.
29
<PAGE>
Gross profit
Dollar Express
Gross profit increased $1.9 million, or 9.1%, to $22.0 million for 1997,
from $20.1 million for 1996. This represents a decrease in gross profit margin
to 25.5% for 1997, from 27.2% for 1996. The decrease in gross profit margin was
primarily due to a decision to increase the proportion of national name brand
consumable items in our product offering. Also contributing to the decrease in
gross profit margin was a decline in the proportion of imported items in our
product offering. As a result of stronger than expected sales of seasonal
imported merchandise in the second half of the year, our inventories were
depleted in several product categories and we had to purchase replacement
merchandise from domestic suppliers at higher costs.
Spain's
Gross profit increased $1.2 million, or 51.1%, to $3.7 million for 1997,
from $2.5 million for 1996. This represents an increase in gross profit margin
to 22.3% for 1997, from 17.3% for 1996. The increase in gross profit margin was
primarily due to a depressed gross profit margin in 1996 from price reductions
employed to liquidate a previous line of cards as a result of a change in our
primary greeting card supplier in April 1996. Additionally, the gross margin on
our newer line of cards was greater than that on our previous line of cards.
Operating and administrative expenses
Operating and administrative expenses increased $2.7 million, or 14.6%, to
$21.0 million for 1997, from $18.3 million for 1996. This represents a decrease
in operating and administrative expenses as a percentage of net sales to 20.4%
for 1997, from 20.8% for 1996. The decrease as a percentage of net sales was
primarily due to our maintaining a consistent level of office support and
executive level payroll costs while our net sales increased.
Interest expense, net
Interest expense, net increased $0.1 million to $0.3 million for 1997,
from $0.2 million for 1996. This increase was primarily due to greater average
outstanding borrowings during 1997.
Quarterly Results of Operations and Seasonality
Our business is seasonal, with our highest net sales, gross profit and
operating profit historically occurring in the fourth quarter, which includes
the Halloween and Christmas selling seasons. We expect this trend to continue.
Additionally, our quarterly financial results may fluctuate significantly based
on such factors as:
o the timing of new store openings;
o the amount of net sales contributed by new and existing stores;
o the timing of Easter, sales for which may occur primarily in the first
quarter of the year or may occur primarily in the second quarter of
the year;
o changes in our merchandise;
30
<PAGE>
o general economic, industry and weather conditions that affect consumer
spending; and
o actions of our competitors.
The following table presents certain results of operations for our seven
quarters ended September 30, 1999. Although this information is unaudited, we
have prepared it on the same basis as the audited financial statements included
elsewhere in this prospectus. We believe that this information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information shown. The results of operations for any
quarter are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
1998 1999
--------------------------------------------------------- ----------------------------------------
First Second Third Fourth First Second Third
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... $ 25,242 $ 32,981 $ 28,067 $ 44,512 $ 31,348 $ 35,270 $ 33,820
Gross profit.................. $ 8,083 $ 8,734 $ 7,274 $ 14,404 $ 9,136 $ 10,406 $ 9,599
Operating profit.............. $ 1,046 $ 2,641 $ 1,657 $ 5,605 $ 2,172 $ 2,503 $ 1,264
Stores open at end of period.. 97 100 101 106 108 112 117
Change in Dollar Express
comparable store net sales. (10.3)% 13.3% 3.1% 6.0% 2.5% 3.4% 2.1%
1998 1999
--------------------------------------------------------- ----------------------------------------
First Second Third Fourth First Second Third
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------- ----------- ----------- ----------- ----------- ----------- -----------
(Percent of annual total)
Net sales..................... 19.3% 25.2% 21.5% 34.0% N/M N/M N/M
Gross profit.................. 21.0% 22.7% 18.9% 37.4% N/M N/M N/M
Operating profit.............. 9.6% 24.1% 15.1% 51.2% N/M N/M N/M
</TABLE>
Liquidity and Capital Resources
We have historically financed our business with funds generated by our
operations and borrowings under our revolving credit facility. Our working
capital requirements for existing stores are seasonal in nature and typically
peak in September and October as we build inventory and start to hire temporary
staff in advance of our Halloween and Christmas selling seasons. We generally
require cash to purchase inventory, provide working capital for ongoing
operations and finance the cost of opening new stores.
The following table compares certain cash-related information for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended Nine Months Thirty Nine
December 31, Ended Weeks Ended
------------------------- September 30, September 30,
1997 1998 1998 1999
---------- ---------- --------------- ---------------
(In millions)
<S> <C> <C> <C> <C>
Net cash provided by (used in):
Operating activities.................... $ 5.6 $14.5 $ 0.1 $(6.1)
Investing activities.................... (3.4) (3.7) (2.5) (4.7)
Financing activities.................... (2.2) (2.1) 2.9 3.5
</TABLE>
31
<PAGE>
Cash flows used in our operating activities were $6.1 million for the
thirty nine weeks ended September 30, 1999, compared to cash provided by our
operating activities of $0.1 million for the nine months ended September 30,
1998. Cash flows used in our operating activities for the thirty nine weeks
ended September 30, 1999 were primarily due to an increase in merchandise
inventories to support the seasonal nature of our business, and prepaid
expenses, offset by net income. Cash provided by our operating activities for
the nine months ended September 30, 1998 was primarily due to net income,
adjusted for depreciation and amortization, offset by an increase in merchandise
inventories.
Cash flows provided by our operating activities were $14.5 million in
1998 compared to $5.6 million in 1997. Cash provided by our operating activities
in 1998 was primarily from net income, adjusted for depreciation and
amortization, an increase in accounts payable and accrued expenses and the
receipt of a volume rebate from a supplier. Cash provided by our operating
activities in 1997 was primarily from net income, adjusted for depreciation and
amortization and an increase in accounts payable and accrued expenses, offset by
an increase in merchandise inventories and accretion of deferred revenue and
volume rebates.
Our net cash used in investing activities was primarily for new stores.
We opened ten stores in 1997, 14 stores in 1998 and 12 stores during the first
thirty nine weeks of 1999 versus nine stores opened during the first nine months
of 1998. The balance of our cash used in investing activities was for capital
expenditures relating to our corporate headquarters and distribution center.
Net cash provided by or used in financing activities reflects
transactions with owners or other providers of capital. Significant transactions
include the following:
o In 1997, funds were primarily used for subchapter S
corporation distributions relating to shareholders' tax
liabilities, offset by proceeds from the issuance of long-term
debt.
o In 1998, funds were used for subchapter S corporation
distributions relating to shareholders' tax liabilities and
principal payments on long-term debt, offset by proceeds from
the issuance of long-term debt and line of credit borrowings.
o During the thirty nine weeks ended September 30, 1999, in
conjunction with a private equity transaction and
recapitalization, we received $35.0 million from a group of
investors led by Advent International Corporation, $20.0
million in proceeds from the issuance of long-term debt, and
$11.8 million in proceeds from a line of credit. These funds
were used, in part, to pay off debt incurred during 1998, to
pay $55.0 million of a $59.5 million dividend to Bernard Spain
and Murray Spain, to pay $3.6 million in transaction costs and
to fund seasonal working capital needs.
In January 1999, Dollar Express Stores, Inc. declared and paid by means
of two promissory notes a dividend to Bernard Spain and Murray Spain, the two
shareholders of record on that date. The total dividend amounted to
approximately $59.5 million.
In February 1999, Dollar Express Stores, Inc. completed a
recapitalization that resulted in changes in its ownership and capital
structure. The recapitalization was initially effected by the contribution by
Bernard Spain and Murray Spain of all the outstanding common stock of Dollar
Express Stores, Inc. in exchange for 6,470,000 shares of our common stock. As a
result, Dollar Express Stores, Inc. became our wholly-owned subsidiary.
Additionally, through a private placement, we sold 3,530,000
32
<PAGE>
shares of newly issued Series A 8.75% cumulative convertible preferred stock,
par value of $0.01, in exchange for $34.0 million. We also issued warrants to
purchase 416,667 shares of our common stock in exchange for $1.0 million.
In February 1999, we entered into a five-year credit facility for an
aggregate amount of $40.0 million, of which $20.0 million is in the form of a
term loan and $20.0 million is a revolving credit facility. At our option,
interest on the facility is calculated at the lender's base rate plus a margin
or LIBOR plus a margin based on a leverage ratio. The margin ranges from 0% to
1% on base rate borrowings and 1.75% to 2.75% on LIBOR borrowings. At September
30, 1999, the weighted average interest rate was 7.70%. A portion of the
proceeds of the facility, together with funds provided from the private
placement, were used to satisfy the promissory notes to Bernard Spain and Murray
Spain, repay the outstanding amount on our line of credit and pay costs
associated with the recapitalization.
The term portion of the credit facility calls for increasing quarterly
payments beginning in 2000. Annual maturities are as follows: 2000 -- $2.0
million, 2001 -- $4.0 million, 2002 -- $6.0 million, 2003 -- $8.0 million.
Our credit facility contains customary financial covenants, including
maximum leverage, fixed charges and minimum operating cash flow amounts. We were
in compliance with all covenants as of and for the thirty nine weeks ended
September 30, 1999.
Upon completion of this offering, we plan to repay all outstanding
amounts under our credit facilities, terminate these facilities and obtain a new
revolving line of credit, a portion of which may be in the form of letters of
credit.
We have entered into an agreement for purchase of the land for our new
corporate headquarters and distribution facilities. We anticipate commencing
construction during the first quarter of 2000 and expect to begin operating out
of the new distribution center during the first quarter of 2001. We expect to
move into our new corporate headquarters, which will be located adjacent to the
new distribution center, in the second quarter of 2001. We estimate that the
cost of our new headquarters and distribution center, including land
acquisition, will be approximately $20.7 million. We expect to obtain permanent
construction financing to fund the cost of these facilities.
We expect that capital expenditures for 2000 and 2001 will be incurred
primarily for construction of our new corporate headquarters and distribution
center, new store openings and upgrading existing stores. Over the next several
years, we plan to open new Dollar Express stores at a rate of approximately 25%
per year. Including all inventory and pre-opening costs, the average store
requires an investment of approximately $0.3 million, which varies based upon
the square footage of the location and the level of tenant's work required. We
currently plan to open 25 Dollar Express stores in 2000 and 32 Dollar Express
stores in 2001, requiring an estimated cash expenditure of $7.5 million in 2000
and $9.6 million in 2001. We believe that cash flows from operations, together
with the funds available under our existing and new credit facility and the net
proceeds from this offering, will be sufficient to satisfy our capital
requirements for at least the next 12 months.
33
<PAGE>
Inflation
We do not believe that inflation has had a material effect on our
financial position or results of operations during the past three years.
However, we cannot predict the future effects of inflation.
Year 2000 Readiness Disclosure
We have completed a comprehensive review of our computer systems and
other microprocessor-based equipment to identify how we may be affected by the
Year 2000 issue. The Year 2000 issue results from the writing of computer
programs using two digits, rather than four, to define the applicable year. As a
result, commencing in 2000, date-sensitive software may recognize a date using
"00" as 1900 rather than as 2000. This could result in a systems failure or
miscalculations causing disruption of operations, including a temporary
inability to receive shipments, process financial information, process credit
card transactions, deliver products to our stores, or engage in other routine
business activities.
Information Technology Systems
Our inventory management system consists of a purchased software
package that has been modified to accommodate our specific processes. The
purchased software has been certified Year 2000 compliant by the Information
Technology Association of America. We have determined that the modified portion
of our inventory management system will require remediation to become Year 2000
compliant. The necessary modifications to the system are scheduled to be
implemented prior to January 1, 2000. This system runs on AS/400 hardware, which
has been certified by IBM to be Year 2000 compliant. Our current financial
accounting software (comprising general ledger, accounts payable and sales audit
programs) is a proprietary package developed for our use by a third party. We
have purchased new financial accounting software, which we plan to implement
prior to January 1, 2000. This software has been certified Year 2000 compliant.
Our in-store systems, through which our store managers order
merchandise using a customized polling program, have recently been upgraded to
achieve Year 2000 compliance. We utilize non-point-of-sale based registers to
process sales transactions, which have no date sensitive functions.
Non-Information Technology Systems
Non-information technology systems include phone systems, fax machines,
and the security systems in our stores, headquarters and distribution center.
Based on our assessment, we have determined that these systems will not be
affected by the Year 2000 issue.
Costs of Year 2000 Compliance
We incurred $0.3 million in costs associated with Year 2000 issues,
attributable primarily to upgrading our store polling software and hardware. The
costs associated with modifications, upgrades and replacements to become Year
2000 compliant were not material to our financial position or results of
operations. We have used a combination of funds from operations and borrowings
on our revolving line of credit to cover our Year 2000 costs.
34
<PAGE>
Contingency Plans
If our inventory management system were to cease operating on January
1, 2000, we could continue to process store orders manually. Additional effort
would be required to process these orders at both the stores and distribution
center. Similarly, if our financial accounting system were to cease operations,
we would manually process the transactions necessary to conduct our business.
While we do not believe the cost of the additional manual effort would be
material, there would be a significant disruption in store, distribution center
and corporate operations.
We believe we have sufficiently mitigated the Year 2000 risks to the
point that we have not developed other Year 2000 contingency plans. If Year 2000
problems are discovered, we will address these issues as they occur.
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential loss arising from adverse changes in
interest rates and foreign currency exchange rates. We are exposed to market
risk from changes in interest rates on borrowings under our revolving line of
credit that bears interest based on the lender's base rate or LIBOR. The balance
on our line of credit fluctuates throughout the year to fund seasonal cash flow
needs. As of September 30, 1999, the balance on our line of credit was $15.8
million. A portion of the proceeds from this offering will be used to pay off
this line, though we expect to continue to use short-term line of credit
borrowings as seasonal needs require.
We have no derivative instruments in our cash and cash equivalents. We
invest cash and cash equivalents not required for current operations in
investment grade, highly liquid investments, consisting of U.S. government
securities. We anticipate investing the net proceeds from this offering in
similar investment grade and highly liquid investments pending their use. See
"Use of Proceeds."
If market interest rates were to increase by 10% from rates as of
December 15, 1999, the effect would not be material to our business, financial
condition, or results of operations.
All of our purchases and sales are in U.S. dollars. Accordingly, we
believe that we have no material foreign exchange rate risk.
35
<PAGE>
BUSINESS
Our Company
Our Dollar Express Stores
We are a leading operator of fixed $1.00 price point stores in the
United States. Our Dollar Express stores operate in the deep discount segment of
the discount retail industry, which is among the fastest growing segments in the
$420 billion mass market retail industry. We offer our customers a wide
assortment of regularly available merchandise, such as housewares, food and
other consumable items, giftware, health and beauty care items and toys. We
supplement this merchandise with ever-changing seasonal and first quality
closeout offerings. This merchandise mix is selected to create a "treasure hunt"
shopping experience. Our products include national brand name merchandise, which
is prominently displayed in our stores, as well as our own and other private
label products. Almost all of our products are sold at our fixed $1.00 price
point and are intended to exceed customers' expectations of the range and
quality of items that can be purchased at this price.
We believe we distinguish ourselves from our competition in the
following ways:
o we balance our merchandising mix between regularly available
consumables and variety merchandise and a changing combination of
seasonal and closeout products;
o we emphasize seasonal and holiday merchandise throughout the year in
our ever- changing product mix;
o we focus attention on the selection and presentation of our
merchandise, considering fashion and color, and emphasize the design
and packaging of those items over which we have control,
particularly our Today's Home private label line;
o we have established a style and look to our stores that we believe
is more upscale than that of other retailers in our segment of the
retail industry; and
o our stores are typically larger than those of many of our direct
competitors, averaging 8,700 square feet.
We believe these features attract customers to our stores, encourage repeat
visits, and generate greater spending.
Each of our founders, Bernard Spain and Murray Spain, has more than 40
years of experience in retail. In addition, the five other members of our senior
management team average more than 20 years of retail experience. Most of these
executives have spent their entire business careers working for us.
In 1998, our Dollar Express stores generated net sales of $111.6
million, representing a compound annual growth rate of 24.9% over the last three
years. In 1998, our Dollar Express stores that were open the entire year
averaged $1.4 million in net sales, and had net sales per estimated selling
square foot of $240. Our stores opened in 1998 generated an average first year
pre-tax cash-on-cash return on investment in excess of 100%, and we believe that
historically, our new stores have become profitable during their first full year
of operation.
36
<PAGE>
We currently operate 99 Dollar Express stores in six states:
Pennsylvania, New Jersey, Maryland, Delaware, New York and Virginia. We plan to
increase our Dollar Express store count by approximately 25% per year, and
believe that we could operate up to 250 stores within our current 250 mile
distribution radius.
Our Spain's Cards & Gifts Stores
We are one of the largest specialty greeting card vendors in the
Philadelphia metropolitan area. Our Spain's Cards & Gifts stores offer our
customers a wide selection of greeting cards, moderately priced giftware, fad
and novelty products, candy and other consumer items. We believe that the
merchandise mix in our Spain's stores allows us to quickly recognize new trends
in merchandising, which we can take advantage of in our Dollar Express stores.
Our Spain's stores have a dedicated management team and buying staff and are run
separately from our Dollar Express stores.
During 1998, the Spain's stores generated net sales of $19.2 million.
We currently operate 25 Spain's stores, primarily in the Philadelphia
metropolitan area. We do not anticipate significant growth in the number of
Spain's stores, but will take advantage of attractive opportunities for new
stores as they arise.
Our History
Our founders, Bernard Spain and Murray Spain, opened their first
Spain's store in 1959. Over the next 25 years, they successfully expanded the
Spain's chain to approximately its current size. In 1970, the Spain brothers
were credited with creating the national "smile face" fad, which was widely used
on items such as buttons, bumper stickers and note pads. We still use the yellow
smile face, which is part of the public domain, as the logo for our Spain's
stores.
During the 1970's, we also established two gourmet cookware stores,
which evolved over the following decade into the "Merit Outlet" chain of
value-oriented general merchandise stores. The success of the "Merit Outlet"
format inspired us to experiment with the deep discount, dollar store concept by
opening a Dollar Express store in Philadelphia in 1989. The strong financial
performance of this Dollar Express store and subsequently opened stores led us
to convert our remaining Merit Outlet stores into Dollar Express stores over the
next two years. Since then, we have grown our Dollar Express stores operations
to 99 stores as of December 15, 1999.
Our Operating Strategy
Our goal is to enhance our position as a leader in the fixed $1.00
price point store segment of the retail industry. The strategies that we employ
in our Dollar Express stores to help us achieve this goal include:
Carry a Broad and Value-Oriented Merchandise Mix. We offer our
customers a wide assortment of regularly available, seasonal and closeout
merchandise. Our products are intended to exceed our customers' expectations of
the range and quality of items that can be purchased at our fixed $1.00 price
point. We carry merchandise in the following product categories:
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
o Food and other consumables o Health and beauty care items
o Seasonal and holiday goods o Toys and baby items
o Housewares, glassware and kitchen items o Cleaning supplies
o Giftware o Other general merchandise
</TABLE>
Our wide variety of regularly available merchandise allows our
customers to shop at our stores for their everyday purchase needs. Much of our
regularly available merchandise consists of products from national brands, such
as Colgate-Palmolive, Hershey Foods, Kraft, Nestle and Procter & Gamble. These
national brands provide our customers with comfort regarding the quality of our
products. In addition, we offer private label products that we believe are
comparable in quality to national name brand products. We sell many of our
housewares under our own label, Today's Home, which includes high-quality
products that add variety and completeness to our product offerings. Our
seasonal and closeout products allow our stores to feature a constantly changing
portion of our product mix, which we believe adds to our customers' "treasure
hunt" shopping experience.
Focus on Product Merchandising. We are proud of our products and how we
merchandise them. We pay careful attention to how our products appear to our
customers. These details include the location of the products in the store, the
grouping of individual products, the manner in which products are displayed, and
the appearance of each product's packaging.
Our merchandise is organized according to a plan-o-gram, which
prescribes a uniform layout for the strategic grouping and placement of
categories of merchandise within our stores. For instance, seasonal and name
brand merchandise is featured prominently at the front of our stores to attract
customers into our stores and to create impulse purchases. The large format of
most of our stores allows us to feature items in multiple locations within the
store and in mass displays, which provides the customer with additional
opportunities to see and buy these products. Complementary products are
displayed together to encourage our customers to purchase related accessories.
The plan-o-gram is changed at least seven times a year to correspond with each
of our seasonal programs.
Our displays are designed to be reminiscent of those of higher priced
specialty retailers. We use a combination of colors, sizes, and product mix in
order to create visually appealing displays. For our Today's Home brand and
other private label products, we work closely with our manufacturers and
suppliers to design packaging and products that create a sense of uniformity and
that are desirable to our customers.
Use Our Large Format Stores to Create a Customer-Friendly Shopping
Environment. Our large format stores, which are typically larger than other
dollar stores, are designed to display more merchandise and to provide our
customers with a comfortable and visually appealing shopping experience. Of our
99 stores, 62 are of the large format variety and include design features
reminiscent of many of the successful large mass merchandisers. These design
features include wider aisles and shopping carts to increase our customers'
shopping comfort. We also offer supermarket style checkout areas for our
customers' convenience. We believe that these features appeal across a wide
range of demographics.
Maintain Flexibility in Selecting Sites for New Locations. Our stores
are successful in a wide range of sizes and formats. We believe that this allows
us to consider more potential store sites and at times negotiate more favorable
lease terms than less flexible retailers. Although our prototype stores are
9,000 to 11,000 square feet, we successfully operate stores as large as
approximately 16,000 square feet.
38
<PAGE>
Additionally, we have been opportunistic in leasing sites that do not conform to
the standard layouts favored by many other retailers. Finally, our stores have
been successful in a variety of locations, including free-standing locations and
anchored and unanchored strip centers. However, we have no stores in enclosed
malls, which tend to charge much higher rents than are charged for similar
spaces in strip centers or free-standing locations.
Operate in an Efficient, Low Cost Manner. Our fixed $1.00 price point
requires us to focus on controlling the cost of our operations. The cost of our
merchandise is the largest component of our cost of goods, and is also our
largest expense. Our experienced buyers, established reputation with our
suppliers, import purchasing program, and purchasing power each add to our
ability to control the cost of this merchandise. Our inventory management system
enables us to benefit from efficient logistics within our central distribution
center, further decreasing our cost of merchandise. The other major component of
our cost of goods is rent, which we attempt to minimize by not locating stores
in high rent locations and by utilizing our flexibility in site selection. Our
gross profit margin, which is net of warehousing, distribution and store
occupancy costs, was 29.4% for 1998 and 29.0% for the thirty nine weeks ended
September 30, 1999.
Payroll costs comprise the largest component of our operating costs. We
attempt to control payroll costs by centrally developing the payroll budget for
each store. We do not advertise, relying instead on attractive exterior signs
and in-store merchandising and signage in order to attract customers. Our
operating profit margin was 8.4% for 1998 and 5.9% for the thirty nine weeks
ended September 30, 1999.
Our Growth Strategy
The following table sets forth information with respect to the growth
of our Dollar Express stores operations (Dollars in thousands, except average
annual net sales per estimated selling square foot):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1997 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Sales Data:
Net sales ................................................... $ 74,125 $ 86,271 $111,618
Annual net sales growth rate ................................ 30.5% 16.4% 29.4%
Average annual net sales per store (1)....................... $ 1,243 $ 1,303 $ 1,430
Change in comparable store net sales......................... 10.7% 0.5% 2.8%
Average annual net sales per estimated selling square foot(1)(2) $ 245 $ 232 $ 240
Store Data:
Number of stores at end of year.............................. 63 70 82
Estimated selling square footage at year end (2)............. 341,252 406,586 531,263
</TABLE>
- ----------------
(1) Includes data only for stores open for the entire year.
(2) Assumes 85% of total square footage is available as selling square footage.
We believe that our growth will come from our Dollar Express stores. In
order to continue our revenue and income growth for these stores in the future,
we intend to pursue the following strategies:
Continue Opening Large Format Stores in our Current Distribution
Radius. Our future growth will primarily result from new store openings. We
operate 99 stores within our current 250 mile
39
<PAGE>
distribution radius and we believe that we can operate up to 250 stores within
this geographic region. By continuing to focus our store openings in the
geographic region served by our existing distribution center for the immediate
future, we can take advantage of our significant brand awareness and operating
experience in the region, as well as management and other operating
efficiencies. We plan to open 25 new Dollar Express stores in 2000, and already
have signed leases for 15 of these stores. We intend to increase our store count
at a rate of approximately 25% per year over the next several years. Although we
will concentrate our efforts on our current geographic region, we will also
consider developing new markets in contiguous regions, to be serviced by new
distribution centers as necessary.
Support Our Growth with Strong New Store Economics. We have strong new
store economics. Our stores opened in 1998 generated an average first year
pre-tax cash-on-cash return on investment in excess of 100%, and historically
our new stores have become profitable within their first full year of operation.
Factors contributing to this success include thoughtful store site selection,
efficiency in preparing our store space for use, and the speed with which our
stores mature. We believe these strong new store economics will facilitate our
continued growth by allowing us to recoup and redeploy the original capital
invested in each store.
Increase Variety and Number of Products Offered. We continuously strive
to offer exciting new products at our fixed $1.00 price point. These products
include new items within our existing range of product categories, as well as
items in categories not previously carried in our stores. We plan to increase
the number of consumable and higher margin import items that we offer.
Introduction of new products is designed to further increase our ability to
attract customers into our stores by generating customer interest throughout the
year. It also is expected to increase sales per customer by increasing our
customers' length of stay and stimulating impulse purchases.
Convert Smaller Stores to Larger Stores and Older Stores to Modern
Stores. We believe that large format stores are more attractive to customers and
therefore are more competitive than smaller stores. We currently have 37 small
format stores. We continue to evaluate converting these smaller stores into
large format stores on an opportunistic basis. With some of our smaller stores,
this can be accomplished by expanding in our current location. Otherwise, we
seek to locate suitable large format space targeting the same population as the
current location.
We have also found that stores with modern fixtures generate greater
revenue and operating profit than stores with older fixtures. Approximately 25
of our stores continue to use their original fixtures. We will seek to replace
these fixtures with modern shelving, slat walls and adjustable displays. These
modern display units allow us the flexibility to display a larger selection of
certain items, and to rearrange merchandise to prominently display our featured
products. We intend to complete this process by the end of 2001. In all of our
stores, we continuously improve our fixtures as appropriate in order to enhance
our customers' shopping experience.
Acquisitions. Although we have no short-term plans regarding potential
acquisitions, we intend to consider potential acquisitions as we continuously
evaluate our position within our industry. We may in the future acquire
complementary businesses that can be integrated into our business operations,
ranging in size from small businesses with only a few stores to larger chains
with many stores.
40
<PAGE>
Dollar Express Stores Concept
Store Design
We have established a style and look to our stores that we believe to
be more upscale than that of other retailers in our segment of the discount
retail industry. Our stores are attractively designed, use bright colors and
uniform decorative signs, and are well-lit and efficiently organized. Our large
format stores also have wide aisles and shopping carts to increase our
customers' shopping comfort. We also offer supermarket style checkout areas for
our customers' convenience.
Our merchandise is organized according to a plan-o-gram, which
prescribes a uniform layout for the strategic grouping and placement of
categories of merchandise within our stores. For instance, seasonal and name
brand merchandise is featured prominently at the front of our stores to attract
customers into our stores and to create impulse purchases. The large format of
most of our stores allows us to feature items in multiple locations within the
store and in mass displays, which provides the customer with additional
opportunities to see and buy these products. Complementary products are
displayed together to encourage our customers to purchase related accessories.
The plan-o-gram is changed at least seven times a year to correspond with each
of our seasonal programs. The following is a sample plan-o-gram for our
prototype store:
[Floor Plan of Prototype Store Layout]
41
<PAGE>
We use a variety of merchandising fixtures, including slat walls, bins
and shelving, and platform and adjustable displays, which allow us the
flexibility to present a large selection of different items, and rearrange
merchandise to prominently display our featured products. Before and after hours
stocking of the stores helps ensure that our displays are always well stocked,
and also assists in maintaining our stores' clean, neat appearance.
Our stores are also designed to be customer friendly. Because speed of
checkout is a priority and because of our continuously changing merchandise mix,
we do not have a point of sale system for tracking sales of individual items of
merchandise. We have designed our stores with a supermarket style, centralized
check-out area at the front of the store. This design, together with our fixed
$1.00 price point, ensures efficient processing of sales and minimizes the time
customers wait to complete purchases. Our stores accept most major credit cards
and some debit cards, but do not accept personal checks.
We believe this shopping environment appeals across demographic
categories and provides our customers with an exciting and enjoyable shopping
experience that encourages longer stays, increases purchases and results in
repeat visits.
Products
Our stores offer quality, regularly available products in a wide range
of categories, as well as a frequently changing mix of seasonal and closeout
products. We utilize color and fashion in the design and packaging of our
products. Our attractive and varied product mix, together with our fixed $1.00
price point, are intended to create a "treasure hunt" experience for our
customers.
During the thirty nine weeks ended September 30, 1999, sales in our
Dollar Express stores (based on shipments from our distribution center) were
broken down by category as follows:
Percent of
Category Sales
- ----------------------------------------------------- -------------
Food and Other Consumables........................... 25%
Seasonal and Holiday Goods........................... 18%
Housewares, Glassware and Kitchen Items.............. 13%
Giftware............................................. 12%
Health and Beauty Care Items......................... 10%
Other General Merchandise ........................... 10%
Toys and Baby Items.................................. 6%
Cleaning Supplies.................................... 6%
-------------
Total...................................... 100%
-------------
Our wide variety of regularly available products allows our customers
to shop in our stores for their everyday needs. These products consist of both
branded and private label items. Although particular items and brands offered at
42
<PAGE>
any time will vary, we offer nationallyrecognized, brand-name products from
manufacturers or suppliers including:
o Alberto Culver o Heinz o M&M/MARS
o Campbell Soup o Helene Curtis o Nabisco
o Coca-Cola o Hershey Foods o Nestle
o Colgate-Palmolive o Hormel Foods o Panasonic
o Dial o Kraft o Procter & Gamble
o Fisher-Price o Lever Brothers o Rubbermaid
o General Mills o Lipton o Wm. Wrigley Jr.
We also offer private label products that we believe are comparable in
quality to national name brand products. Many of our imported products are
packaged under our label "Today's Home." We believe these products are
reminiscent of those carried by higher price specialty retailers. Our private
label also enables us to maintain tighter control over the look, quality and
availability of this merchandise.
The changing portion of our product mix is primarily composed of
seasonal and closeout merchandise. Our seasonal programs are built around the
following seven themes:
o Valentine's Day and St. Patrick's Day
o Easter
o Spring and Summer
o Graduation
o Back-to-school
o Halloween and Thanksgiving
o Christmas and New Years
Holiday themes feature products such as Halloween candy, Easter gifts, and
Christmas ornaments. Seasonal themes feature products such as outdoor tableware
and cookware for summer, supplies for back-to-school, and gardening tools for
the spring. Closeout merchandise varies constantly depending upon availability,
and typically falls within our existing product categories.
Purchasing
In order to be successful in selling products at our fixed $1.00 price
point, we must control merchandise costs. Our experienced buyers, established
reputation with our suppliers, import purchasing program, and purchasing power
each allow us to control our merchandise costs by enabling us to purchase
products at favorable prices. Our principal buyers average more than 25 years
experience with us and have the authority to make immediate buying decisions,
enabling them to move quickly to purchase attractive products at favorable
prices.
We purchase merchandise from over 700 vendors annually, buying both
directly from manufacturers and indirectly from trading companies and brokers.
No vendor accounted for more than 6% of total merchandise purchased in any of
the last three years. We are constantly seeking new vendors in order to
encourage price competition, vary our product mix, and maintain high levels of
value.
43
<PAGE>
During the thirty nine weeks ended September 30, 1999, approximately
64% of the merchandise we purchased consisted of regularly available consumer
goods purchased domestically, approximately 18% consisted of imported private
label and seasonal goods, and approximately 18% consisted of closeout items.
Regardless of the source, our buying decisions focus on items that can be sold
profitably at our fixed $1.00 price point and that we consider to be of real
value to our customers. We believe that this focus allows us to maintain gross
margins and inventory turnover rates that are not depressed by unsaleable
merchandise.
Our domestically sourced, regularly available merchandise is purchased
directly from domestic suppliers, although some of these products are imported
by these suppliers. Our imported merchandise is purchased directly from foreign
manufacturers or from commissioned trading companies. These trading companies
assist us in dealing with the actual vendors and in providing local market
knowledge and expertise. We believe that the products purchased through any one
of these companies could be obtained through others. Our principal foreign
suppliers are located in China, although we also import products from Hong Kong,
Taiwan and other countries. The pricing of and payment for imported products are
conducted in U.S. currency.
Closeout merchandise is typically available due to the need of
manufacturers, wholesalers and others to distribute merchandise outside their
normal channels. It also becomes available as a result of the discontinuance of
merchandise due to style or color changes, the cancellation of orders placed by
other retailers, or the termination of business by a manufacturer or wholesaler.
Although closeout merchandise is important to our merchandising strategy, we
limit the closeout portion of our merchandise mix. We believe depending too much
on closeout items would force us to purchase merchandise lots containing both
undesirable and obsolete products.
We deal with our suppliers principally on an order-by-order basis.
Although we have no long-term purchase contracts or other contractual assurance
of continued supply or pricing, we have been purchasing from many of our
suppliers for more than 15 years. We believe that our strong relationships with
these suppliers will enable us to continue to receive a supply of attractive,
high-quality merchandise suited to our fixed $1.00 price point in sufficient
quantities to meet our future growth plans.
Store Operations
Our stores are generally open from 9:00 a.m. to 9:00 p.m. from Monday
through Saturday, and from 10:00 a.m. to 5:00 p.m. on Sundays. Store hours are
extended during holiday seasons. Each store is managed by a store manager and up
to two assistant managers, and typically has between 12 and 20 full- time and/or
part-time sales associates, depending upon sales volume and store size. Staffing
may also vary based on seasonal needs.
Store managers are responsible for merchandise presentation, hiring and
labor scheduling, customer service, store maintenance, inventory management and
in-store security. Store managers track inventory at the store level and place
re-orders utilizing our computerized merchandise ordering system. Store managers
and assistant managers are compensated with a base salary and a performance
award that is based on on-going store inspections and individual store goals.
Our store managers are supervised by 15 district managers who are, in turn,
overseen by three regional managers. We believe that this organizational
structure will facilitate our expansion program while maintaining the uniformity
and consistency in our stores that our customers have come to expect. We also
believe that we have a high employee retention rate.
44
<PAGE>
We recruit district and store managers from a variety of sources,
including traditional employment advertising, placement agencies, Internet job
postings, employee referrals and promotions. Prior to assuming full
responsibility for a store, newly hired managers complete a store operations
training program and work in another store directly with an experienced manager
and our Director of Manager Training. Newly hired district managers train with
experienced regional and district managers. Their training focuses on manager
supervision, as well as on how to effectively disseminate and enforce store
operating policies.
As part of our regular system of financial controls, we have an
experienced security department devoted to minimizing employee theft and
shoplifting. We also use an independent security firm to supplement our in-house
security measures.
Site Selection and Store Locations
We maintain a disciplined and creative approach to site selection, in
which we seek to locate high-volume, high-visibility locations while at the same
time minimize rent expense. Our stores are typically located in small strip
shopping centers as well as large strip shopping centers anchored by other large
format retailers and mass merchandisers. We also seek free-standing locations.
We believe that these locations require lower rental payments and generate
higher operating margins than stores located in enclosed shopping malls, and
therefore we do not open stores in enclosed malls. Of our 99 stores operating as
of December 15, 1999, 84 were located in strip centers, eight were located on
major streets in traditional shopping locations and seven were located in
free-standing locations.
We have developed procedures for adapting our merchandising and store
design concepts to non-traditional spaces, such as irregularly shaped spaces and
spaces of varying size. We have found that often we can obtain these spaces for
significantly less rent than is typically being paid by the other retailers in
stores adjacent to ours.
We focus our site selection efforts on locating sites suitable for our
large format stores, which we consider to be stores with more than 8,000 square
feet. The average square footage of our newly opened stores was 10,400 in 1998
and 11,200 for the first nine months of 1999. Our current "prototype" store is a
large format store of 9,000 to 11,000 square feet, and we successfully operate
stores as large as approximately 16,000 square feet.
Our stores have been successful in a variety of locations, from small
towns to major metropolitan and suburban markets. Ideally, we seek to locate in
middle and higher income markets with a demographic composition that includes
young married couples with children, and older, value-conscious individuals. A
summary of our stores by state as of the end of each of the last three years is
presented below:
45
<PAGE>
Year Ended December 31,
-----------------------------------------
1996 1997 1998
------------ --------- ----------
Pennsylvania....................... 43 46 52
New Jersey......................... 17 19 22
Maryland........................... - 2 4
Delaware........................... 3 3 4
New York........................... - - -
Virginia........................... - - -
------------ --------- ----------
Total..................... 63 70 82
------------ --------- ----------
We opened 18 stores in 1999 and anticipate opening 25 new stores during 2000,
all of which will be located within our current distribution radius. We have
signed leases for 15 of these planned new stores. We intend to concentrate our
new store openings in this geographic area for the foreseeable future.
We currently lease all of our stores and we expect that our policy of
leasing rather than owning will continue. Our leases typically provide for an
initial lease term with a number of successive renewal options. This format
gives us the flexibility to pursue extension or relocation opportunities that
arise from changing market conditions. The following table lists the number of
leases for our current locations that will expire during each of the periods
listed (assuming the exercise of all options to extend):
Expiring in Calendar Year
------------------------------------------------------------------
2004 and
2000 2001 2002 2003 Beyond
---------- --------- --------- --------- -------------
3 5 3 5 83
We believe that our long, successful operating history, excellent
credit history, strong relationships with substantial real estate developers,
and ability to generate substantial customer traffic give us significant
bargaining power when negotiating lease terms. As current leases expire, we
believe that we will be able to obtain either renewals at present locations or
leases for equivalent or better locations in the same target area.
Spain's Cards & Gifts Stores
We operate 25 Spain's Cards & Gifts Stores, which makes us one of the
largest greeting card vendors in the Philadelphia metropolitan area. Spain's
sells a major, nationally recognized line of greeting cards under a purchase
agreement that extends to 2003. In addition, we carry products sold by most of
the leading small greeting card suppliers. Spain's also offers moderately
priced, year round and seasonal giftware and related products, fad and novelty
products, candy and other consumer goods.
Spain's stores average 4,000 square feet, and are situated in
neighborhood and large strip shopping centers, center city locations,
neighborhood street locations and regional malls. Although our Spain's stores
share headquarters and warehouse facilities with our Dollar Express stores, our
Spain's stores management team is and will continue to be dedicated exclusively
to Spain's stores. All of the members of Spain's management team have risen
through the ranks from stock positions to executive management. Spain's
management team averages over 18 years experience with our Spain's stores.
46
<PAGE>
We plan to continue operating approximately 25 Spain's stores. We
opened one new Spain's store in 1999. We would consider selectively opening
additional Spain's stores in the region if appropriate locations were to become
available.
Warehousing and Distribution
Warehousing and distribution are managed centrally from our 200,000
square foot distribution center located in Philadelphia, Pennsylvania adjacent
to our 83,000 square foot corporate headquarters and warehouse facility. These
facilities provide convenient access to major interstate highways, as well as
the ports of Philadelphia, Wilmington and Baltimore. Our warehouse facility
primarily supports the Dollar Express stores. The Spain's stores require little
warehouse space, as nearly all of the merchandise carried in these stores is
shipped directly from the supplier to the individual store locations. We believe
that our distribution center has the capacity to service approximately 140
Dollar Express stores, which we expect will be sufficient to serve our needs
through the second quarter of 2001. In order to serve our expansion objectives,
we intend to replace our distribution center and warehouse with a new,
approximately 360,000 square foot facility. This facility will provide us with a
significant increase in warehousing and distribution capacity due to both the
increase in square footage in this facility and its higher ceilings. We estimate
the total cost of this new distribution center to be approximately $20.7
million. We have recently signed an agreement to acquire land located within
three miles of our current distribution center on which we will build this
facility, which we expect will be operational in the first quarter of 2001. We
believe that this new distribution center will be capable of servicing up to 250
stores within a 250 mile radius of the distribution center.
The bulk of our inventory is shipped directly from suppliers and
delivered to our distribution center, where the inventory is processed and then
distributed to our stores by our fleet of leased trucks. We can deliver
merchandise received at the distribution center to stores by the following day.
Our stores are supplied with a combination of new and re-ordered
merchandise on a regular delivery schedule that varies from two to five times
per week, depending on a store's size and inventory turnover. Inventory is
managed and distributed to the stores through a "push/pull" inventory management
process. Approximately two-thirds of the merchandise in the distribution center
is "pushed" by the distribution center to the stores to maintain pre-determined
store inventory levels. The remaining one-third is "pulled" into the stores from
the distribution center by store managers. Store managers log onto terminals at
their stores to re-order merchandise from lists of inventory available at the
distribution center.
Information Systems
Our business is supported by a customized inventory control system
processed by an AS/400 computer, and a standard accounting and financial
reporting system utilizing a PC-based local area network.
The inventory control system tracks the full range of buying functions,
including purchase orders, purchase history by vendor, category and SKU. The
system utilizes radio frequency technology to manage receiving, storing and
shipping at our distribution center in a paperless environment. It also supports
preallocation by store of merchandise purchases. Our store managers use the
inventory control system to place daily orders for product deliveries from our
distribution center. Our inventory server polls the stores each night and
forwards the orders to the inventory control system, which then allocates
47
<PAGE>
the orders according to preprogrammed priorities. Once products are allocated to
a store, the system generates an order confirmation, which it electronically
transmits to the store so that our store managers will know which products they
can expect to be delivered from our distribution center. Because of our
continuously changing merchandise mix and other factors, we have determined not
to install a point of sale system in our stores. We believe our inventory
control system is adequate to support our needs for the foreseeable future.
Our accounting and financial reporting system allows us to prepare
detailed reports to support our operational decisions and our cost control
efforts. Although this system supports our current needs, we will be replacing
this system with a more integrated, year 2000 compliant accounting system that
is expected to be in operation by January 1, 2000. Our payroll is outsourced to
a commercial provider of payroll services.
Competition
The retail industry is highly competitive. Although our Dollar Express
stores compete with many mass merchandisers, our primary dollar store
competitors are Dollar Tree Stores, Inc. and local dollar store chains. We
compete with mass merchandisers and discount retailers primarily on the basis of
price. We compete with other dollar stores primarily on the basis of perceived
value through a broader, more exciting merchandise mix.
Spain's competes in a similar environment, although its primary
competitors are other card and gift stores. We also experience some competition
from on-line greeting card providers. We compete primarily on the basis of our
merchandise mix.
We believe that our Dollar Express stores' fixed $1.00 price point
strategy and the low price point of most of our Spain's stores merchandise limit
the impact of most mail-order and e-commerce competition due to the high cost of
shipping required by those forms of retailing relative to the price of the items
ordered.
Intellectual Property Rights
We are the owners of federally registered service marks, trademarks or
pending federal service mark applications for DOLLAR EXPRESS(R), DOLLAR
EXPRES$(TM), DOLLAR EXPRES$ EVERYTHING $1.00 and Design(R), Today's Home and
Design(R). We also occasionally use various other names under which we market
products, although we believe that these names are not material to our
operations.
Employees
As of December 15, 1999 we employed approximately 2,500 employees, many
of whom were part-time. The number of our part-time employees fluctuates
depending on our seasonal needs. We consider our relationship with employees to
be good.
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<PAGE>
Our 35 truck drivers are unionized. The balance of our work force is
not unionized, although a union is currently attempting to unionize our
warehouse employees, and may attempt to do so again in the future. The
collective bargaining agreement with our union employees expires in February
2002.
Legal Proceedings
From time to time, we may become a party to litigation arising in the
ordinary course of our business. We are not currently a party to any material
litigation.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of December 15,
1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------------ --------- ----------------------------------------------------------
<S> <C> <C>
Bernard Spain ............................ 65 Chairman of the Board and Chief Executive
Officer
Murray Spain.............................. 56 President, Chief Operating Officer and Director
Barry J. Susson........................... 37 Executive Vice President and Chief Financial
Officer
James Misterman........................... 45 Executive Vice President - Purchasing, Dollar
Express Operations
Vincent J. Navitsky....................... 41 Executive Vice President - Purchasing and
Merchandising
Howard B. Savage.......................... 44 Executive Vice President - Construction and
Corporate Operations
David Folkman............................. 49 Executive Vice President - Store Operations
Harvey Goldberg........................... 56 Director
David M. Mussafer......................... 36 Director
William C. Woo............................ 33 Director
David A. Cohen(1)......................... 59 Director
</TABLE>
- ----------------
(1) Mr. Cohen has been nominated and has consented to become a director
following the completion of this offering.
Bernard Spain is our co-founder and has been our Chief Executive Officer
since our inception in 1959. Mr. Spain is primarily responsible for monitoring
and directing the overall operations of our business. Mr. Spain received his
Bachelor of Science degree from Temple University and is a certified public
accountant. Mr. Spain is Murray Spain's brother.
Murray Spain is our co-founder and has been our President and Chief
Operating Officer since our inception in 1959. Mr. Spain is primarily
responsible for directing the day to day operations of our business, with
particular attention paid to retail operations, buying and supplier relations.
Mr. Spain received his Bachelor of Science degree from Temple University.
Barry J. Susson joined us in 1998 as our Executive Vice President and Chief
Financial Officer. Prior to joining us, Mr. Susson was at Ernst & Young LLP for
14 years serving in various capacities, with his last position being Senior
Manager. Mr. Susson received his Bachelor of Science degree from The
Pennsylvania State University and is a certified public accountant.
James Misterman has been our Executive Vice President - Purchasing, Dollar
Express Operations since 1992. Mr. Misterman joined us in 1969 as a stock person
and since then has held various position of increasing responsibility. Prior to
his current position, he was our Vice President and Head Buyer. Mr. Misterman
received his Bachelor of Science degree from LaSalle University.
50
<PAGE>
Vincent J. Navitsky has been our Executive Vice President - Purchasing and
Merchandising since 1992. Mr. Navitsky joined us in 1976 as a stock person and
since then has held various position of increasing responsibility. Prior to his
current position, he was our Vice President and Buyer. Mr. Navitsky received his
Bachelor of Science degree from Temple University.
Howard B. Savage has been our Executive Vice President - Construction and
Corporate Operations since 1992. Mr. Savage joined us in 1970 as a stock person
and since then has held various positions of increasing responsibility. Prior to
his current position, he was our Vice President - Corporate Operations. Mr.
Savage received his Bachelor of Science degree from Temple University.
David Folkman has been our Executive Vice President - Store Operations since
1992. Mr. Folkman joined us in 1966 as a stock person and since then has held
various positions of increasing responsibility. Prior to his current position,
he was our Vice President - Human Resources. Mr. Folkman received his Bachelor
of Science degree from Temple University.
Harvey Goldberg has been a director since February 1999. Mr. Goldberg is
presently the President and Chief Executive Officer of Narricot Industries,
Inc., a manufacturer of industrial textiles. Mr. Goldberg received his Bachelor
of Science degree and Masters of Business Administration from Temple University.
David M. Mussafer has been a director since February 1999. Mr. Mussafer is a
Managing Director of Advent International Corporation, a private equity
investment firm. Mr. Mussafer has held that position since 1997. Mr. Mussafer
joined Advent in 1991 and since then has held various positions of increasing
responsibility. Mr. Mussafer also serves on the board of directors of each of
Kirkland, Inc., Contact East, Inc., Managed Health Care Associates Incorporated
and O-Cedar Holdings, Inc. Mr. Mussafer received his Bachelor of Science degree
from Tulane University and a Masters of Business Administration from the Wharton
School of the University of Pennsylvania.
William C. Woo has been a director since February 1999. Mr. Woo is a
Principal of Advent International Corporation, a private equity investment firm.
Mr. Woo has held that position since 1996. Prior to 1996, Mr. Woo was an
investment manager with Advent. Mr. Woo also serves on the board of directors of
each of CountryBanc Holding Company and Maurice Corp. Mr. Woo received his
Bachelor of Arts degree from Columbia University and a Masters of Business
Administration from the Wharton School of the University of Pennsylvania.
David A. Cohen has been nominated and has consented to become a director
upon completion of this offering. Mr. Cohen is the Chairman of the Board and
Chief Executive Officer of MedQuist Inc., a medical transcription firm. Mr.
Cohen has been Chairman of the Board of MedQuist since July 1996 and Chief
Executive Officer since November 1995. Prior to 1995, Mr. Cohen was President of
Transcription, Ltd., a subsidiary of MedQuist. Mr. Cohen received his Bachelor
of Science degree from Temple University.
Messrs. Mussafer and Woo were appointed to our board in connection with our
recapitalization. See "Certain Relationships and Related Transactions -- The
Recapitalization."
51
<PAGE>
Classified Board of Directors
Upon completion of this offering, our board will consist of six directors.
In accordance with the terms of our charter and bylaws, each of which will
become effective upon the completion of this offering, our board of directors
will be divided into three classes that will serve staggered three-year terms,
as follows:
Initial
Class Expiration Member
------------------------- ---------------- -----------------
Class I 2001 Messrs.
Class II 2002 Messrs.
Class III 2003 Messrs.
At each annual meeting of shareholders after the initial classification,
directors will be elected to serve from the time of election and qualification
until the third annual meeting following the election or special meeting held in
lieu of the annual meeting.
Our bylaws will provide that the authorized number of directors may be
changed by resolution of the board of directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of our board of directors may
have the effect of deterring or delaying any attempt by any group to obtain
control of us by a proxy contest. See "Description of Capital Stock -
Anti-Takeover Effects of Provisions of Our Charter, Our Bylaws and Pennsylvania
Law."
Board Committees
Our board of directors has established a compensation committee, and
prior to or immediately after the closing of this offering, our board will
establish an audit committee.
The compensation committee consists of Harvey Goldberg and David
Mussafer. Neither of the members of the compensation committee is one of our
officers or employees. The compensation committee reviews and makes
recommendations to the board regarding the compensation to be provided to our
executive officers. The compensation committee also administers our bonus and
other incentive arrangements, including the grant of stock options under our
1999 Stock Option Plan.
The audit committee will consist of Harvey Goldberg and David Cohen.
The audit committee will make recommendations to the board regarding the
selection of independent public accountants, review the results and scope of the
audit and other services provided by our independent public accountants, and
review and evaluate our control functions.
The board of directors does not have a nominating committee. The
selection of nominees for the board will be made by the entire board. The board
may from time to time establish other committees to facilitate our management.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
Prior to November 1999, our board of directors did not have a
compensation committee, and all compensation decisions relating to our executive
officers were made by the full board of directors, which in 1998 consisted of
Bernard Spain and Murray Spain. Since November 1999, a compensation committee
has made all compensation decisions regarding our executive officers. Each
member of the compensation committee is a member of the board of directors and
is not an employee. None of our directors or executive officers serves as a
member of the compensation committee or other board committee performing
equivalent functions of any other company whose directors or executive officers
serve on our compensation committee.
Director Compensation
While no director currently receives cash compensation for services
performed in his capacity as director, following the consummation of this
offering, _________. Directors receive reimbursement of out-of-pocket expenses
incurred in connection with attending meetings or attending to other company
business. Each director is eligible to receive discretionary stock option grants
under our 1999 Stock Option Plan. The term and vesting of options awarded to
directors are determined by the compensation committee or, in the case of
outside directors, the full board of directors at the time of grant.
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<PAGE>
The following table shows annual and long-term compensation information
for our Chief Executive Officer and the next five highest paid executive
officers for services rendered in all capacities during 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------- -------------------
Securities All Other
Salary Bonus Underlying Compensation
Name and Principal Position Year ($) ($) Options (#) ($)
- --------------------------------------- --------- ----------- ----------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Bernard Spain ......................... 1998 270,000 100,000 -- 2,613 (1)
Chief Executive Officer
Murray Spain .......................... 1998 270,000 100,000 -- 3,565 (2)
President and Chief Operating Officer
James Misterman........................ 1998 129,116 27,500 -- 1,940 (3)
Executive Vice President -
Purchasing, Dollar Express
Operations
Vincent J. Navitsky ................... 1998 129,116 27,500 -- 1,963 (4)
Executive Vice President - Purchasing
and Merchandising
Howard B. Savage ...................... 1998 129,116 27,500 -- 1,966 (5)
Executive Vice President -
Construction and Corporate
Operations
David Folkman ......................... 1998 129,116 27,500 -- 1,940 (6)
Executive Vice President -
Store Operations
</TABLE>
- ---------------------------
(1) Represents premiums of $1,625 paid by us for group term life insurance and a
matching contribution by us of $988 to our 401(k) savings plan.
(2) Represents premiums of $1,625 paid by us for group term life insurance and a
matching contribution by us of $1,940 to our 401(k) savings plan.
(3) Represents premiums of $810 paid by us for group term life insurance and a
matching contribution by us of $1,130 to our 401(k) savings plan.
(4) Represents premiums of $810 paid by us for group term life insurance and a
matching contribution by us of $1,153 to our 401(k) savings plan.
(5) Represents premiums of $810 paid by us for group term life insurance and a
matching contribution by us of $1,156 to our 401(k) savings plan.
(6) Represents premiums of $810 paid by us for group term life insurance and a
matching contribution by us of $1,130 to our 401(k) savings plan.
54
<PAGE>
Stock Option Information
We did not grant stock options to any of the executive officers named
in the Summary Compensation Table during fiscal year 1998. Pursuant to our 1999
Stock Option Plan, on February 5, 1999, Messrs. Folkman, Navitsky, Misterman and
Savage each received options to purchase 40,000 shares of common stock on a
pre-split basis. These options have an exercise price of $9.63 per share on a
pre-split basis and vest in four equal installments, on August 5, 1999, February
5, 2000, February 5, 2001, and February 5, 2002.
Employment Agreements
On February 5, 1999, we entered into four-year employment agreements
with Bernard Spain, our Chief Executive Officer, and Murray Spain, our President
and Chief Operating Officer. Each of these employment agreements provides for
annual compensation of $325,000, and a maximum annual bonus of $75,000. The
annual compensation amount may be increased by our board of directors after
January 1, 2001. The employment agreements also contain non-competition
covenants, non-solicitation covenants and confidentiality provisions. The
non-competition covenants restrict each of them from competing, directly or
indirectly, with us in the large format dollar store or traditional card and
gift shops business until February 2006 in any geographic areas where we do
business.
On March 1, 1999, we entered into one-year employment agreements with
James Misterman, Vincent J. Navitsky, Howard B. Savage and David Folkman. Each
of these employment agreements provides for annual compensation of $134,000,
subject to increase as of January 1, 2000, as determined by the board. In
addition, each executive officer is entitled to receive an annual bonus in an
amount determined by the board based on our actual performance as compared to
the approved budget. The employment agreements also contain non-competition
covenants, non-solicitation covenants and confidentiality provisions. The
non-competition covenants restrict each of them from competing, directly or
indirectly, with us in the large format dollar store or traditional card and
gift shops business until March 2002 in any geographic areas where we do
business.
Employee Benefit Plans
1999 Stock Option Plan. We adopted our 1999 Stock Option Plan at the
closing of our recapitalization and amended it on _______. This plan is intended
to enable us to provide certain directors, officers, key employees and
consultants with incentives to maximize shareholder value, and to attract and
retain quality candidates for positions of substantial responsibility.
This plan provides for the grant of incentive stock options and
non-qualified stock options and is administered by our board of directors or a
subcommittee of our board of directors. The persons receiving grants of options
under the plans, the number of shares subject to those options, and the exercise
price, vesting conditions and other terms of those options are determined by our
board of directors or its subcommittee.
Options granted under this plan may not be transferred, except by will
or inheritance, and will expire no later than 10 years following their date of
grant. The plan itself will terminate on February 4, 2009. Shares of common
stock subject to an exercisable option may be purchased by the option holder
upon payment of the option exercise price in cash or, at the discretion of our
board of directors or its subcommittee, upon delivery of shares of common stock
with a fair market value equal to the option exercise price.
55
<PAGE>
Upon the occurrence of certain corporate transactions, this plan
provides that our board of directors or its subcommittee may, at its discretion,
accelerate the vesting of outstanding options, exchange outstanding options for
new options to purchase shares of any successor company, or cancel outstanding
options in exchange for a payment of the option "spread" (the difference between
the option exercise price and the then fair market value of the stock subject to
the option). The offering described in this prospectus will not trigger this
discretionary right of our board of directors or its subcommittee.
A total of ________ shares of common stock have been authorized for
issuance under this plan. In addition, we expect to grant to employees, as of
the date of this prospectus, options to purchase an aggregate of _______ shares
of common stock under this plan at an exercise price equal to the initial public
offering price per share. Executive officers who will receive option grants as
of the date of this prospectus, include: Mr. Misterman (_____ shares); Mr.
Navitsky (______ shares); Mr. Savage (______ shares); Mr. Folkman (______
shares); and Mr. Susson (______ shares).
401K Plan. On May 1, 1998, we established the Dollar Express, Inc.
401(k) and Retirement Plan, a defined contribution profit sharing plan
containing elective deferral and employer matching components. This plan is
intended to satisfy the requirements of Sections 401(a), 401(k) and 401(m) of
the Internal Revenue Code. All our employees who are at least 21 years old and
who have completed one year of service are eligible to participate in this plan.
An eligible employee may begin participation in this plan on the first day of
the calendar quarter following the quarter in which he or she satisfies the
above-stated age and service conditions.
A participating employee may elect to defer up to 15% of his or her
compensation under this plan, subject to certain legal limits. Employee
contributions and the investment earnings thereon are fully vested at all times.
For each $1.00 deferred under this plan by a participating employee up to 6% of
his or her compensation, we make a matching contribution of $0.25 to that
participating employee's plan account. Matching contribution expense was $42,375
for 1998. This plan also permits us to make discretionary profit sharing
contributions to be allocated among eligible employees based on the proportion
that each such employee's compensation bears to that of all other eligible
employees. Matching contributions, profit sharing contributions and earnings
thereon vest ratably over six years (or, if sooner, upon attainment of age 65).
We did not make a profit sharing contribution to this plan in fiscal 1998.
All of this plan's assets are invested in a group annuity contract and
mutual funds. Each participant is entitled to direct the investment of all
amounts allocated to his or her plan account. A participant is entitled to a
distribution of his or her plan account upon the earliest of death, disability,
separation from service or attainment of age 59 1/2. Such distributions are made
in the form of either a single lump sum or installment payments. In addition,
this plan permits hardship distributions and participant loans.
Limitation of Liability of Directors and Indemnification of Directors and
Officers
Our charter provides that none of our directors will be personally
liable to us or our shareholders for monetary damages for any action taken or
failure to take any action, unless:
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<PAGE>
o such director has breached or failed to perform the duties of his or
her office under Pennsylvania law; and
o the breach or failure to perform constitutes willful misconduct or
recklessness.
In addition, our bylaws provide that we will indemnify our directors
and officers against any liability incurred in connection with any proceeding in
which the director or officer may be involved as a party or otherwise by reason
of the fact that such director or officer is or was serving as our director,
officer or employee or, at our request, as a director, officer, partner,
fiduciary or trustee of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, unless the act or failure to act
giving rise to the claim for indemnification is finally determined by a court to
have constituted willful misconduct or recklessness or to have been based upon
or attributable to the receipt by any director or officer from us of a personal
benefit to which such director or officer is not legally entitled. Our bylaws
also provide that we may advance expenses to any director or officer upon our
receipt of an undertaking by the director or officer to repay those amounts if
it is finally determined that he or she is not entitled to indemnification.
We maintain directors and officers' liability insurance to provide
directors and officers with insurance coverage for losses arising from claims
based on breaches of duty, negligence, error and other wrongful acts. At
present, there is no pending litigation or proceeding, and we are not aware of
any threatened litigation or proceeding, involving any director, officer,
employee or agent where indemnification will be required or permitted under our
bylaws.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the Act
and is therefore unenforceable.
57
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Recapitalization
Recapitalization and Securities Acquisition
On February 5, 1999 we were recapitalized. In our recapitalization,
Bernard Spain and Murray Spain (the "Spain brothers") contributed to us all of
the stock of Dollar Express Stores, Inc. (the "Operating Company") in exchange
for an aggregate of 6,470,000 shares of our common stock, on a pre-split basis,
and the Operating Company became our wholly-owned subsidiary.
In connection with our recapitalization, on February 5, 1999 we sold
the following persons (the "Investors") 3,530,000 shares of our Series A
convertible preferred stock and warrants to purchase 416,667 shares of our
common stock, on a pre-split basis, for $35.0 million, as described below:
<TABLE>
<CAPTION>
# of Shares of Series A
Purchase Price Convertible Preferred
Investor (in thousands) Stock # of Warrants
- ---------------------------------------------------- ------------------ ------------------------ ----------------
<S> <C> <C> <C>
Global Private Equity III Limited Partnership....... $28,210 2,845,180 335,833
Advent PGGM Global Limited Partnership.............. 4,323 435,990 51,463
Advent Partners GPE III Limited Partnership......... 426 42,960 5,071
Advent Partners Limited Partnership................. 185 18,674 2,204
Advent Partners (NA) GPE III Limited Partnership.... 126 12,708 1,500
Guayacan Private Equity Fund Limited Partnership.... 1,000 100,852 11,904
Dollar Express Investment, LLC...................... 730 73,636 8,692
------------------ ------------------------ ----------------
Total...................................... $35,000 3,530,000 416,667
------------------ ------------------------ ----------------
</TABLE>
In connection with this sale of securities, we appointed to our board
two directors selected by the Investors and agreed that as long as the Series A
convertible preferred stock was outstanding, the holders of this preferred stock
have the right to maintain two directors on our board. Upon the closing of this
offering, the outstanding shares of Series A convertible preferred stock will
convert into shares of our common stock. As a result, this right will terminate.
In addition, the warrants we sold to the Investors will be canceled upon the
closing of this offering.
On January 1, 1999, prior to our recapitalization, the Operating
Company paid a dividend of approximately $59.5 million to the Spain brothers.
This dividend was funded through the issuance of notes that were satisfied with
the proceeds received from the Investors and the credit facilities discussed
below.
Credit Facilities
On February 5, 1999, we entered into a $20.0 million revolving credit
facility and a $20.0 million term loan facility with a syndicate of senior
lenders. We drew down the entire term loan facility and $7.2 million under the
revolving credit facility and used the proceeds from these facilities as
follows:
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<PAGE>
o we loaned $20.0 million to the Operating Company to satisfy in part
the notes that the Operating Company issued as a dividend paid to the
Spain brothers;
o we repaid our existing indebtedness for borrowed money (approximately
$4.0 million at the time); and
o we paid costs associated with our recapitalization.
Investors Rights
In connection with our recapitalization, we entered into an investors
rights agreement with the Investors and the Spain brothers. Upon the
consummation of this offering, the agreement's provisions giving the Investors
the right to nominate two directors for election to the boards of directors of
each of our subsidiaries will terminate.
However, the preemptive rights we granted to the Investors will remain
in effect following the consummation of this offering. These preemptive rights
require us to offer the Investors the opportunity to purchase securities that we
desire to offer prior to our issuing the securities to someone else. The
Investors' preemptive rights do not apply to shares we issued upon the exercise
of stock options or warrants, or to our sale of securities pursuant to a
registered public offering.
In addition, rights of first refusal and co-sale rights, which the
Spain brothers granted to the Investors, will also remain in effect following
the consummation of this offering. These rights of first refusal require the
Spain brothers to first offer to the Investors the opportunity to purchase any
of their shares that either or both of the Spain brothers desire to sell to any
third party prior to their selling these shares to someone else. The co-sale
rights permit the Investors to sell a portion of their shares to any third party
purchasing shares from the Spain brothers. The Investors' rights of first
refusal and co-sale rights, however, would not apply in cases where the Spain
brothers intend to transfer their securities to a trust, family member or
spouse, to sell their securities pursuant to an effective registration statement
under the Securities Act, or where the sale of securities is exempt from
registration under Rule 144.
Registration Rights
In connection with our recapitalization, we entered into a registration
rights agreement with the Spain brothers and the Investors. Pursuant to that
agreement, we granted to the Investors and the Spain brothers certain "demand"
and "piggy-back" registration rights. See "Description of Capital Stock --
Registration Rights."
Leases
Headquarters Lease
We currently lease our corporate headquarters from an entity that is
wholly-owned by the Spain brothers. This lease provides for an annual rental of
$403,749. The lease is year to year, and provides that either party to the lease
may terminate it upon 60 days written notice prior to the end of the term. While
we believe that the terms of the lease are fair to us, its terms were not
negotiated on an arms-length basis. Accordingly, there can be no assurance that
the terms of the lease are as favorable to us as those that we could have
obtained from an independent third party.
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<PAGE>
Store Leases
We currently lease 10 of our 124 stores from entities that are
wholly-owned by the Spain brothers and/or their immediate families. Aggregate
annual rent for all 10 stores is $814,260. Nine of these store leases are on a
year to year basis and are terminable by the landlord upon 60 days written
notice prior to the end of the term. The lease for one of the 10 stores expires
on June 30, 2004 and provides for four 5-year renewal options. While we believe
that the terms of the leases are fair to us, their terms were not negotiated on
an arms-length basis. Accordingly, there can be no assurance that the terms of
the leases are as favorable to us as those that we could have obtained from an
independent third party.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock by:
o each of our named executive officers;
o each of our directors;
o each selling shareholder;
o all of our directors and executive officers as a group; and
o each other person known to us to own beneficially more than 5% of our
outstanding shares.
As of December 15, 1999 there were 10,000,000 shares of our common
stock outstanding, after giving effect to the conversion of all of our shares of
Series A convertible preferred stock into common stock on a one for one basis
and before giving effect to the _____ for one split of our common stock that
will occur immediately before this offering. The table assumes that this
conversion has occurred.
To calculate a shareholder's percentage of beneficial ownership, we
have included in the numerator and denominator those shares underlying options
that the shareholder is considered to beneficially own. A person has beneficial
ownership of shares if he has the power to vote or dispose of the shares. This
power can be exclusive or shared, direct or indirect. In addition, a person is
considered by SEC rules to beneficially own shares underlying options that are
presently exercisable or will become exercisable within 60 days. Shares
underlying options held by other shareholders, however, are disregarded in this
calculation. Therefore, the denominators used in calculating beneficial
ownership among our shareholders differ.
<TABLE>
<CAPTION>
Shares Shares Shares
Beneficially to be Sold Beneficially
Owned Prior to in Owned After
Offering Offering Offering (1)
------------------------------ -------------- ---------------------------
Name Number Percent Number Number Percent
- ------------------------------------------- ------------- ------------ -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Executive Officers and Directors:
Bernard Spain.............................. 2,859,743 28.6%
Murray Spain (2)........................... 3,215,078 32.2%
James Misterman (3)........................ 20,000 *
Vincent J. Navitsky (4).................... 20,000 *
Howard B. Savage (5)....................... 20,000 *
David Folkman (6).......................... 20,000 *
Harvey Goldberg............................ -- *
David M. Mussafer (7)...................... 3,355,512 33.6%
William C. Woo ............................ -- *
David A. Cohen (8)......................... -- *
Executive officers and directors as a
group (10 persons) (9) ................. 6,164,821 61.1%
Other Shareholders:
Advent International Corporation
(7) (10)................................. 3,355,512 33.6%
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Shares Shares Shares
Beneficially to be Sold Beneficially
Owned Prior to in Owned After
Offering Offering Offering (1)
------------------------------ -------------- ---------------------------
Name Number Percent Number Number Percent
- ------------------------------------------- ------------- ------------ -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Global Private Equity III Limited
Partnership (10)......................... 2,845,180 28.5%
</TABLE>
- ----------------
* Denotes ownership of less than one percent.
(1) Assumes no exercise of over-allotment option. If the underwriters'
over-allotment option is exercised in full, ____________ intends to sell
_____ shares of common stock, _____________ intends to sell _____ of
common stock, and ____________ intends to sell _____ shares of common
stock in the over-allotment option.
(2) Includes 377,143 shares owned by a family limited partnership of which Mr.
Spain is a general partner. Mr. Spain disclaims beneficial ownership of
such shares.
(3) Represents 20,000 shares issuable upon exercise of stock options.
(4) Represents 20,000 shares issuable upon exercise of stock options.
(5) Represents 20,000 shares issuable upon exercise of stock options.
(6) Represents 20,000 shares issuable upon exercise of stock options.
(7) All of the shares indicated are held of record by as follows: Global
Private Equity III Limited Partnership, 2,845,180; Advent PGGM Global
Limited Partnership, 435,990; Advent Partners GPE III Limited Partnership,
42,960; Advent Partners Limited Partnership, 18,674; Advent Partners (NA)
GPE III Limited Partnership, 12,708 (collectively, the "Advent Entities").
Advent International Corporation is the general partner of the Advent
Entities. Mr. Mussafer is a managing director of Advent International
Corporation and may be deemed to beneficially own the shares held of
record by the Advent Entities. Mr. Mussafer disclaims beneficial ownership
of all shares held by the Advent Entities. Mr. Mussafer's address is 75
State Street, Boston, Massachusetts 02109.
(8) Mr. Cohen has been nominated and has consented to become a director
following the completion of this offering.
(9) Includes 90,000 shares issuable upon exercise of stock options.
(10) Advent International Corporation's and Global Private Equity III Limited
Partnership's address is 75 State Street, Boston, Massachusetts 02109.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 75,000,000 shares of common
stock, par value $0.01 per share, and 25,000,000 shares of preferred stock, par
value $0.01 per share. Upon completion of this offering, we will have _________
shares of common stock issued and outstanding. No shares of preferred stock will
be outstanding.
The following is qualified in its entirety by reference to our charter
and our bylaws, copies of which are included as exhibits to the registration
statement of which this prospectus is a part, and by the provisions of
applicable law.
Common Stock
As of December 15, 1999, there were 6,470,000 shares of common stock on
a pre-split basis held of record by four shareholders. Holders of common stock
are entitled to one vote for each share held on all matters submitted to a vote
of shareholders, and do not have cumulative voting rights in the election of
directors. Whenever corporate action is to be taken by vote of the shareholders,
it becomes authorized upon receiving the affirmative vote of a majority of the
votes cast by all shareholders entitled to vote on the matter. Holders of common
stock are entitled to receive, as, when and if declared by the board of
directors from time to time, such dividends and other distributions in cash,
stock or property from our assets or funds legally available for such purposes
subject to any dividend preferences that may be attributable to our outstanding
preferred stock.
Other than the Investors' preemptive rights described under "Certain
Relationships and Related Transactions - Investors Rights," no preemptive
conversion, redemption or sinking fund provisions apply to our common stock. All
outstanding shares of common stock are fully paid and non-assessable. In the
event of our liquidation, dissolution or winding up, holders of common stock are
entitled to share ratably in the assets available for distribution.
Preferred Stock
As of December 15, 1999, we had 3,530,000 shares of Series A
convertible preferred stock outstanding, which were held of record by seven
shareholders. Prior to the completion of this offering, all of these shares will
be converted into shares of our common stock and we will have no outstanding
shares of preferred stock. Our board of directors, without further action by the
shareholders, is authorized to issue an aggregate of 25,000,000 shares of
preferred stock. We have no plans to issue a new series of preferred stock. Our
board of directors may issue preferred stock with dividend rates, redemption
prices, preferences on liquidation or dissolution, conversion rights, voting
rights and any other preferences, which rights and preferences could adversely
affect the voting power of the holders of our common stock. An issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions or other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or could discourage or
delay a third party from acquiring control of us.
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<PAGE>
Common Stock Warrants
As of December 15, 1999, we had warrants outstanding to purchase
416,667 shares of our common stock on a pre-split basis, which were held by
seven persons. Prior to the completion of this offering, these warrants will
terminate and we will have no outstanding warrants to purchase shares of our
common stock.
Registration Rights
In connection with our recapitalization, we entered into a registration
rights agreement with the Spain brothers and the Investors. The Investors or the
Spain brothers, subject to certain conditions, may each demand, on not more than
two occasions, that we file a registration statement under the Securities Act
covering the registration of the offer and sale of all or a part of the
Investors' or the Spain brothers' common stock. However, the Spain brothers may
not make such a demand for registration until such time as the Investors have
received gross proceeds in the aggregate of $35.0 million from the registered
sale of their common stock.
In addition, the Investors may demand, but not prior to one year after
the effective date of this offering, that we file a registration statement on
Form S-3 for the registration of the offer and sale of all or part of the
Investors' common stock, provided that we are not required to effect more than
one such registration each year. We must offer to register the common stock held
by the Investors or the Spain brothers any time we intend to register our common
stock for offer and sale on our own account or the account of others. We have
agreed to bear all expenses incurred in connection with these registrations,
except those expenses incurred by holders of our common stock for underwriting
discounts and commissions and certain legal fees of counsel retained by them. We
have agreed to use our best efforts to effect any registration subject to
certain conditions and limitations.
Anti-Takeover Effects of Provisions of Our Charter, Our Bylaws and Pennsylvania
Law
Charter and Bylaws. The ability of our board of directors to establish
the rights of, and to issue, substantial amounts of preferred stock under our
charter without the need for shareholder approval may discourage, delay or
prevent a change in control. This preferred stock, among other things, may be
used to create voting impediments with respect to any changes in control or to
dilute the stock ownership of holders of common stock seeking to obtain control.
Our bylaws will provide that the board of directors will be divided
into three classes of directors, with each class constituting approximately
one-third of the total number of directors and with each class serving a
staggered three-year term. Our bylaws provide that directors may be removed only
for cause. Our bylaws will provide that our shareholders may call a special
meeting of shareholders only upon the request of shareholders owning at least
50% of our capital stock, and that our shareholders may only take action at a
meeting of shareholders or by the unanimous written consent of all of our
shareholders in lieu of a meeting. These provisions are intended to:
o enhance the likelihood of continuity and stability in the composition
of the board of directors and in the policies formulated by the board
of directors;
o discourage certain types of transactions that may involve an actual
or threatened change of our control;
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o reduce our vulnerability to an unsolicited acquisition proposal; and
o discourage certain tactics that may be used in proxy fights.
However, these provisions of our bylaws could discourage potential acquisition
proposals and could delay, deter or prevent a change in our control by delaying
any third party's ability to replace enough members of our board of directors in
order to control the board, and by restricting this party's ability to remove
members of our board except for cause. In addition, these provisions could have
the effect of discouraging others from making tender offers for our shares and,
as a consequence, these provisions also may inhibit fluctuations in the market
price of our shares that could result from actual or rumored takeover attempts.
These provisions also may have the effect of preventing changes in our
management.
Pennsylvania Anti-Takeover Law. Pennsylvania law contains a number of
statutory "anti-takeover" provisions applicable to us.
Subchapter F of the Pennsylvania Business Corporation Law prohibits,
subject to certain exceptions, a "business combination" with a shareholder or
group of shareholders (and certain affiliates and associates of such
shareholders) from beneficially owning more than 20% of the voting power of a
public corporation (an "interested shareholder") for a five-year period
following the date on which the holder became an interested shareholder unless
this business combination is approved by our board of directors. This provision
may discourage open market purchases of our stock or a non-negotiated tender or
exchange offer for our stock and, accordingly, may be considered disadvantageous
by a shareholder who would desire to participate in any such transaction.
Under Section 1715 of the Pennsylvania Business Corporation Law, our
directors are not required to regard the interests of the shareholders as being
dominant or controlling in considering our best interests. The directors may
consider, to the extent they deem appropriate, such factors as:
o the effects of any action upon any group affected by such action,
including our shareholders, employees, suppliers, customers and
creditors, and communities in which we have stores, offices or other
establishments;
o our short-term and long-term interests, including benefits that may
accrue to us from our long-term plans and the possibility that these
interests may be best served by our continued independence;
o the resources, intent and conduct of any person seeking to acquire
control of us; and
o all other pertinent factors.
Section 1715 further provides that any act of our board of directors, a
committee of the board or an individual director relating to or affecting an
acquisition or potential or proposed acquisition of control to which a majority
of our disinterested directors have assented will be presumed to satisfy the
standard of care set forth in the Pennsylvania Business Corporation Law, unless
it is proven by clear and convincing evidence that our disinterested directors
did not consent to such act in good faith after reasonable investigation. As a
result of this and the other provisions of Section 1715, our directors are
provided with broad discretion with respect to actions that may be taken in
response to acquisitions or proposed acquisitions of corporate control.
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Section 1715 may discourage open market purchases of our common stock
or a non-negotiated tender or exchange offer for our common stock and,
accordingly, may be considered disadvantageous by a shareholder who would desire
to participate in any such transaction. As a result, Section 1715 may have a
depressive effect on the price of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is______________.
Listing
We expect our common stock to be approved for quotation on the Nasdaq
National Market, subject to official notice of issuance, under the symbol
"DLRX."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Based on the number of shares outstanding on ________, 1999, upon
completion of this offering we will have outstanding an aggregate of _______
shares of our common stock, excluding any shares issued upon the exercise of
outstanding options. Of these shares, all of the shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, unless such shares are purchased by our "affiliates" as that
term is defined in Rule 144 under the Securities Act. The remaining _______
shares of common stock that are held by existing shareholders will be
"restricted securities" as that term is defined in Rule 144 under the Securities
Act. Restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rule 144 or Rule 701
promulgated under the Securities Act, which rules are summarized below.
Shares will be available for sale in the public market as follows:
o __________ shares of common stock issuable upon exercise of
outstanding options will be eligible for sale following the
effectiveness of a registration statement on Form S-8 covering
the common stock issuable upon exercise of the options, which
we expect to file shortly after the completion of this
offering, although __________ of those shares are issuable
upon the exercise of outstanding options held by our executive
officers who have signed a lock-up agreement and, as a result,
will not be eligible for sale until the expiration of the
lock-up period; and
o __________ shares of common stock held by the Spain brothers,
__________ shares of common stock held by two family limited
partnerships, and __________ shares of common stock held by
the Investors, will be eligible for sale from time to time
after the expiration of the lock-up period subject to the
volume and manner-of-sale requirements of Rule 144.
Lock-up Agreements
Our executive officers, directors and shareholders have entered into
lock-up agreements under which they agreed not to transfer or otherwise dispose
of, directly or indirectly, without the consent of Merrill Lynch, Pierce, Fenner
& Smith Incorporated on behalf of the underwriters, any shares of our common
stock or any securities convertible into or exchangeable or exercisable for
shares of our common stock for a period of 180 days following the date of this
prospectus.
Transfers or dispositions can be made during the lock-up periods in the
case of gifts for estate planning purposes where the donee signs a lock-up
agreement.
The Spain brothers and the Investors have agreed not to demand
registration of their common stock for 180 days after the date of this
prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated on behalf of the underwriters. After that period, if the
Spain brothers or the Investors cause a large number of shares to be registered
and sold into the public market, those sales could have an adverse effect on the
market price for the common stock.
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We have agreed not to offer, sell or otherwise dispose of any shares of
our common stock or any securities convertible into or exercisable or
exchangeable for our common stock or any rights to acquire our common stock for
a period of 180 days after the date of this prospectus, without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf
of the underwriters, subject to certain limited exceptions. See "Underwriting."
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this registration statement, a person who has beneficially
owned shares of our common stock for at least one year, including the holding
period of any prior owner since they were last held by us or one of our
affiliates would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
o 1% of the number of shares of common stock then outstanding,
which will equal approximately _________ shares immediately
after this offering; or
o the average weekly trading volume of our common stock on the
Nasdaq National Market during the four calendar weeks
preceding the filing of a notice on Form 144 of the sale with
the SEC.
Sales under Rule 144 are also subject to manner-of-sale provisions and
notice requirements, and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner since they were last held by us
or one of our affiliates, is entitled to sell his or her shares without
complying with the manner-of-sale, public information, volume limitation or
notice provisions of Rule 144.
Registration Rights
We entered into a registration rights agreement with the Spain brothers
and the Investors pursuant to which we granted to each of them demand and
piggy-back registration rights. See "Description of Capital Stock --
Registration Rights."
Stock Options
As soon as practicable after completion of this offering, we plan to
file a registration statement on Form S-8 under the Securities Act covering the
_____ shares of common stock reserved for issuance under our stock option plan.
As of December 15, 1999, options to purchase __________ shares of common stock
were issued and outstanding, __________ of which were vested. In addition,
options to purchase _____ shares of common stock will be granted upon the
consummation of this offering. Accordingly, shares registered on Form S-8 under
the Securities Act will, subject to lock-up agreements,
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vesting provisions and Rule 144 volume limitations applicable to our affiliates,
be available for sale into the public market immediately after such registration
statement becomes effective.
Market Price
We cannot estimate the number of shares that may be sold in the future
by our shareholders or the effect that sales of shares by our shareholders will
have on the market price of our common stock. Sales of substantial amounts of
our common stock, or the prospect of these sales, could have a material adverse
effect on the market price of our common stock.
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MATERIAL U.S. TAX CONSIDERATIONS APPLICABLE TO
NON-U.S. HOLDERS OF COMMON STOCK
The following discussion is a general summary of the material U.S.
federal income and estate tax consequences of the acquisition, ownership and
disposition of our common stock held by non-U.S. holders. A "non-U.S. holder"
means a beneficial owner of common stock who is not a U.S. holder. A U.S. holder
means a beneficial owner of common stock who, for U.S. federal income tax
purposes, is:
o A citizen or individual resident of the United States;
o A corporation, partnership or other entity created or
organized in the United States or under the laws of the United
States or of any political subdivision thereof (other than a
partnership treated as foreign under U.S. Treasury
regulations);
o An estate whose income is includable in gross income for
United States federal income tax purposes regardless of its
source; or
o A trust, if a United States court is able to exercise primary
supervision over the administration of the trust and one or
more United States persons have the authority to control all
substantial decisions of the trust or the trust has elected to
be treated as a U.S.
person.
An individual may, among other ways, be deemed to be a resident of the
United States with respect to any calendar year by virtue of being present in
the United States on at least 31 days in such calendar year and for an aggregate
of at least 183 days during the current calendar year and the two preceding
calendar years (counting for such purposes all of the days present in the
current year, one-third of the days present in the immediately preceding year
and one-sixth of the days present in the second preceding year).
This summary is included for general information and is based upon the
U.S. federal tax laws (including U.S. Treasury regulations and administrative
and judicial interpretations) now in effect, which are subject to change,
possibly retroactively, which could affect the continued validity of this
summary. The tax treatment of the holders of common stock may vary depending on
their particular situation, and this summary does not address specific facts and
circumstances that may be relevant to a particular holder's tax position. U.S.
holders acquiring common stock are subject to rules different from those
discussed below. In addition, certain holders (including insurance companies,
tax-exempt organizations, financial institutions, traders in securities,
subsequent purchasers of our common stock, U.S. expatriates and broker-dealers)
may be subject to special rules not discussed below. The discussion also does
not consider the tax consequences for any person who is a shareholder, partner
or beneficiary of a holder of the common stock. Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed. In general, this
discussion assumes that a non-U.S. holder holds our common stock as a capital
asset and not as part of a "hedge," "straddle," "conversion transaction,"
"synthetic security" or other integrated investment. Prospective investors are
urged to consult their tax advisors regarding the U.S. federal tax consequences
of acquiring, holding and disposing of our common stock, as well as any tax
consequences that may arise under the laws of any foreign, state, local or other
taxing jurisdiction.
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Dividends
As described above, we do not expect to pay any dividends on our common
stock for the foreseeable future. In the event we pay dividends, except as
described below, we will have to withhold from dividends paid to a non-U.S.
holder a U.S. withholding tax at a rate of 30%, or a lower rate under a relevant
income tax treaty, of the gross amount of the dividends. Non-U.S. holders should
consult their tax advisors regarding their entitlement to benefits under a
relevant income tax treaty.
Prior to January 1, 2001, for purposes of determining whether tax is to
be withheld at the 30% rate or at a reduced treaty rate, we will ordinarily
presume that dividends paid to an address in a foreign country are paid to a
resident of such country, absent knowledge to the contrary. Under U.S. Treasury
regulations effective for payments after December 31, 2000, non-U.S. holders
will be required to satisfy applicable certification requirements in order for
us to withhold tax at a reduced treaty rate. These regulations also contain
special rules regarding treaty benefits available for payments made to some
intermediary or disregarded entities.
Except to the extent otherwise provided under an applicable income tax
treaty, dividends that are effectively connected with a non-U.S. holder's
conduct of a trade or business in the United States are subject to U.S. federal
income tax on a net income basis at applicable graduated individual or corporate
rates, and are not generally subject to withholding, if the holder complies with
applicable certification and disclosure requirements. Any such effectively
connected dividends received by a foreign corporation may also, under some
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
Gain on Disposition of Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income
tax in respect of gain recognized on a disposition of common stock unless:
o The gain is effectively connected with a trade or business of
the non-U.S. holder in the United States, or, alternatively,
if an income tax treaty applies, is attributable to a
permanent establishment maintained by the non-U.S. holder in
the United States (in which cases the non-U.S. holder will be
subject to tax on the gain at the rates and in the manner
applicable to United States persons and, if the holder is a
foreign corporation, the branch profits tax described above
may also apply),
o The non-U.S. holder is an individual who holds the common
stock as a capital asset, is present in the United States for
183 or more days in the taxable year of the disposition and
either the income from the disposition is attributable to an
office or other fixed place of business maintained by the
holder in the United States or where the holder has a "tax
home" in the United States and certain other requirements are
met, or
o We are or have been a "United States real property holding
corporation" for U.S. federal income tax purposes at any time
during the shorter of the five-year period ending on the date
of the disposition and the period that the common stock was
held by the non-U.S. holder.
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The tax with respect to stock in a United States real property holding
corporation does not apply to a non-U.S. holder whose holdings, direct and
indirect, at all times during the applicable period, constitute 5% or less of
our common stock, provided that the common stock is regularly traded on an
established securities market. In general, we will be treated as a United States
real property holding corporation if the fair market value of our U.S. real
property interests equals or exceeds 50% of the total fair market value of our
U.S. and non-U.S. real property interests and our other assets used or held for
use in a trade or business. We believe that we currently are not, and we do not
anticipate becoming, a United States real property holding corporation.
Federal Estate Taxes
Common stock owned or treated as owned by a non-U.S. holder at the time
of death, or common stock of which the non-U.S. holder made certain lifetime
transfers, will be included in such holder's gross estate for U.S. federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
United States Information Reporting Requirements and Backup Withholding Tax --
Dividends
We must report annually to the U.S. Internal Revenue Service and to
each non-U.S. holder the amount of dividends paid to such holder and the tax
withheld with respect to such dividends, regardless of whether any tax was
actually withheld. Copies of the information returns reporting such dividends
and withholding may also be made available to the tax authorities in the country
in which the non-U.S. holder resides under the provisions of an applicable
income tax treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on some payments to persons that fail to furnish
information under the United States information reporting requirements) and
additional information reporting generally will not apply to dividends paid on
common stock before January 1, 2001 that are either:
o Subject to withholding at the 30% rate (or at a reduced rate
under an applicable income tax treaty); or
o Paid to an address outside the United States.
Dividends paid after December 31, 2000 generally will be subject to
backup withholding at a 31% rate unless the non-U.S. holder certifies its status
as a non-U.S. holder in accordance with applicable Treasury regulations or is a
corporation or other exempt recipient.
Payment to or through a United States office of a broker of the
proceeds of a disposition of common stock is generally subject to both backup
withholding and information reporting unless either:
o The non-U.S. holder is a corporation or other exempt
recipient; or
o The non-U.S. holder certifies its status as a non-U.S. holder
in accordance with applicable Treasury regulations,
provided, however, the broker does not have actual knowledge that the holder is
a U.S. holder or that the conditions of any other exemption are not, in fact,
satisfied.
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United States Information Reporting and Back-up Withholding -- Disposition of
Common Stock
Payment of the proceeds of a disposition of common stock to or through
a foreign office of a foreign broker will not be subject to backup withholding
or information reporting unless the foreign broker is a "U.S.-related person."
After December 31, 2000, backup withholding will apply if information reporting
is required. Payments of proceeds from the disposition of common stock to or
through a foreign office of a broker that is a U.S. person or a "U.S.-related
person" will be subject to information reporting unless the holder certifies its
status as a non-U.S. holder in accordance with applicable Treasury regulations
or the broker has documentary evidence in its files that the holder is a
non-U.S. holder and the broker has no actual knowledge to the contrary. For this
purpose, a "U.S.-related person" is:
o A controlled foreign corporation for U.S. federal income tax
purposes;
o A foreign person 50% or more of whose gross income from
certain periods is effectively connected with a United States
trade or business; or
o After December 31, 2000, a foreign partnership if, at any time
during the taxable year, (A) at least 50% of the capital or
profits interest of the foreign partnership is owned by U.S.
persons, or (B) the foreign partnership is engaged in a U.S.
trade or business.
After December 31, 2000, payments made to or through a qualified
foreign intermediary satisfying applicable requirements will not be subject to
either backup withholding or information reporting.
Prospective investors should consult with their own tax advisors
regarding these rules, and in particular with respect to whether the use of a
particular broker would subject the investor to information reporting and backup
withholding.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be allowed as a refund of or a credit to a
non-U.S. holder's U.S. federal income tax liability, provided the required
information is furnished to the Internal Revenue Service.
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UNDERWRITING
General
We intend to offer our common stock through a number of underwriters.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Prudential Securities
Incorporated, U.S. Bancorp Piper Jaffray Inc., First Union Securities, Inc. and
Legg Mason Wood Walker, Incorporated are acting as representatives of each of
the underwriters named below. Subject to the terms and conditions set forth in
the purchase agreement among us, the selling shareholders and the underwriters,
we and the selling shareholders have agreed to sell to each of the underwriters,
and each of the underwriters, severally and not jointly, has agreed to purchase
from us and the selling shareholders the number of shares of our common stock
set forth opposite its name below.
Number of
Underwriter Shares
-----------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................
Prudential Securities Incorporated...........................
U.S. Bancorp Piper Jaffray, Inc..............................
First Union Securities, Inc..................................
Legg Mason Wood Walker, Incorporated.........................
-----------------
Total
=================
In the purchase agreement, the several underwriters have agreed, subject
to the terms and conditions set forth in that agreement, to purchase all of the
shares of common stock being sold under the terms of the purchase agreement if
any of the shares of common stock being sold under the purchase agreement are
purchased. In the event of a default by an underwriter, the purchase agreement
provides that, in some circumstances, the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreements may be
terminated.
We have agreed, as have the selling shareholders, to indemnify the
underwriters against some liabilities, including some liabilities under the
Securities Act, or to contribute to payments the underwriters may be required to
make in respect of those liabilities.
The shares of common stock are being offered by the several
underwriters, subject to prior sales, when, as and if issued to and accepted by
them, subject to approval of certain legal matters by counsel for the
underwriters and certain other conditions. The underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
Commissions and Discounts
The representatives have advised us and the selling shareholders that
they propose initially to offer the shares of common stock to the public at the
initial public offering price set forth on the cover page of this prospectus,
and to certain dealers at such price less a concession not in excess of
$________ per share of common stock. The underwriters may allow, and such
dealers may reallow, a discount not in
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excess of $_________ per share of common stock on sales to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may change.
The following table shows the per share and total public offering price,
the underwriting discount to be paid by us and the selling shareholders to the
underwriters and the proceeds before expenses to us and the selling
shareholders. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Per Share Without Option With Option
------------------ ------------------ ---------------
<S> <C>
Public offering price .................................. $ $ $
Underwriting discount .................................. $ $ $
Proceeds, before expenses, to Dollar Express ........... $ $ $
Proceeds to the selling shareholders.................... $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount,
are estimated at $________ and are payable by us.
Over-allotment Option
The selling shareholders have granted an option to the underwriters,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of ________ additional shares of our common stock sold in this
offering at the public offering price set forth on the cover page of this
prospectus, less the underwriting discount. The underwriters may exercise this
option from time to time solely to cover over-allotments, if any, made on the
sale of our common stock offered hereby. To the extent that the underwriters
exercise this option, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional shares of our common stock
proportionate to such underwriter's initial amount reflected in the foregoing
table.
Reserved Shares
At our request, the underwriters have reserved for sale at the initial
public offering price up to ________ of the shares of our common stock offered
hereby to be sold to some of our directors, officers, employees, distributors,
dealers, business associates and related persons. The number of shares of our
common stock available for sale to the general public will be reduced to the
extent that those persons purchase the reserved shares. Any reserved shares that
are not orally confirmed for purchase within one day of the pricing of this
offering will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.
No Sales of Similar Securities
We and our executive officers and directors and all of our shareholders
have agreed, with certain exceptions, without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters
for a period of 180 days after the date of this prospectus, not to directly or
indirectly:
o offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant for the sale of, lend or
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otherwise dispose of or transfer any shares of our common
stock or any securities convertible into or exchangeable or
exercisable for our common stock, whether now owned or later
acquired by the person executing the agreement or with respect
to which the person executing the agreement later acquires the
power of disposition, or file or cause or request us to file a
registration statement under the Securities Act with respect
to the foregoing; or
o enter into any swap or other agreement or any transaction that
transfers, in whole or in part, directly or indirectly the
economic consequence of ownership of our common stock whether
any such swap or transaction is to be settled by delivery of
our common stock or other securities, in cash or otherwise.
Quotation on the Nasdaq National Market
We expect our common stock to be approved for quotation on the Nasdaq
National Market, subject to official notice of issuance, under the symbol
"DLRX."
Initial Public Offering Price
Before this offering, no public market has existed for our common
stock. The initial public offering price will be determined through negotiations
among us, the selling shareholders and the representatives. The factors
considered in determining the initial public offering price of our common stock,
in addition to prevailing market conditions, are:
o the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;
o certain of our financial information;
o the history of, and the prospects for, our company and the
industry in which we compete;
o an assessment of our management;
o our past and present operations;
o the prospects for, and timing of, our future revenue;
o the present state of our development;
o the percentage interest of Dollar Express being sold as
compared to the valuation for the entire company; and
o the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
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There can be no assurance that an active trading market will develop
for our common stock or that our common stock will trade in the public market
subsequent to the offering at or above the initial public offering price.
The underwriters have advised us that they do not expect sales to
accounts over which the underwriters exercise discretionary authority to exceed
five percent of the total number of shares of our common stock offered by them.
Qualified Independent Underwriter
We will use part of the proceeds of the offering to repay our debt.
Because more than ten percent of the net proceeds of the offering may be paid to
members or affiliates of members of the National Association of Securities
Dealers, Inc. participating in the offering as an underwriter or selling group
member, the offering will be conducted in accordance with NASD Conduct Rule
2710(c)(8). This rule requires that the public offering price of an equity
security be no higher than the price recommended by a qualified independent
underwriter that has participated in the preparation of the registration
statement and performed its usual standard of due diligence. Merrill Lynch,
Pierce, Fenner & Smith Incorporated has agreed to act as qualified independent
underwriter with respect to the offering. The price of the common stock will be
no higher than the price recommended by Merrill Lynch.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of our common stock is completed, rules of the
SEC may limit the ability of the underwriters and selling group members to bid
for and purchase our common stock. As an exception to these rules, the
representatives are permitted to engage in transactions that stabilize the price
of our common stock. Such transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering, that is, if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the representatives may
reduce that short position by purchasing our common stock in the open market.
The representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
our common stock in the open market to reduce the underwriters' short position
or to stabilize the price of our common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of our common stock to the extent
that it discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common
77
<PAGE>
stock. In addition, neither we nor any of the underwriters makes any
representation that the representatives or the lead managers will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
Passive Market Making
In connection with the offering, underwriters and selling group members
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Regulation M under the Exchange Act
during a period before the commencement of offers or sales of common stock
hereunder.
Other Relationships
Legg Mason Wood Walker Incorporated acted as placement agent in
connection with our private placement in February 1999 of 3,530,000 shares of
our Series A convertible preferred stock and warrants to purchase 416,667 shares
of our common stock in return for an aggregate of $35.0 million, for which it
received customary fees.
First Union Securities Inc. is a lender under, and the administrative
agent of, our credit agreement.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for us and for the selling shareholders by Pepper Hamilton LLP. Some
legal matters related to this offering will be passed upon for the underwriters
by Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), which will rely on Pepper Hamilton LLP for purposes
of Pennsylvania law.
EXPERTS
The consolidated financial statements of Dollar Express Stores, Inc. as
of December 31, 1998 and 1997 and for each of the three years in the period
ended December 31, 1998 included in this prospectus and in the registration
statement, of which this prospectus forms a part, have been audited by Grant
Thornton LLP, independent certified public accountants, whose report thereon
appears herein and in the registration statement. Such financial statements are
included in reliance upon the report of Grant Thornton LLP, given upon the
authority of such firm as experts in accounting and auditing.
CHANGE IN PRINCIPAL ACCOUNTANTS
In August 1999 our board of directors elected to engage Ernst & Young
LLP to audit our consolidated financial statements for the year ending December
30, 1999 and, accordingly, effective August 1999 the engagement of Grant
Thornton LLP as our independent accounting firm was discontinued. The report of
Grant Thornton LLP on the financial statements of Dollar Express Stores, Inc. as
of December 31, 1997 and 1998, and for each of the three years in the period
ended December 31, 1998, did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principles. In our opinion, there did not occur, during the year
ended December 31, 1998 or any subsequent interim period prior to August 1999,
any "reportable
78
<PAGE>
events" between us and Grant Thornton LLP within the meaning of Item
304(a)(l)(v) of Regulation S-K promulgated by the Commission. In addition,
during the years ended December 31, 1997 and 1998 and during any subsequent
interim period prior to August 1999, there were no disagreements between us and
Grant Thornton LLP on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
We have received a letter from Grant Thorton LLP stating that it agrees
with the statements made by us in the first paragraph of this "Change in
Principal Accountants" section.
During the years ended December 31, 1997 and 1998, Ernst & Young LLP
was not consulted by us on the application of accounting principles to a
specified transaction, either completed or proposed, or on the type of audit
opinion that might be rendered on our financial statements.
79
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-l under
the Securities Act with respect to the common stock offered in this offering.
This prospectus, which is part of the registration statement, does not contain
all the information set forth in the registration statement and the exhibits to
the registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document filed with the
registration statement as exhibits are necessarily summaries of such documents,
and are qualified in their entirety by reference to the copy of the applicable
document filed as an exhibit to the registration statement. For further
information about us and the securities offered in this offering, reference is
made to the registration statement and to the financial statements, schedules
and exhibits filed as a part of the registration statement.
Upon completion of the offering, we will be subject to the information
requirements of the Securities Exchange Act of 1934, and, in accordance
therewith, we will file reports and other information with the SEC. The
registration statement, the exhibits and schedules forming a part of the
registration statement and the reports and other information filed by us with
the SEC in accordance with the Exchange Act may be inspected without charge at
the public reference facilities maintained by the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of these materials
may also be obtained from the Public Reference Room of the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain
information regarding the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains an Internet Web site at
http://www.sec.gov that contains reports, proxy statements and other
information.
80
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Through December 1998, all of the outstanding stock of Dollar Express
Stores, Inc. was held by Bernard Spain and Murray Spain. Financial statements as
of and for periods ended prior to January 1999 are those of Dollar Express
Stores, Inc.
In January 1999, Bernard Spain and Murray Spain contributed all of the
outstanding stock of Dollar Express Stores, Inc. to Dollar Express, Inc., a
newly created holding company formed to hold all of the stock of Dollar Express
Stores, Inc. The condensed consolidated financial statements for periods ending
subsequent to January 1999 are those of Dollar Express, Inc., including its
subsidiary, Dollar Express Stores, Inc.
<TABLE>
<CAPTION>
<S> <C>
Audited Annual Financial Statements:
Report of Independent Certified Public Accountants..............................................................F-2
Balance Sheets..................................................................................................F-3
Statements of Operations........................................................................................F-4
Statements of Changes in Shareholders' Equity...................................................................F-5
Statements of Cash Flows........................................................................................F-6
Notes to Financial Statements...................................................................................F-7
Unaudited Interim Condensed Consolidated Financial Statements:
Unaudited Condensed Consolidated Balance Sheets................................................................F-18
Unaudited Condensed Consolidated Statements of Operations......................................................F-19
Unaudited Condensed Consolidated Statements of Cash Flows......................................................F-21
Notes to Unaudited Interim Condensed Consolidated Financial Statements.........................................F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders
Dollar Express Stores, Inc.
We have audited the accompanying balance sheets of Dollar Express
Stores, Inc. (formerly Dollar Express, Inc. and Spain's Inc.) as of December 31,
1997 and 1998, and the related statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Dollar Express
Stores, Inc. as of December 31, 1997 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
December 14, 1999
F-2
<PAGE>
DOLLAR EXPRESS STORES, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents...................................................... $ 1,274 $ 10,070
Merchandise inventories........................................................ 12,233 12,013
Prepaid expenses and other current assets...................................... 204 481
--------- ---------
Total current assets........................................................ 13,711 22,564
Property and equipment, net.......................................................... 7,252 8,958
Other assets......................................................................... 620 59
--------- ---------
Total assets................................................................ $ 21,583 $ 31,581
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt.............................................. $ 256 $ 123
Line of credit................................................................. -- 4,000
Accounts payable............................................................... 6,644 6,962
Accrued expenses and other liabilities......................................... 1,488 2,806
--------- ---------
Total current liabilities................................................... 8,388 13,891
Long-term debt, less current portion................................................. 1,200 210
Deferred credits..................................................................... 2,272 1,893
Shareholders' equity
Common stock, $0.01 par value - authorized,
75,000,000 shares; issued and outstanding,
6,470,000 shares in 1997 and 1998........................................... 65 65
Additional paid-in capital..................................................... 2,465 2,465
Retained earnings.............................................................. 7,193 13,057
--------- ---------
Total shareholders' equity.................................................. 9,723 15,587
--------- ---------
Total liabilities and shareholders' equity.................................. $ 21,583 $ 31,581
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
DOLLAR EXPRESS STORES, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales................................................................. $ 88,362 $ 103,030 $ 130,802
Cost of sales, including warehousing, distribution and store
occupancy costs....................................................... 65,745 77,314 92,307
---------- ---------- ----------
Gross profit........................................................ 22,617 25,716 38,495
Operating and administrative expenses..................................... 18,338 21,020 27,546
---------- ---------- ----------
Operating profit.................................................... 4,279 4,696 10,949
Interest expense, net..................................................... 156 277 283
Other income, net......................................................... 136 258 187
---------- ----------- ----------
Income before income taxes.......................................... 4,259 4,677 10,853
Income taxes.............................................................. 35 28 50
---------- ---------- ----------
Net income................................................................ $ 4,224 $ 4,649 $ 10,803
=========== ========== ==========
Net income per common share:
Basic............................................................... $ 0.65 $ 0.72 $ 1.67
========== ========== ==========
Diluted............................................................. $ 0.65 $ 0.72 $ 1.67
========== ========== ==========
Weighted average number of common shares and common share equivalents
outstanding:
Basic............................................................... 6,470 6,470 6,470
========== ========== ==========
Diluted............................................................. 6,470 6,470 6,470
========== ========== ==========
Pro Forma Information (Unaudited):
Historical income before income taxes..................................... $ 4,259 $ 4,677 $ 10,853
Pro forma provision for income taxes...................................... 1,704 1,871 4,341
---------- ---------- ----------
Pro forma net income...................................................... $ 2,555 $ 2,806 $ 6,512
========== ========== ==========
Pro forma net income per common share:
Basic............................................................... $ 0.39 $ 0.43 $ 1.01
========== ========== ==========
Diluted............................................................. $ 0.39 $ 0.43 $ 1.01
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
DOLLAR EXPRESS STORES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
(In thousands)
<TABLE>
<CAPTION>
Common stock Additional
----------------------- paid-in Retained
Shares Amount capital earnings Total
----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996............... 6,470 $ 65 $ 2,465 $ 5,421 $ 7,951
Net income......................... -- -- -- 4,224 4,224
Shareholders' distributions........ -- -- -- (3,595) (3,595)
----------- ----------- ------------ ------------- -------------
Balance at December 31, 1996............. 6,470 65 2,465 6,050 8,580
Net income......................... -- -- -- 4,649 4,649
Shareholders' distributions........ -- -- -- (3,506) (3,506)
----------- ----------- ------------ ------------- -------------
Balance at December 31, 1997............. 6,470 65 2,465 7,193 9,723
Net income......................... -- -- -- 10,803 10,803
Shareholders' distributions........ -- -- -- (4,939) (4,939)
----------- ----------- ------------ ------------- -------------
Balance at December 31, 1998............. 6,470 $ 65 $ 2,465 $ 13,057 $ 15,587
=========== =========== ============ ============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
DOLLAR EXPRESS STORES, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................................. $ 4,224 $ 4,649 $ 10,803
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................................ 1,110 1,494 1,945
Accretion of deferred revenue and volume rebate...................... (193) (686) (407)
Volume rebate received............................................... -- -- 1,000
(Increase) decrease in assets:
Merchandise inventories.............................................. (3,541) (469) 220
Prepaid expenses and other current assets............................ 237 1 (277)
Other assets......................................................... (78) 56 18
Increase in liabilities:
Accounts payable and accrued expenses and other liabilities.......... 1,711 514 1,207
Deferred revenue..................................................... 2,000 -- --
--------- --------- ---------
Net cash provided by operating activities................................... 5,470 5,559 14,509
--------- --------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment........................................ (2,412) (3,366) (3,651)
--------- --------- ---------
Net cash used in investing activities....................................... (2,412) (3,366) (3,651)
--------- --------- ---------
FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligation......... (10) (62) (2,123)
Proceeds from issuance of long-term debt.................................. -- 1,350 1,000
Shareholders' distributions............................................... (3,595) (3,506) (4,939)
Net proceeds from line of credit.......................................... -- -- 4,000
--------- --------- ---------
Net cash used in financing activities....................................... (3,605) (2,218) (2,062)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents........................ (547) (25) 8,796
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............................. 1,846 1,299 1,274
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................................... $ 1,299 $ 1,274 $10,070
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................................. $ 165 $ 282 $ 291
========= ========= =========
Income taxes.............................................................. $ 13 $ 64 $ 17
========= ========= =========
Noncash investing and financing activity:
Capital lease obligation incurred......................................... $ -- $ 149 $ --
========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
DOLLAR EXPRESS STORES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Dollar Express Stores, Inc. (the "Company") is a leading operator of
fixed $1.00 price point stores in the United States. These stores offer
customers a wide assortment of regularly available merchandise, such as
housewares, food and other consumable items, giftware, health and beauty care
items and toys. The Company supplements this merchandise with ever-changing
seasonal and first quality closeout offerings. The Company also operates Spain's
Cards & Gifts Stores, which is one of the largest specialty greeting card
vendors in the Philadelphia metropolitan area.
All of the Company's Dollar Express and Spain's stores, as well as its
corporate headquarters and distribution facility, are located in the
Mid-Atlantic region of the United States. The Company is not dependent on any
one supplier. In August 1998, the Company changed its name to Dollar Express,
Inc. from Spain's Inc. In December 1999, the Board of Directors of the Company
approved the change of its name to Dollar Express Stores, Inc.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions. These estimates and assumptions, which may differ
from actual results, will affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid, short-term
investments with a maturity, at purchase, of three months or less.
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market using
the retail inventory method for the stores' inventory and the average cost
method for warehouse inventory.
Property and Equipment
Property and equipment are recorded at cost, and depreciation and
amortization are provided using the straight-line method over the lesser of the
useful lives of the related assets or the terms of the related leases.
Effective January 1, 1999, the Company changed its method for
depreciating property and equipment from accelerated methods used in previous
periods to the straight-line method. The Company believes that the straight-line
method more appropriately reflects the timing of the economic benefits to be
received from these assets. This change also makes the Company's depreciation
policy more comparable to those used within its industry. The retroactive
application of the new method resulted in a cumulative adjustment of $1.3
million. In accordance with Accounting Principles Board Opinion No. 20,
"Accounting Changes," prior period financial statements have been restated to
account for this change.
F-7
<PAGE>
DOLLAR EXPRESS STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1996, 1997 and 1998
The effect of the change for the years ended December 31, 1996, 1997, and 1998
was to increase income before income taxes by $184,000, $271,000, and $304,000,
respectively. Retained earnings as of January 1, 1996, was restated by $567,000,
to reflect the effect of the change through December 31, 1995.
Cost of Sales
The Company includes the cost of merchandise, warehousing, distribution
and store occupancy costs in cost of sales.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the carrying
value of long-lived assets such as property, plant and equipment may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is required.
Store Opening Costs
The costs of opening new stores are expensed as incurred.
Earnings Per Common Share
Basic earnings per common share is calculated using the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock. The Company has issued no options or other common stock
equivalents that would have caused the basic and diluted shares numbers to be
different.
All references to common shares and per common share, except for the
references to authorized common shares and the stock options discussed in Note 6
in the financial statements, have been restated to give effect to the
Recapitalization described in Note 8.
Deferred Rent
Certain of the Company's store leases contain periodic escalation
clauses. The Company expenses rent on a straight-line basis over the life of the
lease. During the initial years of a store lease, cash payments are typically
less than the straight-line expense. The differential is included in accrued
expenses and other liabilities in the accompanying balance sheets.
F-8
<PAGE>
DOLLAR EXPRESS STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1996, 1997 and 1998
Income Taxes
For each of the years shown in these financial statements, the Company
elected to be taxed pursuant to Subchapter S of the Internal Revenue Code.
Accordingly, federal and state income taxes or credits accrued personally to the
shareholders, with the exception of taxes paid on New Jersey source income,
which were paid at the corporate level.
Pro Forma Adjustments
The Company had, until the Recapitalization described in Note 8,
elected to be treated as an S corporation for federal and state income tax
purposes. On February 5, 1999, the Company's tax status changed from an S
corporation to a C corporation. The pro forma financial information shows the
historical financial statements as if the Company had been taxed as a C
corporation during 1996, 1997 and 1998, assuming a 40% effective corporate tax
rate.
Concentration of Credit Risk
The Company maintains its cash accounts at several financial
institutions. These accounts are insured by the Federal Deposit Insurance
Corporation up to $100,000 per institution. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash.
Reclassifications
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform to the 1998 presentation.
NOTE 2. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (Dollars in
thousands):
<TABLE>
<CAPTION>
Estimated December 31,
useful lives --------------------
(in years) 1997 1998
------------ --------- ----------
<S> <C> <C> <C>
Furniture and fixtures...................................................... 3 to 5 $ 11,549 $ 13,727
Leasehold improvements...................................................... 7 to 10 4,023 5,076
Transportation equipment.................................................... 3 to 5 35 35
Computer equipment.......................................................... 3 to 5 1,205 1,540
--------- ----------
16,812 20,378
Less accumulated depreciation and amortization.............................. 9,560 11,420
--------- ----------
Property and equipment, net................................................. $ 7,252 $ 8,958
========= ==========
</TABLE>
Depreciation and amortization amounted to $1.1 million, $1.5 million and $1.9
million for the years ended December 31, 1996, 1997 and 1998, respectively.
F-9
<PAGE>
DOLLAR EXPRESS STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1996, 1997 and 1998
NOTE 3. REVOLVING CREDIT AND LONG-TERM DEBT
Revolving Credit Agreement
In June 1997, the Company entered into a revolving credit agreement
with a bank. At December 31, 1998, the facility had a borrowing limit of $7.5
million. Interest is charged at the bank's prime or the London Inter-Bank
offered rate plus 1.1%, and is payable monthly. As of December 31, 1998, $4.0
million was outstanding. The interest rate at December 31, 1998 was 6.56%.
At December 31, 1998, the Company had 12 standby letters of credit
outstanding, aggregating $300,000, with various expiration dates extending
through November 30, 1999. These obligations are unsecured.
Long-Term Debt
Long-term debt consists of the following (In thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Note payable (bank)......................................................... $ 1,000 $ --
Note payable (other)........................................................ 348 275
Capital lease............................................................... 108 58
--------- ----------
1,456 333
Less current portion........................................................ 256 123
--------- ----------
$ 1,200 $ 210
========= ==========
</TABLE>
Note payable (bank) -- Unsecured note payable due in monthly installments of
principal and interest at 6.82%, totaling $20,000 per month. This was paid off
in 1998.
Note payable (other) -- Unsecured note payable with a local governmental agency
due in monthly installments of $6,000, maturing in 2000 and bearing interest at
4.25%.
Capital lease -- Obligation under a lease due in monthly installments of $4,000,
maturing in 2000 and bearing interest at 4.79%.
Long-term debt is due as follows (In thousands):
Year ending December 31,
1999........................................ $ 123
2000........................................ 210
-------
$ 333
=======
F-10
<PAGE>
DOLLAR EXPRESS STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1996, 1997 and 1998
Interest expense was $165,000, $282,000 and $291,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.
NOTE 4. COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases its warehouses, offices, and all of its stores.
Substantially all of these leases are non-cancellable. The leases generally
expire through 2009 and provide for renewals. The Company is required to pay for
taxes, maintenance, and insurance on the leased premises.
Future annual minimum lease payments under noncancellable operating
leases, in effect as of December 31, 1998, are as follows (In thousands):
1999....................................... $ 9,334
2000....................................... 8,579
2001....................................... 7,474
2002....................................... 6,308
2003....................................... 4,326
Thereafter................................. 9,389
--------
$45,410
========
Included in the minimum lease payments above are amounts to be paid to
related parties as follows: 1999 through 2002 - $1.0 million per year; 2003 -
$525,000; and thereafter - $1.0 million.
Of total rent expense, $641,000, $765,000, and $1.2 million, was paid
to related parties in 1996, 1997, and 1998 respectively. No amounts were due to
related parties at December 31, 1996, 1997 and 1998.
The leases extend for varying periods up to 12 years. Rent expense for
the years ended December 31, 1996, 1997 and 1998 was $8.0 million, $9.7 million
and $11.0 million, respectively. Contingent rentals are applicable principally
to retail facilities, and are based on percentages of gross receipts
attributable to the related facilities. Contingent rent expense was not
significant in 1996, 1997 and 1998.
Purchase Contracts
In 1996, the Company entered into a purchase agreement with a vendor
that extends to 2003. The Company is required to purchase and pay for at least
$39.5 million in vendor products whereupon the agreement will terminate. The
agreement also entitles the Company to receive volume rebates upon meeting
certain net paid cash receipts thresholds, as defined in the agreement.
These volume rebates are based upon net paid cash receipt levels and
decrease incrementally over the life of the agreement. Such rebates are
recognized on a straight-line basis over the total net paid receipts. Volume
rebates earned in 1996, 1997 and 1998 were $87,000, $456,000 and $255,000,
respectively. A $1.0 million volume rebate was paid to us in February 1998.
F-11
<PAGE>
DOLLAR EXPRESS STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1996, 1997 and 1998
The Company also received a $2.0 million payment at the signing of the
agreement, which is being amortized over the life of the agreement, based upon
total purchases made during the period as a percentage of the total purchase
requirement. Total net paid receipts through 1998 approximated $6.5 million. The
unamortized portion of this payment, amounting to $1.7 million and $1.5 million
at December 31, 1997 and 1998, respectively, is included in deferred credits in
the accompanying balance sheet.
NOTE 5. EMPLOYEE BENEFIT PLAN
During 1998, the Company established a 401(k) savings plan that covers
substantially all employees who meet specified age and service requirements.
Under the plan, the Company matches 25% of employee contributions, limited to 6%
of a participant's salary. The Company's matching contribution was $42,000 for
the year ended December 31, 1998.
NOTE 6. STOCK OPTIONS
During 1998, the Company adopted a stock option plan (the "1998 Plan"),
which provided for the granting of incentive stock options and nonqualified
stock options to employees of the Company. A total of 1,000 shares was
authorized to be granted under the 1998 Plan. As of December 31, 1998, no
options were granted. The 1998 Plan was terminated and replaced with the option
plan discussed in Note 8.
NOTE 7. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). The adoption of SFAS No.
131 has no impact on the Company's results of operations, financial position or
cash flows. Its effect is limited to the disclosures contained in the financial
statements.
The Company owns and operates fixed $1.00 price point stores under the
name Dollar Express. These stores sell substantially all items for $1.00. Dollar
Express' merchandise includes housewares, food and other consumable items,
giftware, health and beauty care items and toys. The Company also operates a
chain of specialty greeting card stores under the name Spain's Cards & Gifts.
These stores carry a national line of greeting cards, as well as products sold
by most of the leading small greeting card suppliers. Spain's also offers
moderately priced giftware and related products, fad and novelty products, candy
and other consumer items.
The Company has aggregated its operations into these two reportable
segments based upon their unique sources of supply, customer base and economic
characteristics. Reporting in this format provides
F-12
<PAGE>
DOLLAR EXPRESS STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1996, 1997 and 1998
management with the financial information necessary to evaluate the success of
the segments and the overall business. The Company evaluates the performance of
the segments based on net sales and gross profit, which is determined net of
warehousing, distribution and store occupancy costs. Operating and
administrative expenses, as well as interest expense and other income, comprise
amounts that are not allocated to segments. The principal identifiable asset for
each operating segment is inventory. Other assets consist primarily of cash and
cash equivalents, and property and equipment. Both the Dollar Express and
Spain's segments are highly diversified. No customer or merchandise vendor
comprises more than 10% of sales or purchases. The accounting policies of the
operating segments are the same as the policies described in Note 1. A summary
of the information about the Company's operations by segment is as follows (In
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
Net Sales:
Dollar Express.............................................. $ 74,125 $ 86,271 $ 111,618
Spain's..................................................... 14,237 16,759 19,184
--------- --------- ----------
Total.................................................... $ 88,362 $ 103,030 $ 130,802
========= ========= ==========
Gross Profit:
Dollar Express.............................................. $ 20,149 $ 21,986 $ 32,880
Spain's..................................................... 2,468 3,730 5,615
--------- --------- ----------
Total.................................................... $ 22,617 $ 25,716 $ 38,495
========= ========= ==========
Inventory:
Dollar Express.............................................. $ 8,658 $ 8,531 $ 8,751
Spain's..................................................... 3,106 3,702 3,262
--------- --------- ----------
Total.................................................... $ 11,764 $ 12,233 $ 12,013
========= ========= ==========
</TABLE>
NOTE 8. SUBSEQUENT EVENTS
Corporate Recapitalization
On January 1, 1999, the Company declared and paid by means of two
promissory notes (the "Promissory Notes") a dividend to the two shareholders of
record of its common stock in an amount equal to approximately $59.5 million.
In February 1999, the Company completed a recapitalization that
resulted in changes in its ownership and capital structure (the
"Recapitalization"). Dollar Express, Inc., a newly formed entity, authorized the
issuance of up to 75,000,000 shares of common stock having a par value of $0.01
per share and also authorized the issuance of up to 25,000,000 shares of
preferred stock having a par value of $0.01 per share. The Recapitalization was
initially effected by the contribution by the Company's shareholders of all the
outstanding common stock of the Company to Dollar Express, Inc. in exchange for
6,470,000 shares of Dollar Express, Inc.'s common stock, which resulted in the
Company becoming a wholly-owned subsidiary of Dollar Express, Inc. Additionally,
through a private placement, Dollar Express, Inc. sold 3,530,000 shares of newly
issued Series A 8.75% cumulative convertible preferred stock with a par value of
$0.01 in exchange for $34.0 million. Warrants to purchase 416,667 shares of
Dollar Express, Inc. common stock were also issued in exchange for $1.0 million.
F-13
<PAGE>
DOLLAR EXPRESS STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1996, 1997 and 1998
In connection with the Recapitalization, the Company converted from a S
to a C corporation.
In February 1999, Dollar Express, Inc. entered into a five-year credit
facility for an aggregate amount of $40.0 million, of which $20.0 million is in
the form of a term loan and $20.0 million is a revolving credit facility. At the
option of Dollar Express, Inc., interest on the facility is calculated at the
lender's base rate plus a margin or LIBOR plus a margin based on a leverage
ratio. The margin ranges from 0% to 1% on base rate borrowings and 1.75% to
2.75% on LIBOR borrowings. A portion of the proceeds of the facility, together
with funds provided from the aforementioned private placement, were used to
satisfy the Promissory Notes, repay the outstanding amount on the line of credit
at December 31, 1998 and pay costs associated with the recapitalization.
The term portion of the credit facility calls for increasing quarterly
payments beginning in 2000. Annual maturities are as follows: 2000 -- $2.0
million, 2001 -- $4.0 million, 2002 -- $6.0 million, 2003 -- $8.0 million.
Stock Option Plan
The Company established the 1999 Stock Option Plan, which reserved
526,316 shares of common stock for future issuance. Under the terms of the plan,
option prices are 100% of the fair market value of the shares on the date of
option grant. To date, 260,000 options have been granted under the plan.
Pro Forma Statements (Unaudited)
The following represents the pro forma balance sheet of Dollar Express,
Inc. as if the Recapitalization had occurred on December 31, 1998. The pro forma
balance sheet has been prepared using the historical financial statements of the
Company, and is qualified entirely by reference to, and should be read in
conjunction with, such historical financial statements. The pro forma balance
sheet is provided for informational and comparative purposes only. The pro forma
balance sheet does not purport to be indicative of the financial position of the
Company had such transactions in fact occurred on December 31, 1998, or during
the periods presented or during any future period.
F-14
<PAGE>
DOLLAR EXPRESS STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1996, 1997 and 1998
The unaudited pro forma balance sheet as of December 31, 1998 is as
follows (In thousands):
<TABLE>
<CAPTION>
Dollar
Company Express, Inc.
historical pro forma
balance Pro forma balance
sheet adjustments sheet
-------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................. $ 10,070 $ 31,412 (1) $ 5,158
27,200 (2)
(4,000)(3)
(4,524)(4)
(55,000)(4)
Merchandise inventories.................................... 12,013 -- 12,013
Prepaid expenses and other current assets................ 481 -- 481
---------- -------- ---------
Total current assets................................. 22,564 (4,912) 17,652
Property and equipment, net..................................... 8,958 -- 8,958
Other assets.................................................... 59 744 (2) 2,893
2,090 (5)
---------- -------- ---------
Total assets......................................... $ 31,581 $ (2,078) $ 29,503
========== ======== =========
</TABLE>
F-15
<PAGE>
DOLLAR EXPRESS STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Dollar
Company Express, Inc.
historical pro forma
balance Pro forma balance
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) sheet adjustments sheet
------------ -------------- -------------
<S> <C> <C> <C>
Current liabilities
Current portion of long-term debt................................$ 123 $ -- $ 123
Line of credit................................................... 4,000 (4,000)(3) 7,200
7,200 (2)
Accounts payable.................................................. 6,962 -- 6,962
Shareholders' promissory notes.................................... -- 59,524 (6) --
(59,524)(4)
Accrued expenses and other liabilities............................ 2,806 -- 2,806
---------- -------- ---------
Total current liabilities.................................... 13,891 3,200 17,091
Long-term debt, less current portion...................................... 210 20,000 (2) 20,210
Deferred credits.......................................................... 1,893 -- 1,893
Common stock warrants..................................................... -- 4,012 (1) 4,012
Redeemable convertible preferred stock.................................... -- 28,144 (1) 28,144
Shareholders' equity (deficit)
Common stock..................................................... 65 -- 65
Additional paid-in capital....................................... 2,465 -- 2,465
Retained earnings (deficit)...................................... 13,057 (59,524)(6) (44,377)
2,090 (5)
---------- -------- ---------
Total shareholders' equity (deficit)......................... 15,587 (57,434) (41,847)
---------- -------- ---------
Total liabilities and shareholders' equity (deficit).........$ 31,581 $ (2,078) $ 29,503
========== ======== =========
</TABLE>
Notes to the unaudited pro forma balance sheet are as follows:
(1) The issuance of 3,530,000 shares of Series A convertible preferred
stock, $0.01 par value, net of discount and warrants to purchase up to
416,667 shares of Dollar Express, Inc.'s common stock, net of offering
expenses, related to the issuance of the preferred shares.
(2) Initial borrowings on the $40.0 million credit facility. Of the amount
borrowed, $20.0 million was drawn on the term loan and $7.2 million was
drawn on the revolving credit facility. Deferred financing costs of
$744,000 were incurred in connection with the issuance of the term loan
and revolving credit facility. These costs will be amortized over the
life of the term loan.
(3) Payoff of the $4.0 million outstanding balance on the Company's
previous revolving credit facility.
F-16
<PAGE>
DOLLAR EXPRESS STORES, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
December 31, 1996, 1997 and 1998
(4) Payment of promissory notes of $59.5 million issued to pay a dividend
to the shareholders of record of the Company.
(5) Deferred tax asset recognized in conjunction with conversion from an
S to a C corporation.
(6) Represents the dividend payment to the Company's shareholders of record
through the issuance of $59.5 million in promissory notes.
Authorization for Initial Public Offering
In December 1999, our board of directors authorized Dollar Express,
Inc. to file a registration statement with the U.S. Securities and Exchange
Commission for an initial public offering of its common stock. If the offering
is consummated under the terms presently anticipated, all of the currently
outstanding shares of Series A convertible preferred stock will be automatically
converted into 3,530,000 shares of common stock and the 416,667 common stock
warrants will automatically terminate.
F-17
<PAGE>
DOLLAR EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Dollar Express Dollar
Stores, Inc. Express, Inc.
----------------- ---------------
December 31, September 30,
1998 1999
----------------- ---------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................... $ 10,070 $ 2,907
Merchandise inventories................................................. 12,013 23,768
Prepaid expenses and other current assets............................... 481 2,437
------------ ------------
Total current assets................................................ 22,564 29,112
Property and equipment, net.................................................. 8,958 11,674
Deferred tax and other assets................................................ 59 2,804
------------ ------------
Total assets........................................................ $ 31,581 $ 43,590
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt....................................... $ 123 $ 1,623
Line of credit.......................................................... 4,000 15,750
Accounts payable........................................................ 6,962 9,668
Accrued expenses and other liabilities.................................. 2,806 2,718
------------ ------------
Total current liabilities........................................... 13,891 29,759
Long-term debt, less current portion......................................... 210 18,621
Deferred credits............................................................. 1,893 2,266
Accrued preferred stock dividends............................................ -- 1,933
Common stock warrants........................................................ -- 4,294
Redeemable convertible preferred stock....................................... -- 31,295
Common shareholders' equity (deficit)
Common stock............................................................ 65 65
Additional paid-in capital.............................................. 2,465 2,465
Retained earnings (deficit) ............................................ 13,057 (47,108)
------------ ------------
Total common shareholders' equity (deficit) ........................ 15,587 (44,578)
------------ ------------
Total liabilities and common shareholders' equity (deficit)......... $ 31,581 $ 43,590
============ ============
</TABLE>
See accompanying notes.
F-18
<PAGE>
DOLLAR EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Dollar Express Dollar
Stores, Inc. Express, Inc.
----------------- ---------------
Nine months Thirty nine
ended weeks ended
September 30, September 30,
1998 1999
----------------- ---------------
<S> <C> <C>
Net sales......................................................................... $ 86,290 $ 100,438
Cost of sales, including warehousing, distribution and store
occupancy costs................................................................. 62,199 71,297
----------- -----------
Gross profit................................................................. 24,091 29,141
Operating and administrative expenses............................................. 18,747 23,202
----------- -----------
Operating profit............................................................. 5,344 5,939
Interest expense, net............................................................. 195 1,640
Accretion of common stock warrants to fair value.................................. -- 282
Other income, net................................................................. 164 95
----------- -----------
Income before income taxes................................................... 5,313 4,112
Income taxes...................................................................... 26 1,757
Deferred income tax benefit resulting from
conversion from S to C corporation........................................... -- (2,090)
----------- -----------
Net income........................................................................ $ 5,287 $ 4,445
=========== ===========
Less preferred stock dividends and accretion...................................... -- 5,084
----------- -----------
Net income (loss) available to common shareholders................................ $ 5,287 $ (639)
=========== ===========
Net income (loss) per common share:
Basic........................................................................ $ 0.82 $ (0.10)
=========== ===========
Diluted...................................................................... $ 0.82 $ (0.10)
=========== ===========
Weighted average number of common shares and common share equivalents
outstanding:
Basic........................................................................ 6,470 6,470
=========== ===========
Diluted...................................................................... 6,470 6,470
=========== ===========
</TABLE>
F-19
<PAGE>
DOLLAR EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Dollar Express Dollar
Stores, Inc. Express, Inc.
----------------- ---------------
Nine months Thirty nine
ended weeks ended
September 30, September 30,
1998 1999
----------------- ---------------
<S> <C> <C>
Pro Forma Information:
Historical income before income taxes............................................. $ 5,313 $ 4,112
Pro forma provision for income taxes.............................................. 2,125 1,645
------------ ----------
Pro forma net income.............................................................. $ 3,188 $ 2,467
------------ ----------
Pro forma net income (loss) available to common shareholders ..................... $ 3,188 $ (2,617)
------------ ----------
Pro forma net income (loss) per common share:
Basic........................................................................ $ 0.49 $ (0.40)
------------ ----------
Diluted...................................................................... $ 0.49 $ (0.40)
------------ ----------
</TABLE>
See accompanying notes.
F-20
<PAGE>
DOLLAR EXPRESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Dollar Express Dollar
Stores, Inc. Express, Inc.
---------------- ----------------
Nine months Thirty nine
ended weeks ended
September 30, September 30,
1998 1999
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.......................................................................... $ 5,287 $ 4,445
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization................................................... 1,407 2,048
Accretion of deferred revenue and volume rebate................................. (280) (390)
Accretion of common stock warrants to fair value................................ -- 282
Volume rebate received.......................................................... 1,000 --
Deferred income taxes .......................................................... -- (2,090)
(Increase) decrease in assets:
Merchandise inventories......................................................... (6,676) (11,755)
Prepaid expenses and other current assets....................................... 92 (1,971)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses and other liabilities .................... (550) 2,949
Deferred revenue................................................................ (143) 430
---------- -----------
Net cash provided by (used in) operating activities...................................... 137 (6,052)
---------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment.................................................. (2,513) (4,660)
---------- -----------
Net cash used in investing activities.................................................... (2,513) (4,660)
---------- -----------
FINANCING ACTIVITIES:
Net borrowings under revolving credit facility ..................................... 4,000 11,750
Proceeds from issuance of long term debt............................................ -- 20,000
Payments on long-term debt and capital lease obligations............................ (94) (89)
Issuance of redeemable convertible preferred stock and common stock warrants,
net of offering expenses........................................................ -- 32,156
Payment of deferred financing costs .............................................. -- (744)
Shareholders distributions ....................................................... (1,003) (59,524)
---------- -----------
Net cash provided by financing activities................................................ 2,903 3,549
---------- -----------
Net increase (decrease) in cash and cash equivalents..................................... 527 (7,163)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................................... 1,274 10,070
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................... $ 1,801 $ 2,907
========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................................... $ 195 $ 1,296
========== ===========
Income taxes ....................................................................... $ -- $ 2,231
========== ===========
</TABLE>
See accompanying notes.
F-21
<PAGE>
DOLLAR EXPRESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999
NOTE 1. BASIS OF PRESENTATION
Dollar Express, Inc. (the "Company") was incorporated in December 1998
to hold 100% of the outstanding shares of Dollar Express Stores, Inc. and was
initially capitalized primarily by issuing its capital stock in exchange for all
of the outstanding capital stock of Dollar Express Stores, Inc. The controlling
shareholders of the Company and Dollar Express Stores, Inc. were the same before
and after the transaction. Therefore, the historical basis of Dollar Express
Stores, Inc.'s assets and liabilities is carried over in the accompanying
consolidated financial statements. The results of operations of all companies
are combined for all periods presented.
In December 1999, the Board of Directors approved the change of its
name from DE&S Holding Co. to Dollar Express, Inc. and changed the name of its
operating subsidiary from Dollar Express, Inc. to Dollar Express Stores, Inc.
The accompanying unaudited condensed consolidated financial statements
present the consolidated financial position, results of operations and cash
flows of the Company and its wholly-owned subsidiaries as of the dates and for
the periods indicated. All intercompany transactions and balances have been
eliminated. Effective January 1, 1999, the Company adopted a 52/53 week fiscal
year. As such, our fiscal quarters will end on the Thursday closest to each of
March 31, June 30 and September 30, and our fiscal year end will be the Thursday
closest to December 31.
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. In the opinion of management, this
information contains all adjustments, consisting only of normal recurring
adjustments, considered necessary to present fairly the financial position of
the Company as of September 30, 1999, the results of its operations and its cash
flows for the nine months and thirty nine weeks ended September 30, 1998 and
1999, respectively. The results of operations for the thirty nine weeks ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the full fiscal year ending December 30, 1999.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted as permitted by the rules and
regulations of the Securities and Exchange Commission, although the Company
believes the disclosures are adequate to make the information presented not
misleading. The accompanying unaudited consolidated financial statements should
be read in conjunction with the audited financial statements and notes thereto
included elsewhere herein.
NOTE 2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 3. CORPORATE RECAPITALIZATION
On January 1, 1999, Dollar Express Stores, Inc. declared and paid by
means of two promissory notes (the "Promissory Notes") a dividend to the two
shareholders of record of its common stock in an amount equal to approximately
$59.5 million.
F-22
<PAGE>
DOLLAR EXPRESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
September 30, 1998 and 1999
In February 1999, Dollar Express Stores, Inc. completed a
recapitalization that resulted in changes in its ownership and capital structure
(the "Recapitalization"). The Company, a newly formed entity, authorized the
issuance of up to 75,000,000 shares of common stock having a par value of $0.01
per share and also authorized the issuance of up to 25,000,000 shares preferred
stock having a par value of $0.01 per share. The Recapitalization was initially
effected by the contribution by Dollar Express Stores, Inc. shareholders of all
outstanding common stock to Dollar Express Stores, Inc. in exchange for
6,470,000 shares of the Company's common stock, which resulted in Dollar Express
Stores, Inc. becoming a wholly-owned subsidiary of the Company. Additionally,
through a private placement, the Company sold 3,530,000 shares of newly issued
Series A 8.75% cumulative convertible preferred stock with a par value of $0.01
in exchange for $34.0 million. Warrants to purchase up to 416,667 shares of the
Company's common stock were also issued, in exchange for $1.0 million.
In connection with the Recapitalization, the Dollar Express Stores,
Inc. converted from an S to a C corporation.
In February 1999, the Company entered into a five-year credit facility
for an aggregate amount of $40.0 million, of which $20.0 million is in the form
of a term loan and $20.0 million is a revolving credit facility. At the option
of the Company, interest on the facility is calculated at the lender's base rate
plus a margin or LIBOR plus a margin based on a leverage ratio. The margin
ranges from 0% to 1% on base rate borrowings and 1.75% to 2.75% on LIBOR
borrowings. A portion on the proceeds of the facility, together with funds
provided from the private placement, were used to satisfy the Promissory Notes,
repay the outstanding amount on the line of credit at December 31, 1998 and pay
costs associated with the Recapitalization.
The term portion of the facility calls for increasing quarterly
payments beginning in 2000. Annual maturities are as follows: 2000 - $2.0
million, 2001 - $4.0 million, 2002 - $6.0 million, 2003 - $8.0 million.
NOTE 4. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In connection with the Recapitalization, the Company issued 3,530,000
shares of its Series A 8.75% cumulative convertible preferred stock ("Preferred
Stock") with a par value of $0.01 per share. The Preferred Stock ranks senior to
all other shares of capital stock. Dividends are payable in arrears on March 31,
June 30, September 30 and December 31 of the year in which such dividends
accrue, in an amount equal to the stated rate times $34.0 million. All dividend
payments are to be made in cash. Dividends for 1999 of $1.9 million have been
accrued and are unpaid at September 30, 1999. The payment of these dividends can
be deferred for up to 910 days from February 5, 1999, and therefore have been
classified as long-term in the accompanying consolidated balance sheet.
The holders of the Preferred Stock have the right, at any time, to
convert any or all shares into shares of common stock on a one-for-one basis.
Additionally, all shares of Preferred Stock will be automatically converted into
common stock on a one-for-one basis on the date at which a registration
statement filed with the Securities and Exchange Commission ("SEC"), in respect
of shares of common stock to be sold in a qualified public offering, shall be
declared effective by the SEC. Upon conversion, the holders of Preferred Stock
shall also be entitled to payment of all accrued and unpaid dividends, if any,
so long as a qualified public offering, merger or
F-23
<PAGE>
DOLLAR EXPRESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
September 30, 1998 and 1999
consolidation or any other recapitalization or other business combination with
an unaffiliated entity has not occurred prior to the date which is 910 days
after February 5, 1999.
Each share of Preferred Stock shall have the number of votes equal to
the number of shares of common stock into which each share of Preferred Stock is
convertible. Additionally, so long as the Preferred Stock is outstanding the
Preferred Stock holders have the right to elect two of the current five
directors to the Board of Directors of the Company.
Beginning on the fifth anniversary from February 5, 1999 and continuing
until the date at which a registration statement filed with the SEC in respect
of shares of common stock to be sold in a qualified public offering, shall be
declared effective by the SEC, at the option of the holders of a majority of the
outstanding Preferred Stock, such holders may require the Company to redeem, at
any time, all, but not less than all, of the Preferred Stock then outstanding.
The Company is obligated to pay to the holders of Preferred Stock an amount in
cash, in aggregate, equal to the greater of: 1) $34.0 million plus all accrued
and unpaid dividends; and 2) the fair market value of shares of Common Stock
into which such Preferred Stock would have been convertible, plus all accrued
and unpaid dividends.
In the event of any liquidation of the Company each issued and
outstanding share of Preferred Stock will entitle the holder to payment at the
rate of approximately $9.63 per share, plus all accrued and unpaid dividends.
NOTE 5. COMMON STOCK WARRANTS
In connection with the Recapitalization, the Company issued 416,667
warrants to the holders of Preferred Stock to purchase shares of its Common
Stock ("Warrants"), par value $0.01 per share, for cash proceeds of $1.0
million. Beginning on the date that is 910 days after February 5, 1999, and
thereafter until expiration, the Warrants may be exercised by the holders to
purchase shares of Common Stock. The exercise price is $0.01 per share, of
Common Stock.
The Warrants were issued in conjunction with the Preferred Stock, and
as such, in the event the holders of the Preferred Stock exercise their
redemption rights, as discussed in Note 4, the Company will be required to also
repurchase the Warrants then outstanding. Each Warrant is to be repurchased by
the Company in cash equal to the fair market value of shares of Common Stock,
less the exercise price for each Warrant, plus an amount up to $2.40 per share,
which is dependent on the fair market value of the Common Stock at the date of
repurchase.
NOTE 6. INCOME TAXES
The Company was taxed as an S corporation for the nine months ended
September 30, 1998. Accordingly, federal and state income taxes or credits for
that period accrued personally to the shareholders, with the exception of taxes
paid on New Jersey source income, which were paid at the corporate level.
Concurrent with the Recapitalization (discussed in Note 3.), the Company
converted from an S corporation to a C corporation under the Internal Revenue
Code. Accordingly, earnings are now taxed at the company level rather than
passed through to the Company's shareholders. The Company's effective tax rate
for the thirty nine weeks ended September 30, 1999 was 40%. Upon conversion from
an S to a C corporation, the Company recognized a deferred income tax benefit of
$2.1 million. These financial statements also contain a pro forma calculation of
tax expense as if the Company had become a C corporation on January 1, 1998.
F-24
<PAGE>
DOLLAR EXPRESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
September 30, 1998 and 1999
NOTE 7. ACCOUNTING CHANGE
Effective January 1, 1999, the Company changed the depreciable lives of
leasehold improvements to more closely reflect their expected remaining lives.
Specifically, the depreciable lives were changed to the shorter of the lease
term or estimated useful life of the asset, excluding any renewal options on the
leases. The effect of the change on the thirty nine weeks ended September 30,
1999 was to decrease net income by $104,000, or $0.02 per common share.
NOTE 8. EARNINGS (LOSS) PER COMMON SHARE
The table below sets forth the reconciliation of net income to net
income (loss) available to common shareholders (In thousands):
Dollar
Express, Inc.
--------------
Thirty nine
weeks ended
September 30,
1999
-------------
Net income.........................................................$ 4,445
Dividends on redeemable convertible preferred stock........... (1,933)
Accretion of fair market value adjustment on redeemable
convertible preferred stock................................ (2,391)
Accretion of discount on redeemable convertible preferred
stock.................................................... (760)
------------
Net loss available to common shareholders..........................$ (639)
============
Weighted average number of common shares and common
share equivalents outstanding - basic and diluted............. 6,470
============
Net loss per common share..........................................$ (0.10)
============
Options to purchase 260,000 shares of common stock, warrants to
purchase 416,667 shares of common stock, and 3,530,000 shares of redeemable
convertible preferred stock, eligible for conversion into 3,530,000 shares of
common stock were outstanding during the 1999 period. These common stock
equivalents are not included in the calculation of diluted weighted average
number of common shares and common share equivalents outstanding during the 1999
period because their effect would be anti-dilutive.
All share and per share information for periods prior to 1999 reflect
common shares outstanding as if the Recapitalization occurred at the beginning
of 1998.
NOTE 9. SEGMENT INFORMATION
The Company has two reportable segments -- Dollar Express stores and
Spain's Cards & Gifts stores.
F-25
<PAGE>
DOLLAR EXPRESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
September 30, 1998 and 1999
The following are the relevant data for the nine months ended September
30, 1998 and the thirty nine weeks ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Dollar Express Dollar Express,
Stores, Inc. Inc.
----------------- ----------------
Nine months Thirty nine
ended weeks ended
September 30, September 30,
1998 1999
----------------- ----------------
<S> <C> <C>
Net sales:
Dollar Express..................................................... $ 72,647 $ 88,008
Spain's............................................................ 13,643 12,430
------------ -----------
Total........................................................... $ 86,290 $ 100,438
============ ===========
Gross profit:
Dollar Express..................................................... $ 20,630 $ 26,406
Spain's............................................................ 3,461 2,735
------------ -----------
Total........................................................... $ 24,091 $ 29,141
============ ===========
Inventory:
Dollar Express..................................................... $ 15,162 $ 20,386
Spain's............................................................ 3,747 3,382
------------ -----------
Total........................................................... $ 18,909 $ 23,768
============ ===========
</TABLE>
NOTE 10. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following (Dollars in
thousands):
<TABLE>
<CAPTION>
Estimated
useful lives December 31, September 30,
(in years) 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
Furniture and fixtures............................... 3 to 5 $ 13,727 $ 15,948
Leasehold improvements............................... 7 to 10 5,076 6,643
Transportation equipment............................. 3 to 5 35 35
Computer equipment................................... 3 to 5 1,540 2,212
---------- ----------
20,378 24,838
Less accumulated depreciation and amortization....... 11,420 13,164
---------- ----------
Property and equipment, net.......................... $ 8,958 $ 11,674
========== ==========
</TABLE>
Depreciation and amortization amounted to $1.4 million and $1.9 million for the
nine months ended September 30, 1998 and thirty nine weeks ended September 30,
1999, respectively.
F-26
<PAGE>
DOLLAR EXPRESS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
September 30, 1998 and 1999
NOTE 11. SUBSEQUENT EVENT
In December 1999, our board of directors authorized Dollar Express,
Inc. to file a registration statement with the U.S. Securities and Exchange
Commission for an initial public offering of its common stock. If the offering
is consummated under the terms presently anticipated, all of the currently
outstanding shares of Series A convertible preferred stock will be automatically
converted into 3,530,000 shares of common stock and the 416,667 common stock
warrants will automatically terminate.
F-27
<PAGE>
================================================================================
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
________________ Shares
(R)
[Dollar Express logo]
Common Stock
------------------
PROSPECTUS
------------------
Merrill Lynch & Co.
Prudential Securities
U.S. Bancorp Piper Jaffray
First Union Securities, Inc.
Legg Mason Wood Walker
Incorporated
_________ ___, 2000
================================================================================
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Securities and Exchange Commission registration fee.............. $ 16,632
NASD fees and expenses........................................... 6,800
Blue Sky fees and expenses (*)...................................
Nasdaq National Market listing fee (*)...........................
Accountants' fees and expenses (*)...............................
Legal fees and expenses.......................................... 200,000
Transfer Agent's fees and expenses (*)...........................
Printing and engraving expenses (*)..............................
Directors and Officers Insurance (*).............................
Miscellaneous (*)................................................
---------
Total Expenses (*)...............................................
=========
- --------------------
(*)To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Pennsylvania Business Corporation Law, our charter and our bylaws
limit the monetary liability of our directors to us and to our shareholders and
provide for indemnification of our officers and directors for liabilities and
expenses that they may incur in such capacities. In general, we will indemnify
our directors and officers against any liability except where indemnification
would be expressly prohibited by law or where a court has determined that the
director's or officer's actions were reckless or willful or resulted in an
unlawful personal benefit to the director or officer from us.
Reference is made to our bylaws filed as Exhibit 3.3 hereto.
We have an insurance policy that insures our directors and officers
against certain liabilities that might be incurred in connection with the
performance of their duties. Prior to the completion of the offering, we will
amend our policy to include coverage against liabilities with respect to the
Securities Act.
The underwriting agreement filed as Exhibit 1.1 to this registration
statement provides for indemnification by the underwriters of the registrant and
its officers and directors severally, but not jointly, and by the registrant and
the selling shareholders of the underwriters for certain liabilities, including
liabilities arising under the Securities Act and affords certain rights of
contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the registrant has sold the securities set
forth below, which were not registered under the Securities Act:
Shares of Common Stock
1. On February 5, 1999, pursuant to a Securities Purchase and Contribution
Agreement dated as of February 3, 1999 (the "Securities Purchase
Agreement"), we issued an aggregate of 6,470,000
II-1
<PAGE>
shares of common stock to Bernard Spain and Murray Spain in exchange
for all of issued and outstanding shares of our now wholly-owned
operating subsidiary, Dollar Express Stores, Inc.
Shares of Preferred Stock
2. On February 5, 1999, pursuant to the Securities Purchase Agreement, we
issued an aggregate of 3,530,000 shares of Series A convertible
preferred stock to seven accredited investors for an aggregate cash
purchase price of $34.0 million.
Warrants
3. On February 5, 1999, pursuant to the Securities Purchase Agreement, we
issued warrants to purchase an aggregate of 416,667 shares of our
common stock to seven accredited investors for an aggregate purchase
price of $1.0 million.
Options to Purchase Common Stock
4. In 1999, we granted stock options to employees for the first time.
Pursuant to the 1999 Stock Option Plan, we granted options to purchase
_____________ shares of our common stock, in the aggregate. The
__________ options granted to the employees in 1999 have an average
weighted exercise price of $_____ per share.
We believe that all of the transactions described above were exempt
from registration under Section 4(2) of the Securities Act because the subject
securities were sold to a limited group of persons, each of whom was believed to
have been a sophisticated, accredited investor or to have had a pre-existing
business or personal relationship with us or our management and to have been
purchasing for investment without a view to further distribution. In addition,
the recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such transactions.
All recipients had adequate access to information about us.
We further believe that the transactions described in 4 above were
exempt from registration pursuant to Rule 701 under the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) The following exhibits are filed herewith or incorporated herein by
reference:
Exhibit
<TABLE>
<CAPTION>
No. Description
- --- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Articles of Incorporation of DE&S Holding Co.
3.2 Articles of Amendment of DE&S Holding Co. changing its name to Dollar Express, Inc.
3.3 Bylaws of DE&S Holding Co.
3.4* Amended and Restated Articles of Incorporation of Dollar Express, Inc.
3.5* Amended and Restated Bylaws of Dollar Express, Inc.
4.1* Specimen Stock Certificate of Dollar Express.
5.1* Opinion of Pepper Hamilton LLP.
10.1* Headquarters Lease.
10.2 1999 Stock Option Plan of Dollar Express, including forms of Incentive Stock Option Agreement
and Non-Qualified Stock Option Agreement.
10.3 Securities Purchase and Contribution Agreement, dated February 3,1999.
10.4* Employment Agreement with Bernard Spain.
10.5* Employment Agreement with Murray Spain.
10.6* Employment Agreement with James Misterman.
10.7* Employment Agreement with Vincent J. Navitsky.
10.8* Employment Agreement with Howard B. Savage.
10.9* Employment Agreement with David Folkman.
10.10 Investor Rights Agreement.
10.11 Registration Rights Agreement.
10.12 Credit Agreement dated February 5, 1999, among Dollar Express, First
Union National Bank and BankBoston, N.A.
10.13* Collective Bargaining Agreement dated February 8, 1999, among Dollar
Express and Teamsters Local 830.
16.1 Letter from Grant Thornton LLP, re: Change in Certifying Accountant
21 Dollar Express' Subsidiaries.
23.1 Consent of Grant Thornton LLP.
23.2* Consent of Pepper Hamilton LLP (included in Exhibit 5.1).
23.3 Consent of David A. Cohen, director nominee.
24.1 Powers of Attorney (included in the signature page to the registration statement).
27.1 Financial Data Schedule (in electronic format only).
</TABLE>
- -------------------------
* To be filed by amendment.
(b) Financial statements.
None.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
II-3
<PAGE>
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(ii) For purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania on the
23rd day of December, 1999.
DOLLAR EXPRESS, INC.
By: /s/ Bernard Spain
--------------------------
Bernard Spain
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Bernard Spain and Murray Spain, and each
or any of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement and other registration
statements and amendments thereto relating to the offering contemplated by this
registration statement (including registration statements under Rule 462
promulgated under the Securities Act), and to file the same, with all exhibits
thereto and other documents in connection therewith, with the SEC, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their, his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
II-5
<PAGE>
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Bernard Spain Chairman of the Board and 12/23/99
- ---------------------- Chief Executive Officer
Bernard Spain (principal executive officer)
/s/ Murray Spain President, Chief Operating Officer and Director 12/23/99
- ----------------------
Murray Spain
/s/ Barry J. Susson Executive Vice President, Chief Financial Officer 12/23/99
- ---------------------- (principal financial and accounting officer)
Barry J. Susson
/s/ Harvey Goldberg Director 12/23/99
- ----------------------
Harvey Goldberg
/s/ David Mussafer Director 12/23/99
- ----------------------
David Mussafer
/s/ William Woo Director 12/23/99
- ----------------------
William Woo
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
No. Description
- --- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Articles of Incorporation of DE&S Holding Co.
3.2 Articles of Amendment of DE&S Holding Co. changing its name to Dollar Express, Inc.
3.3 Bylaws of DE&S Holding Co.
3.4* Amended and Restated Articles of Incorporation of Dollar Express, Inc.
3.5* Amended and Restated Bylaws of Dollar Express, Inc.
4.1* Specimen Stock Certificate of Dollar Express.
5.1* Opinion of Pepper Hamilton LLP.
10.1* Headquarters Lease.
10.2 1999 Stock Option Plan of Dollar Express, including forms of Incentive Stock Option Agreement
and Non-Qualified Stock Option Agreement.
10.3 Securities Purchase and Contribution Agreement, dated February 3,1999.
10.4* Employment Agreement with Bernard Spain.
10.5* Employment Agreement with Murray Spain.
10.6* Employment Agreement with James Misterman.
10.7* Employment Agreement with Vincent J. Navitsky.
10.8* Employment Agreement with Howard B. Savage.
10.9* Employment Agreement with David Folkman.
10.10 Investor Rights Agreement.
10.11 Registration Rights Agreement.
10.12 Credit Agreement dated February 5, 1999, among Dollar Express, First
Union National Bank and BankBoston, N.A.
10.13* Collective Bargaining Agreement dated February 8, 1999, among Dollar
Express and Teamsters Local 830.
16.1 Letter from Grant Thornton LLP, re: Change in Certifying Accountant
21 Dollar Express' Subsidiaries.
23.1 Consent of Grant Thornton LLP.
23.2* Consent of Pepper Hamilton LLP (included in Exhibit 5.1).
23.3 Consent of David A. Cohen, director nominee.
24.1 Powers of Attorney (included in the signature page to the registration statement).
27.1 Financial Data Schedule (in electronic format only).
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE>
Exhibit 3.1
COMMONWEALTH OF PENNSYLVANIA
ARTICLES OF INCORPORATION
OF
DE&S HOLDING CO.
THE UNDERSIGNED, desiring to form a business corporation in compliance
with the requirements of Section 1306 of the Pennsylvania Business Corporation
Law of 1988, hereby certifies as follows:
1. Name. The name of the corporation (hereinafter referred to as the "Company")
is: DE&S Holding Co.
2. Registered Office. The address of the Company's registered office in the
Commonwealth of Pennsylvania is: 1700 Tomlinson Road, Philadelphia, PA 19116
(Philadelphia County).
3. Authorizing Law. The Corporation is incorporated under the provisions of the
Pennsylvania Business Corporation Law of 1988.
4. Corporate Powers. The Company shall have the unlimited power to engage in and
to do any lawful act concerning any or all lawful businesses for which
corporations may be incorporated under the Pennsylvania Business Corporation Law
of 1988, as amended, or any successor provision thereto.
5. Term. The term for which the Company is to exist is perpetual.
6. Capital Stock. The aggregate number of shares of capital stock which the
Company shall have authority to issue is one hundred million (100,000,000)
shares, of which (a) seventy-five million (75,000,000) shares shall be
designated as Common Stock having a par value of $.01 per share, and (b)
twenty-five million (25,000,000) shares shall be designated as Preferred Stock
having a par value of $.01 per share.
The following is a statement of the designations, voting rights,
preferences, limitations, and the special rights granted to or imposed upon the
shares of each such class.
Common Stock
(a) The holders of the Common Stock shall not have the right
to subscribe to any additional shares of stock which the
Company may now or hereafter authorize.
(b) Upon the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, the assets of the
Company remaining after the payment of all creditors and prior
claimants, shall be divided among all creditors and prior
claimants and holders of shares of any series of the Company=s
Preferred Stock having liquidation rights senior in preference
to that of the holders of the Company's Common Stock, shall be
divided among and paid to the holders of the Common Stock in
accordance with their respective holdings.
<PAGE>
Preferred Stock
(a) Issue in Series. Preferred Stock may be issued from time
to time in one or more series, each such series to have the
terms stated herein and in the resolution of the Board of
Directors providing for its issue. All shares of any one
series of Preferred Stock shall be identical, but shares of
different series of Preferred Stock need not rank equally or
be identical except insofar as provided by law.
(b) Creation of Series. The Board of Directors shall have
authority by resolution to cause to be created one or more
series of Preferred Stock, and to determine and fix with
respect to each series, prior to the issuance of any shares of
the series to which such resolution relates:
(i) the distinctive designation of the series and the
number of shares which shall constitute the series,
which number may be increased or decreased (but not
below the number of shares then outstanding) from
time to time by action of the Board of Directors;
(ii) the dividend rate, if any, and the times of
payment of dividends on the shares of the series,
whether dividends shall be cumulative, and, if so,
from what date or dates;
(iii) the price or prices at which, and the terms and
conditions on which, the shares of the series may be
redeemed at the option of the Company;
(iv) whether or not the shares of the series shall be
entitled to the benefit of a retirement or sinking
fund to be applied to the purchase or redemption of
such shares and, if so entitled, the amount of such
fund and the terms and provisions relative to the
operation thereof;
(v) whether or not the shares of the series shall be
convertible into, or exchangeable for, shares of any
other series of the same or any other class or
classes of stock of the Company, and if so
convertible or exchangeable, the conversion price or
prices, or the rates of exchange, and any adjustments
thereof, if any, at which such conversion or exchange
may be made, and any other terms and conditions of
such conversion or exchange;
(vi) the rights of the shares of the series in the
event of voluntary or involuntary liquidation,
dissolution or winding up of the Company;
(vii) whether or not the shares of the series shall
have priority over or parity with or be junior to the
shares of any other series or class in any respect or
shall be entitled to the benefit of limitations
restriction the issuance of shares of any other
series or class having priority over or being on a
parity with the shares of such series in any respect,
or restricting the payment of dividends on, or the
making of other distributions in respect of, shares
of any other series or class ranking junior to the
shares of the series as to dividends or assets, or
restricting
-2-
<PAGE>
the purchase or redemption of the shares of any such
junior series or class, and the terms of any such
restrictions;
(ix) whether the series shall having voting rights,
in addition to the voting rights provided by law,
and, if so, the terms of such voting rights; and
(x) any other designations, voting rights,
preferences, limitations, or special rights of that
series.
7. Cumulative Voting. The Shareholders of the Company shall not have the right
to cumulate their votes for the election of directors of the Company.
8. Personal Liability of Directors. No director of the Corporation, as such,
shall be personally liable for monetary damages for such action taken, or any
failure to take any action, unless: (a) the director has breached or failed to
perform the duties of his or her office under Section 1721 of the Pennsylvania
Business Corporation Law of 1988, as amended, or any successor provision
thereto; and (b) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness; provided, however, that the provisions of
this Section shall not apply to the responsibility or liability of a director
pursuant to any criminal statute, or to the liability of a director for the
payment of taxes pursuant to local, state or Federal law.
9. Opt Out. Subchapters E, F, G, H, I and J of Chapter 25 of the Pennsylvania
Business Corporation Law of 1988, as amended, shall not be applicable to the
Company.
10. Amendment. The Company reserves the right, from time to time, to amend,
alter or repeal any provision contained in these Articles of Incorporation in
the manner now or hereafter provided by statute for the amendment of articles of
incorporation.
11. Incorporator. The name and address, including street and number, of the sole
Incorporator of the Corporation is:
Bradley S. Rodos
2000 Market Street, 10th Floor
Philadelphia, PA 19103
IN WITNESS WHEREOF, the undersigned Incorporator has signed and sealed
these Articles of Incorporation the 24th day of December, 1998.
/s/ Bradley S. Rodos (SEAL)
------------------------------
Bradley S. Rodos, Incorporator
-3-
<PAGE>
Exhibit 3.2
Microfilm Number____________ Filed with the Department of State on____________
Entity Number__________________
_____________________________
Secretary of the Commonwealth
ARTICLES OF AMENDMENT-DOMESTIC NONPROFIT CORPORATION
DSCB:15-5915 (Rev 90)
In compliance with the requirements of 15 Pa.C.S. ss. 5915 (relating to
articles of amendment), the undersigned nonprofit corporation, desiring to amend
its articles, hereby states that:
1. The name of the corporation is: DE&S HOLDING CO.
-----------------------------------------
- -------------------------------------------------------------------------------
2. The (a) address of this corporation's current registered office in this
Commonwealth or (b) name of its commercial registered office provider and
the county of venue is (the Department is hereby authorized to correct the
following information to conform to the records of the Department):
(a) 1700 Tomlinson Road, Philadelphia, PA 19116-3848 Philadelphia
---------------------------------------------------------------------
Number and Street City State Zip County
(b) c/o:__________________________________________________________________
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider,
the county in (b) shall be deemed the county in which the corporation is
located for venue and official publication purposes.
3. The statute by or under which it was incorporated is: Business Corporation
Law of 1988
4. The date of its incorporation is: 12/24/98
--------
5. (Check, and if appropriate complete, one of the following):
X The amendment shall be effective upon filing these Articles of
---
Amendment in the Department of State.
The amendment shall be effective on: _________ at ___________
--- Date Hour
6. (Check one of the following):
The amendment was adopted by the members (or shareholders) pursuant
--- to 15 Pa.C.S. ss. 5914(a).
X The amendment was adopted by the board of directors pursuant to 15
--- Pa.C.S. ss. 5914(b).
7. (Check, and if appropriate complete, one of the following):
X The amendment adopted by the corporation, set forth in full, is as
--- follows:
The name of the Company shall be changed to Dollar Express, Inc.
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
--- The amendment adopted by the corporation is set forth in full in
Exhibit A attached hereto and made a part hereof.
<PAGE>
8. (Check, if the amendment restates the Articles):
The restated Articles of Incorporation supersede the original
--- Articles and all amendments thereto.
IN TESTIMONY WHEREOF, the undersigned corporation has caused these
Articles of Amendment to be signed by a duly authorized officer thereof this
14th day of December, 1999.
DE&S HOLDING CO.
----------------------
(Name of Corporation)
BY: /s/ Bernard Spain
---------------------
(Signature)
TITLE: Chief Executive Officer
----------------------------
<PAGE>
Exhibit 3.3
BY-LAWS
OF
DE&S HOLDING CO.
(a Pennsylvania corporation)
These By-Laws are adopted by this Corporation and are supplemental to
the Pennsylvania Business Corporation Law of 1988 as the same shall
from time to time be in effect.
ARTICLE I - OFFICES AND FISCAL YEAR
Section 1.01. REGISTERED OFFICE. The registered office of the
Corporation in Pennsylvania shall be at 1700 Tomlinson Road, Philadelphia, PA
19115, until otherwise established by an amendment of the Articles or by the
Board of Directors and a record of such change is filed with the Department of
State in the manner provided by law.
Section 1.02. OTHER OFFICES. The Corporation may also have offices at
such other places within or without Pennsylvania as the Board of Directors may
from time to time appoint or the business of the Corporation may require.
Section 1.03. FISCAL YEAR. The fiscal year of the Corporation shall
begin the first day of January in each year.
ARTICLE II - NOTICE, WAIVERS & MEETINGS GENERALLY
Section 2.01. MANNER OF GIVING NOTICE.
(a) Whenever written notice is required to be given to any
person under the provisions of the Business Corporation Law or by the Articles
of Incorporation or these By-Laws, it may be given to the person either
personally or by sending a copy thereof by first class or express mail, postage
prepaid, or by telegram (with messenger service specified), telex or TWX (with
answer back received) or courier service, charges prepaid, or by telecopier, to
the address (or to the telex, TWX, telecopier or telephone number) of the person
appearing on the books of the Corporation or, in the case of Directors, supplied
by the Directors to the Corporation for the purpose of notice. If the notice is
sent by mail, telegraph or courier service, it shall be deemed to have been
given to the person entitled thereto when deposited in the United States mail or
with a telegraph office or courier service for delivery to that person or, in
the case of telex or TWX, when dispatched or, in the case of telecopier, when
received. A notice of meeting shall specify the place, day and hour of the
meeting and any other information required by any other provision of the
Business Corporation Law, the Articles or these By-Laws.
(b) Adjourned Shareholder Meetings. When a meeting of
shareholders is adjourned, it shall not be necessary to give any notice of the
adjourned meeting or of the business
<PAGE>
to be transacted at an adjourned meeting, other than by announcement at the
meeting at which the adjournment is taken, unless the Board fixes a new record
date for the adjourned meeting.
Section 2.02. NOTICE OF MEETINGS OF BOARD OF DIRECTORS. Notice of a
regular meeting of the Board of Directors need not be given. Notice of every
special meeting of the Board of Directors shall be given to each director by
telephone or in writing at least 24 hours (in the case of notice by telephone,
telex, TWX or telecopier) or 48 hours (in the case of notice by telegraph,
courier service or express mail) or three days (in the case of notice by first
class mail) before the time at which the meeting is to be held. Every such
notice shall state the time and place of the meeting. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
need be specified in a notice of a meeting.
Section 2.03. NOTICE OF MEETINGS OF SHAREHOLDERS.
(a) Written notice of every meeting of the shareholders shall
be given by, or at the direction of, the Secretary to each shareholder of record
entitled to vote at the meeting at least ten (10) days prior to the day named
for a meeting called to consider a fundamental change as that term is defined
under the Pennsylvania Business Corporation Law of 1988, or any amendments
thereto, or five (5) days prior to the day named for the meeting in any other
case.
(b) Notice of Action By Shareholders on By-Laws. In the case
of a meeting of shareholders that has as one of its purposes action on the
By-Laws, written notice shall be given to each shareholder that the purpose, or
one of the purposes, of the meeting is to consider the adoption, amendment or
repeal of the By-Laws. There shall be included in, or enclosed with, the notice
a copy of the proposed amendment or a summary of the changes to be effected
thereby.
Section 2.04. USE OF CONFERENCE TELEPHONE AND SIMILAR EQUIPMENT. One or
more persons may participate in a meeting of the Board of Directors, committee,
or the shareholders of the Corporation by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other. Participation in a meeting pursuant to this
section shall constitute presence in person at the meeting.
Section 2.05. WAIVER. Whenever any notice is required to be given under
the provisions of any law, the Articles of Incorporation, or these By-Laws, a
written waiver thereof signed by the person entitled to said notice, whether
before or after the time stated therein, shall be deemed to be equivalent to
such notice. Except in the case of a special meeting of the shareholders,
neither the business to be transacted nor the purpose of the meeting need be
specified in the waiver of notice of such meeting. In addition, any shareholder
who attends a meeting or is represented at such meeting by proxy, without
protesting at the commencement of the meeting the lack of notice thereof to him,
or any director who attends a meeting of the Board of Directors without
protesting at the commencement of the meeting the lack of notice, shall be
conclusively deemed to have waived notice of such meeting. If a person entitled
to notice, either in person or by proxy, attends a meeting for the express
purpose of objecting to the transaction of any business because the meeting was
not lawfully called or convened, such person's attendance shall not constitute
waiver of notice of such meeting.
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ARTICLE III - SHAREHOLDERS
Section 3.01. PLACE OF MEETING. All meetings of the shareholders of the
Corporation shall be held at the registered office of the Corporation unless
another place is designated by the Board of Directors in the notice of the
meeting.
Section 3.02. ANNUAL MEETING. The Board of Directors may fix the date
and time of the annual meeting of the shareholders, but if no such date and time
is fixed by the Board, the meeting for any calendar year shall be held on the
third Wednesday of April in such year, if not a legal holiday under the laws of
Pennsylvania and, if a legal holiday, then on the next succeeding business day,
not a Saturday, at 2 o'clock p.m., and at said meeting the shareholders then
entitled to vote shall elect directors and shall transact such other business as
may properly be brought before the meeting.
Section 3.03. SPECIAL MEETINGS.
(a) Call of special meetings. Special meetings of the
shareholders may be called at any time:
(1) by the majority of the Board of Directors;
(2) by the Chief Executive Officer; or
(3) unless otherwise provided in the Articles, by
shareholders entitled to cast at least 20% of the vote that all shareholders are
entitled to cast at the particular meeting.
(b) Fixing of time for meeting. At any time, upon written
request of any person who has called a special meeting, it shall be the duty of
the Secretary to fix the time of the meeting which shall be held not more than
sixty (60) days after the receipt of the request.
(c) Business of special meetings. Business transacted at all
special meetings shall be confined to the business stated in the call.
Section 3.04. QUORUM AND ADJOURNMENT.
(a) A meeting of shareholders of the Corporation duly called
shall not be organized for the transaction of business unless a quorum is
present. The presence of shareholders entitled to cast at least a majority of
the votes that all shareholders are entitled to cast on a particular matter to
be acted upon at the meeting shall constitute a quorum for the purposes of
consideration and action on the matter. Shares of the Corporation owned,
directly or indirectly, by it and controlled, directly or indirectly, by the
Board of Directors of this Corporation, as such, shall not be counted in
determining the total number of outstanding shares for quorum purposes at any
given time.
(b) Withdrawal of a Quorum. The shareholders present at a duly
organized meeting can continue to do business until adjournment notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
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(c) Adjournment for Lack of Quorum. If a meeting cannot be
organized because a quorum has not attended, those present may, except as
provided in the Business Corporation Law, adjourn the meeting to such time and
place as they may determine.
(d) Action in Absence of Quorum at Adjourned Meeting . Those
shareholders entitled to vote who attend a meeting called for the election of
directors that has been previously adjourned for lack of a quorum, although less
than a quorum as fixed in this section, shall nevertheless constitute a quorum
for the purpose of electing directors. Those shareholders entitled to vote who
attend a meeting of shareholders that has been previously adjourned for one or
more periods aggregating at least 15 days because of an absence of a quorum,
although less than a quorum as fixed in this section, shall nevertheless
constitute a quorum for the purpose of acting upon any matter set forth in the
notice of the meeting if the notice states that those shareholders who attend
the adjourned meeting shall nevertheless constitute a quorum for the purpose of
acting upon the matter.
Section 3.05 ACTION BY SHAREHOLDERS. Except as otherwise provided in
the Business Corporation Law or the Articles or these By-Laws, whenever any
corporate action is to be taken by vote of the shareholders of the Corporation,
it shall be authorized by a majority of the votes cast at a duly organized
meeting of the shareholders by the holders of shares entitled to vote thereon;
or if any shareholders are entitled to vote thereon as a class, upon receiving
the affirmative vote of the majority of the votes cast by the shareholders
entitled to vote thereon as a class on the matter.
Section 3.06 ORGANIZATION. At every meeting of the shareholders, the
Chairman of the Board, if there be one, or, in the case of vacancy in office or
absence of the Chairman of the Board, one of the following officers present in
the order stated: the Vice Chairman of the Board, if there be one, the Chief
Executive Officer, the President, the Vice President in their order of rank and
seniority, or a person chosen by vote of the shareholders present, shall act as
chairman of the meeting. The chairman of the meeting shall have any and all
powers necessary in the chairman's sole discretion to conduct an orderly meeting
and preserve order and to determine any and all procedural matters, including
imposing reasonable limits on the amount of time at the meeting taken up by any
one shareholder or group of shareholders. In addition, until the business to be
completed at a meeting of the shareholders is completed, the chairman of a
meeting of the shareholders is expressly authorized to temporarily adjourn and
postpone the meeting from time to time. The Secretary or, in the absence of the
Secretary, an Assistant Secretary, or in the absence of both the Secretary and
Assistant Secretaries, a person appointed by the chairman of the meeting, shall
act as Secretary.
Section 3.07 VOTING RIGHTS OF SHAREHOLDERS. Unless otherwise provided
in the Articles, every shareholder of the Corporation shall be entitled to one
vote for every share standing in the name of the shareholder on the books of the
Corporation. Shareholders shall not be entitled to cumulate votes.
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Section 3.08 VOTING AND OTHER ACTION BY PROXY.
(a) General Rule.
(1) Every shareholder entitled to vote at a meeting
of shareholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person to act for the
shareholder by proxy.
(2) The presence of, or vote or other action at a
meeting of shareholders, or the expression of consent or dissent to
corporate action in writing, by a proxy of a shareholder shall
constitute the presence of, or vote or action by, or written consent or
dissent of the shareholder.
(b) Minimum Requirements. Every proxy shall be executed in
writing by the shareholder or by the duly authorized attorney-in-fact of the
shareholder and filed with the Secretary of the Corporation. A proxy, unless
coupled with an interest, shall be revocable at will, notwithstanding any other
agreement or any provision in the proxy to the contrary, but the revocation of a
proxy shall not be effective until written notice thereof has been given to the
Secretary of the Corporation. An unrevoked proxy shall not be valid after three
years from the date of its execution unless a longer time is expressly provided
therein. A proxy shall not be revoked by the death or incapacity of the maker
unless, before the vote is counted or the authority is exercised, written notice
of the death or incapacity is given to the Secretary of the Corporation.
(c) Expenses. Unless otherwise restricted in the Articles, the
Corporation shall pay the reasonable expenses of solicitation of votes, proxies
or consents of shareholders by or on behalf of the Board of Directors or its
nominees for election to the Board, including solicitation by professional proxy
solicitors and otherwise.
Section 3.09 VOTING BY FIDUCIARIES AND PLEDGEES. Shares of the
Corporation standing in the name of a trustee or other fiduciary and shares held
by an assignee for the benefit of creditors or by a receiver may be voted by the
trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged
shall be entitled to vote the shares until the shares have been transferred into
the name of the pledgee, or a nominee of the pledgee, but nothing in this
section shall affect the validity of a proxy given to a pledgee or nominee.
Section 3.10 VOTING BY JOINT HOLDERS OF SHARES.
(a) Where shares of the Corporation are held jointly or as
tenants in common by two or more persons, as fiduciaries or otherwise:
(1) if only one or more of such persons is present in
person or by proxy, all of the shares standing in the names of such persons
shall be deemed to be represented for the purpose of determining a quorum and
the Corporation shall accept as the vote of all the shares the vote cast by a
joint owner or a majority of them; and
(2) if the persons are equally divided upon whether
the shares held by them shall be voted or upon the manner of voting the shares,
the voting of the shares shall be divided equally among the persons without
prejudice to the rights of the joint owners or the beneficial owners thereof
among themselves.
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(b) Exception. If there has been filed with the Secretary of
the Corporation a copy, certified by an attorney at law to be correct, of the
relevant portions of the agreement under which the shares are held or the
instrument by which the trust or estate was created or the order of court
appointing them or of an order of court directing the voting of the shares, the
persons specified as having such voting power in the document latest in date of
operative effect so filed, and only those persons, shall be entitled to vote the
shares but only in accordance therewith.
Section 3.11 VOTING BY CORPORATIONS. Any corporation that is a
shareholder of this Corporation may vote by any of its officers or agents, or by
proxy appointed by any officer or agent, unless some other person, by resolution
of the board of directors of the other corporation or provision of its articles
or by-laws, a copy of which resolution or provision certified to be correct by
one of its officers has been filed with the Secretary of this Corporation, is
appointed its general or special proxy in which case that person shall be
entitled to vote the shares.
Section 3.12 DETERMINATION OF SHAREHOLDERS OF RECORD.
(a) Fixing Record Date. The Board of Directors may fix a time
prior to the date of any meeting of shareholders as the record date for the
determination of the shareholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be not
more than 90 days and no less than 10 days prior to the date of the meeting of
shareholders. Only shareholders of record on the date fixed shall be so entitled
notwithstanding any transfer of shares on the books of the Corporation after any
record date fixed as provided in this subsection. The Board of Directors may
similarly fix a record date for the determination of shareholders of record for
any other purpose. When a determination of shareholders of record has been made
as provided in this section for purposes of a meeting, the determination shall
apply to any adjournment thereof unless the Board fixes a new record date for
the adjourned meeting.
(b) Determination When a Record Date is Not Fixed. If a record
date is not fixed:
(1) The record date for determining shareholders
entitled to notice of or to vote at a meeting of shareholders shall be at the
close of business on the date immediately preceding the day on which notice is
given or, if notice is waived, at the close of business on the day immediately
preceding the day on which the meeting is held.
(2) The record date for determining shareholders
entitled to express consent or dissent to corporate action in writing without a
meeting, when prior action by the Board of Directors is not necessary, shall be
the close of business on the day on which the first written consent or dissent
is filed with the Secretary of the Corporation.
(3) The record date for determining shareholders for
any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating, thereto.
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Section 3.13 JUDGES OF ELECTION. In advance of any meeting of
shareholders of the Corporation, the Board of Directors may appoint judges of
election, who need not be shareholders, to act at the meeting or any adjournment
thereof. If judges of election are not so appointed, the presiding officer of
the meeting may, and on the request of any shareholder shall, appoint judges of
election at the meeting. The number of judges shall be one or three. A person
who is a candidate for office to be filled at the meeting shall not act as a
judge. In case any person appointed as a judge fails to appear or fails or
refuses to act, the vacancy may be filled by appointment made by the Board of
Directors in advance of the convening of the meeting or at the meeting by the
presiding officer thereof. The judges of election shall determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum, the authenticity, validity and effect of
proxies, receive votes or ballots, hear and determine all challenges and
questions in any way arising in connection with the right to vote, count and
tabulate all votes, determine the result and do such acts as may be proper to
conduct the election or vote with fairness to all shareholders. The judges of
election shall perform their duties impartially, in good faith, to the best of
their ability and as expeditiously as is practical. If there are three judges of
election, the decision, act or certificate of a majority shall be effective in
all respects as the decision, act or certificate of all. On request of the
presiding officer of the meeting, or of any shareholder, the judge shall make a
report in writing of any challenge or question or matter determined by them, and
execute a certificate of any fact found by them. Any report or certificate made
by them shall be prima facie evidence of the facts stated therein.
Section 3.14 CONSENT OF SHAREHOLDERS IN LIEU OF MEETING. Any action
required or permitted to be taken at a meeting of the shareholders or of a class
of shareholders may be taken without a meeting if, prior or subsequent to the
action, unanimous consent thereto by all of the shareholders who would be
entitled to vote at a meeting for such purpose shall be filed with the Secretary
of the Corporation.
ARTICLE IV - BOARD OF DIRECTORS
Section 4.01. POWERS: PERSONAL LIABILITY.
(a) The business of the Corporation shall be managed by its
Board of Directors, which may exercise all powers of the Corporation and perform
all lawful acts that are not by law, the Articles or these By-Laws directed or
required to be exercised by the shareholders.
(b) Personal Liability of Directors.
(1) A director shall not be personally liable, as
such, for monetary damages for any action taken, or any failure to take
any action, unless:
(i) the director has breached or failed to
perform the duties of his or her office under the Business
Corporation Law; and
(ii) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness.
(2) The provisions of subparagraph (1) shall not
apply to the responsibility or liability or a director pursuant to any
criminal statute, or the liability of a director for the payment of
taxes pursuant to local, State or Federal law.
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(3) Notwithstanding anything herein contained to the
contrary, this Section 4.01(b) may not be amended or repealed, and a provision
inconsistent herewith may not be adopted, except by the affirmative vote of
66-2/3% of the members of the entire Board of Directors or by the affirmative
vote of the shareholders of the Corporation entitled to cast at least 80% of the
votes which all shareholders of the Corporation are then entitled to cast,
except that, if the Business Corporation Law is amended or any other statute is
enacted so as to decrease the exposure of directors to liability, then Section
4.01(b) and any other provision of these By-Laws inconsistent with such
decreased exposure shall be amended, automatically and without any further
action on the part of the shareholders or directors, to reflect such reduced
exposure, unless such legislation expressly requires otherwise.
(4) If for any reason any provision of this Section
4.01(b) shall be held invalid, such invalidity shall not effect any other
provision not held so invalid, and each such other provision shall, to the full
extent consistent with law, continue in full force and effect. If any provision
of this Section 4.01(b) shall be held invalid in part, such invalidity shall in
no way affect the remainder of such provision, and the remainder of such
provision, together with all other provisions of Section 4.01(b) shall, to the
full extent consistent with law, continue in full force and effect.
Section 4.02. QUALIFICATION AND SELECTION OF DIRECTORS.
(a) Qualifications. Each director of the Corporation shall be
a natural person of full age who need not be a resident of Pennsylvania or a
shareholder of the Corporation.
(b) Election of Directors. Except as otherwise provided in
these By-Laws, directors of the Corporation shall be elected by the
shareholders. In elections for directors, voting need not be by ballot, except
upon demand made by a shareholder entitled to vote at the election and before
the voting begins. The candidates receiving the highest number of votes from
each class or group of classes, if any, entitled to elect directors separately
up to the number of directors to be elected by the class or group of classes
shall be elected. If at any meeting of shareholders, directors of more than one
class are to be elected, each class of directors shall be elected in a separate
election.
Section 4.03. NUMBER AND TERM OF OFFICE.
(a) Number. The Board of Directors shall consist of such
number of directors, not less than two (2) nor more than ten (10), as may be
determined from time to time by resolution of the Board of Directors.
(b) Term of Office. Each director shall hold office until the
expiration of the term for which he or she was elected and until a successor has
been selected and qualified or until his or her earlier death, resignation or
removal. A decrease in the number of directors shall not have the effect of
shortening the term of any incumbent director.
(c) Resignation. Any director may resign at any time upon
written notice to the Corporation. The resignation shall be effective upon
receipt thereof by the Corporation or at such subsequent time as shall be
specified in the notice of resignation. It shall not be necessary for a
resignation to be accepted before it becomes effective.
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Section 4.04. VACANCIES.
(a) General Rule. Vacancies in the Board of Directors,
including vacancies resulting from an increase in the number of members of the
Board, shall be filled by the remaining members of the Board, though less than a
quorum, or by a sole remaining director. Each person so elected shall be a
director until his successor is elected by the shareholders, who may make such
election at the next annual meeting of the shareholders or at any special
meeting duly called for that purpose and held prior thereto.
(b) Directors Elected by Class or Classes of Stock. Whenever
the holders of any class or classes of stock or series thereof are entitled to
elect one or more directors by the provisions of the Articles, vacancies and
newly created directorships of such class or classes or series may be filled by
a majority of the directors elected by such class or classes or series thereof
then in office, or by a sole remaining director so elected.
Section 4.05. REMOVAL OF DIRECTORS.
(a) Removal by the Shareholders. The entire Board of
Directors, or any class of the Board, or any individual director may be removed
from office without assigning any cause by the vote of shareholders, or of the
holders of a class or series of shares, entitled to elect directors, or the
class of directors. In case the Board or a class of the Board or any one or more
directors are so removed, new directors may be elected at the same meeting. The
Board of Directors may be removed at any time with or without cause by the vote
or consent of shareholders holding sixty-six and two thirds percent (66-2/3%) of
votes that all holders of shares, or a class or series of shares, are entitled
to vote thereon.
(b) Removal by the Board. The Board of Directors may declare
vacant the office of a director who has been judicially declared of unsound mind
or who has been convicted of an offense punishable by imprisonment for a term of
more than one year or if, within 60 days after notice of his or her selection,
the director does not accept the office either in writing or by attending a
meeting of the Board of Directors.
Section 4.06. PLACE OF MEETINGS. Meetings of the Board of Directors may
be held at such place within or without Pennsylvania as the Board of Directors
may from time to time appoint or as may be designated in the notice of the
meeting.
Section 4.07. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such time and place as shall be designated from time
to time by resolution of the Board of Directors.
Section 4.08. SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be held whenever called by the Chairman, the Chief Executive
Officer, the President, or by two or more of the directors.
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Section 4.09. QUORUM OF AND ACTION BY DIRECTORS.
(a) General Rule. A majority of the directors in office of the
Corporation shall be necessary to constitute a quorum for the transaction of
business and the acts of a majority of the directors present and voting at a
meeting at which a quorum is present shall be the acts of the Board of
Directors.
(b) Action by Written Consent. Any action required or
permitted to be taken at a meeting of the directors may be taken without a
meeting if, prior or subsequent to the action, a consent or consents thereto by
all of the directors in office is filed with the Secretary of the Corporation.
Section 4.10. EXECUTIVE AND OTHER COMMITTEES.
(a) Establishment and Powers. The Board of Directors may, by
resolution adopted by a majority of the directors in office, establish one or
more committees to consist of one or more directors of the Corporation. The
Chief Executive Officer shall be an ex-officio member of each committee of the
Board of Directors. Any committee, to the extent provided in the resolution of
the Board of Directors, shall have and may exercise all of the powers and
authority of the Board of Directors except that a committee shall not have any
power or authority as to the following:
(1) The submission to shareholders of any action
requiring approval of shareholders under the Business Corporation Law.
(2) The creation or filling of vacancies in the Board
of Directors.
(3) The adoption, amendment or repeal of these
By-Laws.
(4) The amendment or repeal of any resolution of the
Board that by its terms is amendable or repealable only by the Board.
(5) Action on matters committed by a resolution of
the Board of Directors to another committee of the board.
(b) Alternate Committee Members. The Board may designate one
or more directors as alternate members of any committee who may replace any
absent or disqualified member at any meeting of the committee or for the
purposes of any written action by the committee. In the absence or
disqualification of a member and alternate member or members of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not constituting a quorum, may unanimously appoint another
director to act at the meeting in the place of the absent or disqualified
member.
(c) Term. Each committee of the Board shall serve at the
pleasure of the Board.
(d) Quorum. A majority of the members of a committee shall
constitute a quorum for the transaction of business, and the affirmative vote of
a majority of the members present at any meeting at which there is a quorum
shall be required for any action of the committee.
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Section 4.11. COMPENSATION. Directors shall be entitled to compensation
for their services as directors and to reimbursement for any reasonable expenses
incurred in attending directors' meetings as may from time to time be fixed by
the unanimous action of the Board of Directors. The compensation of directors
may be determined by the Board of Directors. Any director may waive compensation
for any meeting.
ARTICLE V - OFFICERS
Section 5.01. OFFICERS-GENERALLY.
(a) Number, Qualification and Designation. The officers of the
Corporation shall be a Chief Executive Officer, President, a Secretary, a
Treasurer, and such other officers as may be elected in accordance with the
provisions of Section 5.03. Officers may but need not be directors or
shareholders of the Corporation. The Chief Executive Officer, President, and
Secretary shall be natural persons of full age. The treasurer may be a
corporation, but if a natural person shall be of full age. The Board of
Directors may elect from among the members of the Board a Chairman of the Board
and a Vice Chairman of the Board who shall be officers of the Corporation. Any
number of offices may be held by the same person.
(b) Resignations. Any officer may resign at any time upon
written notice to the Corporation. The resignation shall be effective upon
receipt thereof by the Corporation or at such subsequent time as may be
specified in the notice of resignation.
(c) Bonding. The Corporation may secure the fidelity of any or
all of its officers by bond or otherwise.
(d) Standard of Care. Except as otherwise provided in the
articles, an officer shall perform his or her duties as an officer in good
faith, in a manner he or she reasonably believes to be in the best interests of
the Corporation and with such care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use under similar
circumstances. A person who so performs his or her duties shall not be liable by
reason of having been an officer of the Corporation.
Section 5.02. ELECTION AND TERM OF OFFICE. The officers of the
Corporation, except those elected by delegated authority pursuant to Section
5.03, shall be elected annually by the Board of Directors, and each such officer
shall hold office for a term of one year and until a successor has been selected
and qualified or until his or her earlier death, resignation or removal.
Section 5.03. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The Board of
Directors may from time to time elect such other officers and appoint such
committees, employees or other agents as the business of the Corporation may
require, including one or more Vice Presidents, one or more Assistant
Secretaries, and one or more Assistant Treasurers, each of whom shall hold
office for such period, have such authority, and perform such duties as are
provided in these By-Laws or as the Board of Directors may from time to time
determine. The Board of Directors may delegate to any officer or committee the
power to elect subordinate officers and to retain or appoint employees or other
agents, or committees thereof and to prescribe the authority and duties of such
subordinate officers, committees, employees or other agents.
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Section 5.04. REMOVAL OF OFFICERS AND AGENTS. Any officer or agent of
the Corporation may be removed by the Board of Directors with or without cause.
The removal shall be without prejudice to the contract rights, if any, of any
person so removed. Election or appointment of an officer or agent shall not of
itself create contract rights.
Section 5.05. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification, or any other cause, shall be filed by
the Board of Directors or by the officer or committee to which the power to fill
such office has been delegated pursuant to Section 5.03, as the case may be, and
if the office is one for which these By-Laws prescribe a term, shall be filled
for the unexpired portion of the term.
Section 5.06. AUTHORITY. All officers of the Corporation, as between
themselves and the Corporation, shall have such authority and perform such
duties in the management of the Corporation as may be provided by or pursuant to
resolution or orders of the Board of Directors or in the absence of controlling
provisions in the resolutions or orders of the Board of Directors, as may be
determined by or pursuant to these By-Laws.
Section 5.07. THE CHAIRMAN OF THE BOARD. The Chairman of the Board
shall preside at all meetings of the shareholders and of the Board of Directors
and shall perform such other duties as may from time to time be requested by the
Board of Directors.
Section 5.08. THE CHIEF EXECUTIVE OFFICER. The Chief Executive Officer
shall be the chief executive officer of the Corporation and shall have general
supervision over the business and operations of the Corporation, subject
however, to the control of the Board of Directors. The Chief Executive Officer
shall sign execute and acknowledge, in the name of the Corporation, deeds,
mortgages, bonds, contracts or other instruments, authorized by the Board of
Directors, except in cases where the signing and execution thereof shall be
expressly delegated by the Board of Directors, or these By-Laws, to some other
officer or agent of the Corporation; and, in general, shall perform all duties
incident to the office of president and such other duties as from time to time
may be assigned by the Board of Directors. The Chief Executive Officer shall
from time to time make such reports of the affairs of the Corporation as the
Board of Directors may require and shall annually present to the annual meeting
of the shareholders a report of the business of the Corporation for the
preceding fiscal year.
Section 5.09. THE PRESIDENT. The President shall perform the duties of
the Chief Executive Officer in the absence of such officer, and such other
duties as may from time to time be assigned to him by the Board of Directors or
the Chief Executive Officer.
Section 5.10. THE VICE PRESIDENTS. The vice presidents shall perform
the duties of the President in the absence of the President and such other
duties as may from time to time be assigned to them by the Board of Directors,
the Chief Executive Officer or the President, and if there is more than one vice
president, their seniority in performing such duties and exercising such powers
shall be determined by the Board of Directors.
Section 5.11. THE SECRETARY. The Secretary or an Assistant Secretary
shall attend all meetings of the shareholders and of the Board of Directors and
shall record all votes of the
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shareholders and of the directors and the minutes of the meetings of the
shareholders and of the Board of Directors and of committees of the Board in a
book or books to be kept for that purpose; shall see that notices are given and
records and reports properly kept and filed by the Corporation as required by
law; shall be the custodian of the seal of the Corporation and see that it is
affixed to all documents to be executed on behalf of the Corporation under its
seal; and, in general, shall perform all duties incident to the office of
secretary, and such other duties as may from time to time be assigned by the
Board of Directors, the Chief Executive Officer or the President.
Section 5.12. THE ASSISTANT SECRETARY. The Assistant Secretary, if any,
or in the event there is more than one, the Assistant Secretaries in the order
designated, or in the absence of any designation, in the order of their
election, shall, in the absence of the Secretary or in the event of the
Secretary's disability, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as may
from time to time be prescribed by the Board of Directors, the Chief Executive
Officer or the President.
Section 5.13. THE TREASURER. The Treasurer or an Assistant Treasurer
shall have or provide for the custody of the funds or other property of the
Corporation; shall collect and receive or provide for the collection and receipt
of moneys earned by or in any manner due to or received by the Corporation;
shall deposit all funds in his or her custody as Treasurer in such banks or
other places of deposit as the Board of Directors may from time to time
designate; shall, whenever so required by the Board of Directors, render an
account showing all transactions as treasurer and the financial condition of the
Corporation; and, in general, shall discharge such other duties as may from time
to time be assigned by the Board of Directors, the Chief Executive Officer or
the President.
Section 5.14. THE ASSISTANT TREASURER. The Assistant Treasurer, if any,
or in the event there is more than one, the Assistant Treasurers in the order
designated, or in the absence of any designation, in the order of their
election, shall, in the absence of the treasurer or in the event of the
Treasurer's disability, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as may
from time to time be prescribed by the Board of Directors, the Chief Executive
Officer or the President.
Section 5.15. SALARIES. The salaries of the officers elected by the
Board of Directors shall be fixed from time to time by the Board of Directors or
by such officer as may be designated by resolution of the Board. The salaries or
other compensation of any other officers, employees and other agents shall be
fixed from time to time by the officer or committee to which the power to elect
such officers or to retain or appoint such employees or other agents has been
delegated pursuant to Section 5.03. No officer shall be prevented from receiving
such salary or other compensation by reason of the fact that the officer is also
a director of the Corporation.
ARTICLE VI - CERTIFICATES OF STOCK, TRANSFER, ETC.
Section 6.01. SHARE CERTIFICATES. Certificates for shares of the
Corporation shall be in such form as approved by the Board of Directors, and
shall state that the Corporation is incorporated under the laws of Pennsylvania,
the name of the person to whom issued, and the number and class of shares and
the designation of the series (if any) that the certificate represents.
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The share register or transfer books and blank share certificates shall be kept
by the Secretary or by any transfer agent or registrar designated by the Board
of Directors for that purpose.
Section 6.02. ISSUANCE. The share certificates of the Corporation shall
be numbered and registered in the share register or transfer books of the
Corporation as they are issued. They shall be signed by the Chief Financial
Officer or the President and by the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer, and shall bear the corporate seal, which
may be a facsimile, engraved or printed; but where such certificate is signed by
a transfer agent or a registrar the signature of any corporate officer upon such
certificate may be a facsimile, engraved or printed. In case any officer who has
signed, or whose facsimile signature has been placed upon, any share certificate
shall have ceased to be such officer because of death, resignation or otherwise,
before the certificate is issued, it may be issued with the same effect as if
the officer had not ceased to be such at the date of its issue. The provisions
of this Section 6.02 shall be subject to any inconsistent or contrary agreement
at the time between the Corporation and any transfer agent or registrar.
Section 6.03. TRANSFER. Transfers of shares shall be made on the share
register or transfer books of the Corporation upon surrender of the certificate
therefor, endorsed by the person named in the certificate or by an attorney
lawfully constituted in writing. No transfer shall be made inconsistent with the
provisions of the Uniform Commercial Code, 13 Pa.C.S. 8101 et seq., and its
amendments and supplements.
Section 6.04. RECORD HOLDER OF SHARES. The Corporation shall be
entitled to treat the person in whose name any share or shares of the
Corporation stand on the books of the Corporation as the absolute owner thereof,
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share or shares on the part of any other person.
Section 6.05. LOST, DESTROYED OR MUTILATED CERTIFICATES. The holder of
any shares of the Corporation shall immediately notify the Corporation of any
loss, destruction or mutilation of the certificate therefor and make an
affidavit of the fact that the certificate was lost, stolen or mutilated. The
Board of Directors may, in its discretion, cause a new certificate or
certificates to be issued to such holder, in case of mutilation of the
certificate, upon the surrender of the mutilated certificate or, in case of loss
or destruction of the certificate, upon satisfactory proof of such loss or
destruction and, if the Board of Directors shall so determine, the deposit of a
bond in such form and in such sum, and with such surety or sureties, as it may
direct.
ARTICLE VII - INDEMNIFICATION OF DIRECTORS, OFFICERS AND
OTHER AUTHORIZED REPRESENTATIVES
Section 7.01. SCOPE OF INDEMNIFICATION.
(a) General Rule. The Corporation shall indemnify an
indemnified representative against any liability incurred in connection with any
proceeding in which the indemnified representative may be involved as a party or
otherwise by reason of the fact that such person is or was serving in an
indemnified capacity, including, without limitation, liabilities resulting from
any actual or alleged breach or neglect of duty, error, misstatement or
misleading statement, negligence, gross negligence or act giving rise to strict
or products liability, except:
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(1) where such indemnification is expressly prohibited by applicable law; (2)
where the conduct of the indemnified representative has been finally determined:
(i) to constitute willful misconduct or recklessness, or (ii) to be based upon
or attributable to the receipt by the indemnified representative from the
Corporation of a personal benefit to which the indemnified representative is not
legally entitled; or (3) to the extent such indemnification has been finally
determined in a final adjudication.
(b) Presumption. The termination of a proceeding by judgment,
order, settlement or conviction or upon a plea of nolo contendere or its
equivalent shall not of itself create a presumption that the indemnified
representative is not entitled to indemnification.
(c) Definitions. For purposes of this Article:
(1) "indemnified capacity" means any and all past,
present and future service by an indemnified representative in one or
more capacities as a director, officer, employee or agent of the
Corporation, or, at the request of the Corporation, as a director,
officer, employee, agent, fiduciary or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other
entity or enterprise;
(2) "indemnified representative" means any and all
directors and officers of the Corporation and any other person
designated as an indemnified representative by the Board of Directors
of the Corporation (which may, but not, include any person serving at
the request of the Corporation, as a director, officer, employee,
agent, fiduciary or trustee of another Corporation, partnership, joint
venture, trust, employee benefit plan or other entity or enterprise);
(3) "liability" means any damage, judgment, amount
paid in settlement, fine, penalty, punitive damages, excise tax
assessed with respect to an employee benefit plan, or cost or expense,
of any nature (including, without limitation, attorneys' fees and
disbursements); and
(4) "proceeding" means any threatened, pending or
completed action, suit, appeal or other proceeding of any nature,
whether civil, criminal, administrative or investiga tive, whether
formal or informal, and whether brought by or in the right of the
Corporation, a class of its security holders or otherwise.
Section 7.02. ADVANCING EXPENSES. The Corporation shall pay the
expenses (including attorneys' fees and disbursements) incurred in good faith by
an indemnified representative in advance of the final disposition of a
proceeding described in Section 7.01 of the initiation of or participation in
which is authorized pursuant to Section 7.02 upon receipt of an undertaking by
or on behalf of the indemnified representative to repay the amount if it is
ultimately determined that such person is not entitled to be indemnified by the
Corporation pursuant to this Article. The financial ability of an indemnified
representative to repay an advance shall not be a prerequisite to the making of
such advance.
Section 7.03. SECURING OF INDEMNIFICATION OBLIGATIONS. To further
effect, satisfy or secure the indemnification obligations provided herein or
otherwise, the Corporation may maintain insurance, obtain a letter of credit,
act as self-insurer, create a reserve, trust, escrow, cash
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<PAGE>
collateral or other fund or account, enter into indemnification agreements,
pledge or grant a security interest in any assets or properties of the
Corporation, or use any other mechanism or arrangement whatsoever in such
amounts, at such costs, and upon such other terms and conditions as the Board of
Directors shall deem appropriate. Absent fraud, the determination of the Board
of Directors with respect to such amounts, costs, terms and conditions shall be
conclusive against all security holders, officers and directors and shall not be
subject to voidability.
Section 7.04. PAYMENT OF INDEMNIFICATION. An indemnified representative
shall be entitled to indemnification within thirty (30) days after a written
request for indemnification has been delivered to the Secretary of the
Corporation.
Section 7.05. CONTRIBUTION. If the indemnification provided for in this
Article or otherwise is unavailable for any reason in respect of any liability
or portion thereof, the Corporation shall contribute to the liabilities to which
the indemnified representative may be subject in such proportion as is
appropriate to reflect the intent of this Article or otherwise.
Section 7.06. CONTRACT RIGHTS: AMENDMENT OR REPEAL. All rights under
this Article shall be deemed a contract between the Corporation and the
indemnified representative pursuant to which the Corporation and each
indemnified representative intend to be legally bound. Any repeal, amendment or
modification hereof shall be prospective only and shall not affect any rights or
obligations then existing.
Section 7.07. SCOPE OF ARTICLE. The rights granted by this Article
shall not be deemed exclusive of any other rights to which those seeking
indemnification, contribution or advancement of expenses nay be entitled under
any statute, agreement, vote of shareholders or disinterested directors or
otherwise both as to action in an indemnified capacity and as to action in any
other capacity. The indemnification, contribution and advancement of expenses
provided by or granted pursuant to this Article shall continue as to person who
has ceased to be an indemnified representative in respect of matters arising
prior to such time, and shall inure to the benefit of the heirs, executors,
administrators and personal representatives of such a person.
Section 7.08. RELIANCE OF PROVISIONS. Each person who shall act as an
indemnified representative of the Corporation shall be deemed to be doing so in
reliance upon the rights provided in this Article.
ARTICLE VIII - DIVIDENDS
Section 8.01. DIVIDENDS. Subject to applicable law, the Board of
Directors may declare and pay dividends upon the outstanding shares of the
Corporation from time to time, and to such extent as they deem advisable, in
cash, property or in shares of the Corporation.
Section 8.02. PAYMENT OF DIVIDENDS. Before payment of any dividend
there may be set aside out of the net profits of the Corporation, such sum or
sums as the directors, from time to time in their absolute discretion, think
proper as a reserve fund to meeting contingencies, or for equalizing dividends,
or for repairing or maintaining any property of the Corporation, or for such
other purposes as the directors shall think conductive to the interests of the
Corporation, and the directors may abolish any such reserve in the manner in
which it was created.
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ARTICLE IX - MISCELLANEOUS
Section 9.01. SEAL. The Corporation seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Pennsylvania".
Section 9.02. INTERESTED DIRECTORS OR OFFICERS; QUORUM.
(a) General Rule. A contract or transaction between the
Corporation and one or more of its directors or officers or between the
Corporation and another corporation, partnership, joint venture, trust or other
enterprise in which one or more of its directors or officers are directors or
officers or have a financial or other interest, shall not be void or voidable
solely for that reason, or solely because the director or officer is present at
or participates in the meeting of the Board of Directors that authorizes the
contract or transaction, or solely because his, her or their votes are counted
for that purpose, if:
(1) the material facts as to the relationship or
interest and as to the contract or transaction are disclosed or are
known to the Board of Directors and the Board authorizes the contract
or transaction by the affirmative votes of a majority of the
disinterested directors even though the disinterested directors are
less than a quorum;
(2) the material facts as to his or her relationship
or interest and as to the contract or transaction are disclosed or are
known to the shareholders entitled to vote thereon and the contract or
transaction is specifically approved in good faith by vote of those
shareholders; or
(3) the contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified by
the Board of Directors or the shareholders.
(b) Quorum. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board which authorizes
a contract or transaction specified in subsection (a).
Section 9.03. AMENDMENT OF BY-LAWS. These Amended and Restated By-Laws
may be amended or repealed, or new By-Laws may be adopted, either (i) by vote of
the shareholders at any duly organized annual or special meeting of the
shareholders, or (ii) with respect to those matters that are not by statute
committed expressly to the shareholders and regardless of whether the
shareholders have previously adopted or approved the By-Law being amended or
repealed, by vote of a majority of the Board of Directors of the Corporation in
office at any regular or special meeting of directors. Any change in these
By-Laws shall take effect when adopted unless otherwise provided in the
resolution effecting the change.
ARTICLE X - SUPPLEMENTAL PROVISIONS
Section 10.01. SUPPLEMENTAL PROVISIONS. Notwithstanding anything in
these ByLaws to the contrary, for so long as there shall be shares of Series A
Cumulative Convertible Preferred Stock ("Series A Preferred Stock") outstanding
then:
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(a) The Board of Directors shall consist of five directors
(b) Without first obtaining the approval (by vote or written
consent) of at least 80% of the members of the board of directors, the
Corporation shall not:
(1) directly or indirectly, enter into, renew, modify
or extend any transaction (including, without limitation, the purchase, sale,
lease or exchange of property or assets, or the rendering of any service) with
any holder (or any affiliate of such holder) of 5% or more of any class of
capital stock of the Corporation, or with any affiliate of the Corporation;
provided, however, that the approval (by vote or written consent) of at least
80% of the members of the Board of Directors shall not be required to renew a
store lease, provided that (a) the terms of the lease during the renewal terms
are substantially identical to the terms of the lease governing the most recent
period, and (b) the operating profit (revenue less direct expenses and allocated
overhead) for such store during the most recent 12 month period is greater than
$0, such determination to be certified by the Corporation's Chief Financial
Officer;
(2) issue any shares of Common Stock, any warrants,
options or other rights to acquire shares of Common Stock, or any securities
which are convertible into or exchangeable for shares of Common Stock; provided,
however, that the approval (by vote or written consent) of at least 80% of the
members of the Board of Directors shall not be required to issue such shares of
Common Stock as may be issued in an underwritten public offering of Common Stock
registered pursuant to the Securities Act of 1933, as amended (or any successor
statute thereto), resulting in gross proceeds of at least $40,000,000 and which
results in the Common Stock being listed on the New York Stock Exchange or being
eligible for quotation on the Nasdaq National Market, provided that the Common
Equity Value of the Corporation (as defined in the Statement with Respect to
Shares relating to the Series A Preferred Stock (the "Statement with Respect to
Shares")) immediately prior to such registered public offering must be at least
$150,000,000; provided further that the approval (by vote or written consent) of
at least 80% of the members of the Board of Directors shall not be required to
grant options pursuant to the Corporation's 1999 Stock Option Plan (the "Option
Plan") provided that the exercise price at the time of grant is greater than or
equal to the fair market value (as defined in the Option Plan) of the underlying
Common Stock;
(3) redeem, purchase or otherwise acquire, or offer
to redeem, purchase or otherwise acquire, any shares of its capital stock, other
than a Permitted Repurchase (as defined in the Statement with Respect to
Shares);
(4) declare, make or pay any distribution or dividend
in respect of shares of its capital stock;
(5) acquire (by merger, consolidation, or acquisition
of stock or assets) (i) a corporation, partnership or other business
organization or division thereof, or (ii) more than one affiliated corporations,
partnerships or other business organizations or divisions thereof (such acquired
entity or affiliated entities, collectively, referred to herein as an "Acquired
Business"), where the gross revenue of such Acquired Business (as computed from
the financial statements of such Acquired Business) for the last 12 months
exceeds $5,000,000;
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(6) adopt, amend or modify any plan of liquidation or
dissolution of the Corporation;
(7) adopt, amend or modify the budget for any fiscal
year of the Corporation (the "Budget");
(8) appoint or elect any individual other than
Bernard Spain or Murray Spain to serve as Chairman of the Board, President or
Chief Executive Officer of the Corporation;
(9) incur any indebtedness for borrowed money;
(10) enter into any contract or agreement which is
not in the ordinary course of the Corporation's business consistent with past
practices;
(11) authorize any capital expenditures not otherwise
included in the Budget which in the aggregate exceeds $500,000;
(12) in any manner authorize, create or issue (x) any
class or series of capital stock (A) ranking, either as to payment of dividends,
distribution of assets, liquidation or redemption, prior to or on parity with
the Series A Preferred Stock or (B) which could in any manner adversely affect
the holders of the Series A Preferred Stock, or (y) any class or series of any
bonds, debentures, notes or other obligations convertible into or exchangeable
for, or any warrants, options or other rights to purchase, convert into or
exchange for any class or series of capital stock having any such priority or
parity with or could so adversely affecting the holders of the Series A
Preferred Stock;
(13) in any manner alter or change the designations
or the powers, preferences or rights, or the qualifications, limitations or
restrictions of the Series A Preferred Stock, including without limitation, by
increasing or decreasing the number of shares of the Series A Preferred Stock
authorized for issuance hereunder, or by increasing or decreasing the par value
of the shares of the Series A Preferred Stock;
(14) reclassify the shares of Common Stock or any
Junior Stock into shares of any class or series of capital stock (A) ranking,
either as to payment of dividends, distribution of assets, liquidation or
redemption, prior to or on a parity with the Series A Preferred Stock or (B)
which could in any manner adversely affect the holders of the Series A Preferred
Stock;
(15) amend or otherwise modify the Articles of
Incorporation or Bylaws of the Corporation which in any manner adversely affects
the holders of the Series A Preferred Stock, including without limitation,
increasing the authorized number of any class or series of capital stock of the
Corporation or taking any action with respect to Subchapters E, F, G, H, I or J
of Chapter 25 of the Pennsylvania Business Corporation Law;
(16) enter into or consummate any agreement involving
a Business Combination (as defined in the Statement with Respect to Shares);
provided, however, that the approval (by vote or written consent) of at least
80% of the members of the Board of Directors shall not be required to enter into
or consummate any agreement involving a Business Combination if (a)
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the aggregate net proceeds to be received by the holders of the outstanding
capital stock of the Corporation as a result of such Business Combination is
greater than $200,000,000, and (b) the holders of the Series A Preferred Stock
realize a Rate of Return (as defined in the Statement with Respect to Shares) of
at least 35% on their Equity (as defined in the Statement with Respect to
Shares), after taking into account the amount and timing of all capital
contributions (and distributions) to (from) the Corporation by (to) the holders
of the Series A Preferred Stock;
(17) do any act or thing not authorized or
contemplated by the Statement with Respect to Shares which is designed to or is
reasonably likely to have the effect of delaying, deterring or preventing a
Change in Control (as hereinafter defined) of the Corporation (as used herein, a
"Change in Control" shall mean such time as (A) a person or entity acquires more
than 50% of the total voting power of the then outstanding capital stock of the
Corporation on a fully diluted basis; (B) individuals who at the beginning of
any period of two consecutive calendar years constituted the Board of Directors
(together with any directors who are members of the Board of Directors on the
date hereof and any new directors whose election by the Board of Directors or
whose nomination for election by the Company's stockholders was approved by a
vote of at least 80% of the members of the Board of Directors then still in
office who either were members of the Board of Directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the members of such
board of directors then in office; (C) a Business Combination is completed; or
(D) a plan relating to a Liquidation Event is adopted);
(18) do any act or thing not authorized or
contemplated by the Statement with Respect to Shares which would result in
taxation of the holders of shares of the Series A Preferred Stock under Section
305 of the Internal Revenue Code of 1986, as amended (or any comparable
provision of the Internal Revenue Code as hereafter from time to time amended);
(19) amend or modify any existing employment or
consulting agreement, or enter into any new or successor employment or
consulting agreement, with Bernard Spain or Murray Spain, or any family member
of Bernard Spain or Murray Spain;
(20) adopt, amend or modify any option plan, phantom
stock, stock appreciation rights or other equity-related employee benefit plan,
or amend or modify the Option Plan (or any grant or award issued under the
Option Plan), or otherwise take any action with respect to any grant or award
issued under such plans; or
(21) engage in any business or activity other than in
the extreme value retail or card and gift retail industries.
(c) This Article X may be altered, amended or repealed only by
either (i) an affirmative vote of 80% of the members of the board of directors,
or (ii) a vote of the holders of a majority of the shares of capital stock
entitled to vote thereon as a whole and a vote of the holders of a majority of
the outstanding shares of Series A Preferred Stock, voting separately as a
class.
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Exhibit 10.2
DE&S HOLDINGS CO.
1999 STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. PURPOSES OF THE PLAN.....................................................................................1
2. GENERAL PROVISIONS.......................................................................................1
2.1. Definitions.....................................................................................1
2.2. Administration of the Plan......................................................................3
2.3. Effective Date..................................................................................4
2.4. Duration........................................................................................4
2.5. Shares Subject to the Plan......................................................................4
2.6. Amendments......................................................................................4
2.7. Participants and Grants.........................................................................5
3. STOCK OPTIONS............................................................................................5
3.1. General.........................................................................................5
3.2. Price...........................................................................................6
3.3. Period..........................................................................................6
3.4. Exercise........................................................................................6
3.5. Payment.........................................................................................6
3.6. Special Rules for Incentive Stock Options.......................................................7
3.7. Termination of Employment or Relationship.......................................................7
3.8. Effect of Leaves of Absence.....................................................................9
3.9. Acceleration and Redemption.....................................................................9
4. MISCELLANEOUS PROVISIONS................................................................................10
4.1. Adjustments Upon Changes in Capitalization.....................................................10
4.2. Non-Transferability............................................................................10
4.3. Withholding....................................................................................10
4.4. Compliance with Law and Approval of Regulatory Bodies..........................................10
4.5. No Right to Employment.........................................................................11
4.6. Exclusion from Pension Computations............................................................11
4.7. Abandonment of Options.........................................................................11
4.8. Interpretation of the Plan.....................................................................11
4.9. Use of Proceeds................................................................................12
4.10. Construction of Plan...........................................................................12
</TABLE>
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DE&S HOLDINGS CO.
1999 STOCK OPTION PLAN
1. PURPOSES OF THE PLAN
The purposes of this 1999 Stock Option Plan are to enable DE&S
Holdings Co. and its Subsidiaries to attract and retain the services of key
employees and persons with managerial, professional or supervisory
responsibilities, including, but not limited to, members of the Board of
Directors, officers of, and consultants; to, the Company, responsible for the
past and continued success of the Company, and to provide them with increased
motivation and incentive to exert their best efforts on behalf of the Company by
enlarging their personal stake in its success.
2. GENERAL PROVISIONS
a. Definitions
As used in the Plan:
i. "Act" means the Securities Exchange Act of 1934,
including any and all amendments thereto.
ii. "Board of Directors" means the Board of Directors of
the Company.
iii. "Code" means the Internal Revenue Code of 1986,
including any and all amendments thereto.
iv. "Committee" means the committee, if any, appointed by
the Board of Directors from time to time to
administer the Plan pursuant to Section 2.2.
v. "Common Stock" means the Company's Voting Common
Stock, $.01 par value.
vi. "Company" means DE&S Holdings Co., a Pennsylvania
corporation.
vii. "Fair Market Value" means, with respect to a specific
date, the last reported sale price of the Common
Stock in the over-the-counter market, as reported by
NASDAQ if the Common Stock is trading on the NASDAQ
National Market; or, if the Common Stock is listed or
traded on a national securities exchange in the event
that the Fair Market Value is not on the date Fair
Market Value is being determined, Fair Market Value
means the last reported sale price of Common Stock on
such exchange; in the event that the Fair Market
Value is not determinable by any of the foregoing
<PAGE>
means, then the Fair Market Value shall be determined
in good faith by the Board of Directors or the
Committee, as the case may be, on the basis of such
methods and considerations as the Board of Directors
or the Committee, as the case may be, shall deem
appropriate, including, but not limited to the last
sale price by the Company of its Common Stock or any
securities convertible into Common Stock.
viii. "Incentive Stock Option" means an option granted
under the Plan which is intended to qualify as an
incentive stock option under Section 422 of the Code.
ix. "Non-Employee Director" means a member of the Board
of Directors who is a "non-employee director" as that
term is defined in paragraph (b)(3) of Rule 16b-3 and
an "outside director" as that term is defined in
Treasury Regulation ss. 1.162-27(e)(3).
x. "Non-Qualified Stock Option" means an option granted
under the Plan which is not an Incentive Stock Option
xi. "Option Event" means any of the following events or
occurrences: (i) the sale, transfer, assignment or
other disposition (including by merger or
consolidation, but excluding an underwritten public
offering of the Common Stock) in one transaction or a
series of related transactions, of beneficial
ownership (determined in accordance with Rule 13d-3
under the Act) of more than 50% of the issued and
outstanding shares of Common Stock by any Person (as
used in Sections 13 or 14 of the Act) or group of
Persons acting in concert, other than any persons who
are shareholders of the Company following the
consummation of the transactions contemplated by that
certain Securities Purchase and Contribution
Agreement dated February 5, 1999 among the Company,
Dollar Express, Inc. and certain of the Company's
shareholders; (ii) the liquidation or dissolution of
the Company, or (iii) a sale of substantially all the
assets of the Company.
xii. "Participant" means a person to whom a Stock Option
has been granted under the Plan.
xiii. "Plan" means this 1999 Stock Option Plan.
xiv. "Stock Option" means an Incentive Stock Option or a
Non-Qualified Stock Option granted under the Plan.
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xv. "Subsidiary" means any corporation (other than the
Company) in an unbroken chain of corporations
beginning with the Company if, at the time of the
granting of the Stock Option, each of the
corporations other than the last corporation in the
unbroken chain owns 50% or more of the total voting
power of all classes of stock in one of the other
corporations in such chain.
b. Administration of the Plan
i. The Plan shall be administered by the Board of
Directors, provided, however that the Board of
Directors may appoint a Committee to administer the
Plan, which shall at all times consist of two (2) or
more persons, each of whom shall be members of the
Board of Directors and, to the extent that the
Company issues any stock required to be registered
under Section 12 of the Act, Non-Employee Directors.
The Board of Directors may from time to time remove
members from, or add members to, the Committee.
Vacancies on the Committee, howsoever caused, shall
be filled by the Board of Directors. The Committee
shall select one of its members as Chairperson, and
shall hold meetings at such times and places as it
may determine.
ii. The Board of Directors or the Committee, as the case
may be, shall have the full power, subject to and
within the limits of the Plan, to: (i) interpret and
administer the Plan, and Stock Options granted under
it; (ii) make and interpret rules and regulations for
the administration of the Plan and to make changes in
and revoke such rules and regulations (and in the
exercise of this power, shall generally determine all
questions of policy and expediency that may arise and
may correct any defect, omission, or inconsistency in
the Plan or any agreement evidencing the grant of any
Stock Option in a manner and to the extent it shall
deem necessary to make the Plan fully effective);
(iii) determine those persons to whom Stock Options
shall be granted and the number of Stock Options to
be granted to any person; (iv) determine the terms of
Stock Options granted under the Plan, consistent with
the provisions of the Plan; and (v) generally,
exercise such powers and perform such acts in
connection with the Plan as are deemed necessary or
expedient to promote the best interests of the
Company. The interpretation and construction by the
Board of Directors or the Committee, as the case may
be, of any provision of the Plan or of any Stock
Option shall be final, binding and conclusive.
iii. The Board of Directors or the Committee, as the case
may be, may act only by a majority of its members
then in office; however, the Board of Directors or
the Committee, as the case may be, may authorize any
one (1)
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or more of its members or any officer of the Company
to execute and deliver documents on behalf of the
Board of Directors or the Committee, as the case may
be.
iv. No member of the Board of Directors or the Committee,
as the case may be, shall be liable for any action
taken or omitted to be taken or for any determination
made by him or her in good faith with respect to the
Plan, and the Company shall indemnify and hold
harmless each member of the Board of Directors or the
Committee, as the case may be, against any cost or
expense (including counsel fees) or liability
(including any sum paid in settlement of a claim with
the approval of the Board of Directors or the
Committee, as the case may be) arising out of any act
or omission in connection with the administration or
interpretation of the Plan, unless arising out of
such person's own fraud or bad faith.
c. Effective Date
The Plan is and shall be effective February 5, 1999, the date
of its adoption by the Board of Directors and its approval by the shareholders
of the Company, and Stock Options may be granted from time to time thereafter.
d. Duration
Unless sooner terminated by the Board of Directors, the Plan
shall remain in effect until the tenth anniversary of the Plan's adoption by the
Board of Directors.
e. Shares Subject to the Plan
The maximum number of shares of Common Stock which may be
subject to Stock Options granted under the Plan shall be 526,316. The maximum
number of shares of Common Stock with respect to which Stock Options may be
granted to any Participant in any consecutive twelve (12) month period shall be
210,526. These maximum limits shall be subject to adjustment in accordance with
Section 4.1. Shares to be issued upon exercise of Stock Options may be either
authorized and unissued shares of Common Stock or authorized and issued shares
of Common Stock purchased or acquired by the Company for any purpose. If a Stock
Option or portion thereof shall expire or is terminated, canceled or surrendered
for any reason without being exercised in full, the unpurchased shares of Common
Stock which were subject to such Stock Option or portion thereof shall be
available for future grants of Stock Options under the Plan.
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f. Amendments
The Plan may be suspended, terminated or reinstated, in whole
or in part, at any time by the Board of Directors. The Board of Directors may
from time to time make such amendments to the Plan as it may deem advisable,
including, with respect to Incentive Stock Options, amendments deemed necessary
or desirable to comply with Section 422 of the Code and any regulations issued
thereunder; provided, however, that without the approval of the Company's
shareholders no amendment shall be made which:
i. Increases the maximum number of shares of Common
Stock which may be subject to Stock Options granted
under the Plan (other than as provided in Section
4.1); or
ii. Extends the term of the Plan; or
iii. Increases the period during which a Stock Option may
be exercised beyond ten (10) years from the date of
grant; or
iv. Otherwise materially increases the benefits accruing
to Participants under
the Plan; or
v. Materially modifies the requirements as to
eligibility for participation in the Plan; or
vi. Changes the maximum number of shares of Common Stock
with respect to which Stock Options may be granted to
any Participant during any consecutive twelve (12)
month period (other than as provided in Section 4.1).
Except as otherwise provided herein, termination or amendment
of the Plan shall not, without the consent of a Participant, affect such
Participant's rights under any Stock Option previously granted to such
Participant.
g. Participants and Grants
Stock Options may be granted by the Board of Directors or the
Committee, as the case may be, to those persons who the Board of Directors or
the Committee, as the case may be, determines have the capacity to make a
substantial contribution to the success of the Company. The Board of Directors
or the Committee, as the case may be, may grant Stock Options to purchase such
number of shares of Common Stock (subject to the limitation of Section 2.5) as
the Board of Directors or the Committee, as the case may be, may, in its sole
discretion, determine. In granting Stock Options, the Board of Directors or the
Committee, as the case may be, on an individual basis, may vary the number of
Incentive Stock Options or Non-Qualified Stock Options as between Participants
and may grant Incentive Stock Options and/or NonQualified Stock Options to a
Participant in such amounts as the Board of Directors or the Committee, as the
case may be, may determine in its sole discretion.
3. STOCK OPTIONS
a. General
All Stock Options granted under the Plan shall be evidenced by
written agreements executed by the Company and the Participant to whom granted
and dated as of the applicable date of grant, which agreement shall state the
number of shares of Common Stock which may be purchased upon the exercise
thereof and shall contain such investment representation and other terms and
conditions as the Board of Directors or the Committee, as the case may be, may
from time to time determine, or, in the case of Incentive Stock Options, as may
be required by Section 422 of the Code, or any other applicable law. Each such
grant shall be signed on behalf of the Company by a member of the Board of
Directors or the Committee, as the case may be, or by an officer delegated such
authority by the Board of Directors or the Committee, as the case may be.
b. Price
Subject to the provisions of Sections 3.6(d) and 4.1, the
purchase price per share of Common Stock subject to a Stock Option shall, in no
case, be less than one hundred percent (100%) of the Fair Market Value of a
share of Common Stock on the date the Stock Option is granted.
<PAGE>
c. Period
The duration or term of each Stock Option granted under the
Plan shall be for such period as the Committee shall determine but in no event
more than ten (10) years from the date of grant thereof.
d. Exercise
Subject to Section 4.4, Stock Options may be exercisable
immediately upon the grant of the Stock Option or at such other time or times as
the Board of Directors or the Committee, as the case may be, shall specify when
granting the Stock Option. Once exercisable, a Stock Option shall be
exercisable, in whole or in part, by delivery of a written notice of exercise to
the Secretary of the Company at the principal office of the Company specifying
the number of whole shares of Common Stock as to which the Stock Option is then
being exercised together with payment of the full purchase price for the shares
being purchased upon such exercise. Until the shares of Common Stock as to which
a Stock Option is exercised are issued, the Participant shall have none of the
rights of a shareholder of the Company with respect to such shares.
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<PAGE>
e. Payment
(a) The purchase price for shares of Common Stock as to which
a Stock Option has been exercised and any amount required to be withheld, as
contemplated by Section 4.3, may be paid in United States dollars in cash, or by
check, bank draft or money order payable in United States dollars to the order
of the Company.
(b) The Board of Directors or the Committee (as the case may
be) may, in its discretion and subject to such limitations, conditions and
prohibitions as it may prescribe, permit the purchase price for shares of Common
Stock for which a Stock Option has been exercised (and any amount required to be
withheld in connection with such exercise) to be paid by the delivery by the
Participant to the Company of whole shares of Common Stock having an aggregate
Fair Market Value on the date of payment equal to the aggregate of the purchase
price of Common Stock as to which the Stock Option is then being exercised.
f. Special Rules for Incentive Stock Options
Notwithstanding any other provision of the Plan, the following
provisions shall apply to Incentive Stock Options granted under the Plan:
i. Incentive Stock Options shall only be granted to
Participants who are employees of the Company or a
Subsidiary.
ii. To the extent that the aggregate Fair Market Value of
Common Stock, with respect to which Incentive Stock
Options are exercisable for the first time by a
Participant during any calendar year under the Plan
and any other Stock Option Plan of the Company,
exceeds $100,000, such Stock Options shall be treated
as Non-Qualified Stock Options.
iii. Any Participant who disposes of shares of Common
Stock acquired upon the exercise of an Incentive
Stock Option by sale or exchange either within two
(2) years after the date of the grant of the
Incentive Stock Option under which the shares were
acquired or within one (1) year of the acquisition of
such shares, shall promptly notify the Secretary of
the Company at the principal office of the Company of
such disposition, the amount realized, the purchase
price per share paid upon exercise and the date of
disposition.
iv. No Incentive Stock Option shall be granted to a
Participant who, at the time of the grant, owns stock
representing more than ten percent (10%) of the total
combined voting power of all classes of stock either
of the Company or any parent or Subsidiary of the
Company, unless the purchase price of the shares of
Common Stock purchasable upon exercise of such
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<PAGE>
Incentive Stock Option is at least one hundred ten
percent (110%) of the Fair Market Value (at the time
the Incentive Stock Option is granted) of the Common
Stock and the Incentive Stock Option is not
exercisable more than five (5) years from the date it
is granted.
g. Termination of Employment or Relationship
i. In the event a Participant's employment by, or
relationship with, the Company or its Subsidiaries
shall terminate for any reason other than those
reasons specified in Sections 3.7(b), (c), (d), (e)
or (f) while such Participant holds Stock Options,
then all rights of any kind under any outstanding
Stock Option held by such Participant which shall not
have previously lapsed or terminated shall expire
immediately.
ii. If a Participant's employment by, or relationship
with, the Company or its Subsidiaries shall terminate
as a result of such Participant's total disability,
each Stock Option held by such Participant (which has
not previously lapsed or terminated) shall
immediately become fully exercisable as to the total
number of shares of Common Stock subject thereto
(whether or not exercisable to that extent at the
time of such termination) and shall remain so
exercisable by such Participant for a period of six
(6) months after termination unless such Stock Option
expires earlier by its terms. For purposes of the
Plan, "total disability" shall mean permanent mental
or physical disability as determined by the Board of
Directors or the Committee, as the case may be.
iii. In the event of the death of a Participant, each
Stock Option held by such Participant (which has not
previously lapsed or terminated) shall immediately
become fully exercisable as to the total number of
shares of Common Stock subject thereto (whether or
not exercisable to that extent at the time of death)
by the executor or administrator of the Participant's
estate or by the person or persons to whom the
deceased Participant's rights thereunder shall have
passed by will or by the laws of descent or
distribution, and shall remain so exercisable for a
period of six (6) months after such Participant's
death unless such Stock Option expires earlier by its
terms.
iv. If a Participant's employment by the Company or a
Subsidiary shall terminate by reason of such
Participant's retirement in accordance with Company
policies, each Stock Option held by such Participant
at the date of termination (which has not previously
lapsed or terminated) shall immediately become fully
exercisable as to the total number of shares of
Common Stock subject hereto (whether or not
exercisable to that extent at
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<PAGE>
the time of such termination) and shall remain so
exercisable by such Participant for a period of three
(3) months after termination, unless such Stock
Option expires earlier by its terms.
v. In the event the Company or a Subsidiary terminates
the employment of a Participant who at the time of
such termination had been continuously employed by
the Company or a Subsidiary during the five (5) year
period immediately preceding such termination, for
any reason except "good cause" (hereafter defined)
and except upon such Participant's death, total
disability or retirement in accordance with Company
policies, each Stock Option held by such Participant
(which has not previously lapsed or terminated and
which has been held by such Participant for more than
six (6) months prior to such termination) shall
immediately become fully exercisable as to the total
number of shares of Common Stock subject thereto
(whether or not exercisable to that extent at the
time of such termination) and shall remain so
exercisable for a period of three (3) months after
such termination unless such Stock Option expires
earlier by its terms. A termination for "good cause"
shall have occurred only if the Participant in
question is terminated, by written notice (i) because
of his or her conviction of a felony for a crime
involving an act of fraud or dishonesty, (ii)
intentional acts or omissions on such Participant's
part causing material injury to the property or
business of the Company or any Subsidiary, or (iii)
because such Participant shall have breached any
material term of any employment agreement in place
between such Participant and the Company or any
Subsidiary and shall have failed to correct such
breach within any grace period provided for in such
agreement. "Good cause" for termination shall not
include bad judgment or any act or omission
reasonably believed by such Participant, in good
faith, to have been in, or not opposed to, the best
interests of the Company and its Subsidiaries.
vi. In the event of the termination of a Participant's
service as a Director of the Company, who at the time
of such termination had continuously served as a
Director of the Company during the five (5) year
period immediately preceding such termination, and
such termination is for any reason except for such
Participant's death or total disability or the
removal of such Participant as Director (by the
shareholders, the Board of Directors or otherwise)
for "good cause" (as defined in Section 3.7(e)(i) and
(ii)), each Stock Option held by such Participant
(which has not previously lapsed or terminated and
which has been held by such Participant for more than
six (6) months prior to such termination) shall
immediately become fully exercisable as to the total
number of shares of Common Stock subject thereto
(whether or not exercisable to that extent at the
time of such
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<PAGE>
termination) and shall remain so exercisable for a
period of three (3) months after such termination
unless such Stock Option expires earlier by its
terms.
h. Effect of Leaves of Absence
It shall not be considered a termination of employment when a
Participant is on military or sick leave or such other type of leave of absence
which is considered a continuing intact the employment relationship of the
Participant with the Company or any of its Subsidiaries. In case of such leave
of absence, the employment relationship shall be deemed to have continued until
the later of (i) the date when such leave shall have lasted ninety (90) days in
duration, or (ii) the date as of which the Participant's right to reemployment
shall have no longer been guaranteed either by statute or contract.
i. Acceleration and Redemption
Notwithstanding anything to the contrary set forth in the
Plan, upon or in anticipation of an Option Event, the Board of Directors or the
Committee (as the case may be) may, in its sole and absolute discretion and
contingent upon the occurrence of that Option Event: (a) accelerate the
execisability and expiration of any or all Stock Options, (b) cause any or all
Stock Options to be exchanged for options to purchase common stock in any
successor corporation, or (c) cancel any Stock Option and cause the Company to
distribute to the holder of that Stock Option cash and/or other substitute
consideration with a value equal to the difference between (x) the Fair Market
Value of the Common Stock subject to that Stock Option on the date of such
Change of Control, and (y) the aggregate exercise price of such Stock Option.
However, in the absence of the exercise of discretion by the Board of Directors
or the Committee (as the case may be) pursuant to the preceding sentence (or in
the absence of an affirmative determination by the Board of Directors or the
Committee not to exercise such discretion), all Stock Options granted and
outstanding under the Plan shall become fully and immediately exercisable in
anticipation of and contingent upon the occurrence of the Option Event, and upon
the occurrence of such Option Event, any Stock Options which thereafter remain
unexercised will be canceled.
4. MISCELLANEOUS PROVISIONS
a. Adjustments Upon Changes in Capitalization
In the event of changes to the outstanding shares of Common
Stock of the Company through recapitalization, reclassification, stock split-up,
stock dividend, stock consolidation or other similar event affecting the capital
stock of the Company, an appropriate and proportionate adjustment shall be made
in the number and class of shares as to which Stock Options have been or may be
granted. Adjustments under this Section 4.1 shall be made by the
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<PAGE>
Board of Directors or the Committee, as the case may be, whose determination as
to what adjustments shall be made, and the extent thereof, shall be final,
binding and conclusive.
b. Non-Transferability
No Stock Option shall be transferable except by will or the
laws of descent and distribution, nor shall any Stock Option be exercisable
during the Participant's lifetime by any person other than the Participant or
his or her guardian or legal representative.
c. Withholding
The Company's obligations under the Plan shall be subject to
applicable federal, state and local tax withholding requirements. Federal, state
and local withholding tax due at the time of a grant or upon the exercise of any
Stock Option may, in the discretion of the Board of Directors or the Committee,
as the case may be, be paid in shares of Common Stock already owned by the
Participant or through the withholding of shares otherwise issuable to such
Participant, upon such terms and conditions as the Board of Directors or the
Committee, as the case may be, shall determine. If the Participant shall fail to
pay, or make arrangements satisfactory to the Board of Directors or the
Committee, as the case may be, for the payment, to the Company of all such
federal, state and local taxes required to be withheld by the Company, then the
Company shall, to the extent permitted by law, have the right to deduct from any
payment of any kind otherwise due to such Participant an amount equal to any
federal, state or local taxes of any kind required to be withheld by the
Company.
d. Compliance with Law and Approval of Regulatory Bodies
No Stock Option shall be exercisable and no shares will be
delivered under the Plan except in compliance with all applicable federal and
state laws and regulations including, without limitation, compliance with all
federal and state securities laws and withholding tax requirements and with the
rules of NASDAQ, if the Common Stock is listed on the NASDAQ National Market,
and of all domestic stock exchanges on which the Common Stock may be listed. Any
share certificate issued to evidence shares for which a Stock Option is
exercised may bear legends and statements the Board of Directors or the
Committee, as the case may be, shall deem advisable to assure compliance with
federal and state laws and regulations;. No Stock Option shall be exercisable
and no shares will be delivered under the Plan, until the Company has obtained
the consent or approval from regulatory bodies, federal or state, having
jurisdiction over such matters as the Board of Directors or the Committee, as
the case may be, may deem advisable. In the case of the exercise of a Stock
Option by a person or estate acquiring the right to exercise the Stock Option as
a result of the death of the Participant, the Board of Directors or the
Committee, as the case may be, may require reasonable evidence as to the
ownership of the Stock Option and may require consents and releases of taxing
authorities that it may deem advisable.
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<PAGE>
e. No Right to Employment
Neither the adoption of the Plan nor its operation, nor any
document describing or referring to the Plan, or any part thereof, nor the
granting of any Stock Options hereunder, shall confer upon any Participant under
the Plan any right to continue in the employ of the Company or any Subsidiary,
or shall in any way affect the right and power of the Company or any Subsidiary
to terminate the employment of any Participant at any time with or without
assigning a reason therefor, to the same extent as might have been done if the
Plan had not been adopted.
f. Exclusion from Pension Computations
By acceptance of a grant of a Stock Option under the Plan, the
recipient shall be deemed to agree that any income realized upon the receipt or
exercise thereof or upon the disposition of the shares received upon exercise
will not be taken into account as "base remuneration," "wages," "salary" or
"compensation" in determining the amount of any contribution to or payment or
any other benefit under any pension, retirement, incentive, profit-sharing or
deferred compensation plan of the Company or any Subsidiary.
g. Abandonment of Options
A Participant or Eligible Director may at any time abandon a
Stock Option prior to its expiration date. The abandonment shall be evidenced in
writing, in such form as the Board of Directors or the Committee, as the case
may be, may from time to time prescribe. A Participant or Eligible Director
shall have no further rights with respect to any Stock Option so abandoned.
h. Interpretation of the Plan
Headings are given to the Sections of the Plan solely as a
convenience to facilitate reference, such headings, numbering and paragraphing
shall not in any case be deemed in any way material or relevant to the
construction of the Plan or any provision hereof. The use of the masculine
gender shall also include within its meaning the feminine. The use of the
singular shall also include within Its meaning the plural and vice versa.
i. Use of Proceeds
Funds received by the Company upon the exercise of Stock
Options shall be used for the general corporate purposes of the Company.
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<PAGE>
j. Construction of Plan
The place of administration of the Plan shall be in the
Commonwealth of Pennsylvania, and the validity, construction, interpretation,
administration and effect of the Plan and of its rules and regulations, and
rights relating to the Plan, shall be determined solely in accordance with the
laws of the Commonwealth of Pennsylvania.
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<PAGE>
DE&S HOLDING CO.
1999 STOCK OPTION PLAN
FORM OF
INCENTIVE STOCK OPTION AGREEMENT
1. AN INCENTIVE STOCK OPTION AGREEMENT (the "Option") for a total of
_________ shares (the "Optioned Shares") of Common Stock, par value of
$.01 per share, of DE&S Holding Co., a Pennsylvania corporation (the
"Company") is hereby granted to ___________ (the "Optionee") subject to
all of the terms and provisions of the DE&S Holding Co. 1999 Stock
Option Plan (the "Plan") adopted by the Board of Directors on
___________________.
2. The option price as determined by the Committee (the "Committee") which
has authority for administering the Plan for the Company, is
_____________________ ($_________) per Optioned Share, (the "Option
Price") having been determined pursuant to Section 3.2 of the Plan,
which represents 100% of the Fair Market Value (as defined in the Plan)
of the Company's Common Stock on the date of grant of the Option.
3. Subject to the provisions of Sections 7 - 9 hereof, the Option
terminates on the earlier of (i) the date when fully exercised under
the provisions of the Plan, (ii) ____________ or (iii) the date fixed
pursuant to Section 3.3 of the Plan.
4. (a) The Option may not be exercised if the issuance of all or part of
the Optioned Shares upon such exercise would constitute a violation of
any applicable Federal or state securities or other laws or valid
regulations.
(b) Optionee, as a condition to Optionee's exercise of this Option, may
be required to represent to the Company that the Optioned Shares which
Optionee acquires hereunder are being acquired by the Optionee for
investment and not with a present view to distribution or resale
thereof. Optionee consents that the stock certificate(s) issued
pursuant to the exercise of the Option may bear a legend referring to
the unregistered status of the shares indicating that transfers thereof
are restricted, and that the Committee may give appropriate
stop-transfer instructions to the transfer agent of the Company.
5. The Option may not be transferred in any manner other than by will or
the laws of descent or distribution any may be exercised during the
lifetime of the Optionee only by Optionee. The terms of the Option
shall be binding upon the executors, administrators and heirs of the
Optionee.
<PAGE>
6. Optionee is granted the right and option to purchase all or any part of
the Optioned Shares at the Option Price, which right and option may be
exercised from time to time, in whole or in part, on a cumulative
basis, on or after the following dated (the "Exercise Dates"):
No. of Optioned Shares Exercise On or After
7. (a) In the event of a termination of Optionee's employment by, or
relationship with, the Company or its subsidiaries by reason of
permanent and total disability as determined by the Committee ("Total
Disability"), any portion of the outstanding Option which is then
exercisable shall remain so exercisable for the lesser of : (i) six
months or (ii) the remaining term of that Option.
(b) In the event that the Company or a subsidiary of the Company
terminates Optionee's employment for any reason except "good cause"
(defined below), any portion of the outstanding Option which is
exercisable at the time of such termination shall remain so exercisable
for the lesser of (i) three (3) months after such termination, or (ii)
the remaining term of that Option. A termination for "good cause" shall
have occurred if Optionee is terminated: (i) because of his or her
conviction of or plead of guilty or nolo contendere to a felony for a
crime involving an act of fraud or dishonesty, (ii) intentional acts or
omissions on Optionee's part causing material injury to the property or
business of the Company or a subsidiary of the Company, or (iii)
because Optionee shall have breached an material term of any agreement
in place between Optionee and the Company or a subsidiary of the
Company and shall have failed to correct such breach within any grace
period provided for in such agreement. The determination of whether an
option has been terminated for "good cause" will be made by the Board
of Directors in its sole and absolute discretion.
8. In the event of the death of Optionee, any portion of the outstanding
Option which was exercisable immediately prior to Optionee's death
shall remain so exercisable by the executors or administrators of
Optionee's estate, or by the person or persons to whom the deceased
Optionee's rights thereunder shall have passed by will or by the laws
of descent or distribution, as may be appropriate, for the lesser of :
(i) one year or (ii) the remaining term of the Option.
9. In the event of termination of Optionee's employment by the Company for
"good cause" (as defined in Paragraph 7(b)), then all rights of any
kind under any outstanding Option which shall not have previously
lapsed or terminated shall immediately terminate. In addition, if the
Optionee's employment is terminated for "good cause" (as defined in
Paragraph 7(b)), the Optionee shall forfeit all Optioned Shares for
which the Company has not yet delivered share certificates to the
Optionee and the Company shall refund to the Optionee any amount paid
to it with respect to such Optioned Shares, in the same form as it was
paid (or in cash, at the Company's discretion). Notwithstanding any
other provision of this Agreement, the Company may withhold delivery of
share certificates pending the resolution of any inquiry that could
lead to a finding resulting in forfeiture of shares or termination of
the Option pursuant to this paragraph.
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<PAGE>
10. The Option may be exercised only upon the delivery of the completed
"Notice of Exercise", attached hereto (the "Notice"), to the Secretary
of the Company. Any attempted exercise of the Option without such
delivery of the Notice shall be void and ineffective and shall not bind
the Company. Such notice shall be accompanied by full payment for the
Optioned Shares being purchased. As soon as practicable after the
receipt of the Notice and payment, the Company shall issue, or cause to
be issued, to the Optionee (or Optionee's administrators, executors or
distributees, in the event of Optionee's death) one or more
certificates representing the number of shares of Common Stock
purchased by the Optionee pursuant to this Agreement.
11. Optionee shall have none of the rights of a shareholder with respect to
any Optioned Shares except as to the shares for which Optionee has
exercised the Option granted herein.
12. In the event of termination of Optionee's employment by or relationship
with the Company for any reason prior to such time that a registration
statement filed by the Company has been declared effective by the
Securities and Exchange Commission, the Company shall have the right
for a period of ninety (90) days after the termination of Optionee's
employment to acquire any Optioned Shares held by Optionee upon the
date of such termination, and shall have the right to acquire any
Optioned Shares purchased by Optionee pursuant to Paragraphs 7 and 8
above subsequent to the termination of Optionee's employment by or
relationship with the Company within ninety (90) days of such
acquisition by Optionee, in either case at a purchase price per
Optioned Share equal to the Fair Market Value (as defined in the Plan)
of such Option Share; provided, however, that notwithstanding the
foregoing, if Optionee's employment was terminated for "good cause" (as
defined in Paragraph 7(b)), then the repurchase price per Optioned
Share payable by the Company pursuant to the preceding sentence will be
the lesser of : (i) the Option Price paid by Optionee for such Optioned
Share, or (ii) the book value per share of the Company, as determined
by the Board of Directors in good faith and in their sole and absolute
discretion.
13. All notices required to be given hereunder shall be mailed by
registered or certified mail to the Company to the attention of its
Secretary at 1700 Tomlinson Road, Philadelphia, PA 19116, and to
Optionee at Optionee's address as it appears on the Company's books and
records unless either of said parties has duly notified the other in
writing of a change in address.
14. This Option is subject to, and the Optionee agrees to be bound by, all
of the terms and conditions of the Plan. Pursuant to the Plan, the
Board of Directors and the Option Committee of the Board of Directors
are authorized to adopt rules and regulations not inconsistent with the
Plan as they shall deem appropriate.
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<PAGE>
15. Subject to the provisions of the Plan, this Agreement may only be
amended by a writing signed by each of the parties hereto.
16. This Agreement, together with the Plan and the other exhibits attached
thereto or hereto, represents the entire agreement between the parties.
17. This Agreement shall be construed in accordance with the laws of the
Commonwealth of Pennsylvania, without regard to the application of the
principles of conflicts of laws.
18. Subject to the fulfillment by Optionee of any conditions limiting the
disposition of Optioned Shares received under this Option, Optionee
hereby agrees that if Optionee disposes of any Optioned Shares within
one (1) year after such shares were transferred to Optionee or two (2)
years after the date as of which this Option was granted, Optionee will
notify the Company in writing within thirty (30) days after the date of
such disposition.
DE&S Holding Co.
Option Committee
By: ___________________________
Dated: _____________________
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<PAGE>
Optionee acknowledges receipt of a copy of the Plan which is annexed hereto, and
represents that Optionee is familiar with the terms and provisions thereof, and
hereby affirms his acceptance of the Option subject to all the terms and
provisions thereof, and hereby affirms his acceptance of the Option subject to
all the terms and provisions of the Plan, as so amended. Optionee affirms his
agreement to accept as binding, conclusive and final all decisions and
interpretations of the Board or Committee upon any questions arising under the
Plan. Optionee authorizes the Company to withhold in accordance with applicable
law from any compensation payable to Optionee any taxes required to be withheld
by Federal, state or local law as a result of the exercise of the Option.
Optionee acknowledges that in the event of termination of Optionee's employment
by or relationship with the Company for any reason, Company shall have certain
repurchase rights with respect to any shares acquired upon exercise of the
Option, as set forth above in Paragraph 12.
Date: _________________________ _____________________________
Optionee Signature
-5-
<PAGE>
DE&S HOLDING CO.
1999 STOCK OPTION PLAN
FORM OF
NONQUALIFIED STOCK OPTION AGREEMENT
1. A NONQUALIFIED STOCK OPTION AGREEMENT (the "Option") for a total of
_________ shares (the "Optioned Shares") of Common Stock, par value of
$.01 per share, of DE&S Holding Co., a Pennsylvania corporation (the
"Company") is hereby granted to ___________ (the "Optionee") subject to
all of the terms and provisions of the DE&S Holding Co. 1999 Stock
Option Plan (the "Plan") adopted by the Board of Directors on
___________________.
2. The option price as determined by the Committee (the "Committee") which
has authority for administering the Plan for the Company, is
_____________________ ($_________) per Optioned Share, (the "Option
Price") having been determined pursuant to Section 3.2 of the Plan,
which represents 100% of the Fair Market Value (as defined in the Plan)
of the Company's Common Stock on the date of grant of the Option.
3. Subject to the provisions of Sections 7 - 9 hereof, the Option
terminates on the earlier of (i) the date when fully exercised under
the provisions of the Plan, (ii) ____________ or (iii) the date fixed
pursuant to Section 3.3 of the Plan.
4. (a) The Option may not be exercised if the issuance of all or part of
the Optioned Shares upon such exercise would constitute a violation of
any applicable Federal or state securities or other laws or valid
regulations.
(b) Optionee, as a condition to Optionee's exercise of this Option, may
be required to represent to the Company that the Optioned Shares which
Optionee acquires hereunder are being acquired by the Optionee for
investment and not with a present view to distribution or resale
thereof. Optionee consents that the stock certificate(s) issued
pursuant to the exercise of the Option may bear a legend referring to
the unregistered status of the shares indicating that transfers thereof
are restricted, and that the Committee may give appropriate
stop-transfer instructions to the transfer agent of the Company.
5. The Option may not be transferred in any manner other than by will or
the laws of descent or distribution any may be exercised during the
lifetime of the Optionee only by Optionee. The terms of the Option
shall be binding upon the executors, administrators and heirs of the
Optionee.
<PAGE>
6. Optionee is granted the right and option to purchase all or any part of
the Optioned Shares at the Option Price, which right and option may be
exercised from time to time, in whole or in part, on a cumulative
basis, on or after the following dated (the "Exercise Dates"):
No. of Optioned Shares Exercise On or After
7. (a) In the event of a termination of Optionee's employment by, or
relationship with, the Company or its subsidiaries by reason of
permanent and total disability as determined by the Committee ("Total
Disability"), any portion of the outstanding Option which is then
exercisable shall remain so exercisable for the lesser of : (i) six
months or (ii) the remaining term of that Option.
(b) In the event that the Company or a subsidiary of the Company
terminates Optionee's employment for any reason except "good cause"
(defined below), any portion of the outstanding Option which is
exercisable at the time of such termination shall remain so exercisable
for the lesser of (i) three (3) months after such termination, or (ii)
the remaining term of that Option. A termination for "good cause" shall
have occurred if Optionee is terminated: (i) because of his or her
conviction of or plead of guilty or nolo contendere to a felony for a
crime involving an act of fraud or dishonesty, (ii) intentional acts or
omissions on Optionee's part causing material injury to the property or
business of the Company or a subsidiary of the Company, or (iii)
because Optionee shall have breached an material term of any agreement
in place between Optionee and the Company or a subsidiary of the
Company and shall have failed to correct such breach within any grace
period provided for in such agreement. The determination of whether an
option has been terminated for "good cause" will be made by the Board
of Directors in its sole and absolute discretion.
8. In the event of the death of Optionee, any portion of the outstanding
Option which was exercisable immediately prior to Optionee's death
shall remain so exercisable by the executors or administrators of
Optionee's estate, or by the person or persons to whom the deceased
Optionee's rights thereunder shall have passed by will or by the laws
of descent or distribution, as may be appropriate, for the lesser of :
(i) one year or (ii) the remaining term of the Option.
<PAGE>
9. In the event of termination of Optionee's employment by the Company for
"good cause" (as defined in Paragraph 7(b)), then all rights of any
kind under any outstanding Option which shall not have previously
lapsed or terminated shall immediately terminate. In addition, if the
Optionee's employment is terminated for "good cause" (as defined in
Paragraph 7(b)), the Optionee shall forfeit all Optioned Shares for
which the Company has not yet delivered share certificates to the
Optionee and the Company shall refund to the Optionee any amount paid
to it with respect to such Optioned Shares, in the same form as it was
paid (or in cash, at the Company's discretion). Notwithstanding any
other provision of this Agreement, the Company may withhold delivery of
share certificates pending the resolution of any inquiry that could
lead to a finding resulting in forfeiture of shares or termination of
the Option pursuant to this paragraph.
10. The Option may be exercised only upon the delivery of the completed
"Notice of Exercise", attached hereto (the "Notice"), to the Secretary
of the Company. Any attempted exercise of the Option without such
delivery of the Notice shall be void and ineffective and shall not bind
the Company. Such notice shall be accompanied by full payment for the
Optioned Shares being purchased. As soon as practicable after the
receipt of the Notice and payment, the Company shall issue, or cause to
be issued, to the Optionee (or Optionee's administrators, executors or
distributees, in the event of Optionee's death) one or more
certificates representing the number of shares of Common Stock
purchased by the Optionee pursuant to this Agreement.
11. Optionee shall have none of the rights of a shareholder with respect to
any Optioned Shares except as to the shares for which Optionee has
exercised the Option granted herein.
12. In the event of termination of Optionee's employment by or relationship
with the Company for any reason prior to such time that a registration
statement filed by the Company has been declared effective by the
Securities and Exchange Commission, the Company shall have the right
for a period of ninety (90) days after the termination of Optionee's
employment to acquire any Optioned Shares held by Optionee upon the
date of such termination, and shall have the right to acquire any
Optioned Shares purchased by Optionee pursuant to Paragraphs 7 and 8
above subsequent to the termination of Optionee's employment by or
relationship with the Company within ninety (90) days of such
acquisition by Optionee, in either case at a purchase price per
Optioned Share equal to the Fair Market Value (as defined in the Plan)
of such Option Share; provided, however, that notwithstanding the
foregoing, if Optionee's employment was terminated for "good cause" (as
defined in Paragraph 7(b)), then the repurchase price per Optioned
Share payable by the Company pursuant to the preceding sentence will be
the lesser of : (i) the Option Price paid by Optionee for such Optioned
Share, or (ii) the book value per share of the Company, as determined
by the Board of Directors in good faith and in their sole and absolute
discretion.
13. All notices required to be given hereunder shall be mailed by
registered or certified mail to the Company to the attention of its
Secretary at 1700 Tomlinson Road, Philadelphia, PA 19116, and to
Optionee at Optionee's address as it appears on the Company's books and
records unless either of said parties has duly notified the other in
writing of a change in address.
<PAGE>
14. This Option is subject to, and the Optionee agrees to be bound by, all
of the terms and conditions of the Plan. Pursuant to the Plan, the
Board of Directors and the Option Committee of the Board of Directors
are authorized to adopt rules and regulations not inconsistent with the
Plan as they shall deem appropriate.
15. Subject to the provisions of the Plan, this Agreement may only be
amended by a writing signed by each of the parties hereto.
16. This Agreement, together with the Plan and the other exhibits attached
thereto or hereto, represents the entire agreement between the parties.
17. This Agreement shall be construed in accordance with the laws of the
Commonwealth of Pennsylvania, without regard to the application of the
principles of conflicts of laws.
DE&S Holding Co.
Option Committee
By: _________________________
Dated: _____________________
<PAGE>
Optionee acknowledges receipt of a copy of the Plan which is annexed hereto, and
represents that Optionee is familiar with the terms and provisions thereof, and
hereby affirms his acceptance of the Option subject to all the terms and
provisions thereof, and hereby affirms his acceptance of the Option subject to
all the terms and provisions of the Plan, as so amended. Optionee affirms his
agreement to accept as binding, conclusive and final all decisions and
interpretations of the Board or Committee upon any questions arising under the
Plan. Optionee authorizes the Company to withhold in accordance with applicable
law from any compensation payable to Optionee any taxes required to be withheld
by Federal, state or local law as a result of the exercise of the Option.
Optionee acknowledges that in the event of termination of Optionee's employment
by or relationship with the Company for any reason, Company shall have certain
repurchase rights with respect to any shares acquired upon exercise of the
Option, as set forth above in Paragraph 12.
Date: _________________________ _____________________________
Optionee Signature
<PAGE>
Exhibit 10.3
SECURITIES PURCHASE AND CONTRIBUTION AGREEMENT
BY AND AMONG
DE&S HOLDING CO.
DOLLAR EXPRESS, INC.
BERNARD SPAIN
MURRAY SPAIN
GLOBAL PRIVATE EQUITY III LIMITED PARTNERSHIP
ADVENT PGGM GLOBAL LIMITED PARTNERSHIP
ADVENT PARTNERS GPE III LIMITED PARTNERSHIP
ADVENT PARTNERS (NA) GPE III LIMITED PARTNERSHIP
ADVENT PARTNERS LIMITED PARTNERSHIP
GUAYACAN PRIVATE EQUITY FUND LIMITED PARTNERSHIP
and
DOLLAR EXPRESS INVESTMENT, LLC
Dated as of February 3, 1999
<PAGE>
SECURITIES PURCHASE AND CONTRIBUTION AGREEMENT
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TABLE OF CONTENTS
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<TABLE>
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BACKGROUND................................................................................................. 1
ARTICLE I - DEFINITIONS.................................................................................... 3
ARTICLE II - PURCHASE, SALE AND CONTRIBUTION...............................................................11
2.1. Sale, Purchase and Delivery of Stock...........................................................11
2.2. Purchase Price.................................................................................11
2.3. Contribution...................................................................................11
ARTICLE III - THE CLOSING..................................................................................12
3.1. Closing Date...................................................................................12
3.2. Deliveries by the Company to the Purchaser.....................................................12
3.3. Deliveries by Dollar Express to the Purchaser..................................................13
3.4. Deliveries by the Purchaser to the Company.....................................................13
3.5. Deliveries by the Management Shareholders to the Company.......................................14
3.6. Deliveries by the Company to the Management Shareholders.......................................14
3.7. Deliveries by Dollar Express to the Management Shareholders....................................14
3.8. Additional Deliveries..........................................................................14
3.9. Purchase Price Adjustment......................................................................14
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF THE COMPANY,
DOLLAR EXPRESS AND THE MANAGEMENT SHAREHOLDERS.............................................................16
4.1. Organization and Good Standing.................................................................16
4.2. Authorization..................................................................................16
4.3. Capitalization.................................................................................17
4.4. Sale of Shares of Capital Stock; Offering Exemption............................................18
4.5. Subsidiaries...................................................................................19
4.6. Consents.......................................................................................19
4.7. Litigation.....................................................................................19
4.8. Compliance with Law............................................................................19
4.9. Title to Assets................................................................................20
4.10. Other Representations Regarding Dollar Express' Assets and Liabilities.........................20
4.11. Financial Statements...........................................................................22
4.12. No Undisclosed Liabilities.....................................................................22
4.13. Absence of Certain Developments................................................................22
4.14. Material Contracts.............................................................................25
4.15. Product Warranties.............................................................................27
4.16. Product Liabilities............................................................................27
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4.17. Insurance......................................................................................27
4.18. Transactions with Affiliates...................................................................27
4.19. Employee Relations.............................................................................28
4.20. ERISA Matters..................................................................................29
4.21. Environmental Laws.............................................................................32
4.22. Brokers........................................................................................34
4.23. Substantial Suppliers..........................................................................34
4.24. No Illegal Payments............................................................................34
4.25. Year 2000 Compliance...........................................................................35
4.26. The Company's Activities.......................................................................35
4.27. Disclosure.....................................................................................35
ARTICLE V - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER................................................35
5.1. Organization and Good Standing.................................................................36
5.2. Authorization..................................................................................36
5.3. Consents.......................................................................................37
5.4. Litigation.....................................................................................37
5.5. Brokers........................................................................................37
5.6. Investment Intent of the Purchaser.............................................................37
5.7. Disclosure.....................................................................................38
ARTICLE VI - CERTAIN COVENANTS AND OTHER MATTERS...........................................................38
6.1. Confidentiality Agreement......................................................................38
6.2. Restriction on Certain Discussions and Actions.................................................38
6.3. Conduct of Business............................................................................39
6.4. Conduct of the Company. ......................................................................41
6.5. Notice of Certain Events. ....................................................................42
6.6. Cooperation; Access to Books and Records.......................................................42
6.7. Best Efforts...................................................................................43
6.8. Amendment to Articles of Incorporation.........................................................43
6.9. Offer of Employment............................................................................44
6.10. Restructuring..................................................................................44
ARTICLE VII - TAX RELATED MATTERS..........................................................................44
7.1. S Elections....................................................................................44
7.2. Tax Liability in Year of Closing...............................................................46
7.3. Covenants Regarding Distributions..............................................................46
7.4. 1998 Tax Distribution..........................................................................46
7.5. Purchaser Indemnifications. ...................................................................46
7.6. Management Shareholders' Indemnifications......................................................47
7.7. Tax Contest....................................................................................48
ARTICLE VIII - CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS.........................................48
8.1. Representations, Warranties and Covenants......................................................49
8.2. Opinion of the Company's Counsel...............................................................49
8.3. Delivery of Documents..........................................................................49
</TABLE>
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<CAPTION>
<S> <C> <C>
8.4. Bank Debt......................................................................................49
8.5. Other Conditions Precedent to the Purchaser's Obligations......................................50
ARTICLE IX - CONDITIONS PRECEDENT TO THE COMPANY'S, DOLLAR
EXPRESS' AND THE MANAGEMENT SHAREHOLDERS' OBLIGATIONS......................................................51
9.1. Representations, Warranties and Covenants......................................................51
9.2. Bank Debt......................................................................................52
9.3. Other Conditions Precedent to the Company's Obligations........................................52
ARTICLE X - INDEMNIFICATION AND RELATED MATTERS............................................................52
10.1. By the Management Shareholders.................................................................52
10.2. By the Purchaser...............................................................................53
10.3. Limitation on Indemnification Liabilities......................................................53
10.4. Survival of Representations, Warranties and Covenants..........................................54
10.5. Notice of Indemnification......................................................................54
10.6. Indemnification Procedure for Third-Party Claims...............................................54
10.7. Payment of Indemnification Amounts.............................................................55
10.8. Management Shareholders' Claims Against the Company............................................56
10.9. Indemnity by Purchaser Entities................................................................56
ARTICLE XI - TERMINATION...................................................................................56
11.1. Termination....................................................................................56
11.2. Effect of Termination..........................................................................57
11.3. Expenses If No Closing.........................................................................57
ARTICLE XII - MISCELLANEOUS................................................................................57
12.1. Appointment of Directors.......................................................................57
12.2. Additional Restructuring.......................................................................58
12.3. Entire Agreement...............................................................................58
12.4. Specific Performance. ........................................................................58
12.5. Governing Law..................................................................................58
12.6. Transfer Taxes.................................................................................58
12.7. Expenses.......................................................................................58
12.8. Public Announcements...........................................................................59
12.9. Notices........................................................................................59
12.10. Severability...................................................................................61
12.11. Binding Effect; Successors and Assigns.........................................................61
12.12. Entire Agreement...............................................................................61
12.13. Interpretation.................................................................................61
12.14. Amendments.....................................................................................61
12.15. Counterparts...................................................................................62
</TABLE>
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<PAGE>
SECURITIES PURCHASE AND CONTRIBUTION AGREEMENT
THIS SECURITIES PURCHASE AND CONTRIBUTION AGREEMENT (this
"Agreement") is made and entered into as of the 3rd day of February, 1999, by
and among the following parties:
o DE&S Holding Co., a Pennsylvania corporation (the
"Company");
o Dollar Express, Inc., a Pennsylvania corporation ("Dollar
Express");
o Bernard Spain and Murray Spain (collectively, the
"Management Shareholders");
o Global Private Equity III Limited Partnership, a Delaware
limited partnership ("GPE III");
o Advent PGGM Global Limited Partnership, a Delaware limited
partnership ("AG-PGGM");
o Advent Partners GPE III Limited Partnership, a Delaware
limited partnership ("AP-GPEIII");
o Advent Partners (NA) GPE III Limited Partnership, a Delaware
limited partnership ("AP-NA");
o Advent Partners Limited Partnership, a Delaware limited
partnership ("APLP" and together with GPEIII, AG-PGGM, AP-GPEIII and AP-NA, the
"Advent Entities");
o Guayacan Private Equity Fund Limited Partnership, a Delaware
limited partnership ("Guayacan"); and
o Dollar Express Investment, LLC, a North Carolina limited
liability company ("DEI" and together with the Advent Entities and Guayacan, the
"Purchaser," in the proportions described in Exhibit A hereto).
BACKGROUND
A. Dollar Express operates large format dollar stores in the
eastern United States (the "Dollar Express Stores") and traditional card and
gift shops in the Philadelphia region (the "Spain's Cards Stores", and with the
Dollar Express Stores, collectively, the "Business"). The Company is a holding
company which was incorporated by the Management Shareholders to effectuate the
Contemplated Transactions. As of the date of this Agreement, the Management
Shareholders collectively own all of the issued and outstanding shares of stock
of the Company and Dollar Express.
B. Prior to Closing, the Management Shareholders desire (i) to
recapitalize the Company and Dollar Express through a distribution to
shareholders by Dollar Express and the repayment of existing debt and (ii) to
reorganize the entities by contributing all of the stock of Dollar Express to
the Company in exchange for an aggregate of 6,470,000 shares of the Company's
issued and outstanding Common Stock, $.01 par value per share (the "Company
Common Stock") in a transaction intended to qualify under Section 351 of the
Code (as defined in Article I) (collectively, the "Restructuring").
<PAGE>
C. The Purchaser desires to acquire a minority interest in the
Company, and the Company and the Management Shareholders desire that the
Purchaser acquire such interest, substantially in accordance with the procedures
set forth in this Background Section and upon the terms and conditions set forth
in this Agreement.
D. On January 1, 1999, Dollar Express declared and paid by
means of two (2) promissory notes (the "Notes") a dividend to the Management
Shareholders, pro rata with their ownership interest, in an amount equal to, in
the aggregate, Fifty-Five Million Dollars ($55,000,000) plus one- half (1/2) of
Dollar Express' cash available on January 15, 1999 after payment of certain
expenses.
E. At Closing, the Company and Dollar Express will enter into
a credit facility for up to Forty Million Dollars ($40,000,000) from a syndicate
of senior lenders and will use a portion of the proceeds therefrom (the
"Borrowings"), together with all or a portion of the Purchase Price set forth
herein, to (i) satisfy the Notes, (ii) to repay the Company's existing
indebtedness for borrowed money (approximately Four Million Dollars ($4,000,000)
as of the date hereof), (iii) pay costs associated with the Contemplated
Transactions, and (iv) provide for general working capital for the Company and
Dollar Express.
F. At Closing, the Purchaser will purchase from the Company an
aggregate of 3,530,000 shares of newly issued Series A convertible preferred
stock of the Company for an aggregate purchase price of Thirty-Four Million
Dollars ($34,000,000), such stock having the designations set forth on the
Designation Statement attached hereto as Exhibit B and to be convertible into
shares of the Company Common Stock (the "Series A Preferred Shares"), such
Series A Preferred Shares to be issued in the proportions set forth in Exhibit A
hereto.
G. At Closing, the Purchaser will also purchase from the
Company for an aggregate purchase price of One Million Dollars ($1,000,000)
warrants to purchase, in the aggregate, up to four percent (4%) of the
outstanding shares of Company Common Stock (as calculated therein) each in the
form of Exhibit C attached hereto, such warrants to be issued in the proportions
set forth in Exhibit A hereto (the "Liquidity Event Warrants").
NOW, THEREFORE, in consideration of the promises and the
mutual representations, warranties, covenants and agreements hereinafter set
forth, and upon the terms and subject to the conditions hereinafter set forth,
the Company, Dollar Express, the Management Shareholders and the Purchaser,
intending to be legally bound, hereby agree as follows:
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<PAGE>
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms have the
following meanings (such meanings to be equally applicable to both the singular
and plural forms of the terms defined):
"Accounting Referee" has the meaning set forth in Section
3.9(c) hereof.
"Adjustment Percentage" means that percentage of the
outstanding Company Common Stock, determined on a fully-diluted basis, ("x"),
determined by the following formula:
126.15 - [(12.5-A) x 10.09] - B
x = 100 / [ ------------------------------------- ] - 35.3
35
Where:
A = Final Closing EBITDA divided by 1,000,000
B = The amount of the Borrowings drawn on the Closing Date divided
by 1,000,000
"Advent Entities" has the meaning set forth in the recitals
hereof.
"Affiliate" of a Person means any Person which, directly or
indirectly, controls, is controlled by, or is under common control with such
Person. The term "control" (including, with correlative meaning, the terms
"controlled by" and "under common control with"), as used with respect to any
Person, means the possession, directly or indirectly, of the power to elect a
majority of the board of directors (or other governing body) or to direct or
cause the direction of the management and policies of such Person, whether
through the ownership of voting securities, by contract or otherwise and, in any
event and without limiting the generality of the foregoing, any Person owning
ten percent (10%) or more of the voting securities of another Person shall be
deemed to control that Person.
"Agreement" has the meaning set forth in the recitals hereof.
"Benefit Plan" means any Plan established by Dollar Express,
or any predecessor of Dollar Express, to which Dollar Express contributes or has
contributed on behalf of any Employee, or under which any Employee, or any
beneficiary thereof, is covered, is eligible for coverage or has benefit rights,
or for which Dollar Express has any Liability.
"Borrowings" has the meaning set forth in the recitals hereof.
"Business" has the meaning set forth in the recitals hereof.
-3-
<PAGE>
"C Year" means the taxable period or periods on and after the
Closing Date when Dollar Express and the Company are taxable as C corporations.
"Claim" means any written demand, claim, complaint, suit,
action, cause of action, proceeding or notice by any Person, including any
Environmental Claim, alleging actual or potential Liability for any Loss,
including any Environmental Loss, or alleging any Default under any Law,
Contract, License, Permit, or Benefit Plan.
"Closing" means the consummation of the securities purchase
contemplated by this Agreement.
"Closing Date" means the date on which the Closing occurs.
"Closing EBITDA" means the EBITDA of the Company as of
December 31, 1998, as shown in the Purchaser's calculation delivered pursuant to
Section 3.9(a).
"Closing Financial Statements" has the meaning set forth in
Section 3.9(a) hereof.
"COBRA" means the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended, as set forth in Section 4980B of the Code and Part 6 of
Title I of ERISA.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning set forth in the recitals hereof.
"Company Articles Amendment" means the amendment to the
Company's articles of incorporation necessary to authorize the issuance of the
Series A Preferred Shares, effective upon acceptance for filing by the Secretary
of State of the Commonwealth of Pennsylvania.
"Company Common Stock" has the meaning set forth in the
recitals hereof.
"Company Documents" means each agreement, document, instrument
or certificate contemplated by this Agreement or to be executed by the Company,
Dollar Express or the Management Shareholders in connection with the
consummation of the Contemplated Transactions other than this Agreement.
"Confidential Information" shall mean (i) with respect to any
party to this Agreement, all financial, technical, commercial or other
information disclosed by a party (the "Discloser") to another party (the
"Recipient") in connection with the Contemplated Transactions and (ii) each of
the terms, conditions and other provisions contained in this Agreement and the
agreements or documents to be delivered pursuant to this Agreement.
Notwithstanding the preceding sentence, the definition of Confidential
Information shall not include any information that (A) is in the public domain
at the time of disclosure to the Recipient or becomes part of the public domain
after such disclosure through no fault of the Recipient, (B) is already in the
possession of the Recipient at the time of disclosure to such Recipient, (C) is
disclosed to a party by any Person other than a party to this Agreement;
-4-
<PAGE>
provided, that the party to whom such disclosure has been made does not have
actual knowledge that such Person is prohibited from disclosing such information
(either by reason of contract or legal or fiduciary obligation), (D) is
developed independently by any party without the use of any Confidential
Information or (E) is required to be disclosed under Law or Court Order
(provided that prompt notice of such disclosure will be given as far in advance
as reasonably possible to Discloser).
"Contemplated Transactions" means the transactions
contemplated by this Agreement and all documents to be executed pursuant to this
Agreement.
"Contract" means any contract, agreement, indenture, note,
bond, loan, instrument, lease, conditional sale contract, mortgage, guarantee,
license, franchise, insurance policy, commitment or other arrangement or
agreement, and all rights and remedies thereunder.
"Damages" means all claims, actions, losses, damages, costs,
expenses, taxes, interest, penalties, fines, suits, judgments, orders, liens,
obligations and liabilities (including, without limitation, reasonable
attorneys' fees and reasonable consultants, accountants and expert witnesses'
fees incident to the foregoing).
"Default" means (a) a violation, breach or default, (b) the
occurrence of an event which with the passage of time or the giving of notice or
both would constitute a violation, breach or default, or (c) the occurrence of
an event that (with or without the passage of time or the giving of notice or
both) would give rise to a right of damages, specific performance, termination,
renegotiation or acceleration (including the acceleration of payment).
"DEI" has the meaning set forth in the recitals hereof.
"Designation Statement" means the Designation Statement for
the Series A Preferred Shares attached hereto as Exhibit B.
"Dollar Express Articles Amendment" means the amendment to
Dollar Express' articles of incorporation necessary to redesignate the Dollar
Express Stock, effective upon acceptance for filing by the Secretary of State of
the Commonwealth of Pennsylvania.
"Dollar Express Stock" has the meaning set forth in Section
4.3 hereof.
"Dollar Express Stores" has the meaning set forth in the
recitals hereof.
"EBITDA" means the amount of earnings before interest, taxes,
depreciation and amortization, each determined in accordance with GAAP.
"Effective Date" means close of business on the day prior to
the Closing Date.
"Employee Benefit Plan" has the meaning set forth in Section
3(3) of ERISA.
-5-
<PAGE>
"Employees" means all persons employed in the Business on the
day immediately prior to the Closing Date, including any persons on disability,
sick leave or authorized leave of absence from the Business.
"Environmental Claim" means any Claim arising out of, related
to or in connection with the use, treatment, removal, storage, disposal,
presence, migration, transport, handling, manufacture, possession, distribution,
or the actual or threatened emission, injection, escape, dumping, spill, leak,
discharge or release of Hazardous Materials.
"Environmental Laws" means all federal, state and local laws
and regulations relating to pollution or protection of human health or the
environment (including ambient air, surface water, groundwater, land surface or
subsurface strata), including the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA"), 42 U.S.C.A. ss.ss. 9601 et seq., the
Resource Conservation and Recovery Act, 42 U.S.C.A. ss.ss. 6901 et seq., the
Clean Water Act, 33 U.S.C.A. ss.ss. 1251 et seq., the Clean Air Act 42 U.S.C.A.
ss.ss. 7401 et seq., the Occupational Safety and Health Act, 29 U.S.C. ss. 651
et seq., the Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq., and laws
and regulations relating to emissions, spills, leaks, discharges, releases or
threatened releases of Hazardous Materials, or otherwise relating to the
manufacture, possession, distribution, use, treatment, storage, disposal,
presence, transport or handling of Hazardous Materials.
"Environmental Loss" means any Liability arising out of,
related to or in connection with the use, treatment, removal, storage, disposal,
presence, migration, transport, handling, manufacture, possession, distribution,
or the actual or threatened emission, injection, escape, dumping, spill, leak,
discharge or release of Hazardous Materials, including potential or actual
liability for investigatory costs, cleanup costs, governmental response costs,
natural resource damages, property damages, personal injuries or penalties.
"Equipment" means the furniture, fixtures, machinery,
equipment, motor vehicles, office equipment, computers and replacement parts
currently used in the operation of the Business.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Affiliate" means, as to any person, any trade or
business, whether or not incorporated, which together with such person would be
deemed, at any time through the Closing Date, a single employer within the
meaning of Section 4001 of ERISA or Section 414(b), (c), (m) or (o) of the Code.
"Exhibit" means any of the lettered exhibits to this
Agreement.
"Final Closing EBITDA" means Closing EBITDA (a) as shown in
the Purchaser's calculation delivered pursuant to Section 3.9(a), if no notice
of disagreement with respect thereto is duly delivered pursuant to Section
3.9(b); or (b) if such a notice of disagreement is delivered, (i) as agreed by
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the Purchaser and the Management Shareholders pursuant to Section 3.9(c) or (ii)
in the absence of such agreement, as shown in the Accounting Referee's
calculation delivered pursuant to Section 3.9(c).
"Financial Statements" has the meaning set forth in Section
4.11 hereof.
"Financial Statement Date" means December 31, 1997.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States.
"Governmental Body" means any government or governmental or
regulatory body thereof, or political subdivision thereof, whether federal,
state, local or foreign, or any agency or instrumentality thereof, or any court
or arbitrator (public or private).
"Group Health Plan" means a group health plan, as defined in
Section 5000(b)(1) of the Code.
"Guayacan" has the meaning set forth in the recitals hereof.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 and the rules and regulations promulgated thereunder.
"Hazardous Materials" means all explosive or regulated
radioactive materials or substances, hazardous or toxic substances, reactive,
corrosive, carcinogenic, flammable or hazardous pollutant or other substance,
wastes or chemicals, petroleum or petroleum distillates, natural gas or
synthetic gas, asbestos or asbestos containing materials and all other materials
or chemicals regulated pursuant to any Environmental Laws, including any
"hazardous substance" or "hazardous waste" as defined in Environmental Laws,
materials listed in 49 C.F.R. ss.172.101, materials defined as hazardous
pursuant to Section 101(14) of CERCLA, and special nuclear or by-product
material as defined by the Atomic Energy Act of 1954, 42 U.S.C.A. ss. 3011 et
seq. and the regulations promulgated thereto.
"Indemnitee" has the meaning set forth in Section 10.5 hereof.
"Indemnitor" has the meaning set forth in Section 10.5 hereof.
"Initial Balance Sheet" means the audited balance sheet of the
Business at the Financial Statement Date, attached hereto as a part of Schedule
4.11.
"Intangible Assets" means (i) all patents, copyrights, trade
names, trademarks, service marks and names (registered and unregistered), and
applications and registrations therefor; (ii) all research, development and
commercially practiced processes, trade secrets, know-how, inventions, and
engineering and other technical information; (iii) all computer programs,
software and data bases, in each case, owned by or licensed to Dollar Express;
and (iv) all information, drawings, specifications, designs, plans, financial,
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marketing and business data and plans, other proprietary, confidential or
intellectual information or property and all copies and embodiments thereof in
whatever form or medium.
"Inventory" means all inventories of goods held for sale by
Dollar Express.
"Issued Dollar Express Shares" has the meaning set forth in
Section 4.3 hereof.
"Labor Act" means the Labor Management Relations Act, and the
rules and regulations promulgated thereunder.
"Law" means any federal, state, local or foreign law
(including common law), statute, code, ordinance, rule, regulation or other
requirement or guideline.
"Legal Proceeding" means any judicial, administrative or
arbitral action, suit, proceeding (public or private), claim or governmental
proceeding.
"Lender" means the lender of the Borrowings.
"Liabilities" means all indebtedness, obligations and other
liabilities, whether direct or indirect, and any loss, damage (including direct,
incidental, consequential and special damages), cost, deficiency, Lien, penalty,
fine, cost or expense (including any litigation expenses), or any diminution in
value of any real or personal property, or contingent liability, loss
contingency, unpaid expense, claim, guaranty or endorsement (other than
endorsements for deposits or collection of checks in the ordinary course of
business) of or by any Person whether or not ascertainable.
"Licenses" means all licenses, permits, authorizations,
approvals, franchises, rights, orders, variances (including zoning variances),
easements, rights of way, and similar consents or certificates granted or issued
by any Person, other than a Governmental Body, relating to the Business.
"Lien" means any lien, pledge, mortgage, deed of trust,
security interest, claim, lease, charge, option, right of first refusal,
easement, or other real estate declaration, covenant, condition, restriction or
servitude, transfer restriction under any shareholder or similar agreement,
encumbrance or any other restriction or limitation whatsoever.
"Liquidity Event Warrants" has the meaning set forth in the
recitals hereof.
"Management Shareholders" has the meaning set forth in the
recitals hereof.
"Material Adverse Effect" means any material adverse effect
on, or any effect, condition, event, or circumstance that has resulted or could
reasonably be expected to result in a material and adverse change in, the
business, properties, assets, condition (financial or otherwise), results of
operations or Liabilities of the Company and Dollar Express, taken as a whole.
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"Material Contracts" has the meaning set forth in Section 4.14
hereof.
"Maximum Amount" has the meaning set forth in Section 10.3
hereof.
"1998 Distribution" has the meaning set forth in Section 7.3
hereof.
"Notes" has the meaning set forth in the recitals hereof.
"Order" means any order, injunction, judgment, decree, ruling,
writ, assessment or arbitration award issued, granted, imposed or promulgated by
a Governmental Body.
"Outside Closing Date" has the meaning set forth in Section
11.1(b) hereof.
"Pension Plan" means any employee pension benefit plan as
defined in Section 3(2) of ERISA.
"Permit" means any written approval, authorization, consent,
franchise, license, permit, variance, registration or certificate issued or
granted by any Governmental Body.
"Permitted Exceptions" means (i) statutory Liens for current
taxes, assessments or other governmental charges not yet delinquent or the
amount or validity of which is being contested in good faith by appropriate
proceedings; (ii) mechanics', carriers', workers', repairers' and similar Liens
arising or incurred in the ordinary course of business that are not in the
aggregate material to the Business or the assets of Dollar Express; (iii)
zoning, entitlement and other land use regulations by Governmental Bodies,
provided that such regulations have not been violated; (iv) Liens set forth in
Schedule 4.9 hereto; (v) Liens in favor of the Lender; (vi) deposits under
workers compensation, unemployment insurance, social security or similar Laws;
and (vii) such other imperfections in title, charges, easements, restrictions
and encumbrances of public record which do not in the aggregate have a Material
Adverse Effect or do not materially interfere with the ownership, use, value,
operation or marketability of the affected property.
"Person" means any individual, corporation, partnership, firm,
joint venture, association, joint-stock company, trust, unincorporated
organization or Governmental Body.
"Plan" means any bonus, incentive compensation, deferred
compensation, pension, profit sharing, retirement, stock purchase, stock option,
stock ownership, stock appreciation rights, phantom stock, leave of absence,
layoff, vacation or holiday pay, day or dependent care, legal services,
cafeteria, life, health, accident, sickness, disability, workmen's compensation,
medical, life, dental or other insurance, severance, separation or other
employee benefit, fringe benefit, plan, program, trust, contract, practice,
policy or arrangement of any kind, whether written or oral, including any
"employee benefit plan" within the meaning of Section 3(3) of ERISA whether or
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not in the nature of formal or informal understandings and whether or not
included in or described in any employment manual or handbook.
"Prohibited Transaction" means a transaction that is
prohibited under Section 4975 of the Code or Section 406 of ERISA and not exempt
under Section 4975 of the Code or Section 408 of ERISA respectively.
"Purchaser" has the meaning set forth in the recitals hereof.
"Purchaser Documents" means each agreement, document,
instrument or certificate contemplated by this Agreement or to be executed by
the Purchaser in connection with the consummation of the Contemplated
Transactions other than this Agreement.
"Purchaser Representatives" has the meaning forth in Section
6.2 hereof.
"Restructuring" has the meaning set forth in the recitals
hereof.
"S Election Date" has the meaning set forth in Section 7.1
hereof.
"S Year" means the taxable period or periods prior to the
Closing Date when Dollar Express was taxable for federal income tax purposes as
an S corporation.
"Schedule" means any of the numbered schedules to this
Agreement.
"Securities" has the meaning set forth in Section 4.3 hereof.
"Series A Preferred Shares" has the meaning set forth in the
recitals hereof.
"Spain's Cards Stores" has the meaning set forth in the
recitals hereof.
"Taxes" means all federal, state, local and foreign income,
property and sales taxes and tariffs and all charges, fees, levies or other
assessments whether federal, state, local or foreign based upon or measured by
income, capital, net worth or gain and any other tax including but not limited
to all net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, withholding, payroll, employment, social security,
unemployment, FICA, FUTA, excise, occupation, property or other taxes, customs,
duties, fees, assessments or charges of any kind whatsoever including all
interest and penalties thereon, and additions to tax or additional amounts
imposed or charged by any Governmental Body.
"Third Party Leased Real Property" means real property
occupied by Dollar Express as a store which is owned or leased by a Person not
related to or an Affiliate of either of the Management Shareholders or a family
member thereof.
"Threshold Amount" has the meaning set forth in Section 10.3
hereof.
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"WARN" means the federal Worker Adjustment and Retraining
Notification Act.
ARTICLE II
PURCHASE, SALE AND CONTRIBUTION
2.1. Sale, Purchase and Delivery of Stock. On the terms and
subject to the conditions hereinafter set forth in this Agreement, the Company
agrees to sell to the Purchaser, and the Purchaser agrees to purchase from the
Company, on the Closing Date, the Series A Preferred Shares and the Liquidity
Event Warrants.
2.2. Purchase Price. The aggregate purchase price for the
Series A Preferred Shares shall be Thirty-Four Million Dollars ($34,000,000) and
the aggregate purchase price for the Liquidity Event Warrants shall be One
Million Dollars ($1,000,000), each payable to the Company in cash at the
Closing.
2.3. Contribution. At or prior to Closing, the Management
Shareholders shall contribute all of the stock of Dollar Express to the Company
in exchange for an aggregate of 6,470,000 shares of Company Common Stock.
ARTICLE III
THE CLOSING
3.1. Closing Date. Closing of the Contemplated Transactions
shall be effective as of the Effective Date, and shall take place on the fifth
(5th) business day after the day on which the conditions to Closing set forth
herein have been satisfied or are waived by the party entitled to the benefit of
the condition being waived, at 10:00 a.m. at the offices of Pepper Hamilton LLP,
3000 Two Logan Square, Philadelphia, PA, or at such other place and at such
other time and date as may be mutually agreed upon by the parties hereto, but in
no event later than the Outside Closing Date.
3.2. Deliveries by the Company to the Purchaser. Subject to
the fulfillment of each of the conditions set forth in Article IX, except such
conditions as may be waived by the parties at the Closing, the Company shall
deliver, or shall cause to be delivered, to the Purchaser the following:
(a) the Company Articles Amendment, authorizing the
issuance of the Series A Preferred Shares in the form of the Designation
Statement, and evidence of filing thereof;
(b) certificates representing the Series A Preferred
Shares and the Liquidity Event Warrants;
(c) the certificates required by Section 8.1(c) hereof;
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(d) the legal opinion required by Section 8.2 hereof;
(e) the Investor Rights Agreement and Registration Rights
Agreement, required by Section 8.3 hereof;
(f) resolutions duly adopted by the Board of Directors of
the Company authorizing the Restructuring and the transactions which are the
subject of this Agreement;
(g) certificates issued by appropriate governmental
authorities evidencing, as of a recent date, the good standing and tax status of
the Company in the states in which it is incorporated and qualified;
(h) a copy of the By-laws, including all amendments
thereto, of the Company, certified by its Secretary;
(i) the consent of any third party required for the
consummation by the Company of the Contemplated Transactions; and
(j) the other agreements, instruments and documents
referred to in Article VIII hereof and such other agreements, instruments and
documents as the Purchaser or its counsel may reasonably request.
3.3. Deliveries by Dollar Express to the Purchaser. Subject to
the fulfillment of each of the conditions set forth in Article IX, except such
conditions as may be waived by the parties at the Closing, Dollar Express shall
deliver, or shall cause to be delivered, to the Purchaser the following:
(a) the Dollar Express Articles Amendment, redesignating
the Dollar Express Stock, and evidence of filing thereof;
(b) the Employment Agreements required by Section 8.3
hereof;
(c) the certificate required by Section 8.1(c) hereof;
(d) the legal opinion required by Section 8.2 hereof;
(e) resolutions duly adopted by the Board of Directors of
Dollar Express authorizing the Restructuring and the transactions which are the
subject of this Agreement;
(f) certificates issued by appropriate governmental
authorities evidencing, as of a recent date, the good standing and tax status of
Dollar Express in the states in which it conducts the Business;
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(g) a copy of the By-laws, including all amendments
thereto, of Dollar Express, certified by its Secretary;
(h) the consent of any third party required for the
consummation by Dollar Express of the Contemplated Transactions; and
(i) the other agreements, instruments and documents
referred to in Article VIII hereof and such other agreements, instruments and
documents as the Purchaser or its counsel may reasonably request.
3.4. Deliveries by the Purchaser to the Company. Subject to
the fulfillment of each of the conditions set forth in Article VIII, except such
conditions as may be waived by the parties at the Closing, the Purchaser shall
deliver, or cause to be delivered, to the Company, Dollar Express and the
Management Shareholders the following:
(a) immediately available funds in the aggregate amount
of Thirty- Five Million Dollars ($35,000,000) by wire transfer as provided in
Section 2.2 hereof;
(b) the certificates referred to in Section 9.l(c) hereof
signed by duly authorized officers of the Purchaser;
(c) the other agreements, instruments and documents
referred to in Article IX hereof and such other agreements, instruments and
documents as the Company, Dollar Express, the Management Shareholders or their
counsel may reasonably request.
3.5. Deliveries by the Management Shareholders to the Company.
Subject to the fulfillment of each of the conditions set forth in Article VIII,
except such conditions as may be waived by the parties at the Closing, the
Management Shareholders shall deliver, or cause to be delivered, to the Company
the following:
(a) stock certificates, representing the Issued Dollar
Express Shares; and
(b) duly executed stock transfer powers, transferring the
Issued Dollar Express Shares to the Company.
3.6. Deliveries by the Company to the Management Shareholders.
Subject to the fulfillment of each of the conditions set forth in Article VIII,
except such conditions as may be waived by the parties at the Closing, the
Company shall deliver, or cause to be delivered, to the Management Shareholders
stock certificates representing, in the aggregate, 6,470,000 shares of Company
Common Stock.
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3.7. Deliveries by Dollar Express to the Management
Shareholders. Immediately following the completion of the deliveries at the
Closing, Dollar Express shall cause the Notes to be satisfied in full.
3.8. Additional Deliveries. At Closing, the Company shall pay
to Advent International Corporation, a Delaware corporation, in immediately
available funds the aggregate amount of Three Hundred and Fifty Thousand Dollars
($350,000) by wire transfer.
3.9. Purchase Price Adjustment.
(a) As promptly as practicable, but no later than sixty
(60) days, after the Closing Date, the Purchaser shall prepare and deliver to
the Management Shareholders an audited income statement and balance sheet of the
Company as of December 31, 1998 (the "Closing Financial Statements"), together
with a certificate, signed by the Purchaser, based on such Closing Financial
Statements setting forth the Purchaser's calculation of Closing EBITDA. The
Management Shareholders and the Company will fully cooperate with the Purchaser
and its accountants, PricewaterhouseCoopers LLP, in connection with the
preparation of the Closing Financial Statements. The Purchaser will, and will
request PricewaterhouseCoopers LLP to, make available to the Management
Shareholders copies of all customary accounting work papers in their respective
possession that were prepared in connection with the preparation of the Closing
Financial Statements and the calculation of Closing EBITDA. The Closing
Financial Statements shall be accompanied by a special purpose report of
PricewaterhouseCoopers LLP and shall fairly present the results of operations of
the Company as of the Effective Date in accordance with GAAP, applied on a basis
consistent with most recent previous application by the Company in audited
financial statements.
(b) If the Management Shareholders disagree with the
Purchaser's calculation of Closing EBITDA, the Management Shareholders may,
within twenty (20) days after delivery of the Closing Financial Statements,
deliver a notice to the Purchaser disagreeing with such calculation and setting
forth the Management Shareholders' calculation of such amount, which calculation
shall be made in accordance with GAAP. Any such notice of disagreement shall
specify those items or amounts as to which the Management Shareholders disagree,
and the Management Shareholders shall be deemed to have agreed with all other
items and amounts contained in the Closing Financial Statements and the
calculation of Closing EBITDA delivered pursuant to subsection (a). The
Management Shareholders and the Company will, and will request Grant Thornton
LLP to, make available to the Purchaser copies of all customary accounting work
papers in their respective possession that were prepared in connection with the
preparation of any notice delivered pursuant to this subsection (b) and the
Management Shareholders' calculation of Closing EBITDA.
(c) If a notice of disagreement shall be duly delivered
pursuant to subsection (b), the Purchaser and the Management Shareholders shall,
during the fifteen (15) days following such delivery, use their best efforts to
reach agreement on the disputed items or amounts in order to determine, as may
be required, the amount of Closing EBITDA. If, during such period, the Purchaser
and the Management Shareholders are unable to reach such agreement, they shall
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promptly thereafter cause a firm of nationally recognized independent public
accountants as may be agreed by the Purchaser and the Management Shareholders
(the "Accounting Referee") promptly to review this Agreement and the disputed
items or amounts for the purpose of calculating Closing EBITDA. In making such
calculation, the Accounting Referee shall conduct its review in accordance with
GAAP, applied on a basis consistent with the most recent application by the
Company. The Accounting Referee shall deliver to the Purchaser and the
Management Shareholders, as promptly as practicable, a report setting forth its
calculation of Closing EBITDA. Such report shall be final and binding upon the
Purchaser and the Management Shareholders. The cost of such review and report
shall be borne equally by the Purchaser and the Management Shareholders.
(d) If the Final Closing EBITDA is less than Twelve
Million Two Hundred Fifty Thousand Dollars ($12,250,000), then the Company shall
amend the Designation Statement, and the Management Shareholders shall cause the
Company to amend the Designation Statement, so that the sum of thirty-five and
three-tenths percent (35.3%) plus the Adjustment Percentage, expressed as a
decimal, is substituted for 0.353 in the definition of "Conversion Factor" in
Article 6 of the Designation Statement, and any other changes necessary to
conform provisions in the Designation Statement to the foregoing are also made
at that time. In such event, the Series A Preferred Shares received by the
Purchaser pursuant to the Contemplated Transactions shall be convertible, in the
aggregate, into that number of shares of Company Common Stock equal to 35.3%
plus the Adjustment Percentage.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY,
DOLLAR EXPRESS AND THE MANAGEMENT SHAREHOLDERS
The Company, Dollar Express and the Management Shareholders,
jointly and severally, hereby represent and warrant to the Purchaser as follows:
4.1. Organization and Good Standing. Each of the Company and
Dollar Express is a corporation duly organized, subsisting and in good standing
under the laws of the Commonwealth of Pennsylvania and has all requisite
corporate power and authority to carry on its business as it is now being
conducted, and to execute, deliver and perform this Agreement and to consummate
the Contemplated Transactions. Each of the Company and Dollar Express is
qualified to do business as a foreign corporation in each state in which the
failure to qualify would constitute a Material Adverse Effect.
4.2. Authorization. Each of the Company and Dollar Express has
full corporate power and authority to execute and deliver this Agreement and
each of the Company Documents and to perform fully its obligations hereunder and
thereunder. This Agreement has been, and each of the Company Documents will be
at the Closing, duly executed and delivered by the Company and Dollar Express,
and (assuming the due authorization, execution and delivery by the other parties
hereto and thereto) this Agreement constitutes, and the Company Documents when
so executed and delivered will constitute, legal, valid and binding obligations
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of the Company and Dollar Express, enforceable against the Company and Dollar
Express in accordance with their respective terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and subject, as to enforceability, to
general principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity). Neither the execution and delivery by the
Company, Dollar Express or the Management Shareholders of this Agreement or the
Company Documents, nor the consummation by the Company, Dollar Express or the
Management Shareholders of the Contemplated Transactions, nor the compliance by
the Company, Dollar Express or the Management Shareholders with any of the
provisions hereof or thereof, does or will (i) conflict with, or result in the
breach of, any provision of the Articles of Incorporation or By-laws of the
Company or any provision of the Articles of Incorporation or Bylaws of Dollar
Express, (ii) subject to the receipt of the consents set forth in Schedule 4.2
hereto, conflict with, violate, result in the breach or termination of, or
constitute a Default (with or without notice or lapse of time, or both) under
any Contract, Permit or Order relating to the Business to which any or the
Company, Dollar Express or the Management Shareholders is a party or by which
any such Person or any of its assets is bound or subject, (iii) constitute a
violation of any Law applicable to the Company, Dollar Express or the Management
Shareholders, or (iv) result in the creation of any Lien upon any of the
Company's or Dollar Express' assets or give rise to any Liability (other than
any Lien in favor of, or Liability to, the Lender).
4.3. Capitalization.
(a) Of the Company. The authorized capital stock of the
Company consists of 75,000,000 shares of Company Common Stock and 25,000,000
shares of preferred stock, of which two (2) shares have been issued and are
outstanding, free and clear, one (1) each to each of the Management Shareholders
as of the date of this Agreement and of which 3,530,000 shares of preferred
stock and 6,470,000 shares of Company Common Stock will be issued and
outstanding as of the Closing Date. The issued shares of Company Common Stock
have been validly issued, fully paid and nonassessable and no share of Company
Common Stock has been issued in violation of any preemptive or similar right.
Except with respect to the Series A Preferred Shares and Liquidity Event
Warrants comprising part of the Contemplated Transactions, (i) the Company has
not issued or agreed to issue any other shares of capital stock, (ii) there are
no outstanding warrants, options or other rights, commitments, agreements or
understandings to purchase or acquire any shares of capital stock or other
equity securities of the Company, (iii) there are no outstanding debt securities
of the Company convertible into equity securities or otherwise containing equity
provisions, (iv) there are no preemptive rights with respect to the issuance or
sale of any of the Company's capital stock, and (v) the Company has not reserved
any of its authorized capital stock for any purpose. There are no restrictions
on the transfer of the capital stock of the Company other than those arising
from federal and state securities laws or those which arise by reason of the
Contemplated Transactions. The Company has no other understandings or agreements
respecting the Company's capital stock or other securities of the Company except
as constitute the Contemplated Transactions. All shares of capital stock,
options, warrants, notes, bonds or other equity or debt securities
("Securities") which have ever been offered or sold by the Company have been
exempt from registration pursuant to the registration provisions of the
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Securities Act of 1993, as amended and applicable state securities laws, and no
such Securities were registered under any such act or laws.
(b) Of Dollar Express. The authorized capital stock of
Dollar Express consists of 75 million shares of Common Stock, par value $.01 per
share, of which 74 million shares have been designated as voting Common Stock
and one million shares have been designated as non-voting Common Stock, and 25
million shares of undesignated Preferred Stock, par value $.01 per share
(collectively, the "Dollar Express Stock"). Of these, only 10,000 shares of
voting Common Stock and 2,500 shares of non-voting Common Stock have been issued
and are outstanding (collectively, the "Issued Dollar Express Shares"). One-half
of all of the Issued Dollar Express Shares currently outstanding is owned of
record and beneficially by each of the Management Shareholders free and clear.
The Issued Dollar Express Shares have been validly issued, fully paid and
nonassessable and none of the Issued Dollar Express Shares has been issued in
violation of any preemptive or similar right. Except as contemplated by the
Restructuring, (i) Dollar Express has not issued or agreed to issue any other
Dollar Express Stock, (ii) there are no outstanding warrants, options or other
rights, commitments, agreements or understandings to purchase or acquire any
shares of Dollar Express Stock or other equity securities of Dollar Express,
(iii) there are no outstanding debt securities of Dollar Express convertible
into equity securities or otherwise containing equity provisions, (iv) there are
no preemptive rights with respect to the issuance or sale of any of the Dollar
Express Stock, and (v) Dollar Express has not reserved any of the authorized
Dollar Express Stock for any purpose. There are no restrictions on the transfer
of the Dollar Express Stock other than those arising from federal and state
securities laws or those which arise by reason of the Contemplated Transactions.
Dollar Express has no other understandings or agreements respecting the Dollar
Express Stock or other securities of Dollar Express except as constitute the
Contemplated Transactions. All Securities which have ever been offered or sold
by Dollar Express have been exempt from registration pursuant to the
registration provisions of the Securities Act of 1993, as amended and applicable
state securities laws, and no such Securities were registered under any such act
or laws. After the Restructuring, all outstanding Dollar Express Stock will be
owned by the Company, free and clear of any and all Liens.
4.4. Sale of Shares of Capital Stock; Offering Exemption.
(a) The Series A Preferred Shares and Liquidity Event
Warrants being sold by the Company to the Purchaser hereunder, will, upon the
issuance thereof following the payment therefor in accordance with the terms of
this Agreement, be (i) validly issued and outstanding, (ii) fully paid and
nonassessable, (iii) not subject to or issued in violation of any preemptive or
other rights of the shareholders of the Company or others, and (iv) free and
clear of any and all Liens.
(b) The Series A Preferred Shares have the designations,
powers, preferences, and relative and other special rights, and the
qualifications, limitations and restrictions contained in the Company Articles
Amendment and the designations set forth in the Designation Statement.
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(c) The Liquidity Event Warrants have the designations,
powers, preferences, and relative and other special rights, and the
qualifications, limitations and restrictions set forth in the Warrant
Certificate attached hereto as Exhibit C.
(d) The offering for sale and the actual sale of the
Series A Preferred Shares and the Liquidity Event Warrants being sold by the
Company to the Purchaser hereunder are each exempt from registration under the
Securities Act of 1933, as amended, and from registration or qualification under
applicable state securities or blue sky laws.
4.5. Subsidiaries. Except as contemplated by the
Restructuring, neither the Company nor Dollar Express has any subsidiaries nor
does either own, or have the right to acquire, directly or indirectly, any
capital stock or other ownership interest in any corporation, partnership, joint
venture or other entity.
4.6. Consents. No consent, waiver, approval, Order, Permit or
authorization of, or declaration or filing with, or notification to, any Person
or Governmental Body is required on the part of the Company, Dollar Express or
the Management Shareholders in connection with (i) the execution and delivery by
the Company, Dollar Express and the Management Shareholders of this Agreement or
the Company Documents, (ii) the compliance by the Company, Dollar Express and
the Management Shareholders with any of the provisions hereof or thereof, and
(iii) the performance of the Company, Dollar Express and the Management
Shareholders of the Contemplated Transactions, in each case except as set forth
in Schedule 4.6 hereto.
4.7. Litigation. Schedule 4.7 hereto sets forth all pending
Legal Proceedings and all those, to the knowledge of the Company, Dollar Express
or the Management Shareholders, threatened against the Company, Dollar Express
or the Management Shareholders which (i) are not covered by insurance or (ii)
seek in excess of Twenty-Five Thousand Dollars ($25,000) from the Company,
Dollar Express or the Management Shareholders. There is no Legal Proceeding
pending or, to the knowledge of the Company, Dollar Express or the Management
Shareholders, threatened (i) against the Company, Dollar Express or the
Management Shareholders in connection with the operation of the Business which
is not covered by insurance, (ii) that seeks to enjoin or obtain damages in
respect of the consummation of the Contemplated Transactions, or (iii) that
questions the validity of this Agreement, any of the Company Documents or any
action taken or to be taken by the Company, Dollar Express or the Management
Shareholders in connection with the Contemplated Transactions, and there is no
Order outstanding against the Company, Dollar Express or the Management
Shareholders having any such effect or which could reasonably be expected to
have such an effect.
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4.8. Compliance with Law. The Company and Dollar Express have
each complied and currently are in compliance with all applicable Laws and
Orders except for such non-compliance which individually or in the aggregate
will not have a Material Adverse Effect on either the Company or Dollar Express.
Neither the Company nor Dollar Express has received, nor knows of the issuance
of, any notice by any person of any such violation or alleged violation. Dollar
Express has in full force and effect all Permits necessary for it to own, lease
or operate its properties and assets and to carry on the Business as now
conducted, except where the failure to have such Permits will not, individually
or in the aggregate have a Material Adverse Effect, and Dollar Express has
complied, in all material respects, with all of the terms and conditions of such
Permits, and there is no Default under any thereof. Dollar Express has not taken
or failed to take any act which act or failure to act has resulted in or
enabled, or could reasonably be expected to result in or enable, with or without
notice or lapse of time or both, the revocation or termination of any such
Permit or the imposition of any restrictions thereon. No litigation is pending,
or to the knowledge of the Company, Dollar Express or the Management
Shareholders, threatened, to revoke, refuse to renew or modify any such Permit.
4.9. Title to Assets. Dollar Express owns and has good and
marketable title to or, in the case of leased properties, valid leasehold
interests in, all of its assets, tangible or intangible, including all of such
assets reflected on the most recent Financial Statements, except assets disposed
of in the ordinary course of business since the Financial Statement Date. Dollar
Express holds title to its assets free and clear of all Liens other than
Permitted Exceptions. The tangible personal property included in the properties
and assets (including all Equipment) owned or used by Dollar Express in the
operation of the Business are in good working order, repair and condition,
reasonable wear and tear excepted. The properties and assets owned, leased or
licensed by Dollar Express are adequate to conduct the Business as now
conducted.
4.10. Other Representations Regarding Dollar Express' Assets
and Liabilities.
(a) Accounts Receivable. Dollar Express has no accounts
receivable, as all sales by Dollar Express are made for cash or by credit card.
(b) Accounts Payable. Neither the Company, Dollar
Express nor the Management Shareholders presently knows of a reason why, nor has
been advised that, the terms and conditions under which it presently does
business with any of its vendors listed in Schedule 4.23 attached hereto will
not continue in all material respects in accordance with the terms and
conditions in existence on the date hereof other than such changes,
modifications or alterations which may occur in the ordinary course of business
consistent with past practices.
(c) Cash Accounts. Schedule 4.10(c) attached hereto sets
forth a true and complete list of (i) name and address of every bank or other
financial institution in which Dollar Express maintains an account (whether
checking, savings, investment or otherwise), lock box or safe deposit box, (ii)
the account number of each account, and (iii) the identity of each natural
person who is a signatory on each such account.
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(d) Inventory. All items of Inventory reflected in the
Financial Statements are in good and merchantable condition and of a quantity
and quality salable in the ordinary course of business at normal mark-ups,
subject to customary allowances, consistent with past experience, except for
damaged, defective or obsolete Inventory, which, as of the Closing Date, will
not exceed Five Hundred Thousand Dollars ($500,000) in the aggregate. Such
Inventory is valued by the retail inventory method, applied with an average cost
approach, in accordance with GAAP. Dollar Express does not hold any items of
Inventory on consignment. All Inventory is located at premises owned or leased
by Dollar Express, except for Inventory in transit to Dollar Express.
(e) Leasehold Improvements. All leasehold improvements,
fixtures and appurtenances attached to any leased real property are in good
working order, repair and condition, ordinary wear and tear excepted, and
include all of the leasehold improvements, fixtures and appurtenances used by
Dollar Express in the operation of the Business as currently conducted and as
proposed to be conducted by the Management Shareholders.
(f) Real Property. Dollar Express owns no real property.
Dollar Express has made available to the Purchaser correct and complete copies
of the leases and subleases for all real property leased by Dollar Express. A
list of such leases and subleases is attached hereto as Schedule 4.10(f). With
respect to each such lease and sublease:
(i) the lease or sublease is legal, valid, binding,
enforceable, and in full force and effect;
(ii) the lease or sublease will continue to be
legal, valid, binding, enforceable, and in full force and effect on identical
terms immediately following the Closing;
(iii) Dollar Express has not violated the terms of
and is not in Default under any such lease or sublease, and no event has
occurred which, with or without notice or lapse of time, would constitute, or
could reasonably be expected to constitute, a breach or Default, or permit
termination, modification, or acceleration thereunder;
(iv) to the best knowledge of the Company, Dollar
Express or Management Shareholders, no other party to the lease or sublease is
in breach or Default, and no event has occurred which, with or without notice or
lapse of time, would constitute a breach or Default or permit termination,
modification, or acceleration thereunder;
(v) no party to the lease or sublease has repudiated
any provision thereof in a writing to the Company, Dollar Express or either
Management Shareholder;
(vi) there are no disputes, oral agreements, or
forbearance programs in effect as to the lease or sublease; and
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(vii) with respect to each sublease, to the
knowledge of the Company, Dollar Express and the Management Shareholders, the
representations and warranties set forth in subsections (a) through (e) above
are true and correct with respect to the underlying lease.
(g) Intangible Assets. Schedule 4.10(g) hereto sets
forth a list of the material Intangible Assets used in the Business as well as a
list of all registrations of pending applications for any Intangible Asset.
Except as set forth in Schedule 4.10(g) hereto, each of the Intangible Assets is
owned by Dollar Express free and clear of any and all Liens (other than
Permitted Exceptions) and, to the knowledge of the Company, Dollar Express and
the Management Shareholders, no other Person has any Claim of ownership with
respect thereto. Dollar Express has adequate Licenses or other valid rights to
use all of the Intangible Assets which it does not own and which are material to
the conduct of the business as presently conducted. Except as set forth in
Schedule 4.10(g) hereto, Dollar Express' use of the Intangible Assets does not
conflict with, infringe upon, violate or interfere with any intellectual
property rights of any other Person, nor is any other Person infringing upon,
violating or interfering with any rights of Dollar Express in and to ownership
or use of the Intangible Assets.
4.11. Financial Statements. The audited balance sheet and the
statements of income and cash flow of the Business as of and for the fiscal
years ended December 31, 1995, December 31, 1996 and December 31, 1997, together
with the unaudited balance sheet and the statements of income and cash flows of
the Business as of and for the fiscal period ended September 30, 1998, copies of
which are attached hereto as Schedule 4.11A (collectively, the "Financial
Statements"), have been prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered thereby except as set forth in the notes
thereto, are complete and correct and present fairly the financial position and
results of operations and cash flows of the business at the date and for the
period indicated, except in the case of the unaudited statements, which have
been prepared internally and are subject to normal and recurring audit and year
end adjustments, none of which would have a Material Adverse Effect. The
Financial Statements are in accordance with the applicable books and records of
Dollar Express (which books and records are true and correct in all material
requests). The projections of Dollar Express' operating income, prepared by
Dollar Express and the Management Shareholders and attached hereto as Schedule
4.11B, reflect Dollar Express' and the Management Shareholders' good faith best
estimate at the time such projections were prepared of expected results of
operations in the periods covered thereby.
4.12. No Undisclosed Liabilities. Dollar Express has no
indebtedness or Liabilities (whether accrued, absolute, contingent or otherwise,
and whether due or to become due) except for (i) those reflected or reserved
against (which reserves Dollar Express and Management Shareholders represent are
adequate to cover such Liabilities) in the Financial Statements, (ii) those
incurred, consistent with past practice, since the Financial Statement Date, and
(iii) those which are specifically disclosed in this Agreement or a Schedule
attached hereto. Schedule 4.12 sets forth all guarantees, letters of credit and
reimbursement obligations of Dollar Express. Neither the Company, Dollar Express
nor the Management Shareholders know of any facts which could reasonably be
expected to result in the assertion against Dollar Express of any Liability of
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any nature or in any amount not fully reflected or reserved against in Dollar
Express' Initial Balance Sheet or as disclosed by this Agreement or the
Schedules hereto.
4.13. Absence of Certain Developments. Except as set forth in
Schedule 4.13 hereto or as contemplated by this Agreement, since September 30,
1998, Dollar Express has operated the Business in the ordinary course consistent
with past practice and there has not been:
(a) any Material Adverse Effect;
(b) any event or condition of any nature whatsoever
which, individually or in the aggregate, could reasonably be expected to result
in a Material Adverse Effect on Dollar Express;
(c) any Claim, other than warranty claims relating to
sales of Inventory none of which, individually or in the aggregate, would have a
Material Adverse Effect on Dollar Express, against Dollar Express not otherwise
disclosed in Schedule 4.7 attached hereto or not covered (except for
deductibles) by applicable policies of insurance within the maximum insurable
limits of such policies;
(d) any amendment to the Articles of Incorporation or
Bylaws of Dollar Express;
(e) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with respect
to Dollar Express' capital stock;
(f) any split, combination, reclassification, or other
modification of the terms of the equity interests of Dollar Express;
(g) the creation or attachment, or notice thereof, of
any Lien (other than Permitted Liens) on any of the assets of Dollar Express;
(h) any sale, purchase, transfer, pledge or other
disposition by Dollar Express of any assets or properties relating to the
Business not in the ordinary course of business and consistent with past
practices;
(i) any incurrence of any Liabilities (including
indebtedness) by Dollar Express except in the ordinary course, consistent with
past practice, or any waiver of any rights of substantial value;
(j) any discharge or satisfaction of any Liens, or any
settlement of payment of any Liens or Liabilities, by Dollar Express, except in
the ordinary course of business, consistent with past practice;
(k) any increase in the salary or other compensation
payable by any Dollar Express to any of its Employees or consultants (including
its executive officers or directors), or the declaration, payment, commitment or
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obligation of any kind for the payment by Dollar Express of any bonus, other
additional salary or compensation (including severance, retention, termination
or other similar payments) to any of its Employees or consultants, other than
customary compensation increases awarded to its Employees which have been
awarded in the ordinary course of business consistent with past practices;
(l) any sale, transfer or issuance of any capital stock,
equity security or debt security, or of any option, warrant, right or commitment
or agreement entered into requiring or permitting the purchase, sale, transfer
or issuance of any capital stock, equity security or debt security, by Dollar
Express;
(m) any failure by Dollar Express to make any payments
on material Contracts, Licenses or Permits on a current basis as and when due
under the terms of such Contracts, Licenses or Permits as in effect on the date
of this Agreement, except to the extent Dollar Express has a valid dispute with
respect to such payment and all such disputed amounts have been appropriately
reserved for on Dollar Express' books and records, it being understood that all
such disputes which have arisen since the Financial Statement Date and prior to
the date hereof are set forth in Schedule 4.13(m) attached hereto;
(n) any transfer, grant, License, assignment,
termination or other disposal of, modification, change or cancellation of any
rights or obligations with respect to the Intangible Assets other than Licenses
granted by Dollar Express in the ordinary course of business;
(o) any removal of any fixtures, equipment or personal
property from the real property, whether owned or leased, other than in the
ordinary course of business;
(p) any sale, discount or other disposal by Dollar
Express of any Accounts Receivable, including demurrage, rebates, credits, other
reserves or contra accounts, except by collection in the ordinary course of
business;
(q) any cancellation or compromise of any indebtedness
owed to Dollar Express, or any waiver or release of any rights of material value
by Dollar Express, other than in the ordinary course of business;
(r) any material variance in the levels of items of
Inventory (including finished goods, supplies, packaging and other materials) of
Dollar Express from the levels customarily maintained during such periods;
(s) any change in the accounting methods or practices
(including any change in depreciation or amortization policies or rates) with
respect to the Business or otherwise by Dollar Express;
(t) any sales made with extended terms, deep discounts
or rebates which materially deviate from past practices; or
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(u) any agreement by Dollar Express to do any act which
would render any of the preceding clauses inaccurate, other than the
transactions specifically contemplated to occur pursuant to this Agreement.
4.14. Material Contracts. Schedule 4.14 attached hereto sets
forth a true and complete list of all Contracts presently in effect to which
Dollar Express is a party, or by which Dollar Express or any of its respective
assets or properties is bound, that fall within one or more of the following
categories (collectively, the "Material Contracts"), true and correct copies of
which, to the extent in written form or otherwise reduced to writing, have been
delivered or made available to the Purchaser, its counsel or accounting firm
prior to the date hereof:
(a) Contracts with any present or former shareholder,
director or officer;
(b) Contracts with any labor union or other
representative of Employees;
(c) employment or severance Contracts with any Employee
involving the payment of more than $25,000 individually during any one year,
other than employment contracts which create an "employment at-will"
relationship without any severance other than as expressly described in a
Schedule to this Agreement;
(d) Contracts for the performance of services by a third
party which involves the payment to such third party of (i) more than $50,000 in
the case of a single arrangement or commitment or (ii) more the $150,000 in the
case of a series of related arrangements or commitments and, in any such cases,
which is or are not cancelable by Dollar Express on thirty (30) days' notice or
less without penalty;
(e) other than purchase or sales orders given or
received in the ordinary course of business consistent with past practices,
Contracts to purchase, sell or supply products or to perform services which
obligates Dollar Express to purchase products from, sell products to, or perform
services for, a third party which involves (i) more than $50,000 in the case of
a single arrangement or commitment, or (ii) more than $150,000 in the case of a
series of related arrangements or commitments and, in any such cases, which is
not cancelable by Dollar Express on thirty (30) days' notice or less without
penalty;
(f) distribution Contracts where Dollar Express is
acting as supplier or distributor or any agency Contract where Dollar Express is
acting as principal or agent;
(g) Leases under which Dollar Express is either lessor
or lessee of personal property requiring annual lease payments (including rent
and any other charges) in excess of $25,000;
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(h) Contracts evidencing any indebtedness (including
indebtedness to or from officers, directors, shareholders or any member of their
immediate families);
(i) Contracts for any charitable or political
contribution;
(j) Contracts for any capital expenditure in excess of
$25,000;
(k) Contracts limiting or restraining Dollar Express
from engaging or competing in any lines of business with any Person or from
purchasing any products or inventory from any third parties;
(l) Contracts involving either (i) the purchase or sale
(A) of the capital stock or other equity interests of, or (B) substantially all
or a material portion of the assets of Dollar Express, or (ii) a merger,
consolidation or joint venture with, another Person;
(m) Licenses, franchises, distributorships or other
similar agreements, including those which relate in whole or in part to the
Intangible Assets other than Licenses granted by Dollar Express in the ordinary
course of business;
(n) Contracts with any Governmental Body;
(o) powers of attorney granted by Dollar Express in
favor of any Person;
(p) Contracts or correspondence which, when taken
together, constitute a Contract involving the settlement or other disposition of
litigation; or
(q) other Contracts not made in the ordinary course of
business.
Each of such Material Contracts is in full force and effect, there is no Default
under any such Material Contract by Dollar Express or, to the knowledge of the
Company, Dollar Express or the Management Shareholders, by any of the other
parties thereto, except for such Defaults as will not individually or in the
aggregate, with the giving of notice or the passage of time or both, result in a
Material Adverse Effect on Dollar Express. Except as set forth in Schedule 4.14
attached hereto, there has been no cancellation, termination, limitation or
modification or any notice of cancellation, termination, limitation or material
modification of any such Material Contract. Each of the Material Contracts (i)
constitutes a legal, valid and binding obligation of Dollar Express, and (ii) to
the knowledge of the Company, Dollar Express or the Management Shareholders,
constitutes a legal, valid and binding obligation of such other party thereto.
Dollar Express has not assigned any of its rights or obligations under any such
Material Contract.
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4.15. Product Warranties. Except pursuant to any Dollar
Express standard merchandise return policy, which provides for the replacement
or return for credit of defective or damaged Inventory or other returns for
credit at the request of the customer, Dollar Express has not given or made any
warranties to third parties with respect to any products sold or services
performed by it, except for warranties arising by operation of law and
warranties made in respect of products which are no broader in scope or longer
in duration than the respective warranties on such products given to Dollar
Express by the manufacturers of such products. Except as set forth in Schedule
4.15, other than for the replacement or return for credit of defective or
damaged Inventory, there are no pending or, to the knowledge of the Company,
Dollar Express or the Management Shareholders, threatened warranty Claims,
whether on the basis of warranties offered by Dollar Express, warranties offered
by any manufacturer of items of Inventory or otherwise, or any facts, events or
circumstances which have occurred, in either case which could reasonably be
expected to result in a Liability on the part of Dollar Express.
4.16. Product Liabilities. Schedule 4.16 attached hereto is a
true and complete narrative of Claims under all product warranty plans and
product Liability insurance policies relating to Dollar Express since January 1,
1997, other than Claims that are or have been fully covered by insurance. Dollar
Express is insured under all policies of insurance relating to product Liability
listed in Schedule 4.16 attached hereto for and against any Claim for damage to
person or property based upon defects in any product to the extent a Claim is
made during the policy period.
4.17. Insurance. Schedule 4.17 hereto contains a complete and
correct list in all material respects of all policies of insurance of any kind
or nature covering Dollar Express including, without limitation, policies of
life, fire, theft, workers' compensation, employee fidelity and other casualty
and Liability insurance, and such policies are in full force and effect. All
premiums due on such insurance policies have been paid and there is no Default
(with or without notice or lapse of time, or both) by Dollar Express under any
such insurance policy. Complete and correct copies of each such policy have been
furnished or made available to the Purchaser. Insurance policies providing
substantially similar coverages have been in place since Dollar Express'
inception.
4.18. Transactions with Affiliates. Except as set forth in
Schedule 4.18 attached hereto, neither any director, officer or shareholder of
Dollar Express, nor, to the knowledge of the Company, Dollar Express or the
Management Shareholders, any Employee of Dollar Express or any Affiliate of any
such Person, has during the past two years: (i) received or earned except as a
shareholder, director, officer or employee of Dollar Express, or (ii) had an
ownership interest (whether direct or indirect) in any business, corporate or
otherwise, which has or had any business arrangement or relationship of any kind
under which it has received or earned, payments from or to Dollar Express in
excess of $5,000 in any year (other than salaries, wages and bonuses). Other
than routine, unwritten employment terms, arrangements and policies, there are
no Contracts between Dollar Express and any director, officer, shareholder or
Employee of Dollar Express, or any Affiliate, of any such Person, except for
those identified in Schedule 4.18 or Schedule 4.14 attached hereto, a true and
complete copy of each of which (including, without limitation, all amendments or
modifications thereto) has been delivered to the Purchaser. Except as set forth
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in Schedule 4.18 attached hereto, Dollar Express is not indebted to any
director, officer or shareholder of Dollar Express, nor, to the knowledge of the
Company, Dollar Express or the Management Shareholders, to any Employee of
Dollar Express or any Affiliate of any such Person, and Schedule 4.18 attached
hereto contains a true and complete list of all amounts owed to Dollar Express
by any director, officer or shareholder of Dollar Express or, to the knowledge
of the Company, Dollar Express or the Management Shareholders, by any Employee
of Dollar Express or any Affiliate of any such Person.
4.19. Employee Relations.
(a) Schedule 4.19(a) attached hereto sets forth a true
and complete list of all (i) Employees or commission salespersons of Dollar
Express as of the Financial Statement Date whose then current annual
compensation and bonus was in excess of $50,000, (ii) the then current annual
compensation of, and a description of material fringe benefits (other than those
generally available to Employees of Dollar Express) provided by Dollar Express
to any such Employees or commission salespersons and (iii) any increase,
effective on or after the Financial Statement Date in the rate of compensation
of any Employees or commission salespersons if such increase exceeds 5% of the
previous annual compensation of such Employee or commission salesperson.
(b) Schedule 4.19(b) sets forth a true and correct
summary of all payroll amounts incurred or paid in 1998, including employees'
names and salaries and payroll period totals.
(c) Dollar Express has complied and is in compliance, in
all material respects, with all Laws which relate to wages, hours,
discrimination in employment and collective bargaining, and is not liable for
any arrears of wages, Taxes or penalties for failure to comply, in all material
respects, with any of the foregoing.
(d) Except as described in Schedule 4.19(d), (i) none of
the Employees of Dollar Express is represented for purposes of their employment
by a labor organization, (ii), to the knowledge of the Company, Dollar Express
or the Management Shareholders, no petition has been filed for recognition of a
labor union or association as the exclusive bargaining agent for any and all of
the Employees of Dollar Express, and (iii) to the knowledge of the Company,
Dollar Express or the Management Shareholders, there has not been in the past
five (5) years any general solicitation of representation cards by any union
seeking to represent any or all of the Employees of Dollar Express as their
bargaining agent.
(e) Except as set forth in Schedule 4.19(e) attached
hereto, there is no, and during the past three years there has been no, (i)
unfair labor practice charge, complaint or other proceeding against Dollar
Express pending or, to the knowledge of the Company, Dollar Express or the
Management Shareholders, threatened before the National Labor Relations Board
nor, to the knowledge of the Company, Dollar Express or the Management
Shareholders, any commitment or involvement in the commission of any acts or
omissions which could give rise to any unfair labor practices by Dollar Express,
(ii) Claim or Litigation against Dollar Express or any of the Employees or
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agents of Dollar Express pending or, to the knowledge of the Company, Dollar
Express or the Management Shareholders, threatened under the Labor Act nor, to
the knowledge of the Company, Dollar Express or the Management Shareholders, any
commitment or involvement in the commission of any acts or omissions which could
give rise to any Liability under the Labor Act on the part of Dollar Express,
(iii) labor strike, dispute, slowdown or stoppage pending or, to the knowledge
of the Company, Dollar Express or the Management Shareholders, threatened
against or involving Dollar Express, (iv) labor grievance filed with Dollar
Express which has had or may have a Material Adverse Effect on Dollar Express or
(v) any pending, or to the knowledge of the Company, Dollar Express or the
Management Shareholders, threatened Claim or Litigation which has arisen out of
or under a collective bargaining or other labor Contract.
(f) Except as set forth in Schedule 4.19(f) attached
hereto, there is no Claim or Litigation against Dollar Express (whether under
federal, state or local Law, under any employment Contract, or otherwise)
brought or, to the knowledge of the Company, Dollar Express or the Management
Shareholders, threatened by any Employee on account of or for: (i) overtime pay,
other than overtime pay for work done during the current payroll period; (ii)
wages or salary for any period other than the current payroll period; (iii) any
amount of vacation pay or pay in lieu of vacation time, other than vacation time
or pay in lieu thereof earned in or in respect of the current fiscal year; or
(iv) any violation of any Law relating to minimum wages or maximum hours of
work. Except as set forth in Schedule 4.19(f) attached hereto, there is no Claim
or Litigation against Dollar Express (whether under federal, state or local Law,
under any employment Contract, or otherwise) brought or, to the knowledge of the
Company, Dollar Express or the Management Shareholders, threatened by any Person
(including any Governmental Body) relating to discrimination or occupational
safety in employment or employment practices (including the Occupational Safety
and Health Act of 1970, as amended, The Fair Labor Standards Act, as amended,
Title VII of the Civil Rights Act of 1964, as amended, or the Age Discrimination
in Employment Act of 1967, as amended).
4.20. ERISA Matters.
(a) Benefit Plans Generally. Schedule 4.20(a) attached
hereto contains a true and complete list of all Benefit Plans. Neither Dollar
Express nor any ERISA Affiliate is or has ever been a party to any pension plan
or welfare benefit plan that is a "multiemployer plan" (within the meaning of
Section 3(37) of ERISA), a "multiple employer plan" (within the meaning of
Section 413 of the Code) or a "multiple employer welfare arrangement" (within
the meaning of Section 3(40) of ERISA). Neither Dollar Express nor any ERISA
Affiliate maintains, has ever maintained, or has had any obligation under a plan
subject to Title IV of ERISA. Every Benefit Plan which is a "welfare plan"
provides benefits either by making direct payments out of general corporate
assets or through the purchase of insurance.
(b) Qualified Plans; Compliance. With respect to each of
the Benefit Plans intended to qualify under Section 401(a) or 403(a) of the
Code, such Benefit Plan has been maintained and administered at all times in
compliance, in all material respects, with its terms and applicable Laws. With
respect to each such Benefit Plan, the Internal Revenue Service has issued a
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favorable determination notification letter as to its form. Each Benefit Plan
complies, in all material respects, and has been administered, in all material
respects, in accordance with all applicable Laws, including, without limitation,
ERISA and the Code. Dollar Express has timely filed or caused to be timely filed
with the Internal Revenue Service annual reports on form 5500 or 5500C/R, as
applicable, for each Benefit Plan for all years and periods for which such
reports were required. All statements made on documents or forms filed with any
Government Body with respect to any Benefit Plan have been true and complete in
all material respects and have been filed timely. No Benefit Plan has been
assessed any excise tax Liability. To the knowledge of the Company, Dollar
Express or the Management Shareholders, no event, fact or circumstance has
occurred that would likely result in any Benefit Plan incurring such excise tax
Liability.
(c) Contributions. All payments and contributions to all
Benefit Plans have been made on a timely basis as required by the terms of each
such Benefit Plan and any applicable Law. All such payments and contributions
relating to the completed taxable years have been deducted fully by Dollar
Express for federal income tax purposes. Such deductions have not been
challenged or disallowed by any Governmental Body, and Dollar Express has no
reason to believe that such deductions are not properly allowable. Dollar
Express has funded or will fund prior to Closing each Benefit Plan in accordance
with the terms of each such Benefit Plan, any associated insurance contract and
all applicable Laws. Except as set forth in Schedule 4.20(c) attached hereto, no
Benefit Plan is subject to Section 302 of ERISA or Section 412 of the Code.
(d) Prohibited Transactions; etc.. There: (i) has not
occurred any Prohibited Transaction, with respect to any Benefit Plan, for which
no statutory, class or other exemption exists; (ii) is not pending or, to the
knowledge of the Company, Dollar Express or the Management Shareholders,
threatened any civil or criminal Claim or litigation brought pursuant to part 5
of Title I of ERISA against any fiduciary who is an Employee or director of
Dollar Express; (iii) is not, to the knowledge of the Company, Dollar Express or
the Management Shareholders, any civil or criminal Claim or Litigation pending
or threatened pursuant to part 5 of Title I of ERISA against any fiduciary who
is not an Employee or director of Dollar Express; and (iv) has not occurred any
fiduciary violations, as defined in Section 404 of ERISA, with respect to which
Dollar Express could have any material present or future Liability.
(e) Documentation. Dollar Express has provided or made
available to the Purchaser true and complete copies of the following documents:
(i) all plan documents, amendments and trust agreements relating to each Benefit
Plan, including any insurance contracts under which benefits are provided, as
currently in effect; (ii) the most recent annual and periodic accountings of
Benefit Plan assets; (iii) the most recent Internal Revenue Service
determination or notification letters relating to the pension Benefit Plans and
a list identifying all amendments not covered by such determination or
notification letter, including the date such amendments were adopted and
effective; (iv) to the extent such reports were required, all annual reports
filed on form 5500 or 5500C/R, as applicable, for the past three years,
including accompanying schedules; (v) the current summary plan description, if
any was required by ERISA to be prepared and distributed to participants, for
each Benefit Plan; and (vi) all insurance contracts, annuity Contracts,
investment management and advisory Contracts, fidelity bonds and fiduciary
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Liability policies and related applications, and all filings, applications to
and material correspondence with any Governmental Body, written disputed and
unsettled claims made by or against any Benefit Plan, administration Contracts,
service provider Contracts, audit reports, material written legal advice
relating to any Benefit Plan received within the past six (6) years, prohibited
transaction exemption applications, and resolutions of the Board of Directors of
Dollar Express relating to any of the foregoing.
(f) Continuation Coverage. Each Benefit Plan, and each
Plan established, maintained or contributed to by any ERISA Affiliate, that is a
"group health plan" (within the meaning of Section 607 of ERISA) is and has been
operated in compliance, in all material respects, with all requirements of
Sections 601 through 608 of ERISA and either (i) Section 162(i)(2) and (k) of
the Code and the regulations promulgated thereunder (prior to 1989) or (ii)
Section 4980B of the Code and the regulations promulgated thereunder (after
1988), as well as all comparable requirements arising under the Laws of any
state applicable to Dollar Express, relating to the continuation of coverage
under certain circumstances in which coverage would otherwise cease.
(g) Post-Retirement Benefits. No Benefit Plan maintained
by Dollar Express or any ERISA Affiliate provides, at the expense of Dollar
Express or any ERISA Affiliate, post-retirement medical benefits,
post-retirement death benefits or other post-retirement welfare benefits or has
any obligation under any Benefit Plan that provides such benefits, except to the
extent of the continuation coverage provided under the provisions of Section
4980B of the Code and Sections 601 through 608 of ERISA or other applicable
Laws.
(h) Communications. To the knowledge of the Company,
Dollar Express or the Management Shareholders, all communications with respect
to each Benefit Plan by Dollar Express, any ERISA Affiliate or any Employee or
agent of Dollar Express or any ERISA Affiliate reflect and always have reflected
accurately the material terms and conditions of each such Benefit Plan.
(i) Additional Payments. Except as set forth in Schedule
4.20(i) attached hereto, Dollar Express is not a party to any Benefit Plan
pursuant to which the consummation of the Contemplated Transactions, separately
or in the aggregate, have caused or will cause: (i) the entitlement of any
individual to severance pay, or (ii) the acceleration of the time of payment or
vesting of, or an increase in the amount of compensation due to any individual
from Dollar Express or (iii) the payment of an amount subject to the provisions
of Code Section 280G.
(j) Litigation. Except as set forth in Schedule 4.20(j),
there is not, and there has not been at any time within the six years preceding
the date hereof, any pending or, to the knowledge of the Company, Dollar Express
or the Management Shareholders, threatened Litigation concerning or involving
any Benefit Plan. To the knowledge of the Company, Dollar Express or the
Management Shareholders, no Claim to or by any Governmental Body has been filed
at any time within the four years preceding the date hereof or are or were
threatened, or are expected, with respect to any Benefit Plan. Except as set
forth in Schedule 4.20(j), to the knowledge of the Company, Dollar Express or
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the Management Shareholders, no Claims have been made at any time within the
past four years or, are or were threatened, or are expected, with respect to any
bond or any fiduciary Liability or other similar insurance with regard to the
actions of any Person in connection with any Benefit Plan, nor, to the knowledge
of the Company, Dollar Express or the Management Shareholders, is there expected
to be any notice to any insurer under any such bond or policy with regard to any
Benefit Plan. No application for any bond or fiduciary Liability or similar
insurance policy with respect to any Benefit Plan has been rejected at any time
within the past four years, nor is any such bond or policy now subject to any
qualification, condition or exclusion.
4.21. Environmental Laws.
(a) Except as set forth in Schedule 4.21(a) attached
hereto, (i) Dollar Express has complied in all material respects with each, and
is not in violation of any, Environmental Laws, and neither Dollar Express nor
any of its agents or, to the knowledge of the Company, Dollar Express or the
Management Shareholders, its Employees has engaged in any conduct that has or
will give rise to any Environmental Claim, Environmental Loss or other Liability
under any Environmental Laws, (ii) Dollar Express has not received any written
or oral communication from a Governmental Body or any other Person alleging that
Dollar Express is not in compliance in any material respect with, or has a
Liability under (including being a potentially responsible party or allegedly
liable for costs associated for remediation of any site), any Environmental
Laws, (iii) Dollar Express holds, and has complied in all material respects with
and is in compliance with, all necessary Permits required to conduct its
business in compliance with all Environmental Laws, including any Permits
necessary or appropriate to store, treat, dispose of and otherwise handle
Hazardous Materials except for such Permits, the non-compliance with which will
not individually or in the aggregate have a Material Adverse Effect on Dollar
Express, and (iv) neither the Company, Dollar Express nor the Management
Shareholders has any knowledge of any environmental matters or information other
than as set forth in Schedule 4.21(a) attached hereto which could reasonably be
expected to have a Material Adverse Effect on Dollar Express.
(b) From the date upon which Dollar Express acquired an
interest (leasehold or otherwise) in any real property (but, in the case of
leased real property, only during the period such real property was leased by
Dollar Express), there have been no locations on any of such real property where
Hazardous Materials were discharged, leaked, emitted or entered into the
atmosphere, ground, soil, surface water, ground water, any body of water or
sewer system by Dollar Express where such discharge, leak, emission or entrance
could result in an Environmental Claim. Except as set forth in Schedule 4.21(b)
attached hereto, from such date, (i) to the knowledge of the Company, Dollar
Express or the Management Shareholders, there are no and have been no
above-ground or under-ground storage tanks located on or in any Third Party
Leased Real Property currently or formerly leased or used by Dollar Express or
its predecessors in interest and (ii) there are no and have been no above-ground
or under-ground storage tanks located on or in any other real property currently
or formerly owned, leased or used by Dollar Express or its predecessors in
interest.
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(c) There is no on-site or off-site location to which
Dollar Express or any of its agents or Affiliates has transported Hazardous
Materials or arranged for the transportation thereof from Dollar Express'
facilities, which location is the subject of any federal, state or local
enforcement litigation under any Environmental Laws which may lead to Claims
against Dollar Express for clean-up costs, remedial work, damages to natural
resources or for personal injury claims, including Claims under CERCLA.
(d) Except as set forth in Schedule 4.21(d) attached
hereto (i) to the knowledge of the Company, Dollar Express or the Management
Shareholders, no polychlorinated biphenyl or substances containing
polychlorinated biphenyl are present, in use or stored in any Third Party Leased
Real Property, and no asbestos or materials containing asbestos have been
brought upon, kept or used in or about or discharged, leaked, emitted or entered
into or onto any such Third Party Leased Real Property, and (ii) no
polychlorinated biphenyl or substances containing polychlorinated biphenyl are
present, in use or stored in any other real property owned, leased or used by
Dollar Express, and no asbestos or materials containing asbestos have been
brought upon, kept or used in or about or discharged, leaked, emitted or entered
into or onto any such other real property.
(e) Except as set forth in Schedule 4.21(e) attached
hereto, Dollar Express has not, either expressly, by merger or similar
transaction or, to the knowledge of the Company, Dollar Express or the
Management Shareholders, otherwise by operation of law, assumed or undertaken
any Liability including, without limitation, any Liability for corrective
remedial action of any other Person relating to Environmental Law other than any
indemnity obligation by Dollar Express, as a tenant, or any of its agents to a
landlord under any of the leases or sublease set forth in Schedule 4.10(f), and
neither this Agreement nor the consummation of the Contemplated Transactions
will result in any Liability for site investigation or cleanup, or notification
to or consent of any Governmental Body or other Person, pursuant to any of the
so-called "transaction triggered" or "responsible property" transfer
Environmental Laws.
(f) Except as set forth in Schedule 4.21(f) attached
hereto, neither the Company, Dollar Express nor the Management Shareholders has
any knowledge of any past or present actions, activities, facts, circumstances,
conditions, events or incidents, including the release, spill, leak, emission,
injection, escape, dumping, discharge or disposal of any Hazardous Materials,
that form or could reasonably be expected to form the basis for any
Environmental Claim against Dollar Express or against any Person whose Liability
for any Environmental Claim Dollar Express has or may have retained or assumed
either contractually or by operation of Law.
(g) To the knowledge of the Company, Dollar Express or
the Management Shareholders, except as set forth in Schedule 4.21(g) attached
hereto, no actions, activities, incidents, facts, events, circumstances or
conditions relating to the past or present facilities, real property or
operations owned, leased or used by the Company will prevent, hinder or limit
continued compliance in all material respects with Environmental Laws, give rise
to any investigatory, remedial or corrective obligations pursuant to
Environmental Laws or give rise to any other material Liabilities pursuant to
Environmental Laws, including any relating to material releases or threatened
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releases of Hazardous Materials, personal injury, property damage or natural
resource damage.
4.22. Brokers. Except as set forth in Schedule 4.22, no Person
has acted directly or indirectly as a broker, finder or financial advisor for
the Company, Dollar Express or the Management Shareholders in connection with
the negotiations relating to the Contemplated Transactions. Except as set forth
in Schedule 4.22, no Person is entitled to any fee, commission or like payment
from the Company or Dollar Express in respect thereof based in any way on any
agreement, arrangement or understanding made by or on behalf of the Company or
Dollar Express.
4.23. Substantial Suppliers. Schedule 4.23 lists the names and
dollar volumes of purchases by Dollar Express from its twenty (20) largest
suppliers measured by dollar volume for the year ended December 31, 1997. None
of the suppliers listed in Schedule 4.23 has ceased or, to the knowledge of the
Company, Dollar Express or the Management Shareholders, threatened to cease, to
supply the products, goods or services sold or provided to Dollar Express in the
Business, or has substantially reduced supply of such products, goods or
services, nor do the Company, Dollar Express or the Management Shareholders have
any reason to believe that any Person will do so.
4.24. No Illegal Payments. Neither the Company nor Dollar
Express nor, to the knowledge of the Company, Dollar Express or the Management
Shareholders, any of their officers, directors, employees, agents or other
representatives, has (i) made any contributions, payments or gifts to or for the
private use of any governmental official, employee or agent where either the
payment or the purpose of such contribution, payment or gift is illegal under
the laws of the United States or the jurisdiction in which made or (ii)
established or maintained any unrecorded fund or asset for any purpose or made
any false or artificial entries on its books.
4.25. Year 2000 Compliance. All computer software and
computerized systems owned or used by the Company or Dollar Express, or licensed
by the Company or Dollar Express, as licensor or as licensee, other than any
shrinkwrap software available to retail customers, is "Year 2000 Compliant" (as
hereinafter defined), except as disclosed in Schedule 4.25 attached hereto. For
purposes of this Agreement, "Year 2000 Compliant" shall mean (i) all such
software and systems shall operate in 4-digit year format and, in all material
respects, without errors in the recognition, calculation and processing of date
data relating to century recognition, leap years, single and multi-century
formulae, date values and interfaces of date- related functionalities; (ii) all
date processing shall be conducted in a four-digit year format and all date
sorting that includes a "year field" or "year category" shall be based upon a
four-digit year format; and (iii) any date arithmetic programs or calculators in
the software shall operate in all material respects in accordance with the
related user documentation in the Year 2000, and the years following, without
degrading functionality or performance.
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4.26. The Company's Activities. The Company is a newly-formed
corporation which has been formed by the Management Shareholders for the sole
purpose of effecting the Restructuring. Except for its obligations or
liabilities incurred in connection with its organization and the Restructuring,
and except for (a) the Contemplated Transactions, this Agreement and the
Collateral Documents which it is expected to execute at the Closing in order to
consummate the Contemplated Transactions, and (b) the documents and instruments
which it expects to execute, deliver and file prior to the Closing to effect the
Restructuring, the Management Shareholders have not caused and, prior to the
Closing, will not cause or permit, the Company to incur, directly or indirectly,
through any subsidiary or Affiliate, any Liabilities, engage in any business
activities of any type of kind whatsoever, or enter into any arrangements with
any Person of any type or kind whatsoever.
4.27. Disclosure. The representations and warranties of the
Company, Dollar Express and the Management Shareholders set forth in this
Agreement (including without limitation all Exhibits and Schedules hereto) do
not contain any untrue statement of a material fact or omit any material fact
necessary in order to make the statements and information contained herein or
therein, as applicable, not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Advent Entities hereby represent and warrant to the
Company, Dollar Express and the Management Shareholders as to the following
matters insofar as they relate to the Advent Entities, Guayacan hereby
represents and warrants to the Company, Dollar Express and the Management
Shareholders as to the following matters insofar as they relate to Guayacan, and
DEI hereby represents and warrants to the Company, Dollar Express and the
Management Shareholders as to the following matters insofar as they relate to
DEI:
5.1. Organization and Good Standing. Each of the Advent
Entities is a limited partnership, duly organized, validly existing and in good
standing under the laws of the jurisdiction of its formation and has all
requisite power and authority to carry on its business as it is now being
conducted, and to execute, deliver and perform this Agreement and to consummate
the Contemplated Transactions. Guayacan is a limited liability corporation, duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite power and authority to carry on its business as
it is now being conducted, and to execute, deliver and perform this Agreement
and to consummate the Contemplated Transactions. DEI is a limited liability
corporation, duly organized, validly existing and in good standing under the
laws of the State of North Carolina and has all requisite power and authority to
carry on its business as it is now being conducted, and to execute, deliver and
perform this Agreement and to consummate the Contemplated Transactions.
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5.2. Authorization. Each of the entities comprising the
Purchaser has full power and authority to execute and deliver this Agreement and
the Purchaser Documents and to perform fully its obligations hereunder and
thereunder. The execution, delivery and performance by the Purchaser of this
Agreement and each Purchaser Document has been duly authorized by all necessary
action on the part of each of the entities comprising the Purchaser. This
Agreement has been, and the Purchaser Documents will be at the Closing, duly
executed and delivered by each of the entities comprising the Purchaser and
(assuming the due authorization, execution and delivery by the other parties
hereto and thereto) this Agreement constitutes, and the Purchaser Documents when
so executed and delivered will constitute, legal, valid and binding obligations
of each of the entities comprising the Purchaser, enforceable against each of
them in accordance with their respective terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally and subject, as to enforceability, to
general principles of equity (regardless of whether enforcement is sought in a
proceeding at law or in equity). Neither of the execution or delivery by each of
the entities comprising the Purchaser of this Agreement and the Purchaser
Documents, nor the consummation by each of the entities comprising the Purchaser
of the Contemplated Transactions, or compliance by each of the entities
comprising the Purchaser with any of the provisions hereof or thereof, does or
will (i) conflict with, or result in the breach of, any provision of the limited
partnership agreements of any of the entities comprising the Purchaser, (ii)
subject to the receipt of the consents set forth in Schedule 5.2 hereto,
conflict with, violate, result in the breach or termination of, or constitute a
Default (with or without notice or lapse of time, or both) under any Contract or
Order to which any of the entities comprising the Purchaser is a party or by
which it or any of its properties or assets is bound or subject, or (iii)
constitute a violation of any Law applicable to any of the entities comprising
the Purchaser, except, in each case, for violations, conflicts, breaches or
Defaults which individually or in the aggregate will not materially hinder or
impair the Contemplated Transactions.
5.3. Consents. No consent, waiver, approval, Order, Permit or
authorization of, or declaration or filing with, or notification to, any Person
or Governmental Body is required on the part of any of the entities comprising
the Purchaser in connection with the execution and delivery of this Agreement or
the Purchaser Documents or the compliance by each of the entities comprising the
Purchaser with any of the provisions hereof or thereof, except for consents,
waivers, approvals, Orders or Permits set forth in Schedule 5.3 hereto.
5.4. Litigation. There is no Legal Proceeding pending or, to
the knowledge of the Purchaser, threatened, that seeks to enjoin or obtain
damages in respect of the consummation of the Contemplated Transactions or that
questions the validity of this Agreement, the Purchaser Documents or any action
taken or to be taken by any of the entities comprising the Purchaser in
connection with the consummation of the Contemplated Transactions.
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5.5. Brokers. No third party unaffiliated with the Purchaser
has acted directly or indirectly as a broker, finder or financial advisor for
the Purchaser in connection with the negotiations relating to this Agreement or
the Contemplated Transactions, and no Person is entitled to any fee or
commission or like payment in respect thereof based in any way on agreements,
arrangements or understandings made by or on behalf of the Purchaser.
5.6. Investment Intent of the Purchaser. The Purchaser
acknowledges that the Class A Preferred Shares and Liquidity Event Warrants
being purchased pursuant to this Agreement have not been registered under the
Securities Act or any state securities laws. The Purchaser is acquiring the
Class A Preferred Shares and Liquidity Event Warrants for its own account and
not with the intent to distribute the shares to an unrelated third party. The
Purchaser has such knowledge and experience in financial and business matters
and investments in general that make it capable of evaluating the merits and
risks of the ownership and acquisition of the Class A Preferred Shares and the
Liquidity Event Warrants. Each of the entities comprising the Purchaser is an
"accredited investor" within the meaning of Rule 501(a) under the 1933 Act. The
Purchaser acknowledges and agrees that the certificates, if any, representing
the Class A Preferred Shares will contain substantially the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY OTHER STATE OR FEDERAL SECURITIES STATUTE. NO
REOFFER, SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION THEREOF
MAY BE MADE UNLESS THE INTERESTS ARE REGISTERED UNDER THE ACT
AND ANY OTHER APPLICABLE SECURITIES STATUTE, OR AN EXEMPTION
FROM SUCH REGISTRATION REQUIREMENTS IS APPLICABLE TO SUCH
TRANSACTION.
5.7. Disclosure. The representations and warranties of the
Purchaser set forth in this Agreement (including without limitation all Exhibits
and Schedules hereto) do not contain any untrue statement of a material fact or
omit any material fact necessary in order to make the statements and information
contained herein or therein, as applicable, not misleading.
ARTICLE VI
CERTAIN COVENANTS AND OTHER MATTERS
6.1. Confidentiality Agreement. Each party hereto shall and
shall cause its counsel, accountant, financial advisors and lenders to: (a) keep
all Confidential Information confidential and not to disclose or reveal any
Confidential Information to any Person other than its officers, directors,
affiliates, employees, attorneys, accountants, other agents and representatives,
including engineers, financial advisors, current and prospective lenders and
debt securities underwriters who are participating in the evaluation of the
Company and Dollar Express and the Contemplated Transactions or who otherwise
need to know the Confidential Information in connection with any investigation
of the Company and Dollar Express or the negotiation, preparation or performance
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of this Agreement or any document to be delivered hereunder or for the purpose
of evaluating the Company and Dollar Express and/or the Contemplated
Transactions; and (b) not to use the Confidential Information for any purpose
other than (i) in connection with the evaluation and/or consummation of the
Contemplated Transactions; (ii) to the extent necessary to obtain the
termination of the waiting period under the HSR Act or to obtain any required
consents; or (iii) to enforce such party's rights and remedies under this
Agreement. The obligations of each party hereto under this Section 6.1 shall
terminate two years from the date of this Agreement. If the Closing is not
consummated, each party upon the request of the other party shall destroy or
return to such party all Confidential Information which is in writing or can
otherwise be destroyed or returned, including without limitation, the Private
Placement Memorandum of the Company prepared by Legg Mason Wood Walker and dated
August 1998, and will so certify to the parties hereto.
6.2. Restriction on Certain Discussions and Actions. Until the
Closing Date or earlier if this Agreement is terminated in accordance with its
terms, the Company, Dollar Express and the Management Shareholders will refrain,
and will cause their Affiliates, and each of the respective officers, directors,
employees, attorneys, accountants and other agents and representatives, to
refrain, from taking any action, directly or indirectly, to solicit, encourage,
initiate or participate in any way in discussions or negotiations with, or
furnish any information with respect to the Company and Dollar Express to any
Person (other than the Purchaser and its representatives) in connection with any
possible or proposed sale of capital stock, sale of a substantial portion of the
assets, merger or other business combination involving the Company or Dollar
Express , or the acquisition of an equity interest in the Company or Dollar
Express, or any similar transaction involving the Company or Dollar Express , or
any other transaction (including any recapitalization, refinancing or
reorganization) which could impair the ability of the Company, Dollar Express or
any of the Management Shareholders to consummate the Contemplated Transactions
("Alternative Transaction"). The Company, Dollar Express and each of the
Management Shareholders will cease and cause to be terminated any existing
activities, discussions or negotiations with any other Person conducted
heretofore with respect to any Alternative Transaction and will promptly notify
the Purchaser following receipt of any request by any Person (other than the
Purchaser or its representatives) relating to any possible Alternative
Transaction or information concerning the business, properties, assets,
financial condition, results of operations or prospects of the Company or Dollar
Express. The Company, Dollar Express and each of the Management Shareholders
agree that none of them will (without the Purchaser's prior written consent)
disclose any of the terms of this Agreement or the matters referred to herein to
any other prospective acquiror of the Company or Dollar Express until this
Agreement is terminated in accordance with its terms if at all.
6.3. Conduct of Business. During the period from the date of
this Agreement to the Closing Date or earlier if this Agreement is terminated in
accordance with its terms, the Company, Dollar Express and each of the
Management Shareholders (i) agree to cause the Business to be conducted in the
ordinary course consistent with past practices, (ii) will not cause or permit
any of the events, facts or circumstances described in Sections 4.13 to occur
(except as otherwise expressly permitted by this Agreement), and (iii) with
respect to the Business and Dollar Express, will:
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(a) not acquire or agree to acquire (i) by merging or
consolidating with, or by purchasing any of the equity interests of or a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, joint venture, association or other business
organization or division thereof, or (ii) any assets that are material,
individually or in the aggregate, to Dollar Express, except purchases of
inventory and other assets in the ordinary course of business consistent with
past practice and capital expenditures permitted by subsection (c) below;
(b) not (i) incur any indebtedness involving borrowed
money in excess of $5,000 in the aggregate, including (x) guaranteeing any such
indebtedness of another Person, (y) issuing or selling any debt securities or
warrants or other rights to acquire any debt securities of any of Dollar
Express, or (z) guaranteeing any debt securities of another Person, or (ii) make
any loans, advances or capital contributions to, or investments in, any other
Person, other than in the ordinary course of business consistent with past
practices;
(c) not make or agree to make any capital expenditures
which in the aggregate are in excess of $50,000 other than as may be
contemplated by any capital expenditure commitments or plans described in
Schedule 6.3(c) attached hereto;
(d) not change a corporate name or permit the use thereof
by any other Person;
(e) not (i) cause or voluntarily permit the termination
of any Benefit Plan, (ii) voluntarily permit any Prohibited Transaction
involving any Benefit Plan, (iii) fail to pay to any Benefit Plan any
contribution which they are obligated to pay under the terms of such Benefit
Plan, or (iv) allow or suffer to exist any occurrence of any event or condition,
which presents a material risk of termination by the Pension Benefit Guaranty
Corporation of any Benefit Plan;
(f) not enter into any new, or amend or otherwise alter
any existing, Benefit Plan;
(g) not, except in the ordinary course of business
consistent with past practices, (i) remove any fixtures, equipment or personal
property from any of the real property; (ii) enter into any Contract which would
be required to be disclosed in Schedule 4.14 attached hereto; (iii) sell,
discount or otherwise dispose of any accounts receivable (except by collection
in the ordinary course of business); (iv) cancel or compromise any indebtedness
or Claim, or waive or release any rights of material value or (v) change, modify
or alter the return policy for merchandise sold by Dollar Express;
(h) not (i) make a material change in the character of
its Business or in the properties or assets of Dollar Express, or enter into any
new business or relocate any of their facilities or acquire any additional
operations or business; and (ii) not terminate, discontinue, close or dispose of
any facility or business operation;
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(i) pay when due all Taxes lawfully levied or assessed
against Dollar Express before any penalty or interest accrues on any unpaid
portion thereof and to file all tax returns when due (including applicable
extensions);
(j) use its best efforts to maintain the facilities,
assets and properties of Dollar Express in good operating repair, order and
condition, reasonable wear and tear and loss by casualty to the extent covered
by insurance excepted, and notify the Purchaser immediately upon any loss of,
damage to, or destruction of any of the facilities, assets or properties of
Dollar Express, whether or not covered by insurance;
(k) maintain in full force and effect insurance coverage
of the types and in the amounts set forth in Schedule 4.17 attached hereto;
(l) promptly advise the Purchaser in writing of the
commencement of, any known threat to commence, and of any material developments
or changes in any, pending or threatened litigation against the Company, Dollar
Express or any of the Management Shareholders of the type and nature which would
be required to be disclosed in Schedule 4.7 attached hereto;
(m) use its best efforts to maintain in full force and
effect each, and not cause or permit to occur any Default by Dollar Express
under any, Contract, License or Permit required to be listed in any Schedule to
this Agreement and, until the Closing Date, pay all accounts payable in the
ordinary course of its business consistent with past practices;
(n) not cause or permit to occur a violation of any Laws
applicable to Dollar Express except for such immaterial violations which
individually or in the aggregate will not have a Material Adverse Effect on
Dollar Express;
(o) not cause, suffer or permit the creation or
attachment of any Lien (other than Permitted Liens) on any of the assets of or
Dollar Express;
(p) use its best efforts to (i) preserve the business
organization of Dollar Express intact (except as contemplated by the
Restructuring), (ii) keep available the services of each of Dollar Express'
Employees except for those Employees hired solely to work for Dollar Express
during the 1998 Christmas season, (iii) preserve the goodwill of the customers
and others having business relations with Dollar Express and (iv) maintain the
corporate existence of Dollar Express;
(q) use its best efforts to not take or voluntarily
permit any action, or voluntarily omit to take any action, that would render
untrue any of Dollar Express' representations or warranties set forth in this
Agreement; and
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(r) advise the Purchaser in writing of any information
which, if known at the time of preparation, would have materially affected the
projections of Dollar Express' operating income attached hereto as Schedule
4.11B.
6.4. Conduct of the Company. Except for the execution of
documents, agreements and instruments at the Closing in order to consummate the
Contemplated Transactions, and except for the execution, delivery and filing of
documents and instruments prior to the Closing to effect the Restructuring,
prior to the Closing, the Management Shareholders will not cause or permit the
Company to incur, directly or indirectly, through any subsidiary or Affiliate,
any Liabilities, engage in any business activities of any type of kind
whatsoever, or enter into any arrangements with any Person of any type or kind
whatsoever other than as contemplated by this Agreement, or to:
(a) cause or permit to occur a violation, in any material
respect, of any Laws applicable to the Company;
(b) fail to maintain its existence as a corporation;
(c) permit any action, or omit to take any action, that
would render untrue any of its representations or warranties set forth in this
Agreement; or
(d) take any action or refrain from taking any action if
the result of such action or inaction, if taken after Closing, would implicate
the approval rights set forth in the amendments to the Company's Bylaws relating
to governance, as the same will be amended on the Closing Date in substantially
the form of Exhibit H hereto, or Section 4 of the Designation Statement.
6.5. Notice of Certain Events.
(a) Prior to the Closing, the Company, Dollar Express and
each of the Management Shareholders, jointly and severally, covenant and agree
to provide the Purchaser with prompt notice of (i) any event, fact or
circumstance known to them which could reasonably be expected to have a Material
Adverse Effect on the Company or Dollar Express, (ii) any representation or
warranty made by any of them contained in this Agreement which has become known
to them to be untrue or inaccurate in any material respect or (iii) the known
failure by any of them to comply with or satisfy in any material respect any
covenant, agreement or condition to be complied with or satisfied under this
Agreement, within the time frame set forth in this Agreement; provided, however,
that such notification shall not excuse or otherwise affect the representations,
warranties, covenants or agreements of the parties, or the conditions to the
obligations of the parties, under this Agreement.
(b) Prior to the Closing, the Purchaser covenants and
agrees to provide the Company, Dollar Express and the Management Shareholders
with prompt notice of (i) any event, fact or circumstance which could reasonably
be expected to have a Material Adverse Effect on the Purchaser, (ii) any
representation or warranty made by it contained in this Agreement which has
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become known to them to be untrue or inaccurate in any material respect or (iii)
the known failure by it to comply with or satisfy in any material respect any
covenant, agreement or condition to be complied with or satisfied by it under
this Agreement, within the time frame set forth in this Agreement; provided,
however, that such notification shall not excuse or otherwise affect the
representations, warranties, covenants or agreements of the parties, or the
conditions to the obligations of the parties, under this Agreement. In addition,
the Purchaser will provide to the Company, Dollar Express and the Management
Shareholders correct and complete copies of all signed commitment letters
received prior to the Closing Date from financing sources, if any.
6.6. Cooperation; Access to Books and Records. The Company,
Dollar Express and each of the Management Shareholders will cooperate generally
with the Purchaser in connection with the Contemplated Transactions and, until
the Closing Date or earlier if this Agreement is terminated in accordance with
its terms, shall afford to the Purchaser, its agents, attorneys, accountants and
other authorized representatives, including engineers, financial advisers,
current and prospective lenders and debt underwriters, reasonable access to all
of the properties, assets, financial condition, operations, books, records,
files, correspondence, computer output, data, files, log books, technical and
operating manuals and other materials of the Company and Dollar Express
(including those in the possession or control or their accountants, attorneys
and any other third party), as the case may be, for the purpose of permitting
the Purchaser to make such due diligence investigation and examination of the
business, assets, properties and Books and Records of the Company and Dollar
Express as the Purchaser, in its discretion, shall deem to be reasonably
necessary or appropriate. Any such investigation, access and examination shall
be conducted during regular business hours and upon reasonable prior notice
under the circumstances and will be conducted in a manner that will not
materially disrupt the operation of the Business. The Company, Dollar Express
and each of the Management Shareholders will cause its and his counsel,
accountants and representatives, and the Company's and Dollar Express'
directors, officers and employees, to cooperate fully with the employees and
representatives of the Purchaser in connection with such investigation, access
and examination. The results of such investigation and examination shall not
relieve the Company, Dollar Express or the Management Shareholders from its or
his obligations with respect to the representations and warranties made in this
Agreement or reduce the Purchaser's right to pursue such remedies at Law or
hereunder, as it would otherwise have in the absence of having conducted such
investigation. The Purchaser will not contact any employee, customer or supplier
of the Company or Dollar Express without the prior consent of the Company or
Dollar Express, as the case may be, which consent will not be unreasonably
withheld, delayed or conditioned. The Purchaser agrees to treat all of the
information learned in connection with any examination performed by it pursuant
to this Section 6.6 as Confidential Information for purposes of Section 6.1
hereof.
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6.7. Best Efforts. Upon the terms and subject to the
conditions set forth in this Agreement, the parties shall use their good faith
best efforts to take, or cause to be taken, without any party being obligated to
make any payment or payments to any third party or parties which, individually
or in the aggregate, is material and is not otherwise due, all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Closing, and the
other Contemplated Transactions, including (a) obtaining all required consents
and the termination of the waiting period under the HSR Act, (b) defending any
litigation or Claims challenging this Agreement or the consummation of any of
the Contemplated Transactions, including, if the circumstances warrant, seeking
to have any stay or temporary restraining court order vacated or reversed, and
(c) the execution and delivery of any additional documents, agreements and
instruments (in form and substance reasonably satisfactory to the parties)
necessary to consummate the Contemplated Transactions by, and to fully carry out
the purposes of, this Agreement.
6.8. Amendment to Articles of Incorporation. The Company
shall take all action necessary, in accordance with applicable law and its
Articles of Incorporation and Bylaws, to effect the Company Articles Amendment,
and Dollar Express shall take all action necessary, in accordance with
applicable law and its Articles of Incorporation and By-laws, to effect the
Dollar Express Articles Amendment.
6.9. Offer of Employment. The Company and Dollar Express
shall, continue to offer employment as of the Closing Date to each Employee in a
substantially similar position and location and, in each case, at a rate of pay
substantially similar to such Employee's rate of pay in effect, and with such
benefits as shall be substantially similar to such Employee's benefits
(including Employee Benefit Plans and Benefit Arrangements) in effect, on the
business day immediately preceding the Closing Date.
6.10. Restructuring. The Company, Dollar Express and the
Management Shareholders shall complete the Restructuring in a manner which
complies with all applicable Laws and so as not to result in any misstatement or
omission from a representation, or a breach of a warranty or covenant of the
Company, Dollar Express or the Management Shareholders contained herein.
ARTICLE VII
TAX RELATED MATTERS
7.1. S Elections. The Company, Dollar Express and the
Management Shareholders, jointly and severally, represent and warrant to the
Purchaser as follows:
(a) Federal. Dollar Express duly and properly filed an
election to be an S corporation and such election is currently in effect (except
to the extent terminated by Closing as of the Effective date), under Section
1362 of the Code and the rules and regulations promulgated thereunder. Such
election has been in effect without interruption, including without limitation
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any inadvertent termination which has been reinstated, since formation of Dollar
Express (the "S Election Date"). Since the S Election Date, each of the
Management Shareholders and each former shareholder of Dollar Express, if any,
has been a permitted shareholder under Section 1361 of the Code and the rules
and regulations promulgated thereunder.
(b) State. In each state in which Dollar Express does
business, either Dollar Express' federal S election is recognized and given
effect or Dollar Express has made an appropriate and timely election to be
treated as an S corporation for state income taxation purposes. Any such
election was made so that the time when Dollar Express was an S corporation for
state taxation purposes coincided with when Dollar Express was an S corporation
for federal taxation purposes.
(c) Corporate Returns. Except as set forth in Schedule
7.1(c),Dollar Express has duly and timely filed all information and tax returns
and reports with any federal, state or local governmental taxing authority, body
or agency, and all Taxes due and payable by Dollar Express, have been paid,
withheld or reserved for or, to the extent they relate to periods on or prior to
the date of the latest Financial Statements, are reflected as a Liability on the
balance sheet included therein.
(d) Management Shareholders' Taxes. The Management
Shareholders have paid all federal, state, local and foreign income and other
taxes due and payable by them with respect to income reported to them by Dollar
Express as attributable to Dollar Express' operations.
(e) Employee Taxes. Dollar Express has properly withheld
all amounts required by law to be withheld for income taxes and unemployment
taxes, including without limitation, with respect to social security and
unemployment compensation, relating to its employees, and has remitted all
withheld amounts required to be remitted to the appropriate taxing authority,
agency or body.
(f) Audit Information. Dollar Express' federal and state
income tax information has never been audited. Except as set forth in Schedule
7.1(f), Dollar Express has not entered into any agreements for the extension of
time for the assessment of any tax or tax delinquency, and neither the Company,
Dollar Express nor any Management Shareholder has received any outstanding and
unresolved notices from the Internal Revenue Service or other state, local or
foreign taxing authority, agency or body of any proposed audit or examination or
of any proposed change in reported information which may result in a deficiency
or assessment against the Company, Dollar Express or the Management Shareholders
and there are no suits, actions, Claims, investigations, inquiries or
proceedings now pending against the Company, Dollar Express or any Management
Shareholders in respect of taxes, governmental charges or assessments.
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(g) Liens. There are no Liens for Taxes upon any of
Dollar Express' assets except Permitted Liens, provided that adequate reserves
have been provided therefor and are reflected in the Financial Statements.
(h) Extensions. Dollar Express has not requested any
extension of time within which to file a Tax or information return, which return
has not since been filed.
(i) Contracts. Dollar Express is not a party to any
Contract or arrangement pursuant to which Dollar Express has any Liability for
taxes arising from operation of the business of such other entity.
(j) Adjustments. Dollar Express has not agreed to make
and is not required to make, any adjustment under Section 481 of the Code for
any period ending after the Closing Date by reason of a change of accounting
method or otherwise.
7.2. Tax Liability in Year of Closing. The Purchaser and the
Management Shareholders acknowledge that after the Closing Date Dollar Express
will no longer be eligible to be an S corporation because the Purchaser is not
eligible to be a shareholder of an S corporation, and agree that they will make
an election under Section 1362(e)(3) of the Code to close the books of account
of Dollar Express as of the Effective Date, and that any tax Liability in
respect of Dollar Express income in the taxable year in which Closing occurs
shall be determined in accordance with such election.
7.3. Covenants Regarding Distributions. From the date hereof
until the Closing Date, neither the Company nor Dollar Express will, and the
Management Shareholders will not cause or permit the Company or Dollar Express
to, make any distributions to the Management Shareholders except as permitted by
this Section 7.3. On January 1, 1999, Dollar Express declared and paid a
distribution in the amount of the Notes. The aggregate original principal amount
of the Notes shall be equal to the sum of Fifty-Five Million Dollars
($55,000,000) plus the product of fifty percent (50%) times Dollar Express'
cash-on-hand at January 15, 1999 (the distribution of available cash hereinafter
referred to as the "1998 Distribution"), provided that all expenses relating to
the Business which were incurred but not paid in 1998 (including, without
limitation, payroll) and the Company's January lease payments shall be paid by
Dollar Express prior to calculating the 1998 Distribution. Notwithstanding the
foregoing, the 1998 Distribution shall only be paid to the extent that Dollar
Express' cash-on- hand less the 1998 Distribution equals or exceeds Two Million
Seven Hundred Fifty Thousand Dollars ($2,750,000). As soon as practicable
following the issuance of the Notes, Dollar Express shall provide to the
Purchaser evidence of the amount of Dollar Express' cash-on-hand at January 15,
1999.
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7.4. 1998 Tax Distribution. Dollar Express and the Management
Shareholders represent and warrant that Dollar Express distributed Two Million
Five Hundred Thousand Dollars ($2,500,000) to the Management Shareholders in
December 1998 (the "1998 Tax Distribution") to fund the tax obligations of the
Management Shareholders attributable to Dollar Express' operations in 1998 (the
"1998 Tax Obligation").
7.5. Purchaser Indemnifications.
(a) The Purchaser agrees that Dollar Express shall
indemnify, defend and hold harmless each Management Shareholder, from and
against any and all Liabilities with respect to Taxes imposed upon a Management
Shareholder as a result of an adjustment or change, including any increase in
items of income or gain or any decrease in items of Loss, deduction or credit
reported to such Management Shareholder by Dollar Express with respect to the
period of time when Dollar Express was an S Corporation, but only to the extent
that such adjustment or change consists of: (i) an increase in the item of
Dollar Express' income or gain with respect to an S Year and a corresponding
decrease in an item of income or gain with respect to a C Year; or (ii) a
decrease in an item of Loss, deduction or credit reported to a Management
Shareholder by Dollar Express with respect to an S Year and a corresponding
increase in an item of Loss, deduction or credit with respect to a C Year. Any
payment with respect to Liability with respect to Taxes shall be paid in cash by
the Purchaser, the Company or Dollar Express no later than ten (10) days prior
to the due date of any payment required to be made by the Management Shareholder
with respect to such taxes.
(b) In the event any Taxes as to which an amount shall
have been paid to a Management Shareholder by the Purchaser, the Company or
Dollar Express pursuant to Section 7.4(a) are subsequently refunded or repaid to
such Management Shareholder, such Management Shareholder agrees to repay to the
Purchaser, the Company or Dollar Express, as the case may be, such refund or
repayment, less any net tax cost incurred by the Management Shareholder with
respect to such amounts.
(c) Each Management Shareholder agrees to prepare his
income tax returns with respect of the taxable year in which the Closing Date
occurs consistent with the manner in which each item of income, loss, deduction
and credit of Dollar Express is reported by Dollar Express to each such
Management Shareholder.
7.6. Management Shareholders' Indemnifications.
(a) Each Management Shareholder, individually on a pro
rata basis in accordance with the number of Issued Dollar Express Shares owned
by each Management Shareholder on the Closing Date agrees to indemnify, defend
and hold harmless Dollar Express, from and against any and all Liabilities with
respect to taxes imposed upon Dollar Express as a result of an adjustment or
change, including any increase in items of income or gain or any decrease in
items of loss, deduction or credit of Dollar Express, whether before, during or
after the period of time when Dollar Express was an S Corporation, but only to
the extent that such adjustment or change (i) results from the invalidity or
termination of Dollar Express' S Corporation election for any reason other than
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the Closing, or (ii) consists of (A) an increase in an item of Dollar Express'
income or gain in any C Year and a corresponding decrease in an item of income
or gain reported to the Management Shareholders by Dollar Express with respect
to an S Year; (B) a decrease in an item of loss, deduction or credit reported by
Dollar Express in any C Year and a corresponding increase in an item of loss,
deduction or credit with respect to an S Year. Any payment with respect to a
Liability with respect to Taxes shall be paid in cash by the Management
Shareholders no later than ten (10) days prior to the due date of any payment
required to be made by Dollar Express with respect to such taxes.
(b) In the event any taxes as to which an amount shall
have been paid to Dollar Express by the Sellers pursuant to Section 7.5(a) are
subsequently refunded or repaid to Dollar Express, Dollar Express agrees to
repay to the Management Shareholders such refund or a payment, less any net tax
costs incurred by Dollar Express with respect to such amounts.
(c) In the event that the S Corporation election of
Dollar Express is terminated prior to the Closing Date for any reason other than
the Closing, each of the Management Shareholders and the Purchaser agrees to, or
to cause Dollar Express to, take such steps as are reasonably necessary to
obtain relief of such termination pursuant to Section 1362(f) of the Code and
the regulations thereunder.
7.7. Tax Contest. Any Management Shareholder (a "Notified
Shareholder") receiving notice of (i) an intention by a taxing authority to
audit any return of the Management Shareholders which includes any item of
income, gain, deduction, loss or credit reported by Dollar Express with respect
to any S Year, shall inform Dollar Express and the Purchaser, in writing, of the
intended audit within fifteen (15) days after receipt of such notice, or (ii) a
proposed adjustment to such an item, shall give notice to Dollar Express of the
proposed adjustment within fifteen (15) days after receipt of a notice of
proposed adjustment from a taxing authority. A failure on the part of a Notified
Shareholder to provide such notice to Dollar Express and the Purchaser on a
timely basis shall not relieve Dollar Express of its obligation of
indemnification under Section 7.4 unless such failure materially prejudices the
ability of Dollar Express or the Purchaser to cause the proposed adjustment to
be contested. Dollar Express may, upon giving written notice to the Notified
Shareholder, request that the Notified Shareholder contest such proposed
adjustment. If Dollar Express shall request that a proposed adjustment be
contested, then the Notified Shareholder shall either, at Dollar Express'
expense, contest (or engage representatives to contest) the proposed adjustment
or permit Dollar Express and its representatives to contest the proposed
adjustment (including pursuing all administrative and judicial appeals and
processes). The Management Shareholders shall not make, accept or enter into a
settlement or other compromise with respect to any Taxes that are the subject of
indemnification under this Agreement, or forego or terminate any proceeding
relating to a proposed adjustment without the consent of the Purchaser, which
shall not be unreasonably withheld or delayed. Procedures similar to those set
forth in this Section 7.6 shall apply to any proposed adjustment with respect to
which the Management Shareholders may be obligated to indemnify Dollar Express
with respect to any Liability for Taxes. Nothing in this Section 7.6 shall limit
Dollar Express' or the Management Shareholders' obligations to indemnify the
Management Shareholders or the Purchaser pursuant to Section 7.4 or 7.5 hereof
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if the indemnifying party decides not to contest, or abandons its prior decision
to contest, a proposed adjustment.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS
The obligation of the Purchaser to consummate the Contemplated
Transactions on the Closing Date is subject to the satisfaction, on or prior to
the Closing Date and as of the Closing Date, of the following conditions, any of
which may be waived in writing by the Purchaser:
8.1. Representations, Warranties and Covenants.
(a) Each of the representations and warranties of the
Company, Dollar Express and the Management Shareholders contained herein shall
be true and correct on and as of the Closing Date with the same force and effect
as though the same had been made on and as of the Closing Date.
(b) The Company, Dollar Express and the Management
Shareholders shall have performed and complied with the covenants and provisions
of this Agreement required to be performed or complied with by it or them at or
prior to the Closing Date.
(c) The Purchaser shall have received certificates of the
Company and of Dollar Express dated as of the Closing Date and signed by an
officer of each, certifying as to the fulfillment of the conditions set forth in
this Section 8.1.
8.2. Opinion of the Company's Counsel. The Purchaser shall
have received an opinion or opinions of counsel for the Company, dated the
Closing Date, substantially in the form annexed hereto as Exhibit D.
8.3. Delivery of Documents. The Company shall have executed
and delivered to the Purchaser the documents listed in Section 3.3, and Dollar
Express shall have executed and delivered to the Purchaser the documents listed
in Section 3.4. In addition, the Company and/or the Management Shareholders, as
applicable, shall have executed the following documents:
(a) The Liquidity Event Warrant in substantially the form
of Exhibit C hereto;
(b) An Investor Rights Agreement in substantially the
form of Exhibit E hereto; and
(c) A Registration Rights Agreement in substantially the
form of Exhibit F hereto; and
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(d) The Employment Agreements in substantially the form
of Exhibit G hereto.
8.4. Bank Debt. The Borrowings shall be fully funded and
loaned to the Company and Dollar Express at the Closing contemporaneously with
the Closing, pursuant to agreements containing terms and conditions acceptable
to the Purchaser, the Company and Dollar Express.
8.5. Other Conditions Precedent to the Purchaser's
Obligations.
(a) The Management Shareholders shall have completed the
Restructuring in accordance with the terms and conditions of this Agreement.
(b) The Company and Dollar Express shall have obtained or
made all approvals, consents, Permits, Orders, waivers, filings, notices,
registrations and applications set forth in Schedule 4.6 hereto, each of which
shall be in full force and effect.
(c) Neither the Company nor Dollar Express shall not have
discontinued any line of business or changed in any material respect the nature
of its business since the Financial Statement Date. The management of the
Business in place at the Financial Statement Date shall continue to be in the
employment of Dollar Express.
(d) There shall be no injunction, writ, temporary
restraining order or any Order of any nature issued by any Governmental Body
directing that the Contemplated Transactions not be consummated. There shall not
have been any action taken or threatened or proposed to be taken, or any
statute, rule, regulation, judgment, order or injunction proposed, sought,
promulgated, enacted, entered, enforced or deemed applicable to this Agreement
or the Contemplated Transactions, by or before any Governmental Body, that in
the reasonable judgment of the Purchaser might prohibit consummation of the
transactions contemplated in this Agreement.
(e) INTENTIONALLY OMITTED.
(f) The Purchaser shall have received in form and
substance reasonably satisfactory to it a letter from the Company to the
Internal Revenue Service and all relevant state taxing authorities terminating
the Company's S election as of the Effective Date, which letter shall be
delivered to the Internal Revenue Service and all relevant state taxing
authorities upon Closing or as soon as practicable thereafter.
(g) The Company Articles Amendment and the Dollar Express
Articles Amendment shall have been approved and adopted by the stockholders of
each of the Company or Dollar Express, as the case may be, as contemplated by
Section 6.6 and shall have been duly filed with the Secretary of State of the
Commonwealth of Pennsylvania, in each case.
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(h) The Bylaws of the Company and Dollar Express shall
have been amended to be in substantially the form of Exhibit H and Exhibit I,
respectively, hereto.
(i) The Stock Option Plan of the Company shall have been
adopted in substantially the form of Exhibit J hereto. The Stock Option Plan of
Dollar Express shall have been terminated.
(j) All proceedings to be taken and all agreements,
instruments and documents to be executed and delivered by the Company, Dollar
Express and the Management Shareholders in connection with the consummation of
the Contemplated Transactions shall be reasonably satisfactory in form and
substance to the Purchaser and its counsel.
ARTICLE IX
CONDITIONS PRECEDENT TO THE COMPANY'S, DOLLAR EXPRESS'
AND THE MANAGEMENT SHAREHOLDERS' OBLIGATIONS
The obligation of the Company, Dollar Express and the
Management Shareholders to consummate the Contemplated Transactions on the
Closing Date is, at the option of the Company, Dollar Express and the Management
Shareholders, subject to the satisfaction, on or prior to the Closing Date and
as of the Closing Date, of the following conditions, any of which may be waived
in writing by the Company, Dollar Express and the Management Shareholders:
9.1. Representations, Warranties and Covenants.
(a) Each of the representations and warranties of the
Purchaser contained herein, as such may be amended from time to time, shall be
true and correct on and as of the Closing Date with the same force and effect as
though the same had been made on and as of the Closing Date, it being understood
that to the extent that such representations and warranties were made as of a
specified date the same shall continue on the Closing Date to be true and
correct in all material respects as of the specified date.
(b) The Purchaser shall have performed and complied with
the covenants and provisions in this Agreement required herein to be performed
or complied with by it at or prior to the Closing Date.
(c) The Company shall have received a certificate of the
Purchaser, dated as of the Closing Date and signed by an officer of each entity
comprising the Purchaser, certifying as to the fulfillment of the conditions set
forth in this Section 9.1.
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9.2. Bank Debt. The Borrowings shall be fully funded and
loaned to the Company and Dollar Express at the Closing contemporaneously with
the Closing, pursuant to agreements containing terms and conditions acceptable
to the Purchaser, the Company and Dollar Express.
9.3. Other Conditions Precedent to the Company's Obligations.
(a) The Management Shareholders shall have completed the
Restructuring in accordance with the terms and conditions of this Agreement.
(b) The Purchaser shall have obtained or made all
approvals, consents, Permits, Orders, waivers, filings, notices, registrations
and applications set forth in Schedule 5.3 hereto, each of which shall be in
full force and effect.
(c) There shall be no injunction, writ, temporary
restraining order or any Order of any nature issued by any Governmental Body
directing that the Contemplated Transactions not be consummated. There shall not
have been any action taken or threatened or proposed to be taken, or any
statute, rule, regulation, judgment, order or injunction proposed, sought,
promulgated, enacted, entered, enforced or deemed applicable to this Agreement
or the Contemplated Transactions, by or before any Governmental Body, that in
the reasonable judgment of the Purchaser might prohibit consummation of the
transactions contemplated in this Agreement.
(d) All proceedings to be taken and all agreements,
instruments and documents to be executed and delivered by the Purchaser in
connection with the consummation of the Contemplated Transactions shall be
reasonably satisfactory in form and substance to the Company and its counsel.
ARTICLE X
INDEMNIFICATION AND RELATED MATTERS
10.1. By the Management Shareholders. Subject to the
provisions of this Article X and notwithstanding the tax indemnifications
provided for in Section 7.5 hereof, the Management Shareholders, jointly and
severally, agree to indemnify, defend and hold the Purchaser, on the one hand,
or the Company and Dollar Express, on the other hand, (as contemplated by
Section 10.7) harmless from and against all Damages resulting from or arising
out of:
(a) the failure of any of the representations or
warranties of the Company, Dollar Express or the Management Shareholders
contained in this Agreement or in any certificate delivered by the Company,
Dollar Express or the Management Shareholders at the Closing pursuant to this
Agreement to have been true and correct when made and on and as of the Closing
Date;
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(b) the failure of the Company, Dollar Express or the
Management Shareholders to comply with any of their respective covenants
contained in this Agreement;
(c) the operation of the Business prior to the Closing
Date; and
(d) any Legal Proceeding arising out of the items
referred to in subsections (a), (b) and (c) above.
10.2. By the Purchaser. Subject to the provisions of this
Article X and notwithstanding the tax indemnifications provided for in Section
7.4 hereof, (i) the Advent Entities, jointly and severally, (ii) Guayacan,
severally and not jointly with the Advent Entities or DEI, and (iii) DEI,
severally and not jointly with the Advent Entities or Guayacan, agree to
indemnify, defend and hold the Company, Dollar Express and the Management
Shareholders harmless from and against all Damages resulting from or arising out
of:
(a) the failure of any of the representations and
warranties made by such entity contained in this Agreement or in any certificate
delivered by such entity at the Closing pursuant to this Agreement to have been
true and correct when made and on and as of the Closing Date;
(b) the failure of such entity to comply with any of the
covenants to be performed or complied by it contained in this Agreement; and
(c) any Legal Proceeding arising out of the items
referred to in subsections (a) or (b) above.
10.3. Limitation on Indemnification Liabilities. No Claim for
indemnification under Sections 10. l (a) or (d) (but only to the extent
subsection (d) relates to a breach of a representation or warranty referred to
in Section 10.1(a)), or under Section 10.2(a) or (c) (but only to the extent
subsection (c) relates to a breach of a representation or warranty referred to
in Section 10.2(a)), may be brought or maintained unless and until the aggregate
dollar amount of all Damages sought to be indemnified against under such
aforesaid Sections exceeds Five Hundred Thousand Dollars ($500,000) (the
"Threshold Amount"), and then such Claim may be brought for the full amount of
such Damages up to, but not exceeding, the aggregate sum of Fifty-Five Million
Dollars ($55,000,000) (the "Maximum Amount"); provided, however, that any
amounts owing in respect of Section 4.22 or Section 5.6 hereof shall not be
included in either the Threshold Amount or the Maximum Amount.
10.4. Survival of Representations, Warranties and Covenants.
The parties hereto agree that the representations and warranties made in this
Agreement shall survive for a period ending on the second anniversary of the
Closing Date; provided, however, that (i) the representations and warranties in
Article VII (Taxes) and Section 4.20 (ERISA Matters) shall survive for the
period of the statute of limitations applicable to the matters represented and
warranted therein, (ii) the representations and warranties in Section 4.25 (Year
2000 Compliance) shall survive for a period ending on the fourth anniversary of
the Closing Date; and (iii) the representations and warranties in Section 4.2
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(Authorization), Section 4.9 (Title to Assets), and Section 5.2 (Authorization)
shall survive indefinitely.
10.5. Notice of Indemnification. In the event any Legal
Proceeding shall be threatened or instituted or any Claim or demand shall be
asserted by any Person in respect of which payment may be sought by one party
hereto from the other party under the provisions of Sections 10.1(a) or (d) (but
only to the extent subsection (d) relates to a breach of a representation or
warranty referred to in Section 10.1(a)), or under Sections 10.2(a) or (c) (but
only to the extent subsection (c) relates to a breach of a representation or
warranty referred to in Section 10.2(a)), for breach of any of the
representations and warranties set forth herein, the party seeking
indemnification (the "Indemnitee") shall promptly cause written notice of the
commencement of such Legal Proceeding or the assertion of any such Claim, of
which it has knowledge and which is covered by this indemnity, to be forwarded
to the other party (the "Indemnitor"); provided, however, that failure of the
Indemnitee to give the Indemnitor notice promptly as provided in this Section
shall not relieve the Indemnitor of its obligations hereunder except to the
extent that the Indemnitor shall have been prejudiced by such failure. In all
events, notice must be received by the Indemnitor prior to the expiration of the
survival terms of the underlying representations and warranties as described in
Section 10.4 above. Any notice of a Legal Proceeding or a Claim by reason of
breach of any of the representations, warranties or covenants contained in this
Agreement shall state in reasonable detail the representation, warranty or
covenant with respect to which the Claim is made, the facts giving rise to an
alleged basis for the Claim, and the amount of the Liability asserted against
the Indemnitor by reason of the Claim.
10.6. Indemnification Procedure for Third-Party Claims. Except
as otherwise provided herein, in the event of the initiation of any Legal
Proceeding against an Indemnitee by a third party, the Indemnitor shall be
entitled to assume the defense thereof, at the Indemnitor's sole expense. If the
Indemnitor assumes the defense of any Legal Proceeding, it will not settle the
Legal Proceeding without the prior written consent of the Indemnitee (which
shall not be unreasonably withheld or delayed). The Indemnitee shall cooperate
in all reasonable respects with the Indemnitor and its attorneys in the
investigation, trial and defense of any Legal Proceeding and any appeal arising
therefrom (including the filing in the Indemnitee's name of appropriate cross
claims and counterclaims). The Indemnitee may, at its own cost, participate in
any investigation, trial and defense of such Legal Proceeding controlled by the
Indemnitor and any appeal arising therefrom. If after receipt of a written
notice pursuant to Section 10.5 hereof, the Indemnitor does not undertake to
defend any such Legal Proceeding, the Indemnitee may, but shall have no
obligation to, contest or defend against any Legal Proceeding and the Indemnitor
shall be bound by the result obtained with respect thereto by the Indemnitee
(including, without limitation, the settlement thereof without the consent of
the Indemnitor). If there are one or more legal defenses available to the
Indemnitee that conflict with those available to the Indemnitor, the Indemnitee
shall have the right, at the expense of the Indemnitor, to assume the defense of
the Legal Proceeding; provided, however, that the Indemnitee may not settle such
Legal Proceeding without the consent of the Indemnitor, which consent shall not
be unreasonably withheld or delayed.
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10.7. Payment of Indemnification Amounts. Amounts determined
to be owing under Sections 10.1 or 10.2 hereof by an Indemnitor to an Indemnitee
in respect of any Third Party Claim shall be payable by the Indemnitor as
incurred by the Indemnitee. All other amounts owed under Sections 10.1 or 10.2
by an Indemnitor to an Indemnitee shall be paid upon admission or other final
determination of liability under such Sections.
(a) Indemnification owed by the Management Shareholders
under Section 10.1 hereof shall be paid to the Company if payment of such
indemnity meets either of the following criteria:
(i) such indemnity relates to a pre-Closing fact,
circumstance or liability which, had it been known prior to Closing, would not
have been taken into account in determining EBITDA for any period ending on or
prior to December 31, 1998, and payment of the indemnity will put the Company
and the Purchaser in the same position each would have been in had the item
giving rise to the indemnity not occurred; or
(ii) such indemnity involves an extraordinary
non-recurring item and payment of the indemnity will put the Company and the
Purchaser in the same position each would have been in had the item giving rise
to the indemnity not occurred.
(b) Indemnification owed by the Management Shareholders
under Section 10.1 hereof shall be paid in cash to the Purchaser (in which case
such item shall be multiplied by 10.09 and by the Purchaser's fully diluted
percentage ownership of the Company), if such indemnity relates to any other
fact, circumstance or liability which is not an extraordinary non-recurring item
addressed under Section (a)(ii) above and which, had it been known prior to
Closing, would have been taken into account in determining EBITDA for any period
ending on or prior to the Effective Date.
In no event shall any indemnity be paid under this Article X for items taken
into account and adjusted for in the procedures set forth in Section 3.9.
10.8. Management Shareholders' Claims Against the Company. The
Management Shareholders agree that neither of them will seek, nor will either of
them be entitled to, contribution from, or indemnification by, the Company,
under the Company's bylaws, this Agreement, applicable corporate laws or other
laws or otherwise, in respect of amounts due from the Management Shareholders to
the Purchaser under this Article X or otherwise under this Agreement, and each
of the Management Shareholders will hold the Company and the Purchaser harmless
in respect of all such amounts and shall not seek to join the Company in
connection with any suit arising under this Agreement. The Management
Shareholders also agree that they will not make claim against any directors and
officers insurance policy maintained or to be maintained by the Company in
respect of amounts due by the Management Shareholders to the Purchaser under
this Article X or otherwise under this Agreement, if the carrier of such
insurance policy would have any right of subrogation against the Company in
respect of such claim and shall indemnify and hold harmless the Purchaser from
any such action.
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10.9. Indemnity by Purchaser Entities. Each of (i) the Advent
Entities, (ii) Guayacan, and (iii) DEI shall be obligated to pay any
indemnification pursuant to Section 10.2 hereof such that each shall be
responsible for such indemnity only to the extent of its proportionate share
(based on its share of the purchase price paid for the Series A Preferred Shares
and Liquidity Event Warrants pursuant to Exhibit A hereof) of the Loss being
indemnified. Each of the Advent Entities agrees that each Advent Entity shall
have a right of contribution against each such other Advent Entity so that each
Advent Entity shall be responsible to bear an indemnified Loss only to the
extent of its proportionate share thereof (determined as stated above).
ARTICLE XI
TERMINATION
11.1. Termination. This Agreement may be terminated prior to
the Closing Date as follows:
(a) By mutual written consent of the Company, Dollar
Express, the Management Shareholders and the Purchaser;
(b) By either the Purchaser or the Company, Dollar
Express, and the Management Shareholders, so long as the terminating party(ies)
has(have) not breached in any material respect any of its (their) obligations
hereunder, after February 15, 1999 or such later date to which the Closing may
be extended by the parties hereto (such date being herein referred to as the
"Outside Closing Date"), if the Closing shall not have occurred on or before
such date;
(c) By the Company, Dollar Express or the Management
Shareholders, so long as neither the Company, Dollar Express, nor the Management
Shareholders has breached any of its obligations hereunder, if either (i) the
Purchaser fails to perform any covenant in this Agreement when performance
thereof is due and does not cure such failure within twenty (20) business days
after the Company delivers written notice thereof to the Purchaser, or (ii) any
condition in Article IX of this Agreement is not satisfied or capable of being
satisfied on or before the Outside Closing Date;
(d) By the Purchaser, so long as the Purchaser has not
breached any of its obligations hereunder, if either (i) the Company, Dollar
Express or the Management Shareholders fails to perform any covenant in this
Agreement when performance thereof is due, and does not cure the failure within
twenty (20) business days after written notice by the Purchaser thereof to the
non-performing party, or (ii) any condition in Article VIII of this Agreement is
not satisfied or capable of being satisfied on or before the Outside Closing
Date.
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11.2. Effect of Termination. If this Agreement is terminated
pursuant to Section 11.1, all rights and obligations of the parties hereunder
shall terminate, except for the confidentiality covenants referenced in Section
6.2 and the rights and obligations set forth in Section 12.5 and 12.6 hereof,
and except to the extent that such termination results from the willful or
material breach by a party of any of its representations, warranties, covenants
or agreements set forth in this Agreement.
11.3. Expenses If No Closing. If the Closing does not occur
and the Contemplated Transactions are not consummated, then, subject to the
right of a non-defaulting party to pursue all of its remedies, all costs and
expenses incurred in connection with this Agreement shall be paid by the Person
incurring such expenses; provided, however, that if all of the conditions
precedent set forth in Article IX (other than those relating to the delivery of
payments, documents, agreements and instruments required to be made at Closing)
shall have been satisfied, then each of the Company, Dollar Express and the
Management Shareholders, jointly and severally, shall reimburse the Purchaser
for all expenses incurred by it, up to a maximum of $500,000, in connection with
the due diligence investigation of the Company and the negotiation, execution
and delivery of this Agreement and any documents related to the Contemplated
Transactions, which reimbursement shall be made promptly upon demand therefor,
but in no event later than ten (10) business days after delivery of an invoice
with respect thereto.
ARTICLE XII
MISCELLANEOUS
12.1. Appointment of Directors. Immediately upon receipt of
the payments required by Section 3.1 through 3.4 hereof, the Company shall
appoint two individuals selected by the Purchaser to its Board of Directors.
12.2. Additional Restructuring. As soon as practicable
following the Closing Date, the Company shall initiate an additional
restructuring, as a result of which all, or substantially all, of the assets and
liabilities of the Dollar Express Stores will be owned by Dollar Express and
all, or substantially all, of the assets and liabilities of the Spain's Cards
Stores will be owned by another wholly-owned subsidiary of the Company.
12.3. Entire Agreement. This Agreement (with its Schedules and
Exhibits) contains, and is intended as, a complete statement of all of the terms
and the arrangements between the parties hereto with respect to the matters
provided for herein, and supersedes any and all previous agreements and
understandings between the parties hereto with respect to those matters.
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12.4. Specific Performance. The parties hereto agree that, in
the event of any such breach of any representation, warranty or covenant
contained herein or in the Collateral Documents, the parties will be entitled to
seek a decree of specific performance, mandamus or any other appropriate remedy
to enforce such provisions without any requirement that a bond be posted.
12.5. Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the Commonwealth of Pennsylvania without
regard to the application of the principles of conflicts or choice of laws.
12.6. Transfer Taxes. The Company shall pay all stamp,
transfer and documentary taxes and fees imposed with respect to the transaction
contemplated hereby. The Purchaser or the Company, as the case may be, shall
execute and deliver to the other at the Closing any certificates or other
documents as the other may reasonably request to perfect any exemption from any
such transfer or documentary.
12.7. Expenses. Except as set forth in Section 11.3, Dollar
Express shall pay and be responsible for the payment of all costs (including,
without limitation, fees and disbursements of its counsel, accountants and other
experts) that it, the Company, the Management Shareholders and the Purchaser
have incurred or will incur in connection with the preparation, negotiation,
execution, delivery and performance of this Agreement, each of the other
documents and instruments executed in connection with or contemplated by this
Agreement and the consummation of the transactions contemplated hereby and
thereby (including, without limitation, fees and disbursements of its counsel,
accountants and other experts).
12.8. Public Announcements. Neither the Company nor Dollar
Express (nor any of their affiliates) nor the Purchaser (nor any of its
affiliates) shall prior to the Closing make any public statement, including,
without limitation, any press release, with respect to this Agreement and the
Contemplated Transactions, without the prior written consent of the other party
(which consent may not be unreasonably withheld), except as may be required by
Law.
12.9. Notices. All notices and other communications hereunder
shall be in writing and shall be given to the Person either by hand delivery or
by United States express mail, postage prepaid, or by overnight courier services
guaranteeing next business day delivery, charges prepaid, to:
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If to the Company or Dollar Express, to:
DE&S Holding Co.
Dollar Express, Inc.
1700 Tomlinson Road
Philadelphia, PA 19116
Attention: Bernard Spain
with a copy to:
Fox, Rothschild, O'Brien & Frankel, LLP
2000 Market Street, 10th Floor
Philadelphia, PA 19103
Attention: Ramon R. Obod, Esquire
If to the Management Shareholders, to:
Bernard Spain
1700 Tomlinson Road
Philadelphia, PA 19116
Murray Spain
1700 Tomlinson Road
Philadelphia, PA 19116
with a copy to:
Fox, Rothschild, O'Brien & Frankel, LLP
2000 Market Street, 10th Floor
Philadelphia, PA 19103
Attention: Ramon R. Obod, Esquire
If to the Advent Entities, to:
c/o Advent International Corporation
75 State Street
Boston, MA 02109
Attention: David M. Mussafer
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with a copy to:
Pepper Hamilton LLP
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103-2799
Attention: Julia D. Corelli, Esquire
If to Guayacan, to:
Advent Morro Equity Partners
Banco Popular Building, Suite 903
206 Calle Tetuan
San Juan, Puerto Rico 00902
Attention: Cyril Meduna
If to DEI, to:
Dollar Express Investment, LLC
101 South Tryon Street, 40th Floor
Charlotte, NC 28280
Attention: Robert G. Calton III
with a copy to:
Kennedy, Covington, Lobdell & Hickman
100 North Tryon Street, Suite 4200
Charlotte, NC 28202
Attention: Warren P. Kean, Esquire
If the notice is sent by United States express mail or by overnight courier
services, it shall be deemed to have been given to the Person entitled thereto
one business day after deposited with the post office or the courier service for
delivery to that Person or, in the case of a notice given by hand delivery, when
received. Notice of any change in any such address shall also be given in the
manner set forth above. Whenever the giving of notice is required, the giving of
such notice may be waived by the party entitled to receive such notice.
12.10. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or the effectiveness or validity of any provision in any
other jurisdiction, and this Agreement will be reformed, construed and enforced
in such jurisdiction as if such invalid, illegal or unenforceable provision had
never been contained herein.
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12.11. Binding Effect; Successors and Assigns. Nothing in this
Agreement, express or implied, is intended, except as set forth herein, to
confer upon any third party any rights, remedies, obligations or liabilities. No
party can assign its interests herein to any third party, except that any entity
comprising the Purchaser may assign its right to purchase up to 25% of its
interest in the Company without the consent of the Company, Dollar Express or
the Management Shareholders. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, personal
representatives, and permitted successors and assigns agreeing to be bound by
all and the terms and conditions of this Agreement.
12.12. Entire Agreement. This Agreement is intended by the
parties as a final expression of their agreement with regard to the subject
matter hereof and intended to be a complete and exclusive statement of the
agreement and matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein.
This Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
12.13. Interpretation. Unless the context of this Agreement
otherwise requires, (i) words of any gender include each gender and the neuter;
(ii) words using the singular or plural number also include the plural or
singular number, respectively; (iii) the terms "hereof," "herein," "hereby" and
derivative or similar words refer to this entire Agreement; (iv) the terms
"Article" or "Section" refer to the specified Article or Section of this
Agreement; and (v) the term "including" or similar words shall be construed as
to refer to such matter without limitation thereof. Whenever this Agreement
refers to a number of days, such number shall refer to calendar days unless
business days are specified. The table of contents and headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
12.14. Amendments. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given without the written consent of each of the parties hereto.
12.15. Counterparts. This Agreement may be executed, including
by facsimile signature, in one or more counterparts, each of which when so
executed shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
instrument as of the date and year first above written.
DE&S HOLDING CO.
By: /s/ Murray Spain
--------------------------------------------
Name: Murray Spain
Title: President
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DOLLAR EXPRESS, INC.
By: /s/ Bernard Spain
--------------------------------------------
Name: Bernard Spain
Title: Chief Executive Officer
BERNARD SPAIN
/s/ Bernard Spain
------------------------------------------------
MURRAY SPAIN
/s/ Murray Spain
------------------------------------------------
GLOBAL PRIVATE EQUITY III LIMITED PARTNERSHIP
By: Advent International Limited Partnership,
its General Partner
By: Advent International Corporation,
its General Partner
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
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ADVENT PGGM GLOBAL LIMITED PARTNERSHIP
By: Advent International Limited Partnership,
its General Partner
By: Advent International Corporation,
its General Partner
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
ADVENT PARTNERS GPE III LIMITED PARTNERSHIP
By: Advent International Corporation,
General Partner
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
ADVENT PARTNERS (NA) GPE III LIMITED PARTNERSHIP
By: Advent International Corporation,
General Partner
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
ADVENT PARTNERS LIMITED PARTNERSHIP
By: Advent International Corporation,
General Partner
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
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GUAYACAN PRIVATE EQUITY FUND
LIMITED PARTNERSHIP
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
Advent International Corporation
DOLLAR EXPRESS INVESTMENT, LLC
By: /s/ Mark W. Mealy
--------------------------------------------
Name: Mark W. Mealy
Title: Manager, Dollar Express
Investment, LLC
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EXHIBIT A
PROPORTION OF INTERESTS
<TABLE>
<CAPTION>
Entity Dollar Contribution Interest %
<S> <C> <C>
- ------ ------------------- ----------
Global Private Equity III Limited Partnership $28,210,000 80.600%
Advent PGGM Global Limited Partnership $ 4,323,000 12.351%
Advent Partners GPE III Limited Partnership $ 426,000 1.217%
Advent Partners Limited Partnership $ 185,000 0.529%
Advent Partners (NA) GPE III Limited Partnership $ 126,000 0.360%
Guayacan Private Equity Fund Limited Partnership $ 1,000,000 2.857%
Dollar Express Investment, LLC $ 730,000 2.086%
</TABLE>
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EXHIBIT B
DESIGNATION STATEMENT
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EXHIBIT C
FORM OF LIQUIDITY EVENT WARRANT
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EXHIBIT D
FORM OF OPINION OF THE COMPANY'S COUNSEL
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EXHIBIT E
FORM OF INVESTORS RIGHTS AGREEMENT
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EXHIBIT F
FORM OF REGISTRATION RIGHTS AGREEMENT
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EXHIBIT G
FORM OF EMPLOYMENT AGREEMENTS
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EXHIBIT H
FORM OF AMENDED AND RESTATED BYLAWS OF THE COMPANY
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EXHIBIT I
FORM OF AMENDED AND RESTATED BYLAWS OF DOLLAR EXPRESS
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EXHIBIT J
FORM OF AMENDED AND RESTATED STOCK OPTION PLAN
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Exhibit 10.10
================================================================================
INVESTOR RIGHTS AGREEMENT
among
DE&S HOLDING CO.
DOLLAR EXPRESS, INC.
BERNARD SPAIN
MURRAY SPAIN
GLOBAL PRIVATE EQUITY III LIMITED PARTNERSHIP
ADVENT PGGM GLOBAL LIMITED PARTNERSHIP
ADVENT PARTNERS GPE III LIMITED PARTNERSHIP
ADVENT PARTNERS (NA) GPE III LIMITED PARTNERSHIP
ADVENT PARTNERS LIMITED PARTNERSHIP
GUAYACAN PRIVATE EQUITY FUND LIMITED PARTNERSHIP
and
DOLLAR EXPRESS INVESTMENT, LLC
Dated as of February 5, 1999
================================================================================
<PAGE>
INVESTOR RIGHTS AGREEMENT
-------------------------
THIS INVESTOR RIGHTS AGREEMENT (the "Agreement") is made as of this 5th
day of February, 1999, by and among DE&S HOLDING CO., a Pennsylvania corporation
(the "Corporation"), DOLLAR EXPRESS, INC., a Pennsylvania corporation ("Dollar
Express"), BERNARD SPAIN, MURRAY SPAIN (and together with Bernard Spain, the
"Management Holders"), GLOBAL PRIVATE EQUITY III LIMITED PARTNERSHIP, a Delaware
limited partnership ("GPE III"), ADVENT PGGM GLOBAL LIMITED PARTNERSHIP, a
Delaware limited partnership ("AG-PGGM"), ADVENT PARTNERS GPE III LIMITED
PARTNERSHIP, a Delaware limited partnership ("AP-GPEIII"), ADVENT PARTNERS (NA)
GPE III LIMITED PARTNERSHIP, a Delaware limited partnership ("AP-NA"), ADVENT
PARTNERS LIMITED PARTNERSHIP, a Delaware limited partnership ("APLP" and
together with GPEIII, AG- PGGM, AP-GPEIII and AP-NA, the "Advent Entities"),
GUAYACAN PRIVATE EQUITY FUND LIMITED PARTNERSHIP, a Delaware limited partnership
("Guayacan"), and DOLLAR EXPRESS INVESTMENT, LLC, a North Carolina limited
liability company ("DEI"; and, together with Guayacan and the Advent Entities
and their respective Affiliates, collectively, the "Investors"; and each of the
Investors is, individually, an "Investor").
WHEREAS, as of February 3, 1999, the Corporation, the Investors, and
the Management Holders executed a Securities Purchase and Contribuiont Agreement
(the "Purchase Agreement") (capitalized terms used but not defined herein have
the meanings set forth in the Purchase Agreement);
WHEREAS, pursuant to the Purchase Agreement, the Corporation has filed
an amendment to its charter designating 3,530,000 shares of preferred stock, par
value $0.01 per share, as Series A Cumulative Convertible Preferred Stock (the
"Series A Preferred Stock");
WHEREAS, on the date hereof, the Management Holders own 100% of the
outstanding shares of common stock, par value $.01 per share, of the Corporation
(the "Common Stock") and the Investors own 100% of the outstanding shares of
Series A Preferred Stock of the Corporation, each in the amounts set forth on
Schedule 1 hereto;
WHEREAS, under the terms of the Purchase Agreement, the Investors may
become entitled to exercise certain warrants to purchase shares of Common Stock
(the "Warrants"); and
WHEREAS, as an inducement to completion of the transactions
contemplated by the Purchase Agreement the Corporation, the Management Holders
and the Investors have agreed to provide for certain matters with respect to the
ownership and transfer of the Shares (as defined in Section 1 below) and
Warrants owned by them;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and undertakings of the Corporation set forth below, the parties
hereto, intending to be legally bound hereby, agree with each other as follows:
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<PAGE>
1. Certain Defined Terms. Capitalized terms used in this
Agreement have the meanings set forth in this Section 1, or are defined in the
provisions of this Agreement identified in this Section 1.
"Advent" shall mean Advent International Corporation, a
Delaware corporation, and any Affiliate of Advent International Corporation.
"Affiliate" of a Person shall mean any Person which,
directly or indirectly, controls, is controlled by, or is under common control
with, such Person. For purposes hereof, only wholly-owned subsidiaries shall be
deemed to be Affiliates of a parent entity and the requisite amount of "control"
shall exist only if the same Person has the power to direct decisions affecting
Securities. For purposes hereof (i) except as otherwise provided herein, the
partners, members or shareholders of an Investor shall be deemed to be
Affiliates of that Investor (but only to the extent of their pro rata interest
therein), and (ii) each Advent Entity shall be deemed to be an Affiliate of each
other Advent Entity and of Advent.
"Commission" shall mean the U.S. Securities and Exchange
Commission, or any other federal agency at the time administering the Securities
Act.
"Common Equity Percentage" shall mean, as to any
Shareholder, the percentage that (i) the outstanding shares of Common Stock then
owned by such Shareholder plus any shares of Common Stock issuable on the
conversion, exchange or exercise of securities owned by such Shareholder that
are, at the time of determination, convertible into, or exchangeable or
exercisable for, shares of Common Stock, is of (ii) the aggregate outstanding
number of shares of Common Stock then owned by all of the Shareholders plus all
shares of Common Stock issuable on the conversion, exchange or exercise of
securities that are, at the time of determination, convertible into, or
exchangeable or exercisable for, shares of Common Stock.
"Counterpart" shall mean a counterpart to this Agreement in
the form of Exhibit A hereto, pursuant to the execution of which a Person shall
become bound by all of the terms and conditions to this Agreement.
"Excluded Securities" shall mean, collectively: (i) the
Option Shares; (ii) the Warrant Shares; (iii) Shares of any class of the
Corporation's capital stock to be issued in exchange for or in respect of shares
of Common Stock (whether by way of stock split or reverse stock split, dividend
or distribution, subdivision, combination, reclassification, recapitalization,
reorganization or any other means); and (iv) Shares to be issued pursuant to a
Public Offering.
"Management Shares" shall mean and include all issued and
outstanding shares of Common Stock now owned or hereafter acquired by the
Management Holders.
"Options" shall mean incentive stock or non-qualified
options granted pursuant to the an employee benefit plan of the Corporation.
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"Option Shares" shall mean shares of Common Stock issuable
upon the exercise of Options.
"Permitted Transferee" shall mean, with respect to any
Management Shareholder or Permitted Transferee tracing his, her or its chain of
title to Shares from a Management Shareholder (i) any other Management
Shareholder or Permitted Transferee tracing his, her or its chain of title from
a Management Shareholder, (ii) any spouse of the Management Shareholder or any
such Permitted Transferee, (iii) any lineal ancestor or descendant or sibling of
the Management Shareholder or such Permitted Transferee, (iv) spouses of such
lineal descendants, or (v) trusts for the benefit of any such spouse, lineal
descendant or spouse of a lineal descendant.
"Person" shall mean an individual, a sole proprietorship, a
corporation, a partnership, limited liability company, limited liability
partnership, a joint venture, an associa tion, a trust, or any other entity or
organization, including a government or a political subdivision, agency or
instrumentality thereof.
"Pledge Agreement" shall mean that certain pledge agreement
entered into in connection with the Credit Agreement dated as of February 5,
1999, by and among the Corporation, Dollar Express, and any subsidiaries
referred to therein, as borrowers, and the lenders referred to therein (the
"Lenders"), and First Union National Bank, as Administrative Agent
("Administrative Agent").
"Post-QPO Ownership Percentage" shall mean the Investors'
aggregate Common Equity Percentage on the first business day after the
consummation of the Qualified Public Offering.
"Public Offering" shall mean the sale of shares of Common
Stock in an underwritten public offering registered under the Securities Act.
"Qualified Public Offering" shall mean a Public Offering
resulting in gross proceeds of at least $40,000,000 and which results in the
Common Stock being listed on the New York Stock Exchange or being eligible for
quotation on the Nasdaq National Market; provided that the Common Equity Value
of the Corporation immediately prior to such registered public offering must be
at least $150,000,000.
"Registration Rights Agreement" shall mean that certain
Registration Rights Agreement dated as of February 5, 1999, by and among the
Corporation, Dollar Express, the Management Holders, and each of the Investors,
as the same may hereafter be amended or modified.
"Securities" shall mean all shares of capital stock,
options, warrants, notes, bonds or other equity or debt securities of the
Corporation which are offered or sold by the Corporation from time to time on or
after the date hereof.
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"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute enacted hereafter, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect
from time to time.
"Shares" shall mean and include (i) all shares of Common
Stock of the Corporation, including without limitation, shares of Common Stock
issued, issuable on the conversion or exchange or exercise of securities
convertible into or exchangeable or exercisable for Common Stock, and (ii) all
other securities of the Corporation which may be issued in exchange for or in
respect of shares of Common Stock (whether by way of stock split or reverse
stock split, dividend or distribution, subdivision, combination,
reclassification, recapitalization, reorganization or any other means).
"Shareholder" shall mean any Person who, from time to time,
holds any Shares and who or which is or becomes a party to this Agreement
pursuant to the terms hereof.
"Subsidiary" means, with respect to the Corporation, any
corporation, association or other business entity of which more than 50% of the
outstanding Voting Stock is owned, directly or indirectly, by the Corporation
and one or more other Subsidiaries of the Corporation.
"Transfer" shall mean any transfer of Shares, whether by
sale, assignment, gift, will, devise, bequest, operation of the laws of descent
and distribution, or in trust, pledge, hypothecation, mortgage, encumbrance or
other disposition. The verb to "Transfer" shall mean to sell, assign, give,
transfer (including by gift, will, devise, bequest, or operation of laws of
descent and distribution, or in trust), pledge, hypothecate, mortgage, encumber
or dispose of.
"Voting Stock" means with respect to any Person, capital
stock of any class or kind ordinarily having the power to vote for the election
of directors, managers or other voting members of the governing body of such
Person.
"Warrant Shares" shall mean shares of Common Stock issuable
upon the exercise of Warrants.
2. Financing Participation Rights.
a. Except in the case of the issuance of Excluded
Securities, if the Corporation shall at any time desire to raise capital, incur
indebtedness for borrowed money, or otherwise engage in a financing transaction
("Financing Transaction"), the Corporation shall first prepare a written offer
setting forth all material terms and conditions for the proposed Financing
Transaction (the "Term Sheet"), including the price and terms and conditions
thereof, the minimum and maximum limits, if any, on the amount of Securities
proposed to be sold by the Corporation, and the Common Equity Percentage
applicable to the Investor receiving such notice. Such notice shall also specify
whether a third party has made an offer to provide the funds for the proposed
Financing Transaction. The Corporation shall promptly transmit a copy of the
Term Sheet to each of the Investors, and thereupon shall be deemed to have
offered in
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writing to engage in the Financing Transaction with the Investors upon the terms
and conditions set forth in the Term Sheet. For a period of 30 days after the
Term Sheet has been received ("Financing Option Period") by the Investors, the
Investors shall have the option, exercisable by written notice to the
Corporation, to accept the Term Sheet as to the proposed Financing Transaction.
Each Investor who exercises this option shall agree, by doing so, to participate
in the Financing Transaction in such other proportions as to the other Investors
as they may agree among themselves and set forth in the notice accepting the
Term Sheet. For a period beginning on the date of the exercise of the option and
continuing until 60 days after date the Term Sheet was received by the Investors
(the "Negotiation Period"), the Corporation and the Investors exercising the
option shall negotiate in good faith the terms and conditions of a definitive
agreement concerning the Financing Transaction.
b. Each Investor may assign to another Investor, or
to an Affiliate of itself or any other Investor, all or any part of its rights
and responsibilities with respect to an offer to engage in the proposed
Financing Transaction upon the terms and conditions set forth in the Term Sheet.
Such Investors or Affiliates which are such assignees shall thereafter be deemed
to be such assigning Investor (to the extent of such assignment) for purposes of
applying this Section 2 to proposed Financing Transactions. In the event of a
purchase of equity securities pursuant to such assignment, each such Affiliate
shall be deemed an Investor and shall agree in writing, as a condition to such
assignment, to execute a Counterpart and a counterpart to the Registration
Rights Agreement.
c. If, at the end of the Negotiation Period, the
Investors and the Corporation have not consummated the Financing Transaction,
then the Corporation shall be free, subject to the preemptive rights set forth
in Section 3 hereof and other applicable limitations, for a period of 180 days
thereafter, to consummate the Financing Transaction upon substantially the same
terms and conditions set forth in the Term Sheet with a third party which is not
an Affiliate of the Corporation, of any director or executive officer of the
Corporation, or of any Management Shareholder ("Third-Party Financing Closing").
The failure of the Investors to accept the Term Sheet shall not be deemed to be
a waiver of the Investors rights under the Corporation's charter or bylaws, or
any other agreement. As a condition to the third party financing, in the event
any equity securities are to be issued in the Financing Transaction, such third
party shall execute a copy of this Agreement as a Shareholder. If the
Third-Party Financing Closing does not occur substantially upon the terms and
conditions set forth in the Term Sheet within the aforesaid 180-day period, then
the Corporation shall not be permitted to engage in a Financing Transaction
without again complying with this Section 2.
d. If at any time, or from time to time, Dollar
Express or any other Subsidiary proposes to raise capital, incur indebtedness
for borrowed money, or otherwise engage in a financing transaction ("Subsidiary
Financing Transaction"), Dollar Express shall, and the Corporation shall cause
any other Subsidiary to, enter into an agreement granting to each of the
Investors and the Management Holders, pro rata based on such party's Common
Equity Percentage, financing participation rights with respect to the Subsidiary
Financing Transaction on terms identical to those set forth in Section 2(a), (b)
and (c) hereof. Such participation rights shall not be applicable to issuances
of securities by a Subsidiary solely to the Corporation and/or
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to any other Subsidiary. If any Investor participates in a Subsidiary Financing
Transaction under this Section 2(d), and as a result of which such Investor
acquires equity securities of a Subsidiary, the Corporation shall cause such
Subsidiary to enter into an agreement granting to such Investor preemptive
rights and, if any Management Holders also purchase securities of such
Subsidiary, tag-along rights with respect to the securities of such Subsidiary
on terms identical to the terms set forth in Section 3 and Section 4 hereof.
e. The rights and obligations set forth in Section 2
shall terminate upon the consummation of a Qualified Public Offering.
3. Preemptive Rights.
a. Except in the case of the issuance of Excluded
Securities, the Corporation shall not, including instances where any Investor
has not exercised its rights under Section 2 above, issue, sell or exchange,
agree to issue, sell or exchange, or reserve or set aside for issuance, sale or
exchange, any Securities unless it shall have first offered (the "Preemptive
Offer") to sell such Securities to the Investors on the terms set forth in this
Section 3. Each Investor shall have a preemptive right to purchase up to such
Investor's Common Equity Percentage of such Securities. Each Investor may assign
all or any part of its rights and responsibilities with respect to such Offer
(as defined below) to another Investor, or to an Affiliate of itself or any
other Investor. Such Investors or Affiliates which are such assignees shall
thereafter be deemed to be such assigning Investor (to the extent of such
assignment) for purposes of applying this Section 3 to such Preemptive Offer. In
the event of a purchase of Securities pursuant to such assignment, each such
Affiliate shall be deemed an Investor and shall agree in writing, as a condition
to such assignment, to execute a Counterpart and a counterpart to the
Registration Rights Agreement.
b. The Corporation shall deliver to each Investor
written notice of the Preemptive Offer, specifying the price and terms and
conditions of the offer, including without limitation, the minimum and maximum
limits on the amount of Securities proposed to be sold by the Corporation, and
the Common Equity Percentage applicable to the Investor receiving such notice.
The Preemptive Offer by its terms shall remain open and irrevocable for a period
of 15 days from the date such notice is given (the "15-Day Period").
c. If an Investor desires to purchase Securities
pursuant to the Preemptive Offer, such Investor shall evidence his or its
intention to accept the Preemptive Offer by delivering a written notice to the
Corporation signed by the Investor, setting forth the percentage of the
Securities (not exceeding such Investor's Common Equity Percentage of such
Securities) that the Investor elects to purchase (the "Notice of Acceptance").
Provided the minimum number of Securities set forth in the Preemptive Offer has
been sold after conclusion of all procedures set forth in this Section 3, then,
upon closing of the Preemptive Offer, each Investor shall be obligated to buy
the percentage set forth in such Investor's Notice of Acceptance times the
number of Securities being sold at such closing. The Corporation shall not be
permitted to sell at such closing (or any subsequent closing with respect to
which the procedures set forth in this Section 3 have not again been followed,
except as provided in this Section 3)
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more than the maximum number of Securities set forth in the Preemptive Offer.
The Notice of Acceptance must be given, if at all, prior to the end of the
15-Day Period. Within five days following the end of the 15-Day Period, the
Corporation shall give written notice (the "Notice of Refused Securities") to
the Investors setting forth the percentage of Securities for which a Notice of
Acceptance was not received (the "Refused Securities").
d. If the Investors give Notices of Acceptance to the
Corporation prior to the end of the 15-Day Period indicating their intention to
purchase, in the aggregate, less than the maximum amount of Securities set forth
in the Preemptive Offer, each Investor giving a Notice of Acceptance ("Accepting
Investors") shall be entitled to purchase by an additional Notice of Acceptance
given to the Corporation within 5 days after the date the Notice of Refused
Securities is given (the "5-Day Period"), that proportion of the Refused
Securities which the Common Equity Percentage of such Accepting Investor (prior
to the Offer) bears to the Common Equity Percentage of all Accepting Investors.
e. If the Investors give Notices of Acceptance prior
to the end of the 15-Day Period or 5-Day Period, as applicable, indicating their
intention to purchase, in the aggregate, at least the minimum amount of
Securities set forth in the Preemptive Offer, the Corporation shall schedule a
closing of the sale of the Securities to occur on the same date as the
Third-Party Financing Closing. In no event shall the Accepting Investors be
obligated to purchase the securities prior to the Third-Party Financing Closing.
Upon the closing of the sale of the Securities, each Accepting Investor shall
purchase those Securities for which it tendered a Notice of Acceptance upon the
terms specified in the Offer.
f. Regardless of whether the Investors tender Notices
of Acceptance pursuant to subsection (c) and (d) of this Section 3 for at least
the minimum amount of Securities set forth in the Offer within the 15-Day Period
or the 5-Day Period, as applicable, any remaining Refused Securities may be sold
on the date of the Third-Party Financing Closing to any other Person or Persons
(including without limitation, executive officers of the Corporation) upon terms
and conditions which are in all material respects (including without limitation,
price, form of consideration, payment period and interest rates) the same as
those set forth in the Preemptive Offer. In the event Accepting Investors gave
Notices of Acceptance for less than the minimum number of Securities set forth
in the Preemptive Offer, provided the Refused Securities agreed to be purchased
plus the Securities for which Accepting Investors gave Notices of Acceptance
exceeds such minimum, then at the same time as the closing of the sale of
Refused Securities, each Accepting Investor shall purchase those Securities for
which it tendered a Notice of Acceptance upon the terms specified in the
Preemptive Offer.
g. If at least the minimum amount of the Securities
set forth in the Preemptive Offer and the Outside Offer are not agreed to be
purchased in connection with the Third-Party Financing Closing (including any
securities to be purchased by the Investors and any Refused Securities), the
Corporation may rescind all Notices of Acceptance tendered by Investors by
providing written notice of such rescission to each Accepting Investor and the
Corporation shall not sell any Securities pursuant to the Outside Offer. Any
Securities as to which Notices of Acceptance are rescinded, and any Refused
Securities not purchased in the Outside Offer may not be sold or otherwise
disposed of until they are again offered to the Investors under the procedures
specified in subsections (a) through (g) hereof.
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h. The transferability of Securities purchased by
Person pursuant to this Section 3 shall be subject to the terms and conditions
set forth in this Agreement and any Person who is not then a Shareholder and who
purchases Securities shall execute a Counterpart as a condition precedent to
such purchase. The obligation of any Investor to purchase such Securities is
further conditioned upon the preparation of a purchase agreement embodying the
terms of the Preemptive Offer or Outside Offer which shall be reasonably
satisfactory in form and substance to the Corporation and its counsel, and such
Investor or other purchaser and such Investor's or other purchaser's counsel.
i. The rights and obligations set forth in this
Section 3, including any such similar rights granted with respect to a
Subsidiary pursuant to Section 2(d), shall terminate on such day as the
Investors' Post-QPO Ownership Percentage shall have been reduced by 50%.
4. Proposed Sales by Certain Shareholders.
a. Subject to the provisions of subsection (d) below,
if any Shareholder who is not an Investor shall at any time desire to sell all
or any of such Shareholder's Shares, such Shareholder (the "Selling
Shareholder") shall first prepare a written offer to sell such Shares (the
"Offered Shares") setting forth the proposed date of the sale, the proposed
price per Share, and the other terms and conditions upon which the sale is
proposed to be made (the "Offer"). Such notice shall also specify whether a
Third Party Purchaser (as hereinafter defined) has made an offer to acquire such
Shares at the price and on the terms and conditions set forth in the Offer. The
Selling Shareholder shall then transmit a copy of the Offer to the Corporation
and each of the Investors, and thereupon shall be deemed to have offered in
writing to sell all, but not less than all, of the Offered Shares to the
Investors, as a group, at the price and on the terms and conditions set forth in
the Offer. For a period of 45 days after such Offer to the Investors (the
"Option Period"), each Offeree Shareholder shall have the option, exercisable by
written notice to the Selling Shareholder with a copy to the Corporation and to
each of the other Investors, to accept the Offer as to the Offered Shares. Each
Offeree Shareholder who exercises this option shall agree, by doing so, to
purchase that proportionate part of the Offered Shares which the number of
Shares owned by such Offeree Shareholder bears to the total number of Shares
owned by all Investors accepting the Offer pursuant to this Section 4(a) (or in
such other proportions as the Investors may agree among themselves).
b. If, at the end of the Option Period, the Investors
have not agreed to purchase all of the Offered Shares, then the Selling
Shareholder shall be free, subject to the co-sale provisions of Section 4(c)
hereof, for a period of 180 days thereafter to sell any or all of the Offered
Shares to a third party purchaser (the "Third Party Purchaser") at the price and
upon the terms and conditions set forth in the Offer, and on condition that such
Third Party Purchaser executes a copy of this Agreement as a Shareholder. If the
Offered Shares are not so sold within the aforesaid 180-day period, then the
Selling Shareholder shall not be permitted to sell the Offered Shares without
again complying with this Section 4.
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c. As a condition precedent to any sale made to a
Third Party Purchaser by a Selling Shareholder in accordance with Section 4(b)
("Third Party Sale"), the Selling Shareholder shall notify each Investor of the
terms and conditions of the Third Party Sale ("Co-Sale Offer"). Notice of the
Co-Sale Offer shall be deemed to have been given on the date the notice of the
Offer was given pursuant to Section 4(a). The Co-Sale Offer shall remain open
and irrevocable until 10 days prior to the scheduled closing of the Third Party
Sale (the "Co-Sale Offer Period"). Upon receipt of such notice, each Investor
shall have the right ("Co-Sale Right") to sell to the Third Party Purchaser,
that number of shares of Common Stock equal to the product attained by
multiplying (a) the number of shares of Common Stock the Third Party Purchaser
proposes to purchase, times (b) the quotient derived by dividing (i) the number
of shares of Common Stock held (or deemed to be held) by the Investors
exercising the Co-Sale Right under this Section 4(c) by (ii) the total number of
shares of Common Stock held (or deemed to be held) by the Selling Shareholders
and the Investors exercising the Co-Sale Right under this Section 4(c). Each
Investor's right to sell pursuant to this Section 4(c) can be exercised by
delivery of a written notice to the Selling Shareholders prior to the
termination of the Co-Sale Offer Period. The Selling Shareholder shall deliver
to each Investor notice of the scheduled closing of the Third Party Sale at
least 15, but not more than 20, days prior to such scheduled closing. As a
condition to any Investor's exercise of the Co-Sale Right, such Investor agrees,
immediately prior to the closing of the Third Party Sale, to convert such number
of shares of Series A Preferred Stock as necessary to deliver to the Third Party
Purchase only shares of Common Stock in the Third Party Sale.
d. The provisions of this Section 4 shall not apply
(i) to proposed transfers by a Shareholder to a Permitted Transferee so long as
such Permitted Transferee, as a condition precedent to acquiring Shares,
executes a copy of this Agreement as a Shareholder, or (ii) to sales by a
Shareholder registered under the Securities Act or exempt from registration
pursuant to Rule 144 of the Securities Act.
5. Stock Splits, Etc. If there shall be any change in the
Shares as a result of any merger, consolidation, reorganization,
recapitalization, stock dividend, split-up, combination or exchange of Shares,
or otherwise, the provisions of this Agreement shall apply with equal force to
additional and/or substitute Securities, if any, received by each Shareholder in
exchange for or by virtue of its ownership of Shares.
6. Failure to Deliver Shares. If a Shareholder (the
"Transferring Shareholder") becomes obligated to Transfer any Shares to any of
the Corporation or to another Shareholder pursuant to this Agreement (including
a Transfer to another Shareholder for purposes of Transfer to another purchaser
pursuant to Section 6 or otherwise) and fails to deliver such Shares in
accordance with the terms of this Agreement, the Corporation or such other
Shareholder, as the case may be, may, at its or their option, in addition to all
other remedies it may have, either (i) send to the Transferring Shareholder the
purchase price for such Shares as is herein specified, or (ii) deposit such
amount with a trustee or escrow agent for the benefit of the Transferring
Shareholder for release upon delivery of such Shares to the trustee or escrow
agent in accordance with the terms of this Agreement. Thereupon, the Corporation
upon written notice
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to the Transferring Shareholder, (a) shall cancel on its books the certificate
or certificates representing the Shares so required to be transferred by the
Transferring Shareholder and (b) shall issue, in lieu thereof, in the name of
the Corporation, such other Shareholder or purchaser, as the case may be, a new
certificate or certificates representing such Shares; provided, however, the
Corporation shall be under no obligation to so cancel and issue Shares unless
the other Shareholder or purchaser, as the case may be, delivers to the
Corporation its agreement to indemnify, defend and hold harmless the
Corporation, its officers and employees, successors and assigns, from any and
all losses, claims, damages or liabilities (or actions in respect thereof) to
which the Corporation may become subject as a result of, arising out of, or
based upon the Corporation so canceling and issuing Shares, and such other
Shareholder or purchaser, as the case may be, shall reimburse the Corporation
for any legal or other expenses reasonably incurred by the Corporation in
connection therewith. All of the Transferring Shareholder's rights in and to
such Shares shall terminate as of the date of such Notice.
7. Financial Reports and Information. In addition to such
rights as the Investors (or their transferees) have under applicable law as a
Shareholder, at the Corporation's cost and expense, the Corporation shall
provide the Investors, and to any other Person who, as a result of the transfer
of shares of Series A Preferred Stock or Warrants to him, her or it, directly or
indirectly from an Investor, is the beneficial owner (determined in accordance
with Rule 13d-3 promulgated under the Securities Act of 1934, as amended) of at
least 2% of the outstanding shares of Common Stock, the financial reports and
information specified in this Section 7.
a. Within 90 days after the end of each fiscal year of the
Corporation, for so long as this Agreement shall be in effect, the Corporation
shall furnish each of the Investors with audited financial statements of the
Corporation for such fiscal year (showing comparison to the prior fiscal year)
which shall include a statement of income and retainedearnings for each such
fiscal year, a balance sheet as at the last day thereof, and a statement of cash
flows prepared in accordance with generally accepted accounting principles
consistently applied, and accompanied by the report, without qualification, of
the Corporation' independent certified public accountants (which shall be of
recognized national standing), including such accountant's management letters to
the Corporation. In addition, the Corporation shall furnish each of the
Investors with a discussion and analysis of the financial information described
above, prepared by management in accordance with the requirements of Item 303 of
Regulation S-K (or any successor provision) promulgated by the Commission.
b. Within 45 days after the end of each quarter, for so
long as this Agreement shall be in effect, the Corporation shall furnish each of
the Investors with unaudited financial statements of the Corporation for such
quarter (showing comparison to the same month the prior fiscal year) which shall
include, for each such quarter and the year-to-date period, a statement of
income and retained earnings, a balance sheet as at the last day thereof, and a
statement of cash flows prepared in accordance with generally accepted
accounting principles consistently applied, and accompanied by the report,
without qualification, of the Corporation' independent certified public
accountants (which shall be of recognized national standing), including such
accountant's management letters to the Corporation. In addition, the Corporation
shall furnish each of the Investors with a discussion and analysis of the
financial information described above, prepared by management in accordance with
the requirements of Item 303 of Regulation S-K (or any successor provision)
promulgated by the Commission.
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c. Within 30 days after the end of month, for so long as
this Agreement shall be in effect, the Corporation shall furnish each of the
Investors with unaudited financial statements of the Corporation for such month
(showing comparison to the same month the prior fiscal year) which shall
include, for each such month and the year-to-date period, a statement of income
and retained earnings, a balance sheet as at the last day thereof, and a
statement of cash flows prepared in accordance with generally accepted
accounting principles consistently applied, and accompanied by the report,
without qualification, of the Corporation' independent certified public
accountants (which shall be of recognized national standing), including such
accountant's management letters to the Corporation. In addition, the Corporation
shall furnish each of the Investors with a management commentary of the
operating and financial results for the applicable monthly period.
d. If for any period any Corporation shall have any
Subsidiary or Subsidiaries whose accounts are consolidated with those of such
Corporation, then in respect of such period the financial statements delivered
pursuant to the foregoing Section 7(a) and (b) shall be the consolidating and
consolidated financial statements of such Corporation and all such consolidated
Subsidiaries.
e. Promptly upon becoming available, copies of all
financial statements, reports, press releases, notices, proxy statements and
other documents sent by any of the Corporation to their lenders or released to
the public and copies of all regular and periodic reports, if any, filed by the
Corporation with the Commission or any securities exchange.
f. Upon request from any Shareholder, the Corporation shall
disclose to such Shareholder, in writing, the name and address of such
Shareholder (as it then appears on the records of the Corporation) and each
Shareholders Common Equity Percentage.
8. Election of Subsidiary Directors. The Corporation and the
Shareholders hereby agree to cause the board of directors of each Subsidiary,
including, without limitation, Dollar Express, to consist of five individuals
and to cause to be nominated and elected to serve as members of the board of
directors of any Subsidiary two individuals which shall be selected for
nomination by the Investors holding a majority of the outstanding shares of
Series A Preferred Stock, and three individuals which shall be selected for
nomination by the holders of a majority of the outstanding shares of Common
Stock. The Corporation and the Shareholders agree that no director of a
Subsidiary selected for nomination by the Investors may be removed unless such
removal is approved by the holders of a majority of the outstanding shares of
Series A Preferred Stock and that no director of a Subsidiary selected for
nomination by the holders of Common Stock may be removed unless such removal is
approved by the holders of a majority of the outstanding shares of Common Stock.
The Corporation and the Shareholders agree that any vacancy on the board of
directors of any Subsidiary, whether occurring through resignation, removal or
otherwise, shall be filled with an individual selected by the same group of
Shareholders who selected the individual whose resignation, removal or other
action or omission resulted in such vacancy, and that the Corporation and the
Shareholders shall cause such individual to be nominated and elected to serve on
the board of directors of the applicable Subsidiary as soon as practicable.
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9. Specific Performance. Because of the unique character of
the Shares, the Corporation will be irreparably damaged if this Agreement is not
specifically enforced. Should any dispute arise concerning the Transfer of
Shares, an injunction may be issued restraining any Transfer pending the
determination of such controversy. In the event of any controversy concerning
the right or obligation to Transfer any such Shares, such right or obligation
shall be enforceable in a court of equity by a decree of specific performance.
Such remedy shall be cumulative and not exclusive, and shall be in addition to
any other remedy which the Corporation or the other Shareholders of the
Corporation may have.
10. Legend. Each certificate evidencing any of the shares of
Common Stock, other than those sold in a registered public offering, shall bear
a legend substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON TRANSFER AND MAY NOT BE SOLD, EXCHANGED,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
EXCEPT IN ACCORDANCE WITH AND SUBJECT TO ALL THE TERMS AND
CONDITIONS OF A CERTAIN INVESTOR RIGHTS AGREEMENT DATED AS OF
FEBRUARY 5, 1999, AMONG THE CORPORATION AND CERTAIN OF ITS
SHAREHOLDERS, A COPY OF WHICH THE CORPORATION WILL FURNISH TO
THE HOLDER OF THIS CERTIFICATE UPON REQUEST AND WITHOUT
CHARGE."
11. Notices. All notices and other communications hereunder
shall be in writing and shall be given to the person either personally or by
sending a copy thereof by overnight delivery via United States express mail,
postage prepaid, or by a nationally recognized courier service guaranteeing next
business day delivery, charges prepaid, or by telecopier, to such party's
address or to such party's telecopier number. All notices shall be deemed to
have been given to the person entitled thereto one business day after deposited
with the U.S. Postal Service or courier service for delivery to that person or,
in the case of telecopy or hand delivery, when dispatched.
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If to the Corporation or to Dollar Express, to:
DE&S Holding Co.
Dollar Express, Inc.
1700 Tomlinson Road
Philadelphia, PA 19116
Attention: Bernard Spain
Telecopy No.: 215.676.1166
with a copy to:
Fox, Rothschild, O'Brien & Frankel, LLP
2000 Market Street, 10th Floor
Philadelphia, PA 19103
Attention: Ramon R. Obod, Esquire
Telecopy No.: 215.299.2150
If to the Management Shareholders, to:
Bernard Spain
1700 Tomlinson Road
Philadelphia, PA 19116
Telecopy No.: 215.676.1166
Murray Spain
1700 Tomlinson Road
Philadelphia, PA 19116
Telecopy No.: 215.676.1166
with a copy to:
Fox, Rothschild, O'Brien & Frankel, LLP
2000 Market Street, 10th Floor
Philadelphia, PA 19103
Attention: Ramon R. Obod, Esquire
Telecopy No.: 215.299.2150
If to DEI, to:
Dollar Express Investment, LLC
101 South Tryon Street, 40th Floor
Charlotte, NC 28280
Attention: Robert G. Calton III
Telecopy No.: 704.348.1099
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with a copy to:
Kennedy, Covington, Lobdell & Hickman
100 North Tryon Street, Suite 4200
Charlotte, NC 28202
Attention: Warren P. Kean, Esquire
Telecopy No.: 704.331.7598
If to the Advent Entities or Guayacan, to:
c/o Advent International Corporation
75 State Street
Boston, MA 02109
Attention: David M. Mussafer
Telecopy No.: 617.443.0322
With a copy to:
Pepper Hamilton LLP
3000 Two Logan Square
Philadelphia, PA 19103-2799
Attention: James D. Epstein, Esq.
Telecopy No.: 215.981.4750
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<PAGE>
Notice of any change in any such address shall also be given in the manner set
forth above. Whenever the giving of notice is required, the giving of such
notice may be waived by the party entitled to receive such notice.
12. Entire Agreement; Amendments; Waiver; Termination. This
Agreement constitutes the entire agreement of the parties with respect to the
subject matter hereof and neither this Agreement nor any provision hereof may be
waived, modified, amended or terminated except by a writing duly executed by
holders of Shares having an aggregate Common Equity Percentage of at least 80%,
and, if the waiver, modification, amendment or termination would affect the
rights or obligations of a holder of another class of Shares other than Common
Stock, by holders of at least 80% of the outstanding shares of such class of
Shares so affected; provided, however, that for so long as Advent's aggregate
Common Equity Percentage is at least 5%, this Agreement may not be waived,
modified, amended or terminated without the prior written consent of Advent
International Corporation. To the extent any term or other provision of any
other indenture, agreement or instrument by which any party hereto is bound
conflicts with this Agreement, this Agreement shall have precedence over such
conflicting term or provision.
13. Foreclosure Upon Securities. Notwithstanding anything
herein to the contrary, this Agreement shall not apply to any equity securities
of the Corporation, or to any equity securities of Dollar Express or any other
Subsidiary, upon foreclosure on any such equity securities ("Foreclosed
Securities") by the Lenders (or the Administrative Agent on their behalf)
pursuant to the Pledge Agreement, but continuing only for so long as the Lenders
shall hold Foreclosed Securities.
14. Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the Commonwealth of Pennsylvania and
shall be binding upon the parties hereto and their respective successors and
assigns.
15. Waivers. The failure of any party to insist upon strict
performance of any of the terms or conditions of this Agreement will not
constitute a waiver of any of its rights hereunder.
16. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision
-15-
<PAGE>
of this Agreement is held to be invalid, illegal or unenforceable in any respect
under any applicable law or rule in any jurisdiction, such invalidity,
illegality or unenforceability will not affect any other provision or the
effectiveness or validity of any provision in any other jurisdiction, and this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained
herein.
17. Captions. Captions are for convenience only and are not
deemed to be part of this Agreement.
18. Counterparts; Facsimile Signatures. This Agreement may be
executed, including by facsimile signature, in one or more counterparts, each of
which when so executed shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
19. Attorney's Fees. In the event of litigation of any dispute
or controversy arising from, in, under or concerning this Agreement or any
amendment hereof, including, without limiting the generality of the foregoing,
any claimed breach hereof or thereof, the prevailing party in such action shall
be entitled to recover from the other party in such action, such sum as the
court shall fix as reasonable attorney's fees incurred by such prevailing party.
20. Parties Benefitted. Nothing in this Agreement, express or
implied, is intended to confer upon any third party any rights, remedies,
obligations or liabilities.
21. Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
personal representatives, successors and assigns.
[SPACE INTENTIONALLY LEFT BLANK]
-16-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Investor Rights
Agreement under seal on the date first above written.
DE&S HOLDING CO.
By: /s/ Murray Spain
--------------------------------------------
Name: Murray Spain
Title: President
DOLLAR EXPRESS, INC.
By: /s/ Bernard Spain
--------------------------------------------
Name: Bernard Spain
Title: Chief Executive Officer
BERNARD SPAIN
/s/ Bernard Spain
--------------------------------------
MURRAY SPAIN
/s/ Murray Spain
--------------------------------------
GLOBAL PRIVATE EQUITY III LIMITED PARTNERSHIP
By: Advent International Limited Partnership,
its General Partner
By: Advent International Corporation,
its General Partner
By: /s/ David M. Mussafer
--------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
-17-
<PAGE>
ADVENT PGGM GLOBAL LIMITED PARTNERSHIP
By: Advent International Limited Partnership,
its General Partner
By: Advent International Corporation,
its General Partner
By: /s/ David M. Mussafer
--------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
ADVENT PARTNERS GPE III LIMITED PARTNERSHIP
By: Advent International Corporation, General Partner
By: /s/ David M. Mussafer
-----------------------------
Name: David M. Mussafer
Title: Senior Vice-President
ADVENT PARTNERS (NA) GPE III LIMITED PARTNERSHIP
By: Advent International Corporation, General Partner
By: /s/ David M. Mussafer
-----------------------------
Name: David M. Mussafer
Title: Senior Vice-President
-18-
<PAGE>
ADVENT PARTNERS LIMITED PARTNERSHIP
By: Advent International Corporation, General Partner
By: /s/ David M. Mussafer
-----------------------------
Name: David M. Mussafer
Title: Senior Vice-President
GUAYACAN PRIVATE EQUITY FUND
LIMITED PARTNERSHIP
By: /s/ David M. Mussafer
-----------------------------
Name: David M. Mussafer
Title: Senior Vice-President
Advent International Corporation
DOLLAR EXPRESS INVESTMENT, LLC
By: /s/ Mark W. Mealy
----------------------------------------------
Name: Mark W. Mealy
Title: Manager, Dollar Express Investment, LLC
-19-
<PAGE>
Schedule 1
TO
INVESTOR RIGHTS AGREEMENT
OWNERSHIP INTERESTS
<TABLE>
<CAPTION>
Common Stock
- ------------
<S> <C>
Bernard Spain 3,235,000 shares
Murray Spain 3,235,000 shares
Global Private Equity III Limited Partnership warrant to purchase 335,833 shares
Advent PGGM Global Limited Partnership warrant to purchase 51,463 shares
Advent Partners GPE III Limited Partnership warrant to purchase 5,071 shares
Advent Partners (NA) GPE III Limited Partnership warrant to purchase 1,500 shares
Advent Partners Limited Partnership warrant to purchase 2,204 shares
Guayacan Private Equity Fund Limited Partnership warrant to purchase 11,904 shares
Dollar Express Investment, LLC Limited Partnership warrant to purchase 8,692 shares
Preferred Stock
- ---------------
Global Private Equity III Limited Partnership 2,845,180 shares
Advent PGGM Global Limited Partnership 435,990 shares
Advent Partners GPE III Limited Partnership 42,960 shares
Advent Partners (NA) GPE III Limited Partnership 12,708 shares
Advent Partners Limited Partnership 18,674 shares
Guayacan Private Equity Fund Limited Partnership 100,852 shares
Dollar Express Investment, LLC Limited Partnership 73,636 shares
</TABLE>
-20-
<PAGE>
Exhibit A
TO
INVESTOR RIGHTS AGREEMENT
COUNTERPART
THIS INSTRUMENT forms part of the Investor Rights Agreement (the
"Agreement") made as of the 5th day of February, 1999, by and among DE&S
Holding Co., a Pennsylvania corporation, Dollar Express, Inc., a Pennsylvania
corporation, Bernard Spain, Murray Spain, Global Private Equity III Limited
Partnership, a Delaware limited partnership, Advent PGGM Global Limited
Partnership, a Delaware limited partnership, Advent Partners GPE III Limited
Partnership, a Delaware limited partnership, Advent Partners (NA) GPE III
Limited Partnership, a Delaware limited partnership, Advent Partners Limited
Partnership, a Delaware limited partnership, Guayacan Private Equity Fund
Limited Partnership, a Delaware limited partnership, Dollar Express Investment,
LLC, a North Carolina limited liability company, and any additional Holders (as
defined in the Agreement), from time to time, which Agreement permits execution
(including by facsimile) by counterpart. The undersigned hereby acknowledges
having received a copy of the Agreement (which is annexed hereto as Annex I) and
having read the Agreement in its entirety, and for good and valuable
consideration, receipt and sufficiency of which is hereby acknowledged, hereby
agrees that the terms and conditions of the Agreement shall be binding upon the
undersigned as a Holder, and such terms and conditions shall inure to the
benefit of and be binding upon the undersigned, and its successors and permitted
assigns.
IN WITNESS WHEREOF, the undersigned has executed this
instrument this ____ day of _________________, ____.
---------------------------------
(Signature of Holder)
---------------------------------
(Print Name of Person, if an Entity)
---------------------------------
(Print Name & Title of Person Signing)
-21-
<PAGE>
Exhibit 10.11
================================================================================
REGISTRATION RIGHTS AGREEMENT
among
DE&S HOLDING CO.
DOLLAR EXPRESS, INC.
BERNARD SPAIN
MURRAY SPAIN
GLOBAL PRIVATE EQUITY III LIMITED PARTNERSHIP
ADVENT PGGM GLOBAL LIMITED PARTNERSHIP
ADVENT PARTNERS GPE III LIMITED PARTNERSHIP
ADVENT PARTNERS (NA) GPE III LIMITED PARTNERSHIP
ADVENT PARTNERS LIMITED PARTNERSHIP
GUAYACAN PRIVATE EQUITY FUND LIMITED PARTNERSHIP
and
DOLLAR EXPRESS INVESTMENT, LLC
Dated as of February 5, 1999
================================================================================
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made this made
as of this 5th day of February, 1999, by and among DE&S HOLDING CO., a
Pennsylvania corporation (the "Corporation"), DOLLAR EXPRESS, INC., a
Pennsylvania corporation ("Dollar Express"), BERNARD SPAIN, MURRAY SPAIN
(together with Bernard Spain, the "Management Shareholders"), GLOBAL PRIVATE
EQUITY III LIMITED PARTNERSHIP, a Delaware limited partnership ("GPE III"),
ADVENT PGGM GLOBAL LIMITED PARTNERSHIP, a Delaware limited partnership
("AG-PGGM"), ADVENT PARTNERS GPE III LIMITED PARTNERSHIP, a Delaware limited
partnership ("AP-GPEIII"), ADVENT PARTNERS (NA) GPE III LIMITED PARTNERSHIP, a
Delaware limited partnership ("AP- NA"), ADVENT PARTNERS LIMITED PARTNERSHIP, a
Delaware limited partnership ("APLP" and together with GPEIII, AG-PGGM,
AP-GPEIII and AP-NA, the "Advent Entities"), GUAYACAN PRIVATE EQUITY FUND
LIMITED PARTNERSHIP, a Delaware limited partnership ("Guayacan"), and DOLLAR
EXPRESS INVESTMENT, LLC, a North Carolina limited liability company ("DEI"; and,
together with Guayacan and the Advent Entities and their respective Affiliates,
collectively, the "Investors"; and each of the Investors is, individually, an
"Investor").
BACKGROUND
WHEREAS, as of February 3, 1999, the Corporation, Dollar Express, the
Management Shareholders and the Investors executed a Securities Purchase and
Contribution Agreement (the "Purchase Agreement") (capitalized terms used but
not defined herein have the meanings set forth in the Purchase Agreement);
WHEREAS, pursuant to the Purchase Agreement, the Corporation has filed
an amendment to its charter designating 3,530,000 shares of preferred stock, par
value $0.01 per share, as Series A Cumulative Convertible Preferred Stock (the
"Series A Preferred Stock");
WHEREAS, under the terms of the Purchase Agreement, the Investors may
become entitled to exercise certain warrants to purchase Common Stock (as
defined in Section 1) of the Corporation (the "Warrants");
WHEREAS, on the date hereof, the parties hereto own 100% of the
outstanding capital stock of the Corporation (whether voting or non-voting) in
the amounts set forth on Schedule 1 hereto; and
WHEREAS, as an inducement to completion of the transactions
contemplated by the Purchase Agreement the Corporation has agreed to provide the
Investors and the Management Shareholders with certain rights incident to the
ownership of shares of Stock pursuant to this Agreement.
<PAGE>
NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto, intending to be
legally bound hereby, do hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following
terms shall have the following respective meanings:
"Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute enacted hereafter, and the rules and regulations of
the Commission thereunder, all as the same shall be in effect from time to time.
"Advent" shall mean Advent International Corporation, a
Delaware corporation, and any Affiliate of Advent International Corporation.
"Affiliate" of a Person shall mean any Person which,
directly or indirectly, controls, is controlled by, or is under common control
with, such Person. For purposes hereof, only wholly-owned subsidiaries shall be
deemed to be Affiliates of a parent entity and the requisite amount of "control"
shall exist only if the same Person has the power to direct decisions affecting
Securities. For purposes hereof (i) except as otherwise provided herein the
partners or shareholders of an Investor shall be deemed to be Affiliates of that
Investor (but only to the extent of their pro rata interest therein), and (ii)
each Advent Entity shall be deemed to be an Affiliate of each other Advent
Entity and of Advent.
"Commission" shall mean the U.S. Securities and Exchange
Commission, or any other federal agency at the time administering the Act.
"Common Stock" shall mean (i) the class or series (however
designated) of capital stock of the Corporation, authorized on or after the date
hereof, the holders of which shall have the right, without limitation as to
amount per share, either to all or to a share of the balance of current
dividends and liquidating distributions after the payment of dividends and
distributions on any shares entitled to preference in the payment thereof, and
the holders of which shall ordinarily, in the absence of contingencies, be
entitled to vote for the election of directors of the Corporation (even though
the right so to vote has been suspended by the happening of such a contingency),
and (ii) any other securities into which or for which any of the securities
described in clause (i) above may be converted or exchanged pursuant to a plan
of recapitalization, reorganization, merger, sale of assets or otherwise.
"Corporation" shall mean DE&S Holding Co., or any successor
by merger, consolidation or other transaction, and shall include any
Subsidiaries thereof.
"Counterpart" shall mean a counterpart to this Agreement in
the form of Exhibit A hereto, pursuant to the execution of which a Person shall
become bound by all of the terms and conditions of this Agreement. Any Person
who shall become a Holder shall be required to execute and become bound by all
of the terms and conditions to this Agreement.
2
<PAGE>
"Demand Registration" shall mean an Investor Demand
Registration or a Management Demand Registration, as the case may be.
"Holder" shall mean each of the Investors and the
Management Shareholders to the extent it or he holds Registrable Securities, and
any other Person holding Registrable Securities to whom registration rights
granted under and pursuant to this Agreement have been transferred pursuant to
Section 13 hereof.
"Initiating Holders" shall mean the Initiating Investors or
the Initiating Management Holders, as the case may be.
"Investor Registrable Securities" shall mean the
Registrable Securities beneficially owned (which, for purposes of this
Agreement, shall be determined in accordance with Rule 13d-3 of the 1934 Act) by
any Investor.
"IPO" shall mean the initial underwritten public offering
of Common Stock.
"Management Registrable Securities" shall mean the
Registrable Securities beneficially owned (which, for purposes of this
Agreement, shall be determined in accordance with Rule 13d-3 of the 1934 Act) by
any Management Shareholder.
"Person" shall mean an individual, a sole proprietorship, a
corporation, a partnership, a limited liability company, a limited liability
partnership, a joint venture, an association, a trust, or any other entity or
organization, including a government or a political subdivision, agency or
instrumentality thereof.
"Piggyback Registration" shall have the meaning set forth
in Section 3 hereof.
"Pledge Agreement" shall mean that certain pledge agreement
entered into in connection with the (Credit Agreement dated as of February 5,
1999, by and among the Corporation, Dollar Express, and any subsidiaries
referred to therein, as borrowers, and the lenders referred to therein (the
"Lenders"), and First Union National Bank, as Administrative Agent
("Administrative Agent").
The terms "register," "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement
("Registration Statement") in compliance with the Act and the declaration or
ordering of effectiveness of such Registration Statement by the Commission.
"Registered Holder" shall mean, with respect to a
particular Registration Statement, each Holder which has included Registrable
Securities in such Registration Statement.
3
<PAGE>
"Registered Securities" shall mean the Registrable
Securities included in a particular Registration Statement which has been
declared effective by the Commission and which has remained effective for the
minimum period required under and pursuant to the terms and conditions of this
Agreement.
"Registrable Securities" shall mean (i) any shares of
Common Stock beneficially owned (which, for purposes of this Agreement, shall be
determined in accordance with Rule 13d-3 of the 1934 Act) by any Holder,
including shares of Common Stock issued or issuable from time to time upon the
conversion of the Series A Preferred Stock, (ii) any shares of Common Stock
which may, from time to time, be beneficially owned by any Holder from the
Corporation, including (without limitation) (A) shares of Common Stock issued or
issuable in respect of preemptive rights or financing participation rights
granted to any Holder, (B) upon the exercise of warrants (including the
Warrants), options or other rights to acquire shares of Common Stock, or (C)
upon the conversion or exchange of securities convertible into or exchangeable
for shares of Common Stock, and (iii) securities which were issued or received
in respect of, or in exchange or in substitution for any of the foregoing,
including, but not limited to, those arising from a stock dividend,
distribution, stock split, reclassification, reorganization, merger,
consolidation, sale or transfer of assets or other exchange of securities. As to
any particular Registrable Securities, once issued, such securities shall cease
to be Registrable Securities when (x) a Registration Statement with respect to
the sale of such securities shall have become effective under the Act and such
securities shall have been disposed of in accordance with such Registration
Statement, (y) such securities shall have ceased to be outstanding or (z) such
securities shall have been transferred as permitted by, and in compliance with,
Rule 144 (or any successor provision) promulgated under the Act.
"Series A Preferred Stock" shall mean (i) the Series A
Preferred Stock of the Corporation, par value $.01 per share, and (ii) any other
securities into which or for which any of the securities described in clause (i)
above may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, consolidation, sale of assets or otherwise.
"Subsidiary" means, with respect to any Person, any
corporation, association or other business entity of which more than 50% of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Voting Stock" means with respect to any Person, capital
stock of any class or kind ordinarily having the power to vote for the election
of directors, managers or other voting members of the governing body of such
Person.
"1934 Act" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute enacted hereafter, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect
from time to time.
4
<PAGE>
2. Demand Registrations.
(a) Beginning on the date which is 270 days after the date
of this Agreement, upon the receipt of a written request from the holders of a
majority of the Investor Registrable Securities ("Initiating Investors") that
the Corporation file a Registration Statement under the Act covering the
registration for the offer and sale of all or part of such Initiating Investors'
Registrable Securities (an "Investor Demand Registration"), as soon as
practicable, the Corporation shall give written notice to all other Holders of
such Investor Demand Registration and shall cause all Registrable Securities
that the Initiating Investors have requested be registered to be registered
under the Act, subject to and in accordance with the terms, conditions,
procedures and limitations contained in this Agreement. A maximum of two such
Investor Demand Registrations may be effected pursuant to this Section 2(a), and
a registration requested pursuant to this Section 2(a) shall not be deemed to
have been effected unless a Registration Statement with respect thereto has
become effective, remained continuously effective without interruption in
accordance with the provisions of Section 5(a) hereof, and the Registered
Securities shall have been disposed of in accordance with the plan of
distribution set forth therein. The Initiating Investors may terminate an
Investor Demand Registration prior to the filing of a Registration Statement
relating thereto, or require the Corporation to withdraw promptly any
Registration Statement which has been filed pursuant to this Section 2 but which
has not become effective under the Act, and such registration shall not be
deemed to be an Investor Demand Registration if either (i) it agrees to pay the
costs and expenses of such registration as set forth in Section 8 below or (ii)
such withdrawal is accompanied by notice from the Initiating Investors that, in
the good faith exercise of its reasonable judgment, there has occurred either
(x) a material adverse change in the business, results of operations, financial
condition or prospects of the Corporation, (y) a material adverse change in the
United States financial markets which makes it inadvisable to proceed with the
registration, or (z) a misstatement or omission in any preliminary prospectus
which makes it inadvisable to proceed with the registration.
(b) Beginning on the date on which the Investors have
received $35 Million of Aggregate Proceeds (as determined pursuant to Section
9(g) below), upon the receipt of a written request from the holders of a
majority of the Management Registrable Securities ("Initiating Management
Holders") that the Corporation file a Registration Statement under the Act
covering the registration for the offer and sale of all or part of such
Initiating Management Holders' Registrable Securities (a "Management Demand
Registration"), as soon as practicable, the Corporation shall give written
notice to all other Holders of such Management Demand Registration and shall
cause all Registrable Securities that the Initiating Management Holders have
requested be registered to be registered under the Act, subject to and in
accordance with the terms, conditions, procedures and limitations contained in
this Agreement. A maximum of two such Management Demand Registrations may be
effected pursuant to this Section 2(b), and a registration requested pursuant to
this Section 2(b) shall not be deemed to have been effected unless a
Registration Statement with respect thereto has become effective, remained
continuously effective without interruption in accordance with the provisions of
Section 5(a) hereof, and the Registered Securities shall have been disposed of
in accordance with the plan of distribution set forth therein. The Initiating
Management Holders may terminate a Management Demand Registration prior to the
5
<PAGE>
filing of a Registration Statement relating thereto, or require the Corporation
to withdraw promptly any Registration Statement which has been filed pursuant to
this Section 2(b) but which has not become effective under the Act, and such
registration shall not be deemed to be a Management Demand Registration if
either (i) it agrees to pay the costs and expenses of such registration as set
forth in Section 8 below or (ii) such withdrawal is accompanied by notice from
the Initiating Management Holders that, in the good faith exercise of its
reasonable judgment, there has occurred either (x) a material adverse change in
the business, results of operations, financial condition or prospects of the
Corporation, (y) a material adverse change in the United States financial
markets which makes it inadvisable to proceed with the registration, or (z) a
misstatement or omission in any preliminary prospectus which makes it
inadvisable to proceed with the registration.
3. Piggyback Registration.
(a) Subject to Section 9 hereof, if at any time the
Corporation proposes to register its Common Stock under the Act, either for its
own account or for the account of others (including and to the extent any such
registrations are effected pursuant to Section 2 hereof), in connection with the
public offering of such Common Stock solely for cash, on a registration form
that would also permit the registration of Registrable Securities (other than a
registration covering shares of Common Stock issued pursuant to an employee
benefit plan, or a registration on Form S-4 for the purpose of offering such
securities to another business entity or the shareholders of such entity in
connection with the acquisition of assets or shares of capital stock,
respectively, of such entity), the Corporation shall, each such time, promptly
give each Holder written notice of such proposal (a "Piggyback Registration
Notice"). Within 20 days after the Piggyback Registration Notice is given, the
Holders shall give notice as to the number of shares of Registrable Securities,
if any, which such Holders request to be registered simultaneously with such
registration by the Corporation ("Piggyback Registration"). The Corporation
shall include any Registrable Securities in such Registration Statement (or in a
separate Registration Statement concurrently filed) which the Holders thereof
request to be registered under the Act, subject to and in accordance with the
terms, conditions, procedures and limitations contained in this Agreement.
(b) Notwithstanding the foregoing, if such Piggyback
Registration was initiated by the Corporation to effect a primary public
offering of its securities and, if at any time after giving written notice of
its intention to so register securities and before the effectiveness of the
Registration Statement filed in connection with such registration, the
Corporation determines for any reason either not to effect such registration or
to delay such registration, the Corporation may, at its election, by prior
written notice to each Holder: (i) in the case of a determination not to effect
registration, relieve itself of its obligation to register the Registrable
Securities in connection with such registration, provided that such
determination shall not preclude such Holder of Registrable Securities from
enjoying registration rights which it might otherwise possess under Section 2
hereof; or (ii) in the case of a determination to delay registration, delay the
registration of such Registrable Securities for the same period as the delay
registration of such other securities, provided that the Corporation shall not
delay any such registration more than once in any twelve month period or for a
period of exceeding 90 days.
6
<PAGE>
(c) Each Holder requesting inclusion in a registration
pursuant to this Section 3 may, at any time before the effective date of the
Registration Statement relating to such registration, revoke such request by
written notice of such revocation to the Corporation, in which case the
Corporation shall cause such Holder's Registrable Securities to be withdrawn
from such Registration Statement.
4. Registration Pursuant to Rule 415.
(a) At such time as the Corporation shall have qualified
for the use of Form S-3 (or any similar form promulgated by the Commission), but
in no event prior to one year after the effective date of the Registration
Statement for the IPO, the Investors shall have the right, in addition to and
not exclusive of the other rights set forth in this Agreement, to request on one
occasion during each year that the Corporation file a Registration Statement on
Form S-3 pursuant to Rule 415 under the Act (a "Rule 415 Request"). No Investor
shall initiate a Rule 415 Request without first consulting in good faith with
the Corporation and its investment bankers; provided that the Corporation and
investment bankers make themselves reasonably available for such consultation.
Any Rule 415 Request (i) shall be made by Investors holding not less than 25% of
the Registrable Securities, (ii) shall specify the Registrable Securities
intended to be sold or disposed of by the particular holders thereof, and (iii)
shall state the intended method or methods of disposition of such Registrable
Securities by the Investors requesting such registration. Promptly after the
Corporation receives a Rule 415 Request and subject to the provisions of the
immediately preceding sentence, the Corporation shall give written notice of a
Rule 415 Request to the Investors other than the Investors initiating the Rule
415 Request. All Registrable Securities owned by any other Investors which
notify the Corporation in writing, within 30 days after receipt of the
Corporation's notice contemplated by this sentence, that it intends to
participate in the registration contemplated by the Rule 415 Request (such
notification to include the number of Registrable Securities sought to be
included and the intended method or methods of distribution for such Registrable
Securities), subject to and in accordance with the terms, conditions, procedures
and limitations contained in this Agreement. No registration pursuant to this
Section 4 shall count as a Investor Demand Registration pursuant to Section 2,
nor shall the Investors rights under Section 2 be deemed to be waived by virtue
of a request made under this Section 4.
(b) Notwithstanding foregoing, the holders of a majority of
the Registrable Securities held by all Management Shareholders may delay a
registration under Section 4(a) above if (i) within 7 days after the Rule 415
Request they notify the Investors that the Management Shareholders intend to
demand registration of Shares under Section 2 hereof (the "Preemptive Request"),
and (ii) within 60 days after the Rule 415 Request the Corporation has filed a
Registration Statement with the Commission in respect of the Preemptive Request.
The Preemptive Request shall be deemed a request for a Management Demand
Registration under Section 2(b) hereof, provided, however that any registration
in respect of a Preemptive Request shall not count for purposes of the
limitation on the number of Management Demand Registrations. If the Corporation
has filed a Registration Statement with the Commission in respect of the
Preemptive Request, the Corporation shall, within 180 days after the
effectiveness of such Registration Statement, file a Registration Statement in
respect of the Rule 415 Request that was delayed by the Preemptive Request (the
7
<PAGE>
"Delayed 415 Registration Statement"). If the Corporation has failed to file a
Registration Statement in respect of a Preemptive Request as provided herein, it
shall promptly file the Delayed 415 Registration Statement. The Corporation
shall not file any Management Demand Registration (other than the Management
Demand Registration contemplated by this subsection (b)) until the Delayed 415
Registration Statement has been declared effective.
5. Obligations of the Corporation.
(a) Whenever required under this Agreement to effect the
registration of any Registrable Securities, the Corporation shall, as
expeditiously as reasonably possible:
(i) Prepare and file with the Commission a Registration
Statement covering such Registrable Securities and use its best efforts to cause
such Registration Statement to be declared effective by the Commission and to
keep such registration continuously effective until the date when all
Registrable Securities covered by the Registration Statement have been sold;
provided, however, in the case of registration under Section 2 or Section 3
hereof, not longer than 270 days after the effective date of the Registration
Statement or any amendments or supplements thereto. The Corporation will furnish
to each Holder of Registrable Securities covered by such Registration Statement
and the underwriters, if any, within a reasonable period of time prior to the
making of any filing thereof, copies of all such documents proposed to be filed
(excluding exhibits, unless any such person shall specifically request
exhibits), which documents will be subject to the review of each Holder and any
underwriters, and the Corporation will not file such Registration Statement or
any amendment thereto or any prospectus or any supplement thereto (including any
documents incorporated by reference therein) with the Commission if (i) the
Holders of a majority of the Registrable Securities covered by such Registration
Statement or the underwriters, if any, shall reasonably object to such filing or
(ii) information in such Registration Statement or prospectus concerning a
particular Registered Holder is inaccurate.
(ii) Prepare and file with the Commission such
amendments and post-effective amendments to such Registration Statement as may
be necessary to keep such Registration Statement effective until the applicable
date referred to in Section 5(a)(i) hereof and to comply with the provisions of
the Act with respect to the disposition of all securities covered by such
Registration Statement, and cause the prospectus to be supplemented by any
required prospectus supplement, and as so supplemented to be filed with the
Commission pursuant to Rule 424 under the Act.
(iii) Furnish to the Registered Holders such number of
copies of such Registration Statement, each amendment thereto, the prospectus
included in such Registration Statement (including each preliminary prospectus),
each supplement thereto and such other documents, as they may reasonably request
in order to facilitate the disposition of Registered Securities owned by them.
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(iv) Use its best efforts to register and qualify the
Registered Securities under such other securities laws of such jurisdictions as
shall be reasonably requested by any Registered Holder and do any and all other
acts and things which may be reasonably necessary or advisable to enable each
Registered Holder to consummate the disposition of the Registered Securities
owned by such Holder in such jurisdictions; provided that the Corporation shall
not be required in connection therewith or as a condition thereto to qualify
generally to transact business in any such states or jurisdictions.
(v) Promptly notify each Registered Holder at any time
when a prospectus is required to be delivered under the Act of the happening of
any event (including a reasonably detailed description of such event) as a
result of which the prospectus included in such Registration Statement contains
an untrue statement of a material fact or omits any fact necessary to make the
statements therein not misleading and, at the request of any such Holder, the
Corporation will promptly prepare a supplement or amendment to such prospectus
so that, as thereafter delivered to the purchasers of such Registered
Securities, such prospectus will not contain an untrue statement of a material
fact or omit to state any fact necessary to make the statements therein not
misleading.
(vi) Make available for inspection by any Registered
Holder, any underwriter participating in any disposition pursuant to such
Registration Statement and any attorney, accountant or other agent retained by
any such Registered Holder or underwriter, all financial and other records,
pertinent corporate documents and properties of the Corporation, and cause the
officers, directors, employees and independent accountants of the Corporation to
supply all information reasonably requested by any such Registered Holder,
underwriter, attorney, accountant or agent in connection with such Registration
Statement.
(vii) Promptly notify the Registered Holders and the
underwriters, if any, of the following events and, if requested by any such
Person, confirm such notification in writing and provide copies of any relevant
documents relating to: (1) the filing of the prospectus or any prospectus
supplement and the Registration Statement and any amendment or post-effective
amendment thereto and, with respect to the Registration Statement and any
amendment or post-effective amendment thereto, the declaration of the
effectiveness of such documents, (2) any comment letters from or requests by the
Commission for amendments or supplements to the Registration Statement or the
prospectus or for additional information, (3) the issuance or threat of issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that purpose,
and (4) the receipt by the Corporation of any notification with respect to the
suspension of the qualification of the Registered Securities for sale in any
jurisdiction or the initiation or threat of initiation of any proceeding for
such purpose.
(viii) Use its best efforts to prevent the entry of any
order suspending the effectiveness of the Registration Statement, or the
qualification, or exemption from qualification, of such securities included
therein for sales in any jurisdiction, and to obtain the withdrawal of any such
order, if entered.
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(ix) If reasonably requested by any underwriter or a
Registered Holder in connection with any underwritten offering, incorporate in a
prospectus supplement or post-effective amendment such information as the
underwriters and the Holders of a majority of the Registrable Securities covered
by the particular Registration Statement agree should be included therein
relating to the sale of such Registrable Securities, including, without
limitation, information with respect to the number of Registrable Securities
being sold to such underwriters, the purchase price being paid therefor by such
underwriters and any other terms of the underwritten offering of such
Registrable Securities to be sold in such offering, and make all required
filings of such prospectus supplement or post-effective amendment after being
notified of the matters to be incorporated in such prospectus supplement or
post-effective amendment.
(x) Cooperate with the Registered Holders and the
underwriters, if any, to facilitate the timely preparation and delivery of
certificates evidencing Registered Securities and not bearing any restrictive
legends, and enable such Registered Securities to be in such lots and registered
in such names as the underwriters may request at least two business days prior
to any delivery of Registered Securities to the underwriters.
(xi) Provide a transfer agent, registrar and CUSIP
number for all Registrable Securities not later than the effective date of the
Registration Statement.
(xii) Prior to the effectiveness of the Registration
Statement and any post-effective amendment thereto and at each closing of any
underwritten offering, (i) make such representations and warranties to the
Registered Holders and the underwriters, if any, with respect to the Registered
Securities and the Registration Statement as are customarily made by issuers to
underwriters in primary underwritten public offerings and such other matters as
may be reasonably requested by such Registered Holders and underwriters or their
counsel, (ii) obtain opinions of counsel to the Corporation and updates thereof
(which opinions shall be reasonably satisfactory to the underwriters, if any,
and to the Holders of a majority of the Registered Securities) addressed to each
Registered Holder and the underwriters, if any, covering the matters customarily
covered in opinions requested in underwritten offerings and such other matters
as may be reasonably requested by such Holders and underwriters or their
counsel, (iii) obtain "cold comfort" letters and updates thereof from the
Corporation's independent certified public accountants addressed to the
Corporation and the underwriters, if any, such letters to be in customary form
and covering matters of the type customarily covered in "cold comfort" letters
required by underwriters in connection with primary underwritten public
offerings and (iv) deliver such documents and certificates as may be reasonably
requested by the Holders of a majority of the Registered Securities being sold
and by the underwriters, if any, to evidence compliance with clause (i) above
and with any customary conditions contained in the underwriting agreement or
other agreement entered into by the Corporation.
(xiii) Enter into such agreements and take all such
other reasonable actions in connection therewith in order to expedite or
facilitate the disposition of such Registered Securities and in such connection,
in the case of an underwritten offering, enter into an underwriting agreement or
other similar agreement in form, scope and substance as is customary in primary
underwritten public offerings which underwriting agreement shall, among other
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things, set forth in full the indemnification and contribution provisions and
procedures of Section 13 hereof with respect to all parties to be indemnified
pursuant to said Section and provide for customary indemnification and
contribution provisions and procedures by the underwriters of any Holders
registering Registrable Securities. The above shall be done at each closing
under such underwriting or similar agreement or as and to the extent required
thereunder.
(xiv) Use its best efforts to cause all Registered
Securities included in such Registration Statement to be listed, by the date of
first sale of Registered Securities pursuant to such registration statement, on
each securities exchange on which shares of Common Stock are then listed or
proposed by the Corporation to be listed, if any, and to use best efforts to
arrange for at least two market makers to register as such with respect to such
Registrable Securities with the National Association of Securities Dealers.
(xv) Provide such reasonable assistance in the
marketing of the Registered Securities as is customary of issuers in primary
underwritten public offerings (including participation by its senior management
in "road shows").
(xvi) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally available
to its security holders earnings statements satisfying the provisions of Section
11(a) of the Act and the Rules promulgated thereunder (including Rule 158), no
later than 45 days after the end of any twelve month period (i) commencing at
the end of any fiscal quarter in which Registered Securities are sold to
underwriters in a firm or best efforts underwritten offering or (ii) if not sold
to underwriters in such an offering, beginning with the first day of the first
fiscal quarter of the Corporation commencing after the effective date of the
Registration Statement, which earnings statement will cover such 12-month
period.
(b) If at the time of any request to register Registrable
Securities pursuant to Section 2 or Section 4 hereof, the Corporation is
preparing, or within 30 days thereafter engages a managing underwriter and
commences to prepare, a Registration Statement for a public offering (other than
a registration covering shares of Common Stock issued pursuant to an employee
benefit plan) which in fact is filed and becomes effective within 90 days after
the date the Holders made the request to register Registrable Securities, then
the Corporation may, subject to Section 3 and Section 9(c)(i) hereof, at its
option direct that such request for registration be delayed for a period not in
excess of 90 days from the date of such request. Nothing herein shall preclude
such Holder of Registrable Securities from enjoying registration rights which it
might otherwise possess under Section 3 hereof. Notwithstanding anything to the
contrary herein, the Corporation shall not be permitted pursuant to this
subsection (b) to further delay a registration to be effected pursuant to
Section 4 hereof if a Preemptive Request has been made.
(c) If at the time of any request to register Registrable
Securities pursuant to Section 2 or Section 4 hereof, the Corporation is engaged
in any material acquisition or divestiture or other business transaction with a
third party which would be adversely affected by such request to register
Registrable Securities to the material detriment of the Corporation, then the
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Corporation may direct that such request for registration be delayed for a
period not in excess of 90 days from the date of such request. Notwithstanding
anything to the contrary herein, the Corporation shall not be permitted pursuant
to this subsection (c) to further delay a registration to be effected pursuant
to Section 4 hereof if a Preemptive Request has been made.
(d) Notwithstanding anything herein to the contrary, in no
event shall the Corporation exercise its right to delay any such registration
under this Section 5 more than once in any twelve month period or for a period
of exceeding 90 days.
6. Furnish Information. The Holders shall furnish to the
Corporation such information regarding them, the Registrable Securities held by
them, and the intended method of disposition by them of such Registrable
Securities as is customarily provided by selling securityholders and as the
Corporation or any underwriters shall reasonably request.
7. Suspension of Disposition of Registrable Securities. Each
Registered Holder agrees that, upon receipt of any notice from the Corporation
of the happening of any event of the kind described in Section 5(a)(v) or
5(a)(vii)(3) or (4) hereof, such Registered Holder will forthwith discontinue
disposition of Registered Securities until such Registered Holder's receipt of
copies of a supplemented or amended prospectus contemplated by Section 5(a)(v)
hereof, or until it is advised in writing (the "Advice") by the Corporation that
the use of the prospectus may be resumed, and has received copies of any
additional or supplemental filings which are incorporated by reference in the
prospectus, and, if so directed by the Corporation, such Registered Holder will
deliver to the Corporation (at the expense of the Corporation) all copies, other
than permanent file copies then in such Registered Holder's possession, of the
prospectus covering such Registered Securities at the time of receipt of such
notice. In the event the Corporation shall give any such notice, the time period
mentioned in Section 5(a)(i) hereof shall be extended by the number of days
during the period from and including the date of the giving of such notice
pursuant to Section 5(a)(v) or 5(a)(vii)(3) or (4) hereof to and including the
date when each Registered Holder shall have received the copies of the
supplemented or amended prospectus contemplated by Section 5(a)(v) hereof or the
Advice.
8. Expenses of Registration.
(a) Except as provided in Section 8(b) through 8(d) hereof,
all expenses incurred in connection with a registration pursuant to this
Agreement, whether or not a registration is consummated, shall be borne by the
Corporation, including (without limitation) charges, costs, expenses,
disbursements, fees and taxes in connection with (i) the preparation and filing
of any Registration Statement, each preliminary prospectus, the final
prospectus, and any amendments or supplements thereto, and the printing and
furnishing of copies of each thereof to any underwriters and to dealers
(including costs of mailing and shipment), (ii) the preparation, issuance and
delivery of the certificates for the Registrable Securities to offered and sold
hereunder, including any stock or other transfer taxes or duties payable upon
the sale thereof, (iii) the printing of any underwriting agreement and any
dealer agreements and furnishing of copies of each to the underwriters and to
dealers (including costs of mailing and shipment) participating in any
registration, (iv) the qualification of the Registrable Securities for offering
and sale under state laws (including the legal fees and filing fees and other
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disbursements of counsel in connection therewith) and the printing and
furnishing of copies of any blue sky surveys or legal investment surveys to the
Underwriters and to dealers, (v) the filing for listing or approval for
quotation of the Registrable Securities on the Nasdaq Stock Market or on any
national securities exchange (including the legal fees and filing fees and other
disbursements of counsel in connection therewith), (vi) filing for review of the
public offering of the Registrable Securities by the National Association of
Securities Dealers, Inc. (including the legal fees and filing fees and other
disbursements of counsel in connection therewith), (vii) the fees and expenses
of any transfer agent or registrar for the Registrable Securities, (viii) making
road show presentations with respect to the offering of the Registrable
Securities, (ix) the legal fees and disbursements charged by counsel to the
Corporation, by counsel to the underwriters, if any, (x) the fees and
disbursements charged by the accountants to the Corporation, (xi) fees and
disbursements charged by one counsel chosen by (A) the Initiating Investors, in
the case of an Investor Demand Registration, (B) the Initiating Management
Holders , in the case of a Management Demand Registration, (C) the Holders of a
majority of the Registrable Securities sought to be included in the Registration
Statement, in the case a Piggyback Registration in which the Company or any
other holder of contractual rights granted by the Corporation and consented to
by the holders of a majority of the Investor Registrable Securities ("Additional
Rights Holders") initiates such registration, and (D) the Investor initiating a
Rule 415 Request, and (xii) the fees and disbursements charged by any experts or
other consultants which any Holders participating in such registration may
reasonably request participate in the registration.
(b) Each Holder agrees to pay all underwriting discounts
and commissions and the fees and disbursements of any legal counsel retained by
it, other than the legal counsel referred to in clause (x) of Section 8(a)
above. Additionally, the Corporation agrees to use its best efforts to cause its
transfer agent or its counsel to serve as a custodian, to the extent any
underwriters participating in any such registration shall require the
participation of a custodian for any selling security holders and, in such
event, the Corporation shall be responsible for the fees and disbursements of
its transfer agent or its counsel acting in such custodial capacity.
(c) If a registration proceeding is begun under Section 2
but subsequently discontinued, whether prior to or after the filing of a
Registration Statement, at the request of the Initiating Holders, such
Initiating Holders shall have the option (exercisable by the Holders of a
majority of the Registrable Securities beneficially owned by Initiating Holders)
of either (i) reserving their right to such Demand Registration pursuant to
Section 2, in which case the Initiating Holders will pay all reasonable
out-of-pocket expenses incurred to effect such terminated registration, or (ii)
waiving their right to one future Demand Registration under Section 2 (but not
its right to effect a Piggyback Registration pursuant to Section 3 hereof if
another Holder shall initiate a Demand Registration under Section 2 hereof), in
which case the Corporation will pay the expenses of such withdrawn registration.
(c) Registered Holders may withdraw a request made within
45 days after the end of the fiscal year if the audited financial statements of
the Corporation for such year and at such year-end materially and adversely
differ from the financial information furnished to
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such Registered Holders by the Corporation at the time of their request, in
which event such Registered Holders shall not be required to pay any of the
expenses of such withdrawn registration and such withdrawn registration shall be
treated for all purposes of this Agreement as if it had never occurred.
(d) All expenses incurred in connection with a registration
which are, under this Section 8, to be borne by Registered Holders shall be
borne pro rata by the Registered Holders on the basis of the number of such
Holder's Registered Securities (or Registrable Securities proposed to be
registered, as the case may be); provided, however, that if any such cost or
expense is attributable solely to one Registered Holder and does not constitute
a normal cost or expense of such a registration, such cost or expense shall be
allocated to and borne by that Registered Holder.
9. Underwriting Requirements; Priorities.
(a) With respect to a Demand Registration pursuant to
Section 2, the investment banker(s) and managing underwriters to administer such
registration shall be selected by the mutual agreement of the Initiating Holders
and the Corporation, subject to the Corporation's obligations under its
engagement letter with Legg Mason Wood Walker, Incorporated dated May 12, 1998,
amended May 26, 1998 and countersigned on June 1, 1998. The Corporation will
have the right to select the investment banker(s) and manager(s), if any, to
administer any offering which is initiated by the Corporation.
(b) If a registration under Section 2 hereof is an
underwritten offering and the managing underwriters advise the Corporation that
in their opinion the number of shares of Common Stock requested to be registered
exceeds the number of shares which can be sold in such offering without
materially and adversely affecting the marketability of the offering, then the
Corporation will include in such registration, before inclusion of any
securities sought to be registered by any other Person, including (without
limitation) the Corporation or any Additional Rights Holder:
(i) until the Investors shall have received $35 Million
in Aggregate Proceeds (as determined pursuant to subsection (g) below),
all of the Registrable Securities owned by any of the Holders, on the
basis of the number of Registrable Securities such Holders have
requested to be registered, allocated two-thirds to the Investors, pro
rata among them, and one-third to the Management Shareholders, pro rata
among them,
(ii) thereafter, until the Management Shareholders
shall have received $35 Million in Aggregate Proceeds (as determined
pursuant to subsection (g) below), all of the Registrable Securities
owned by any of the Holders, on the basis of the number of Registrable
Securities such Holders have requested to be registered, two-thirds to
the Management Shareholders, pro rata among them, and one-third to the
Investors, pro rata among them, and
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(iii) thereafter, all of the Registrable Securities
owned by any of the Holders, pro rata among them on the basis of the
number of Registrable Securities such Holders have requested to be
registered.
(c) If a registration under Section 3 hereof is an
underwritten primary offering initiated by the Corporation or an Additional
Rights Holder and the managing underwriters advise the Corporation that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering without materially and
adversely affecting the marketability of the offering, the Corporation will
include in such registration (i) first, depending upon who initiated such
registration, the securities that the Corporation or the Additional Rights
Holders initiating such registration, proposes to sell, and (ii) second, before
inclusion of any securities sought to be registered by any other Person,
(A) until the Investors shall have received $35 Million
in Aggregate Proceeds (as determined pursuant to subsection (g) below),
all of the Registrable Securities owned by any of the Holders, on the
basis of the number of Registrable Securities such Holders have
requested to be registered, allocated two-thirds to the Investors, pro
rata among them, and one-third to the Management Shareholders, pro rata
among them,
(B) thereafter, until the Management Shareholders shall
have received $35 Million in Aggregate Proceeds (as determined pursuant
to subsection (g) below), all of the Registrable Securities owned by
any of the Holders, on the basis of the number of Registrable
Securities such Holders have requested to be registered, two-thirds to
the Management Shareholders, pro rata among them, and one-third to the
Investors, pro rata among them, and
(C) thereafter, all of the Registrable Securities owned
by any of the Holders, pro rata among them on the basis of the number
of Registrable Securities such Holders have requested to be registered;
provided, however, that if the holders of Registrable Securities have requested
that their Registrable Securities be included in a registration pursuant to
Section 3 following the Corporation's exercise of its right to delay a request
pursuant to Section 5, then the Corporation will include in such registration,
at a minimum, the lesser of (x) all Registrable Securities held by Holders
requesting registration pursuant to Section 3 hereof and (y) such number of
Registrable Securities held by Holders requesting registration pursuant to
Section 3 hereof as is equal to 50% of the total number of shares of Common
Stock being registered, such inclusion to give effect to the priorities and
allocations among the Investors and the Management Shareholders set forth in
this subsection (c); provided further that if such registration contemplates an
"over-allotment option" on the part of underwriters, to the extent such
over-allotment option is exercised and Holders of Registrable Securities were
excluded from registering any Registrable Securities pursuant to the priority
provisions of this section, then the over-allotment option shall be exercised
with respect to such Registrable Securities held by such excluded Holders, such
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inclusion to give effect to the priorities and allocation among the Investors
and the Management Shareholders set forth in this subsection (c).
(d) In the event that the number of securities requested to
be included in a registration statement is less than that number allocated to
the Investors, on the one hand, or the Management Shareholders, on the other
hand, pursuant to Section 9(b) or (c) (the "Unused Allocation"), the Investors
or the Management Shareholders, as the case may be, may include additional
Registrable Securities under such subsections in an amount not to exceed the
Unused Allocation.
(e) No Holder may participate in any underwritten
registration hereunder unless such Holder (i) agrees to sell such Holder's
Registrable Securities on the basis provided in any underwriting arrangements
approved by the persons entitled hereunder to approve such arrangements and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
(f) The Corporation shall not grant registration rights to
any Person which impair in any way the priorities for inclusion in a
registration set forth in this Section 9, including, without limitation, by
providing any such Person with higher priority than or equal priority to that
provided to the parties herein with regard to any Registration Statement filed
by be Corporation, whether upon such Person's demand or otherwise.
(g) For purposes of this Agreement, "$35 Million in
Aggregate Proceeds" shall be determined, with respect to the Investors as a
group or the Management Shareholders as a group, each as of the original date of
the filing of a particular Registration Statement, and shall equal the gross
proceeds received as of the date of determination by the applicable group of
Holders from sales, if any, of Registered Securities. For purposes of making the
calculation contained in this subsection (g) and for purposes of determining the
priorities and allocations set forth in this Section 9, subsequent transferees
of Registrable Securities to whom rights under this Agreement are also assigned
shall be included in the applicable groups of Holders.
10. Rule 144 and Rule 144A. At such time as the Corporation
becomes subject to the reporting requirements of the 1934 Act, the Corporation
will file the reports required to be filed by it under the Act and the 1934 Act
and the rules and regulations adopted by the Commission thereunder, and will use
its best efforts to take such further action as any Holder of Registrable
Securities may reasonably deem to be necessary, all to the extent required from
time to time to enable such Holder to sell Registrable Securities without
registration under the Act within the limitation of the exemptions provided by
(i) Rule 144 and Rule 144A under the Act, as such Rule may be amended from time
to time or (ii) any similar rule or regulation hereafter adopted by the
Commission. Upon the request of any Holder of Registrable Securities, the
Corporation will deliver to such Holder a written statement as to whether it has
complied with such information and requirements.
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11. Holdback Agreement.
(a) The Corporation agrees (i) not to effect any public or
private sale or distribution of its equity securities, or any securities
convertible into or exchangeable or exercisable for such securities, or
otherwise grant any option for the purchase of its equity securities (other than
options issued by the Corporation pursuant to any stock option plan or other
employee benefit plan), during the period commencing on the date the
registration statement relating to any Registrable Securities is first filed
with the Commission, and ending 180 days after the date of the final prospectus
relating to such Registrable Securities (other than a registration covering
shares of Common Stock issued pursuant to an employee benefit plan, a
registration on Form S-4 for the purpose of offering such securities to another
business entity or the shareholders of such entity in connection with the
acquisition of assets or shares of capital stock, respectively, of such entity,
or a registration effected pursuant to Rule 415 Request under Section 4 hereof),
unless the underwriters managing the registered public offering otherwise agree
and (ii) except for (A) issuances of Common Stock upon exercise of options
granted under the Corporation's stock option plan as in effect on the date
hereof and (B) issuances of Common Stock, options, warrants or other rights to
purchase Common Stock, or securities convertible into or exchangeable for Common
Stock (in each case in connection with a Business Combination transaction), not
to issue securities to any Person if, after giving effect to such issuance, such
Person would beneficially own two percent or more of the then outstanding Common
Stock unless such Person agrees, in the context of a registration contemplated
hereby, not to effect any sale or distribution of any such securities during the
period referred to above (except as part of such underwritten registration, if
otherwise permitted), unless the underwriters managing the registered public
offering otherwise agree.
(b) Subject to the rights set forth in Section 3 hereof,
each of the Holders agrees that, during the period commencing on the date when
any Registration Statement relating to (x) the IPO, (y) any public offering to
be effected subsequent to the IPO which involves the registration of securities
solely for the account of the Corporation, or (z) any registration effected
pursuant to Sections 2 or 3 hereof, is first filed with the Commission, and
ending 180 days after the date of the final prospectus relating to such public
offering, it will not and, except as may be disclosed in the prospectus to
accompany the reoffering of Registrable Securities, will not announce or
disclose any intention to, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, the Shares owned by it, or (ii) enter into any swap
or other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the transfer of shares of Common Stock or other
securities by the undersigned as a gift or gifts, (B) the transfer of shares of
Common Stock or other securities of the Company by the undersigned to its
Affiliates, and (C) the sale of shares of Common Stock pursuant to the
Registration Statement relating to such registration effected pursuant to
Sections 2 or 3 hereof; provided, that, in the case of clause (A) or (B) above,
the recipient(s), donee(s) or transferee(s), respectively, agree(s) in writing
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as a condition precedent to such issuance, gift or transfer to be bound by the
terms of this Agreement.
12. No Agreements. The Corporation has not previously, and
shall not hereafter without the prior written consent of a holders of a majority
of the Investor Registrable Securities, enter into any agreement granting rights
with respect to the registration of any of its securities (other than a
registration covering shares of Common Stock issued pursuant to an employee
benefit plan).
13. Transfer of Registration Rights. Provided that the
Corporation is given written notice by the Holder at the time of such transfer
stating the name and address of the transferee and identifying the securities
with respect to which the rights under this Agreement are being assigned, the
registration rights under this Agreement may be transferred in whole or in part
in connection with the transfer of Registrable Securities. Notwithstanding the
foregoing, if such transfer is subject to covenants, agreements or other
undertakings restricting transferability thereof the registration rights under
this Agreement shall not be transferred in connection with such transfer unless
such transfer complies with all such covenants, agreements and other
undertakings. In all cases, such registration rights shall not be transferred
unless the transferee thereof executes a Counterpart. If any Investor transfers
Registrable Securities to another Person and such Person becomes a party to this
Agreement, such Person shall be deemed an Investor for all purposes hereof.
14. Indemnification and Contribution.
(a) To the fullest extent permitted by law, the
Corporation will and hereby does (i) indemnify and hold harmless each Holder,
each director, officer, partner, employee, affiliate, or agent of or for such
Holder, any Underwriter (as defined in the Act) for such Holder, and each
Person, if any, who controls such Holder or underwriter within the meaning of
the Act, against any losses, claims, damages, costs or liabilities, joint or
several, to which they may become subject insofar as such losses, claims,
damages, costs or liabilities (or actions in respect thereof) arise out of, are
caused by, or are based on any untrue or alleged untrue statement of any
material fact contained in any Registration Statement filed with the Commission,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which it was made, or arise out of any
violation by the Corporation of any securities law, rule or regulation
applicable to the Corporation and relating to action or inaction required of the
Corporation in connection with any such registration; and (ii) will reimburse
each such Person or entity for any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
damage, costs, liability, or action; provided, however, that the indemnity
agreement contained in this Section 14(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Corporation (which consent
shall not be unreasonably withheld, delayed or conditioned) nor shall the
Corporation be liable to a Holder, underwriter or controlling person in any such
case for any such loss, claim, damage, liability or action to the extent that it
18
<PAGE>
arises out of or is based upon an untrue statement or an alleged untrue
statement or omission or alleged omission made in connection with any such
Registration Statement, preliminary prospectus, final prospectus, or amendments
or supplements thereto, in reliance upon and in conformity with information
furnished in writing expressly for use in connection with such registration by
or on behalf of any such Holder or controlling person of such Holder. This
indemnity shall be in addition to other indemnification arrangements to which
the Corporation and any Holders may otherwise be party.
(b) To the fullest extent permitted by law, each Holder
requesting or joining in a registration under this Agreement, severally and not
jointly, will and hereby does (i) indemnify and hold harmless the Corporation,
each of its directors, each of its officers who have signed the Registration
Statement, each Person, if any, who controls the Corporation within the meaning
of the Act, and any Underwriter (as defined in the Act) for the Corporation,
each other Holder and each Person, if any, who controls such other Holder within
the meaning of Section 15 of the Act, against any losses, claims, damages or
liabilities, joint or several, to which the Corporation or any such director,
officer, controlling person, other Holder or underwriter may become subject,
under the Act and applicable state securities laws, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in such Registration Statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which it was made, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in such Registration Statement, preliminary or
final prospectus, or amendments or supplements thereto, in reliance upon and in
conformity with information furnished in writing by or on behalf of such Holder
expressly for use in such Registration Statement and (ii) reimburse any legal or
other expenses reasonably incurred by the Corporation or any such director,
officer, other Holder, controlling person or Underwriter attributable to
investigating or defending any loss, claim, damage, liability or action
indemnified by such Holder pursuant to clause (i); provided, however, that the
indemnity agreement contained in this Section 14(b) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of such Holder (which consent shall
not be unreasonably withheld, delayed or conditioned).
(c) Promptly after receipt by an indemnified party under
this Section 14 of notice of the commencement of any action or knowledge of a
claim that would, if asserted, give rise to a claim for indemnity hereunder,
such indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Section 14, notify the indemnifying party in
writing of the commencement thereof or knowledge thereof and the indemnifying
party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties. If prejudicial to any material extent to his
ability to defend such action, the failure to notify an indemnifying party
promptly of the commencement of any such action or of the knowledge of any such
claim, shall relieve such indemnifying party of any liability to the indemnified
19
<PAGE>
party under this Section 14 to the extent so prejudiced, but the omission so to
notify the indemnifying party will not relieve him of any liability that he may
have to any indemnified party otherwise than under this Section 14. Each
indemnified party shall have the right to employ separate counsel in such
action, claim or proceeding and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of each indemnified party
unless: (i) such indemnifying party has agreed to pay such expenses, (ii) such
indemnifying party has failed promptly to assume the defense and employ counsel
reasonably satisfactory to such indemnified party or (iii) such indemnified
party shall have been advised in writing by counsel that either there may be one
or more legal defenses available to it which are different from or in addition
to those available to such indemnifying party or such affiliate or controlling
person or a conflict of interest may exist if such counsel represents such
indemnified party and such indemnifying party or its affiliate or controlling
person; provided, however, that such indemnifying party shall not, in connection
with any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be responsible hereunder for the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel), which counsel shall be designated by such indemnified party.
(d) The indemnifying party's liability to any such
indemnified party hereunder shall not be extinguished solely because any other
indemnified party is not entitled to indemnity hereunder. The indemnification
provided for under this Agreement will remain in full force and effect
regardless of any investigation made by or on behalf of the indemnified party or
any officer, director or controlling person of such indemnified party, and will
survive the transfer of securities. No Person guilty of fraudulent
misrepresentation within the meaning of Section 11(f) of the Act shall be
entitled to indemnification from any Person who was not guilty of such
fraudulent misrepresentation.
(e) If the indemnification provided for in this Section 14
is for any reason, other than pursuant to the terms thereof, held to be
unavailable or insufficient to an indemnified party in respect of any losses,
claims, damages or liabilities (or actions in respect thereof) referred to
therein, then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities (or actions in
respect thereof) in such proportion as is appropriate to reflect the relative
fault of the indemnifying and indemnified parties in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative fault but also the relative benefits received by the indemnifying and
indemnified parties from the offering of Registrable Securities. The relative
benefits received by a party shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by
such party bears to the total net proceeds from the offering received by all
parties. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
relates to information supplied by the Corporation or a Holder and the parties'
20
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relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Corporation and the Holders agree that
it would not be just and equitable if contribution pursuant to this subsection
(e) were determined by pro rata allocation or by any other method of allocation
taking into account the equitable considerations referred to above in this
subsection (e). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (e) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. No Person guilty of
fraudulent misrepresentation within the meaning of Section 11(f) of the Act
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
(f) The liability of each Holder in respect of any
indemnification or contribution obligation of such Holder arising under this
Agreement with respect to a particular registration statement shall not in any
event exceed an amount equal to the net proceeds to such Holder (after deduction
of all underwriters' discounts and commissions and all other expenses paid by
such Holder in connection with the registration in question) from the
disposition of the Registrable Securities disposed of by such Holder pursuant to
such registration.
15. Remedies. In addition to being entitled to exercise all
rights provided in this Agreement as well as all rights granted by law,
including recovery of damages, each Holder of Registrable Securities will be
entitled to specific performance of its rights under this Agreement. The
Corporation agrees that monetary damages would not be adequate compensation for
any loss incurred by reason of a breach by it of the provisions of this
Agreement and hereby agrees not to raise the defense in any action for specific
performance that a remedy at law would be adequate.
16. Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Corporation has obtained the written consent of the
holders of a majority of the Investor Registrable Securities.
17. Future Changes in Registration Requirements. In the event
that the registration requirements under the Act are amended or eliminated to
accommodate a "Company registration" or similar approach, this Agreement shall
be deemed amended to the extent necessary to reflect such changes and the intent
of the parties hereto with respect to the benefits and obligations of the
parties, and in such connection, the Corporation shall use reasonable efforts to
provide Holders of Registrable Securities equivalent benefits to those provided
under this Agreement.
18. Filing Notices and Copies. The Corporation shall provide
to each Holder of Registrable Securities such number of copies of any
Registration Statement, amendment thereto (including post-effective amendments)
or other report, document or notice that is filed with the Commission or other
authority under the securities laws, as may be reasonably requested by such
Holder of Registrable Securities. In addition, the Corporation shall provide
prior notice to any Holder of Registrable Securities of any such filing of a
21
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Registration Statement or amendment thereto, provided that the foregoing notice
provision shall not shorten any other advance notice provision contained in this
Agreement.
19. Foreclosure Upon Securities. Notwithstanding anything
herein to the contrary, this Agreement shall not apply to any equity securities
of the Corporation, or to any equity securities of Dollar Express or any other
Subsidiary, upon foreclosure on any such equity securities ("Foreclosed
Securities") by the Lenders (or the Administrative Agent on their behalf)
pursuant to the Pledge Agreement, but continuing only for so long as the Lenders
shall hold Foreclosed Securities.
20. Notices. All notices and other communications hereunder
shall be in writing and shall be given to the Person either by hand delivery or
by United States express mail, postage prepaid, or by overnight courier services
guaranteeing next business day delivery, charges prepaid, or by telecopier, to
such party's address or to such party's telecopy number. Copies of all notices
to the Corporation and to the Management Shareholder shall be sent to Fox,
Rothschild, O'Brien & Frankel, LLP, 2000 Market Street, 10th Floor,
Philadelphia, Pennsylvania 19103, Attention: Ramon R. Obod, Esq., telecopy (215)
299-2150, and copies of all notices to any Investor shall be sent to Pepper
Hamilton LLP, 3000 Two Logan Square, Philadelphia, Pennsylvania, 19103-2799,
Attention: James D. Epstein, Esq., telecopy (215) 981-4750. If the notice is
sent by United States express mail or by overnight courier services, it shall be
deemed to have been given to the Person entitled thereto one business day after
deposited with the post office or the courier service for delivery to that
Person or, in the case of a notice given by hand delivery or telecopy, when
received. Notice of any change in any such address shall also be given in the
manner set forth above. Whenever the giving of notice is required, the giving of
such notice may be waived by the party entitled to receive such notice.
21. Interpretation. Unless the context of this Agreement
otherwise requires, (i) words of any gender include each gender and the neuter;
(ii) words using the singular or plural number also include the plural or
singular number, respectively; (iii) the terms "hereof," "herein," "hereby" and
derivative or similar words refer to this entire Agreement; (iv) the terms
"Article" or "Section" refer to the specified Article or Section of this
Agreement; and (v) the term "including" or similar words shall be construed as
to refer to such matter without limitation thereof. Whenever this Agreement
refers to a number of days, such number shall refer to calendar days unless
business days are specified. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
22. Governing Law. This Agreement shall be construed and
enforced in accordance with the laws of the Commonwealth of Pennsylvania without
regard to the application of the principles of conflicts or choice of laws.
23. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
22
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jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or the effectiveness or validity of any provision in any
other jurisdiction, and this Agreement will be reformed, construed and enforced
in such jurisdiction as if such invalid, illegal or unenforceable provision had
never been contained herein.
24. Entire Agreement. This Agreement is intended by the
parties as a final expression of their agreement with regard to the subject
matter hereof and intended to be a complete and exclusive statement of the
agreement and matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the rights granted by the Corporation with respect to the
Registrable Securities. This Agreement supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
25. Counterparts; Facsimile Signatures. This Agreement may be
executed, including by facsimile signature, in one or more counterparts, each of
which when so executed shall be deemed to be an original and all of which
together shall constitute one and the same instrument.
26. Parties Benefitted. Nothing in this Agreement, express or
implied, is intended, except as set forth herein, to confer upon any third party
any rights, remedies, obligations or liabilities.
27. Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective heirs,
personal representatives, successors and assigns including, without limitation,
subsequent Holders of Registrable Securities agreeing to be bound by all and the
terms and conditions of this Agreement.
23
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IN WITNESS WHEREOF, this Registration Rights Agreement has
been executed as of the date and year first above written.
DE&S HOLDING CO.
By: /s/ Murray Spain
--------------------------------------------
Name: Murray Spain
Title: President
DOLLAR EXPRESS, INC.
By: /s/ Bernard Spain
--------------------------------------------
Name: Bernard Spain
Title: Chief Executive Officer
BERNARD SPAIN
/s/ Bernard Spain
------------------------------------------------
MURRAY SPAIN
/s/ Murray Spain
------------------------------------------------
GLOBAL PRIVATE EQUITY III LIMITED PARTNERSHIP
By: Advent International Limited Partnership,
its General Partner
By: Advent International Corporation,
its General Partner
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
24
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ADVENT PGGM GLOBAL LIMITED PARTNERSHIP
By: Advent International Limited Partnership,
its General Partner
By: Advent International Corporation,
its General Partner
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
ADVENT PARTNERS GPE III LIMITED PARTNERSHIP
By: Advent International Corporation,
General Partner
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
ADVENT PARTNERS (NA) GPE III LIMITED PARTNERSHIP
By: Advent International Corporation,
General Partner
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
ADVENT PARTNERS LIMITED PARTNERSHIP
By: Advent International Corporation,
General Partner
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
25
<PAGE>
GUAYACAN PRIVATE EQUITY FUND
LIMITED PARTNERSHIP
By: /s/ David M. Mussafer
--------------------------------------------
Name: David M. Mussafer
Title: Senior Vice-President
Advent International Corporation
DOLLAR EXPRESS INVESTMENT, LLC
By: /s/ Mark W. Mealy
--------------------------------------------
Name: Mark W. Mealy
Title: Manager, Dollar Express
Investment, LLC
26
<PAGE>
Schedule 1
TO
REGISTRATION RIGHTS AGREEMENT
OWNERSHIP INTERESTS
<TABLE>
<CAPTION>
<S> <C>
Common Stock
Bernard Spain 3,235,000 shares
Murray Spain 3,235,000 shares
Global Private Equity III Limited Partnership warrant to purchase 335,833 shares
Advent PGGM Global Limited Partnership warrant to purchase 51,463 shares
Advent Partners GPE III Limited Partnership warrant to purchase 5,071 shares
Advent Partners (NA) GPE III Limited Partnership warrant to purchase 1,500 shares
Advent Partners Limited Partnership warrant to purchase 2,204 shares
Guayacan Private Equity Fund Limited Partnership warrant to purchase 11,904 shares
Dollar Express Investment, LLC Limited Partnership warrant to purchase 8,692 shares
Preferred Stock
Global Private Equity III Limited Partnership 2,845,180 shares
Advent PGGM Global Limited Partnership 435,990 shares
Advent Partners GPE III Limited Partnership 42,960 shares
Advent Partners (NA) GPE III Limited Partnership 12,708 shares
Advent Partners Limited Partnership 18,674 shares
Guayacan Private Equity Fund Limited Partnership 100,852 shares
Dollar Express Investment, LLC Limited Partnership 73,636 shares
</TABLE>
<PAGE>
Exhibit A
TO
REGISTRATION RIGHTS AGREEMENT
COUNTERPART
THIS INSTRUMENT forms part of the Registration Rights Agreement (the
"Agreement") made as of the __ day of ___________, 1999, by and among DE&S
Holding Co., a Pennsylvania corporation, Dollar Express, Inc., a Pennsylvania
corporation, Bernard Spain, Murray Spain, Global Private Equity III Limited
Partnership, a Delaware limited partnership, Advent PGGM Global Limited
Partnership, a Delaware limited partnership, Advent Partners GPE III Limited
Partnership, a Delaware limited partnership, Advent Partners (NA) GPE III
Limited Partnership, a Delaware limited partnership, Advent Partners Limited
Partnership, a Delaware limited partnership, Guayacan Private Equity Fund
Limited Partnership, a Delaware limited partnership, Dollar Express Investment,
LLC, a North Carolina limited liability company, and any additional Holders (as
defined in the Agreement), from time to time, which Agreement permits execution
(including by facsimile) by counterpart. The undersigned hereby acknowledges
having received a copy of the Agreement (which is annexed hereto as Annex I) and
having read the Agreement in its entirety, and for good and valuable
consideration, receipt and sufficiency of which is hereby acknowledged, hereby
agrees that the terms and conditions of the Agreement shall be binding upon the
undersigned as a Holder, and such terms and conditions shall inure to the
benefit of and be binding upon the undersigned, and its successors and permitted
assigns.
IN WITNESS WHEREOF, the undersigned has executed this
instrument this ____ day of _________________, ____.
--------------------------------------
(Signature of Holder)
--------------------------------------
(Print Name of Person, if an Entity)
--------------------------------------
(Print Name & Title of Person Signing)
<PAGE>
================================================================================
CREDIT AGREEMENT
dated as of February 5, 1999,
by and among
DE&S HOLDING CO.,
DOLLAR EXPRESS, INC.,
and the other Subsidiaries referred to herein,
as Borrowers,
the Lenders referred to herein,
FIRST UNION NATIONAL BANK,
as Administrative Agent, and
BANKBOSTON, N.A.
as Syndication Agent
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE I DEFINITIONS.....................................................................................1
SECTION 1.1 Definitions..................................................................................1
SECTION 1.2 General.....................................................................................15
SECTION 1.3 Other Definitions and Provisions............................................................16
ARTICLE II REVOLVING CREDIT FACILITY......................................................................16
SECTION 2.1 Revolving Credit Loans......................................................................16
SECTION 2.2 Procedure for Advances of Revolving Credit Loans............................................16
SECTION 2.3 Repayment of Revolving Credit Loans.........................................................17
SECTION 2.4 Revolving Credit Notes......................................................................18
SECTION 2.5 Permanent Reduction of the Revolving Credit Commitment......................................18
SECTION 2.6 Termination of Revolving Credit Facility....................................................19
ARTICLE III LETTER OF CREDIT FACILITY......................................................................19
SECTION 3.1 L/C Commitment..............................................................................19
SECTION 3.2 Procedure for Issuance of Letters of Credit.................................................19
SECTION 3.3 Commissions and Other Charges...............................................................20
SECTION 3.4 L/C Participations..........................................................................20
SECTION 3.5 Reimbursement Obligation of the Borrowers...................................................21
SECTION 3.6 Obligations Absolute........................................................................22
SECTION 3.7 Effect of Application.......................................................................22
ARTICLE IV TERM LOAN FACILITY.............................................................................22
SECTION 4.1 Term Loan...................................................................................22
SECTION 4.2 Procedure for Advance of Term Loan..........................................................23
SECTION 4.3 Repayment of Term Loan......................................................................23
SECTION 4.4 Prepayments of Term Loan....................................................................24
SECTION 4.5 Term Notes..................................................................................25
ARTICLE V GENERAL LOAN PROVISIONS... ....................................................................25
SECTION 5.1 Interest....................................................................................25
SECTION 5.2 Notice and Manner of Conversion or Continuation of Loans....................................28
SECTION 5.3 Fees........................................................................................28
SECTION 5.4 Manner of Payment; Allocation of Commitment Deductions......................................29
SECTION 5.5 Crediting of Payments and Proceeds..........................................................30
SECTION 5.6 Adjustments.................................................................................30
SECTION 5.7 Nature of Obligations of Lenders Regarding Extensions of Credit; Assumption by the
Administrative Agent........................................................................30
SECTION 5.8 Changed Circumstances.......................................................................31
SECTION 5.9 Indemnity...................................................................................33
SECTION 5.10 Capital Requirements........................................................................33
SECTION 5.11 Taxes.......................................................................................33
SECTION 5.12 Use of Proceeds.............................................................................35
SECTION 5.13 Security....................................................................................35
</TABLE>
i
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<S> <C>
ARTICLE VI CLOSING; CONDITIONS OF CLOSING AND BORROWING...................................................35
SECTION 6.1 Closing.....................................................................................35
SECTION 6.2 Conditions to Closing and Initial Extensions of Credit......................................35
SECTION 6.3 Conditions to All Extensions of Credit......................................................40
SECTION 6.4 Real Estate Post-Closing Covenants..........................................................41
ARTICLE VII REPRESENTATIONS AND WARRANTIES OF THE BORROWERS................................................41
SECTION 7.1 Representations and Warranties..............................................................41
SECTION 7.2 Survival of Representations and Warranties, Etc.............................................48
ARTICLE VIII FINANCIAL INFORMATION AND NOTICES..............................................................49
SECTION 8.1 Financial Statements and Projections........................................................49
SECTION 8.2 Officer's Compliance Certificate............................................................50
SECTION 8.3 Accountants'Certificate.....................................................................50
SECTION 8.4 Other Reports...............................................................................50
SECTION 8.5 Notice of Litigation and Other Matters......................................................51
SECTION 8.6 Accuracy of Information.....................................................................52
ARTICLE IX AFFIRMATIVE COVENANTS..........................................................................52
SECTION 9.1 Preservation of Corporate Existence and Related Matters.....................................52
SECTION 9.2 Maintenance of Property.....................................................................52
SECTION 9.3 Insurance...................................................................................53
SECTION 9.4 Accounting Methods and Financial Records....................................................53
SECTION 9.5 Payment and Performance of Obligations......................................................53
SECTION 9.6 Compliance With Laws and Approvals..........................................................53
SECTION 9.7 Environmental Laws..........................................................................53
SECTION 9.8 Compliance with ERISA.......................................................................54
SECTION 9.9 Compliance With Agreements..................................................................54
SECTION 9.10 Conduct of Business.........................................................................54
SECTION 9.11 Visits and Inspections......................................................................54
SECTION 9.12 Additional Borrowers and Collateral.........................................................54
SECTION 9.13 Hedging Agreement...........................................................................55
SECTION 9.14 Year 2000 Compatibility.....................................................................55
SECTION 9.15 Further Assurances..........................................................................55
ARTICLE X FINANCIAL COVENANTS............................................................................56
SECTION 10.1 Leverage Ratio..............................................................................56
SECTION 10.2 Fixed Charge Coverage Ratio.................................................................56
SECTION 10.3. Minimum EBITDA..............................................................................57
ARTICLE XI NEGATIVE COVENANTS.............................................................................58
SECTION 11.1 Limitations on Debt.........................................................................58
SECTION 11.2 Limitations on Guaranty Obligations.........................................................58
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
SECTION 11.3 Limitations on Liens........................................................................58
SECTION 11.4 Limitations on Loans, Advances, Investments and Acquisitions................................59
SECTION 11.5 Limitations on Mergers and Liquidation......................................................60
SECTION 11.6 Limitations on Sale of Assets...............................................................61
SECTION 11.7 Limitations on Dividends, Distributions and Redemptions.....................................61
SECTION 11.8 Limitations on Exchange and Issuance of Capital Stock.......................................61
SECTION 11.9 Transactions with Affiliates................................................................62
SECTION 11.10 Certain Accounting Changes..................................................................62
SECTION 11.11 Charter Documents; Capitalization...........................................................62
SECTION 11.12 Restrictive Agreements......................................................................62
ARTICLE XII DEFAULT AND REMEDIES........... ...............................................................62
SECTION 12.1 Events of Default...........................................................................62
SECTION 12.2 Remedies....................................................................................65
SECTION 12.3 Rights and Remedies Cumulative; Non-Waiver; etc.............................................66
ARTICLE XIII THE ADMINISTRATIVE AGENT.......................................................................66
SECTION 13.1 Appointment.................................................................................66
SECTION 13.2 Delegation of Duties........................................................................66
SECTION 13.3 Exculpatory Provisions......................................................................66
SECTION 13.4 Reliance by the Administrative Agent........................................................67
SECTION 13.5 Notice of Default...........................................................................67
SECTION 13.6 Non-Reliance on the Administrative Agent and Other Lenders..................................68
SECTION 13.7 Indemnification.............................................................................68
SECTION 13.8 The Administrative Agent in Its Individual Capacity.........................................69
SECTION 13.9 Resignation of the Administrative Agent; Successor Administrative Agent.....................69
SECTION 13.10 Syndication Agent...........................................................................69
ARTICLE XIV MISCELLANEOUS..................................................................................69
SECTION 14.1 Notices.....................................................................................69
SECTION 14.2 Expenses; Indemnity.........................................................................70
SECTION 14.3 Set-off.....................................................................................71
SECTION 14.4 Governing Law...............................................................................71
SECTION 14.5 Consent to Jurisdiction.....................................................................71
SECTION 14.6 Binding Arbitration; Waiver of Jury Trial...................................................72
SECTION 14.7 Reversal of Payments........................................................................73
SECTION 14.8 Injunctive Relief; Punitive Damages.........................................................73
SECTION 14.9 Accounting Matters..........................................................................73
SECTION 14.10 Successors and Assigns; Participations......................................................74
SECTION 14.11 Amendments, Waivers and Consents............................................................77
SECTION 14.12 Performance of Duties.......................................................................78
SECTION 14.13 All Powers Coupled with Interest............................................................78
SECTION 14.14 Survival of Indemnities.....................................................................78
SECTION 14.15 Titles and Captions.........................................................................78
SECTION 14.16 Severability of Provisions..................................................................78
SECTION 14.17 Counterparts................................................................................78
</TABLE>
iii
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<TABLE>
<CAPTION>
<S> <C>
SECTION 14.18 Parent as Agent for Borrowers...............................................................78
SECTION 14.19 Obligations Joint and Several; Contribution.................................................79
SECTION 14.20 Inconsistencies with Other Documents; Independent Effect of Covenants.......................79
SECTION 14.21 Term of Agreement...........................................................................80
</TABLE>
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EXHIBITS AND SCHEDULES
EXHIBITS
Exhibit A-1 - Form of Revolving Credit Note
Exhibit A-2 - Form of Term Note
Exhibit B-1 - Form of Notice of Revolving Credit Loan Borrowing
Exhibit B-2 - Form of Term Loan Borrowing
Exhibit C - Form of Notice of Account Designation
Exhibit D - Form of Notice of Prepayment
Exhibit E - Form of Notice of Conversion/Continuation
Exhibit F - Form of Officer's Compliance Certificate
Exhibit G - Form of Assignment and Acceptance
Exhibit H - Form of Security Agreement
Exhibit I-1 - Form of Investor Pledge Agreement
Exhibit I-2 - Form of Borrower Pledge Agreement
Exhibit J - Form of Joinder Agreement
SCHEDULES
Schedule 1.1(a) - Lenders and Commitments
Schedule 1.1(b) - Recapitalization Documents
Schedule 1.1(c) - Advent Purchasers
Schedule 5.12 - Sources and Uses of Recapitalization
Schedule 7.1(a) - Jurisdictions of Organization and Qualification
Schedule 7.1(b) - Subsidiaries and Capitalization
Schedule 7.1(g) - Intellectual Property Matters
Schedule 7.1(h) - Environmental Matters
Schedule 7.1(i) - ERISA Plans
Schedule 7.1(l) - Material Contracts
Schedule 7.1(m) - Labor and Collective Bargaining Agreements
Schedule 7.1(r) - List of Real Property
Schedule 7.1(t) - Debt and Guaranty Obligations
Schedule 7.1(u) - Litigation
Schedule 11.3 - Existing Liens
Schedule 11.4 - Existing Loans, Advances and Investments
v
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CREDIT AGREEMENT
CREDIT AGREEMENT, dated as of the 5th day of February, 1999, by and
among DE&S HOLDING CO., a Pennsylvania corporation (the "Parent"), DOLLAR
EXPRESS, INC., a Pennsylvania corporation (the "Company"), and any other
Subsidiaries of the Parent joined to this Agreement (together with the Company,
the "Subsidiary Borrowers", and together with the Parent and the Company, the
"Borrowers"), the Lenders who are or may become a party to this Agreement (the
"Lenders"), FIRST UNION NATIONAL BANK, as Administrative Agent for the Lenders
(the "Administrative Agent"), and BANKBOSTON, N.A., as Syndication Agent for the
Lenders (the "Syndication Agent").
STATEMENT OF PURPOSE
The Borrowers have requested, and the Lenders have agreed, to extend
certain credit facilities to the Borrowers on the terms and conditions of this
Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, intending to
be legally bound hereby, such parties hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. The following terms when used in this
Agreement shall have the meanings assigned to them below:
"Administrative Agent" means First Union in its capacity as
Administrative Agent hereunder, and any successor thereto appointed pursuant to
Section 13.9.
"Administrative Agent's Office" means the office of the Administrative
Agent specified in or determined in accordance with the provisions of Section
14.1(c).
"Advent Purchasers" means the Affiliates of Advent International
Corporation purchasing the Preferred Stock on the Closing Date as listed on
Schedule 1.1(c).
"Affiliate" means, with respect to any Person, any other Person (other
than a Subsidiary) which directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such first Person or any of its Subsidiaries. The term "control" means (a) the
power to vote ten percent (10%) or more of the securities or other equity
interests of a Person having ordinary voting power, or (b) the possession,
directly or indirectly, of any other power to direct or cause the direction of
the management and policies of a Person, whether through ownership of voting
securities, by contract or otherwise.
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"Aggregate Commitment" means the aggregate amount of the Lenders'
Commitments hereunder, as such amount may be reduced or modified at any time or
from time to time pursuant to the terms hereof. On the Closing Date, the
Aggregate Commitment shall be Forty Million Dollars ($40,000,000).
"Agreement" means this Credit Agreement, as amended, restated,
supplemented or otherwise modified.
"Applicable Law" means all applicable provisions of constitutions,
laws, statutes, ordinances, rules, treaties, regulations, permits, licenses,
approvals, interpretations and orders of courts or Governmental Authorities and
all orders and decrees of all courts and arbitrators.
"Applicable Margin" shall have the meaning assigned thereto in Section
5.1(c).
"Application" means an application, in the form specified by the
Issuing Lender from time to time, requesting the Issuing Lender to issue a
Letter of Credit.
"Articles of Incorporation" means the articles of incorporation of the
Parent as in effect on the Closing Date after giving affect to the Transactions.
"Assignment and Acceptance" shall have the meaning assigned thereto in
Section 14.10.
"Base Rate" means, at any time, the higher of (a) the Prime Rate and
(b) the sum of (i) the Federal Funds Rate plus (ii) 1/2 of 1%; each change in
the Base Rate shall take effect simultaneously with the corresponding change or
changes in the Prime Rate or the Federal Funds Rate.
"Base Rate Loan" means any Loan bearing interest at a rate based upon
the Base Rate as provided in Section 5.1(a).
"Borrowers" means the collective reference to the Parent and the
Subsidiary Borrowers in their capacity as Borrowers hereunder.
"Borrower Pledge Agreement" means the Pledge Agreement of even date
executed by the Parent, as pledgor, and the Company and any other issuer joined
thereto, as issuer, in favor of the Administrative Agent, for the ratable
benefit of itself and the Lenders, substantially in the form of Exhibit I-2, as
amended, restated, supplemented or otherwise modified.
"Business Day" means (a) for all purposes other than as set forth in
clause (b) below, any day other than a Saturday, Sunday or legal holiday on
which banks in Charlotte, North Carolina and New York, New York, are open for
the conduct of their commercial banking business, and (b) with respect to all
notices and determinations in connection with, and payments of principal and
interest on, any LIBOR Rate Loan, any day that is a Business Day described in
clause (a) and that is also a day for trading by and between banks in Dollar
deposits in the London interbank market.
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"Capital Asset" means, with respect to the Parent and its Subsidiaries,
any asset that should, in accordance with GAAP, be classified and accounted for
as a capital asset on a Consolidated balance sheet of the Parent and its
Subsidiaries.
"Capital Expenditures" means, with respect to the Parent and its
Subsidiaries for any period, the aggregate cost of all Capital Assets acquired
by the Parent or any Subsidiary during such period, as determined in accordance
with GAAP.
"Capital Lease" means, with respect to the Parent and its Subsidiaries,
any lease of any property that should, in accordance with GAAP, be classified
and accounted for as a capital lease on a Consolidated balance sheet of the
Parent and its Subsidiaries.
"Capital Markets" means First Union Capital Markets Group, a division
of Wheat First Securities, Inc., and it successors.
"Change in Control" shall have the meaning assigned thereto in Section
12.1(i).
"Closing Date" means the date of this Agreement or such later Business
Day upon which each condition described in Sections 6.1 and 6.2 shall be
satisfied or waived in all respects in a manner acceptable to the Administrative
Agent, in its sole discretion.
"Code" means the Internal Revenue Code of 1986, and the rules and
regulations thereunder, each as amended, supplemented or otherwise modified.
"Collateral" shall mean the collateral security for the Obligations
pledged pursuant to Security Documents.
"Commitment" means, as to any Lender, the sum of such Lender's
Revolving Credit Commitment and Term Loan Commitment as set forth opposite such
Lender's name on Schedule 1.1(a) hereto, as the same may be reduced or modified
at any time or from time to time pursuant to the terms hereof.
"Commitment Percentage" means, as to any Lender at any time, the ratio
of (a) the amount of the Commitment of such Lender to (b) the Aggregate
Commitment of all of the Lenders.
"Company" means Dollar Express, Inc., a Pennsylvania corporation, and
its successors.
"Consolidated" means, when used with reference to financial statements
or financial statement items of the Parent and its Subsidiaries, such statements
or items on a consolidated basis in accordance with applicable principles of
consolidation under GAAP.
"Credit Facility" means the collective reference to the Revolving
Credit Facility, the Term Loan Facility and the L/C Facility.
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"Debt" means, with respect to the Parent and its Subsidiaries at any
date and without duplication, the sum of the following calculated in accordance
with GAAP: (a) all liabilities, obligations and indebtedness for borrowed money,
including, but not limited to, obligations evidenced by bonds, debentures, notes
or other similar instruments of the Parent or any of its Subsidiaries, (b) all
obligations to pay the deferred purchase price of property or services of the
Parent or any of its Subsidiaries, except trade payables arising in the ordinary
course of business not more than ninety (90) days past due, (c) all obligations
of the Parent or any of its Subsidiaries as lessee under Capital Leases, (d) all
Debt of any Person other than the Parent or any of its Subsidiaries secured by a
Lien on any asset of the Parent or any of its Subsidiaries, (e) all Guaranty
Obligations of the Parent or any of its Subsidiaries, (f) all obligations,
contingent or otherwise, of the Parent or any of its Subsidiaries relative to
the face amount of letters of credit, whether or not drawn, including, without
limitation, any Reimbursement Obligation, and banker's acceptances issued for
the account of the Parent or any of its Subsidiaries, (g) all obligations of the
Parent or any of its Subsidiaries to redeem, repurchase, exchange, defease or
otherwise make payments in respect of capital stock or other securities of the
Parent or any of its Subsidiaries and (h) all termination payment obligations
incurred by the Parent or any of its Subsidiaries pursuant to Hedging
Agreements.
"Default" means any of the events specified in Section 12.1 which with
the passage of time, the giving of notice or any other condition, would
constitute an Event of Default.
"Dollars" or "$" means, unless otherwise qualified, dollars in lawful
currency of the United States.
"EBITDA" means, for any period, the sum of the following determined on
a Consolidated basis, without duplication, for the Parent and its Subsidiaries
in accordance with GAAP: (a) Net Income for such period plus (b) the sum of the
following to the extent deducted in determining Net Income: (i) income and
franchise taxes, (ii) Interest Expense, (iii) amortization, depreciation and
other non-cash charges (including amortization of goodwill, covenants not to
compete and other intangible assets) less (c) interest income and any
extraordinary gains (and plus any extraordinary non-cash losses).
"Eligible Assignee" means, with respect to any assignment of the
rights, interest and obligations of a Lender hereunder, a Person that is at the
time of such assignment (a) a commercial bank organized under the laws of the
United States or any state thereof, having combined capital and surplus in
excess of $500,000,000, (b) a commercial bank organized under the laws of any
other country that is a member of the Organization of Economic Cooperation and
Development, or a political subdivision of any such country, having combined
capital and surplus in excess of $500,000,000, (c) a finance company, insurance
company or other financial institution which in the ordinary course of business
extends credit of the type extended hereunder and that has total assets in
excess of $1,000,000,000, (d) already a Lender hereunder (whether as an original
party to this Agreement or as the assignee of another Lender), (e) the successor
(whether by transfer of assets, merger or otherwise) to all or substantially all
of the commercial lending business of the assigning Lender, or (f) any other
Person that has been approved in writing as an Eligible Assignee by the
Borrowers and the Administrative Agent.
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"Employee Benefit Plan" means any employee benefit plan within the
meaning of Section 3(3) of ERISA which (a) is maintained for employees of the
Parent or any ERISA Affiliate or (b) has at any time within the preceding six
years been maintained for the employees of any Borrower or any current or former
ERISA Affiliate.
"Environmental Laws" means any and all federal, state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals,
interpretations and orders of courts or Governmental Authorities, relating to
the protection of human health or the environment, including, but not limited
to, requirements pertaining to the manufacture, processing, distribution, use,
treatment, storage, disposal, transportation, handling, reporting, licensing,
permitting, investigation or remediation of Hazardous Materials.
"Equity Purchase" means the purchase in accordance with the Equity
Purchase Agreement by the Advent Purchasers and other applicable Investors of
the Preferred Stock and Warrants issued by the Parent.
"Equity Purchase Agreement" means the Securities Purchase and
Contribution Agreement dated as of February 5, 1999 by and among the Parent, the
Company, the Founders, the Advent Purchasers, and any other Investors party
thereto.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
the rules and regulations thereunder, each as amended, supplemented or otherwise
modified.
"ERISA Affiliate" means any Person who together with the Parent is
treated as a single employer within the meaning of Section 414(b), (c), (m) or
(o) of the Code or Section 4001(b) of ERISA.
"Eurodollar Reserve Percentage" means, for any day, the percentage
(expressed as a decimal and rounded upwards, if necessary, to the next higher
1/100th of 1%) which is in effect for such day as prescribed by the Federal
Reserve Board (or any successor) for determining the maximum reserve requirement
(including without limitation any basic, supplemental or emergency reserves) in
respect of eurocurrency liabilities or any similar category of liabilities for a
member bank of the Federal Reserve System in New York City.
"Event of Default" means any of the events specified in Section 12.1,
provided that any requirement for passage of time, giving of notice, or any
other condition, has been satisfied.
"Excess Proceeds" shall have the meaning assigned thereto in Section
2.5(b).
"Existing Facility" means that certain revolving credit facility
between the Company and PNC Bank, National Association.
"Existing Shareholders' Agreement" means the existing shareholders'
agreement executed by the Founders.
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"Extensions of Credit" means, as to any Lender at any time, (a) an
amount equal to the sum of (i) the aggregate principal amount of all Revolving
Credit Loans made by such Lender then outstanding, (ii) such Lender's Commitment
Percentage of the L/C Obligations then outstanding and (iii) such Lender's
Commitment Percentage of the Term Loans then outstanding or (b) the making of
any Loan or issuance of or participation in any Letter of Credit by any Lender,
as the context requires.
"FDIC" means the Federal Deposit Insurance Corporation, or any
successor thereto.
"Federal Funds Rate" means, the rate per annum (rounded upwards, if
necessary, to the next higher 1/100th of 1%) representing the daily effective
federal funds rate as quoted by the Administrative Agent and confirmed in
Federal Reserve Board Statistical Release H.15 (519) or any successor or
substitute publication selected by the Administrative Agent. If, for any reason,
such rate is not available, then "Federal Funds Rate" shall mean a daily rate
which is determined, in the opinion of the Administrative Agent, to be the rate
at which federal funds are being offered for sale in the national federal funds
market at 9:00 a.m. (Philadelphia time). Rates for weekends or holidays shall be
the same as the rate for the most immediate preceding Business Day.
"Fee Letter" means the separate fee letter agreement dated January 22,
1999 by and among the Parent, the Company, Advent International Corporation,
First Union and Capital Markets.
"First Union" means First Union National Bank, a national banking
association, and its successors.
"Fiscal Year" means the fiscal year of the Parent and its Subsidiaries
ending on December 31.
"Fixed Charges" means, for any period, the sum of the following
determined on a Consolidated basis, without duplication, for the Parent and its
Subsidiaries in accordance with GAAP: (a) scheduled principal and interest
payments with respect to Total Funded Debt, (b) Capital Expenditures, (c) taxes
paid or, without duplication, payable in cash and (d) dividends paid or, without
duplication, payable in cash.
"Founders" means the collective reference to Bernard Spain and Murray
Spain.
"GAAP" means generally accepted accounting principles, as recognized by
the American Institute of Certified Public Accountants and the Financial
Accounting Standards Board, consistently applied and maintained by the Parent
and its Subsidiaries on a consistent basis for the Parent and its Subsidiaries
throughout the period indicated and consistent with the prior financial practice
of the Parent and its Subsidiaries.
"Governmental Approvals" means all authorizations, consents, approvals,
licenses and exemptions of, registrations and filings with, and reports to, all
Governmental Authorities.
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"Governmental Authority" means any nation, province, state or political
subdivision thereof, and any government or any Person exercising executive,
legislative, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Guaranty Obligation" means, with respect to the Parent and its
Subsidiaries, without duplication, any obligation, contingent or otherwise, of
any such Person pursuant to which such Person has directly or indirectly
guaranteed any Debt or other obligation of any other Person and, without
limiting the generality of the foregoing, any obligation, direct or indirect,
contingent or otherwise, of any such Person (a) to purchase or pay (or advance
or supply funds for the purchase or payment of) such Debt or other obligation
(whether arising by virtue of partnership arrangements, by agreement to keep
well, to purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement condition or otherwise) or (b) entered into for the
purpose of assuring in any other manner the obligee of such Debt or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, that the term Guaranty
Obligation shall not include endorsements for collection or deposit in the
ordinary course of business.
"Hazardous Materials" means any substances or materials (a) which are
or become defined as hazardous wastes, hazardous substances, pollutants,
contaminants, chemical substances or mixtures or toxic substances under any
Applicable Law, (b) which are toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic or otherwise harmful to human
health or the environment and are or become regulated by any Governmental
Authority, (c) the presence of which require investigation or remediation under
any Applicable Law, (d) the discharge or emission or release of which requires a
permit or license under any Applicable Law or other Governmental Approval, (e)
which are deemed to constitute a nuisance, a trespass or pose a health or safety
hazard to persons or neighboring properties, (f) which consist of underground or
aboveground storage tanks, whether empty, filled or partially filled with any
substance, or (g) which contain, without limitation, asbestos, polychlorinated
biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum
derived substances or waste, crude oil, nuclear fuel, natural gas or synthetic
gas.
"Hedging Agreement" means any agreement with respect to an interest
rate swap, collar, cap, floor or a forward rate agreement or other agreement
regarding the hedging of interest rate risk exposure executed in connection with
hedging the interest rate exposure of any Borrower, and any confirming letter
executed pursuant to such hedging agreement, all as amended, restated,
supplemented or otherwise modified.
"Insurance Proceeds" shall have the meaning assigned thereto in Section
4.4(b).
"Interest Expense" means, with respect to the Parent and its
Subsidiaries for any period, the total interest expense (including, without
limitation, interest expense attributable to Capital Leases and all net payment
obligations pursuant to Hedging Agreements, but excluding amortization of
financing fees) of such Persons, all determined for such period on a
Consolidated basis in accordance with GAAP.
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"Interest Period" shall have the meaning assigned thereto in Section
5.1(b).
"Investor Pledge Agreement" means the Pledge Agreement of even date
executed by the Investors and any issuers thereunder in favor of the
Administrative Agent, for the ratable benefit of itself and the Lenders,
substantially in the form of Exhibit I-1, as amended, restated, supplemented or
otherwise modified.
"Investor Rights Agreement" means the Investor Rights Agreement by and
among the Parent, the Company and the Investors.
"Investors" means the collective reference to the Founders, the Advent
Purchasers and any other equity purchasers party to the Equity Purchase
Agreement.
"Issuing Lender" means (i) with respect to any standby Letter of
Credit, First Union, in its capacity as issuer of such standby Letter of Credit,
or any successor thereto, and (ii) with respect to any commercial Letter of
Credit, any Lender designated by the Borrowers with the consent of the
Administrative Agent (which consent shall not be unreasonably withheld), in its
capacity as issuer of such Letter of Credit, or any successor thereto.
"Joinder Agreement" means any Joinder Agreement executed by a
Subsidiary of the Borrowers pursuant to Section 9.12 in favor of Administrative
Agent for the ratable benefit of itself and the Lenders and substantially in the
form of Exhibit J, as amended, restated, supplemented or otherwise modified.
"L/C Commitment" means the lesser of (a) Five Million Dollars
($5,000,000) and (b) the Revolving Credit Commitment.
"L/C Facility" means the letter of credit facility established pursuant
to Article III hereof.
"L/C Obligations" means at any time, an amount equal to the sum of (a)
the aggregate undrawn and unexpired amount of the then outstanding Letters of
Credit and (b) the aggregate amount of drawings under Letters of Credit which
have not then been reimbursed pursuant to Section 3.5.
"L/C Participants" means the collective reference to all the Lenders
other than the Issuing Lender.
"Lender" means each Person executing this Agreement as a Lender set
forth on the signature pages hereto and each Person that hereafter becomes a
party to this Agreement as a Lender pursuant to Section 14.10.
"Lending Office" means, with respect to any Lender, the office of such
Lender maintaining such Lender's Commitment Percentage of the Loans.
"Letters of Credit" shall have the meaning assigned thereto in Section
3.1.
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"Leverage Ratio" shall have the meaning given thereto in Section 10.1.
"LIBOR" means the rate of interest per annum determined on the basis of
the rate for deposits in Dollars in minimum amounts of at least $5,000,000 for a
period equal to the applicable Interest Period which appears on the Telerate
Page 3750 (or any successor) at approximately 11:00 a.m. (London time) two (2)
Business Days prior to the first day of the applicable Interest Period. If, for
any reason, such rate does not appear on Telerate Page 3750 (or any successor),
then "LIBOR" shall be determined by the Administrative Agent to be the
arithmetic average of the rate per annum at which deposits in Dollars would be
offered by first class banks in the London interbank market to the
Administrative Agent approximately 11:00 a.m. (London time) two (2) Business
Days prior to the first day of the applicable Interest Period for a period equal
to such Interest Period and in an amount substantially equal to the amount of
the applicable Loan.
"LIBOR Rate" means a rate per annum (rounded upwards, if necessary, to
the next higher 1/100th of 1%) determined by the Administrative Agent pursuant
to the following formula:
LIBOR Rate = LIBOR
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1.00-Eurodollar Reserve Percentage
"LIBOR Rate Loan" means any Loan bearing interest at a rate based upon
the LIBOR Rate as provided in Section 5.1(a).
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, collateral assignment, security interest or encumbrance of any kind in
respect of such asset. For the purposes of this Agreement, a Person shall be
deemed to own subject to a Lien any asset which it has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
Capital Lease or other title retention agreement relating to such asset.
"Loans" means the collective reference to the Revolving Credit Loans
and the Term Loans and "Loan" means any of such Loans.
"Loan Documents" means, collectively, this Agreement, the Notes, the
Applications, any Hedging Agreement with any Lender (which Hedging Agreement is
permitted or required hereunder), the Security Documents and each other
document, instrument, certificate and agreement executed and delivered by any
Borrower, any Subsidiary thereof or their counsel in connection with this
Agreement or otherwise referred to herein or contemplated hereby, all as may be
amended, restated, supplemented or otherwise modified.
"Material Adverse Effect" means, with respect to the Parent or any of
its Subsidiaries, a material adverse effect on the properties, business,
prospects, operations or condition (financial or otherwise) of such Persons
taken as a whole or the ability of the Borrowers taken as a whole to perform
their payment obligations under the Loan Documents or the ability of any such
Person to perform its other material obligations under the Loan Documents to
which it is a party.
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"Material Contract" means (a) any contract or other agreement, written
or oral, of the Parent or any of its Subsidiaries involving monetary liability
of or to any such Person in an amount in excess of $250,000 per annum, or (b)
any other contract or agreement, written or oral, of the Parent or any of its
Subsidiaries the failure to comply with which could reasonably be expected to
have a Material Adverse Effect.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA to which the Parent or any ERISA Affiliate is making, or is
accruing an obligation to make, contributions within the preceding six years.
"Net Cash Proceeds" means, as applicable, (a) with respect to any sale
or other disposition of assets, the gross cash proceeds received by the Parent
or any of its Subsidiaries from such sale less the sum of (i) all income taxes
and other taxes assessed by a Governmental Authority as a result of such sale
and any other fees and expenses incurred in connection therewith including,
without limitation, all legal, accounting and investment banking fees and
expenses and (ii) the principal amount of, premium, if any, and interest on any
Debt secured by a Lien on the asset (or a portion thereof) sold, which Debt is
required to be repaid in connection with such sale, (b) with respect to any
offering of capital stock or issuance of Debt, the gross cash proceeds received
by the Parent or any of its Subsidiaries therefrom less all legal, accounting,
underwriting, investment banking and other fees and expenses incurred in
connection therewith (excluding, without limitation, any dividends paid or
payable in connection with any such offering) and (c) with respect to any
payment under an insurance policy or in connection with a condemnation
proceeding, the amount of cash proceeds received by the Parent or its
Subsidiaries from an insurance company or Governmental Authority, as applicable,
net of all expenses of collection.
"Net Income" means, with respect to the Parent and its Subsidiaries for
any period, the net income (or loss) thereof for such period determined on a
Consolidated basis in accordance with GAAP; provided, that there shall be
excluded from net income (or loss) the income (or loss) of any Person (other
than a Wholly-Owned Subsidiary of the Parent) in which the Parent or any
Subsidiary has an ownership interest unless received by any such Person in a
cash distribution.
"Notes" means the collective reference to the Revolving Credit Notes
and the Term Notes and "Note" means any of such Notes.
"Notice of Account Designation" shall have the meaning assigned thereto
in Section 2.2(b).
"Notice of Revolving Credit Loan Borrowing" shall have the meaning
assigned thereto in Section 2.2(a).
"Notice of Conversion/Continuation" shall have the meaning assigned
thereto in Section 5.2.
"Notice of Prepayment" shall have the meaning assigned thereto in
Section 2.3(e).
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"Notice of Term Loan Borrowing" shall have the meaning assigned thereto
in Section 4.2.
"Obligations" means, in each case, whether now in existence or
hereafter arising: (a) the principal of and interest on (including interest
accruing after the filing of any bankruptcy or similar petition) the Loans, (b)
the L/C Obligations, (c) all payment and other obligations owing by the
Borrowers (or any of them) to any Lender or the Administrative Agent under any
Hedging Agreement with any Lender (which such Hedging Agreement is permitted or
required hereunder), and (d) all other fees and commissions (including
attorney's fees), charges, indebtedness, loans, liabilities, financial
accommodations, obligations, covenants and duties owing by the Borrowers (or any
of them) to the Lenders or the Administrative Agent, of every kind, nature and
description, direct or indirect, absolute or contingent, due or to become due,
contractual or tortious, liquidated or unliquidated, and whether or not
evidenced by any note, in each case under or in respect of this Agreement, any
Note, any Letter of Credit or any of the other Loan Documents.
"Officer's Compliance Certificate" shall have the meaning assigned
thereto in Section 8.2.
"Other Taxes" shall have the meaning assigned thereto in Section
5.11(b).
"Parent" means DE&S Holding Co., a Pennsylvania corporation, and its
successors.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
agency.
"Pension Plan" means any Employee Benefit Plan, other than a
Multiemployer Plan, which is subject to the provisions of Title IV of ERISA or
Section 412 of the Code and which (a) is maintained for employees of any
Borrower or any ERISA Affiliates or (b) has at any time within the preceding six
years been maintained for the employees of any Borrower or any of its current or
former ERISA Affiliates.
"Permitted Acquisition" shall have the meaning assigned thereto in
Section 11.4(d).
"Person" means an individual, corporation, limited liability company,
partnership, association, trust, business trust, joint venture, joint stock
company, pool, syndicate, sole proprietorship, unincorporated organization,
Governmental Authority or any other form of entity or group thereof.
"Pledge Agreements" means the collective reference to the Investor
Pledge Agreement and the Borrower Pledge Agreement.
"Preferred Stock" means the Series A Cumulative Convertible Preferred
Stock issued by the Parent with the terms and designations set forth in the
Statement With Respect to Shares.
"Prime Rate" means, at any time, the rate of interest per annum
publicly announced from time to time by First Union as its prime rate. Each
change in the Prime Rate shall be effective as of the opening of business on the
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day such change in the Prime Rate occurs. The parties hereto acknowledge that
the rate announced publicly by First Union as its Prime Rate is an index or base
rate and shall not necessarily be its lowest or best rate charged to its
customers or other banks.
"Real Estate Security Documents" means (a) any mortgage, deed of trust,
collateral assignment of lease or other document or agreement granting a Lien on
any interest in real property held by any Borrower or any Subsidiary thereof in
favor of the Administrative Agent, for the ratable benefit of itself and the
Lenders, to secure the Obligations and (b) any landlord consent, mortgagee
estoppel agreement or other document or agreement pertaining to any such Lien,
in each case with respect to clauses (a) and (b) in form and substance
satisfactory to the Administrative Agent.
"Recapitalization" means the restructuring and recapitalization of the
Company as a Wholly-Owned Subsidiary of the Parent effected by the Equity
Purchase, the Shareholder Distribution and the other transactions contemplated
by the Recapitalization Documents.
"Recapitalization Documents" means the collective reference to the
documents described on Schedule 1.1(b).
"Register" shall have the meaning assigned thereto in Section 14.10(d).
"Reimbursement Obligation" means the obligation of the Borrowers to
reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn under
Letters of Credit.
"Required Lenders" means, at any date, any combination of holders of at
least sixty percent (60%) of the aggregate unpaid principal amount of the Notes,
or if no amounts are outstanding under the Notes, any combination of Lenders
whose Commitment Percentages aggregate at least sixty percent (60%); provided
that at any time there are only two Lenders under this Agreement, "Required
Lenders" shall be comprised of such two Lenders.
"Responsible Officer" means any of the following: the chief executive
officer or chief financial officer of the Parent or the applicable Borrower or
any other officer of the Parent or the applicable Borrower reasonably acceptable
to the Administrative Agent.
"Revolving Credit Commitment" means (a) as to any Lender, the
obligation of such Lender to make Revolving Credit Loans to the account of the
Borrowers hereunder in an aggregate principal amount at any time outstanding not
to exceed the amount set forth opposite such Lender's name on Schedule 1.1(a)
hereto as such amount may be reduced or modified at any time or from time to
time pursuant to the terms hereof and (b) as to all Lenders, the aggregate
commitment of all Lenders to make Revolving Credit Loans, as such amount may be
reduced or modified at any time or from time to time pursuant to the terms
hereof. The Revolving Credit Commitment of all Lenders on the Closing Date shall
be $20,000,000.
"Revolving Credit Facility" means the revolving credit facility
established pursuant to Article II hereof.
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"Revolving Credit Loans" means any revolving loan made to the Borrowers
pursuant to Section 2.1, and all such revolving loans collectively as the
context requires.
"Revolving Credit Notes" means the collective reference to the
Revolving Credit Notes made by the Borrowers payable to the order of each
Lender, substantially in the form of Exhibit A-1 hereto, evidencing the
Revolving Credit Facility, and any amendments and modifications thereto, any
substitutes therefor, and any replacements, restatements, renewals or extension
thereof, in whole or in part; "Revolving Credit Note" means any of such
Revolving Credit Notes.
"Revolving Credit Maturity Date" means the earliest of the dates
referred to in Section 2.6.
"Security Agreement" means the Security Agreement of even date executed
by the Borrowers in favor of the Administrative Agent, for the ratable benefit
of itself and the Lenders, substantially in the form of Exhibit H, as amended,
restated, supplemented or otherwise modified.
"Security Documents" means the collective reference to the Security
Agreement, the Pledge Agreements, any Real Estate Security Documents and each
other agreement or writing pursuant to which the Parent or any Subsidiary
thereof purports to pledge or grant a security interest in any property or
assets securing the Obligations or any such Person purports to guaranty the
payment and/or performance of the Obligations.
"Shareholder Distribution" means the cash amount payable to the
Founders on the Closing Date which amount shall repay in full and cancel the
promissory notes dated January 1, 1999 issued to the Founders in connection with
the Recapitalization; provided that the aggregate amount of the proceeds of the
initial Loans and the Equity Purchase utilized to fund such payment shall not
exceed $55,000,000.
"Solvent" means, as to the Parent and its Subsidiaries on a particular
date, that any such Person (a) has capital sufficient to carry on its business
and transactions and all business and transactions in which it is about to
engage and is able to pay its debts as they mature in the normal course of
business, (b) owns property having a value, both at fair valuation and at
present fair saleable value, greater than the amount required to pay its
probable liabilities (including contingencies), and (c) does not believe that it
will incur debts or liabilities beyond its ability to pay such debts or
liabilities as they mature in the normal course of business.
"Statement With Respect To Shares" means the Statement With Respect to
Shares Designating the Preferences, Relative, Participating, Optional or other
Rights, Qualifications, Limitations and Restrictions of the Preferred Stock
filed with the Pennsylvania Secretary of State on or prior to Closing Date by
the Parent.
"Subordinated Debt" means any Debt of the Parent or any Subsidiary
subordinated in right and time of payment to the Obligations on terms reasonably
satisfactory to the Required Lenders.
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"Subsidiary" means as to any Person, any corporation, partnership,
limited liability company or other entity of which more than fifty percent (50%)
of the outstanding capital stock or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other managers of
such corporation, partnership, limited liability company or other entity is at
the time, directly or indirectly, owned by or the management is otherwise
controlled by such Person (irrespective of whether, at the time, capital stock
or other ownership interests of any other class or classes of such corporation,
partnership, limited liability company or other entity shall have or might have
voting power by reason of the happening of any contingency). Unless otherwise
qualified references to "Subsidiary" or "Subsidiaries" herein shall refer to
those of the Parent.
"Subsidiary Borrowers" means each Subsidiary of the Parent party hereto
on the Closing Date or thereafter joined hereto pursuant to Section 9.12.
"Syndication Agent" means BankBoston, N.A. in its capacity as
Syndication Agent hereunder.
"Taxes" shall have the meaning assigned thereto in Section 5.11(a).
"Term Loans" shall mean the term loans made to the Borrowers by the
Lenders pursuant to Section 4.1.
"Term Loan Commitment" means (a) as to any Lender, the obligation of
such Lender to make the Term Loans to the account of the Borrowers hereunder in
an aggregate principal amount not to exceed the amount set forth opposite such
Lender's name on Schedule 1.1(a) hereto, as such amount may be reduced or
modified at any time or from time to time pursuant to the terms hereof and (b)
as to all Lenders, the aggregate commitment to make Term Loans. The Term Loan
Commitment of all Lenders as of the Closing Date shall be $20,000,000.
"Term Loan Facility" shall mean the term loan facility established
pursuant to Article IV hereof.
"Term Loan Maturity Date" means the first to occur of (a) December 31,
2003, and (b) the date of termination by the Administrative Agent on behalf of
the Lenders pursuant to Section 12.2(a).
"Term Notes" means the Term Notes made by the Borrowers payable to the
order of each of the Lenders, substantially in the form of Exhibit A-2 hereto,
evidencing the Debt incurred by the Borrowers pursuant to the Term Loan
Facility, and any amendments, modifications and supplements thereto, any
substitute therefor, and any replacement, restatements, renewals or extensions
thereof, in whole or in part.
"Termination Event" means: (a) a "Reportable Event" described in
Section 4043 of ERISA, or (b) the withdrawal of any Borrower or any ERISA
Affiliate from a Pension Plan during a plan year in which it was a "substantial
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employer" as defined in Section 4001(a)(2) of ERISA, or (c) the termination of a
Pension Plan, the filing of a notice of intent to terminate a Pension Plan or
the treatment of a Pension Plan amendment as a termination under Section 4041 of
ERISA, or (d) the institution of proceedings to terminate, or the appointment of
a trustee with respect to, any Pension Plan by the PBGC, or (e) any other event
or condition which would constitute grounds under Section 4042(a) of ERISA for
the termination of, or the appointment of a trustee to administer, any Pension
Plan, or (f) the partial or complete withdrawal of any Borrower or any ERISA
Affiliate from a Multiemployer Plan, or (g) the imposition of a Lien pursuant to
Section 412 of the Code or Section 302 of ERISA, or (h) any event or condition
which results in the reorganization or insolvency of a Multiemployer Plan under
Sections 4241 or 4245 of ERISA, or (i) any event or condition which results in
the termination of a Multiemployer Plan under Section 4041A of ERISA or the
institution by PBGC of proceedings to terminate a Multiemployer Plan under
Section 4042 of ERISA.
"Total Funded Debt" means, as of any date of determination with respect
to the Parent and its Subsidiaries on a Consolidated basis without duplication,
the sum of all Debt of the Parent and its Subsidiaries.
"Transactions" means the collective reference to the closing and
initial funding hereunder and the Recapitalization.
"Uniform Customs" the Uniform Customs and Practice for Documentary
Credits (1993 Revision), International Chamber of Commerce Publication No. 500.
"UCC" shall have the meaning given thereto in the Security Agreement.
"United States" means the United States of America.
"Warrants" means the warrants issued to the Investors (other than the
Founders) on the Closing Date to purchase, in the aggregate, up to four percent
(4%) of the outstanding shares of common stock of the Parent.
"Wholly-Owned" means, with respect to a Subsidiary, that all of the
shares of capital stock or other equity ownership interests of such Subsidiary
are, directly or indirectly, owned or controlled by any Borrower and/or one or
more of its Wholly-Owned Subsidiaries.
SECTION 1.2 General. Unless otherwise specified, a reference in this
Agreement to a particular section, subsection, Schedule or Exhibit is a
reference to that section, subsection, Schedule or Exhibit of this Agreement.
Wherever from the context it appears appropriate, each term stated in either the
singular or plural shall include the singular and plural, and pronouns stated in
the masculine, feminine or neuter gender shall include the masculine, the
feminine and the neuter. Any reference herein to "Philadelphia time" shall refer
to the applicable time of day in Philadelphia, Pennsylvania.
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SECTION 1.3 Other Definitions and Provisions.
(a) Use of Capitalized Terms. Unless otherwise defined therein, all
capitalized terms defined in this Agreement shall have the defined meanings when
used in this Agreement, the Notes and the other Loan Documents or any
certificate, report or other document made or delivered pursuant to this
Agreement.
(b) Miscellaneous. 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.
ARTICLE II
REVOLVING CREDIT FACILITY
SECTION 2.1 Revolving Credit Loans. Subject to the terms and conditions
of this Agreement, each Lender severally agrees to make Revolving Credit Loans
to the Borrowers on a joint and several basis from time to time from the Closing
Date through the Revolving Credit Maturity Date as requested by the Borrowers in
accordance with the terms of Article II; provided, that (a) the aggregate
principal amount of all outstanding Revolving Credit Loans (after giving effect
to any amount requested) shall not exceed the Revolving Credit Commitment less
the sum of all outstanding L/C Obligations and (b) the principal amount of
outstanding Revolving Credit Loans from any Lender to the Borrowers shall not at
any time exceed such Lender's Revolving Credit Commitment less the sum of such
Lender's Commitment Percentage of outstanding L/C Obligations. Each Revolving
Credit Loan by a Lender shall be in a principal amount equal to such Lender's
Commitment Percentage of the aggregate principal amount of Revolving Credit
Loans requested on such occasion. Subject to the terms and conditions hereof,
the Borrowers may borrow, repay and reborrow Revolving Credit Loans hereunder
until the Revolving Credit Maturity Date.
SECTION 2.2 Procedure for Advances of Revolving Credit Loans.
(a) Requests for Borrowing. The Parent, on behalf of the Borrowers,
shall give the Administrative Agent irrevocable notice in the form attached
hereto as Exhibit B-1 (a "Notice of Revolving Credit Loan Borrowing") not later
than 11:00 a.m. (Philadelphia time) (i) on the same Business Day as each Base
Rate Loan and (ii) at least three (3) Business Days before each LIBOR Rate Loan,
of its intention to borrow, specifying (A) the date of such borrowing, which
shall be a Business Day, (B) the amount of such borrowing, which shall be in an
amount equal to the amount of the Revolving Credit Commitment then available to
the Borrowers, or if less, (x) with respect to Base Rate Loans in an aggregate
principal amount of $500,000 or a whole multiple of $250,000 in excess thereof
and (y) with respect to LIBOR Rate Loans in an aggregate principal amount of
$500,000 or a whole multiple of $250,000 in excess thereof, (C) whether such
Loan is to be a Revolving Credit Loan, (D) in the case of a Revolving Credit
Loan whether the Loans are to be LIBOR Rate Loans or Base Rate Loans, and (E) in
the case of a LIBOR Rate Loan, the duration of the Interest Period applicable
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thereto. Notices received after 11:00 a.m. (Philadelphia time) shall be deemed
received on the next Business Day. The Administrative Agent shall promptly
notify the Lenders of each Notice of Revolving Credit Loan Borrowing.
(b) Disbursement of Revolving Credit Loans. Not later than 2:00 p.m.
(Philadelphia time) on the proposed borrowing date set forth in the applicable
Notice of Revolving Credit Loan Borrowing, each Lender will make available to
the Administrative Agent, for the account of the Borrowers, at the office of the
Administrative Agent in funds immediately available to the Administrative Agent,
such Lender's Commitment Percentage of the Revolving Credit Loans to be made on
such borrowing date. The Borrowers hereby irrevocably authorize the
Administrative Agent to disburse the proceeds of each borrowing requested
pursuant to this Section 2.2 in immediately available funds by crediting or
wiring such proceeds to the deposit account of the Borrowers identified in the
most recent notice substantially in the form of Exhibit C hereto (a "Notice of
Account Designation") delivered by the Parent, on behalf of the Borrowers, to
the Administrative Agent or may be otherwise agreed upon by the Borrowers and
the Administrative Agent from time to time. Subject to Section 5.7 hereof, the
Administrative Agent shall not be obligated to disburse the portion of the
proceeds of any Revolving Credit Loan requested pursuant to this Section 2.2 to
the extent that any Lender has not made available to the Administrative Agent
its Commitment Percentage of such Loan.
SECTION 2.3 Repayment of Revolving Credit Loans.
(a) Repayment on Revolving Credit Maturity Date. The Borrowers shall
repay the outstanding principal amount of all Revolving Credit Loans in full on
the Revolving Credit Maturity Date, together with all accrued but unpaid
interest thereon.
(b) Mandatory Repayment of Revolving Credit Loans. If at any time the
outstanding principal amount of all Revolving Credit Loans plus the sum of all
outstanding L/C Obligations exceeds the Revolving Credit Commitment, the
Borrowers shall repay immediately upon notice from the Administrative Agent, by
payment to the Administrative Agent for the account of the Lenders, Revolving
Credit Loans and/or furnishing cash collateral reasonably satisfactory to the
Administrative Agent or repay the L/C Obligations in an amount equal to such
excess with each such repayment applied first to the principal amount of the L/C
Obligations and second to the principal amount of outstanding Revolving Credit
Loans. Such cash collateral shall be applied in accordance with Section 12.2(b).
(c) Excess Proceeds. If at any time proceeds ("Excess Proceeds") remain
after the prepayment of Term Loans pursuant to Section 4.4(b), the Borrowers
shall repay any outstanding Revolving Credit Loans by an amount equal to the
amount of such Excess Proceeds.
(d) Insurance Proceeds. Any Net Cash Proceeds referred to in Section
4.4(b)(iv) that are required to be applied to the Loans shall be utilized in
accordance with such Section 4.4(b)(iv) to repay any outstanding Revolving
Credit Loans in an amount up to the amount of such Net Cash Proceeds (with any
such excess Net Cash Proceeds being applied to the Term Loans in accordance with
Sections 4.4(b)(iv) and 4.4(b)(v)).
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(e) Optional Repayments. The Borrowers may at any time and from time to
time repay the Loans, in whole or in part, upon at least three (3) Business
Days' irrevocable notice to the Administrative Agent with respect to LIBOR Rate
Loans and one (1) Business Day irrevocable notice with respect to Base Rate
Loans, in the form attached hereto as Exhibit D (a "Notice of Prepayment")
specifying the date and amount of repayment and whether the repayment is of
LIBOR Rate Loans, Base Rate Loans or a combination thereof, and, if of a
combination thereof, the amount allocable to each. Upon receipt of such notice,
the Administrative Agent shall promptly notify each Lender. If any such notice
is given, the amount specified in such notice shall be due and payable on the
date set forth in such notice. Partial repayments (other than with respect to
the final repayment of Revolving Credit Loans) shall be in an aggregate amount
of $500,000 or a whole multiple of $250,000 in excess thereof with respect to
Base Rate Loans and $500,000 or a whole multiple of $250,000 in excess thereof
with respect to LIBOR Rate Loans.
(f) Limitation on Repayment of LIBOR Rate Loans. The Borrowers may not
repay any LIBOR Rate Loan on any day other than on the last day of the Interest
Period applicable thereto unless such repayment is accompanied by any amount
required to be paid pursuant to Section 5.9 hereof.
SECTION 2.4 Revolving Credit Notes. Each Lender's Revolving Credit
Loans and the obligation of the Borrowers to repay such Revolving Credit Loans
shall be evidenced by a separate Revolving Credit Note executed by the Borrowers
payable to the order of such Lender in principal amount equal to such Lender's
Revolving Credit Commitment. Each Revolving Credit Note shall be dated the date
hereof and shall bear interest on the unpaid principal amount thereof at the
applicable interest rate per annum specified in Section 5.1.
SECTION 2.5 Permanent Reduction of the Revolving Credit Commitment.
(a) Voluntary Reduction. The Borrowers shall have the right at any time
and from time to time, upon at least five (5) Business Days prior written notice
to the Administrative Agent, to permanently reduce, without premium or penalty,
(i) the entire Revolving Credit Commitment at any time or (ii) portions of the
Revolving Credit Commitment, from time to time, in an aggregate principal amount
not less than $500,000 or any whole multiple of $250,000 in excess thereof.
(b) Payments. Each permanent reduction permitted or required pursuant
to this Section 2.5 shall be accompanied by a payment of principal sufficient to
reduce the aggregate outstanding Revolving Credit Loans and L/C Obligations, as
applicable, after such reduction to the Revolving Credit Commitment as so
reduced, and if the Revolving Credit Commitment as so reduced is less than the
aggregate amount of all outstanding Letters of Credit, the Borrowers shall be
required to deposit in a cash collateral account opened by the Administrative
Agent an amount equal to the aggregate then undrawn and unexpired amount of such
Letters of Credit. Any reduction of the Revolving Credit Commitment to zero
shall be accompanied by payment of all outstanding Revolving Credit Loans (and
furnishing of cash collateral satisfactory to the Administrative Agent for all
L/C Obligations) and shall result in the termination of the Revolving Credit
Commitment and the Revolving Credit Facility. Such cash collateral shall be
applied in accordance with Section 12.2(b). If the reduction of the Revolving
Credit Commitment requires the repayment of any LIBOR Rate Loan, such repayment
shall be accompanied by any amount required to be paid pursuant to Section 5.9
hereof.
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SECTION 2.6 Termination of Revolving Credit Facility. The Revolving
Credit Facility shall terminate on the earliest of (a) December 31, 2003, (b)
the date of termination by the Borrowers pursuant to Section 2.5(a) or 2.5(b),
and (c) the date of termination by the Administrative Agent on behalf of the
Lenders pursuant to Section 12.2(a).
ARTICLE III
LETTER OF CREDIT FACILITY
SECTION 3.1 L/C Commitment. Subject to the terms and conditions hereof,
the Issuing Lender, in reliance on the agreements of the other Lenders set forth
in Section 3.4(a), agrees to issue standby and commercial letters of credit
("Letters of Credit") for the account of the Borrowers on any Business Day from
the Closing Date through but not including the Revolving Credit Maturity Date in
such form as may be approved from time to time by the Issuing Lender; provided,
that the Issuing Lender shall have no obligation to issue any Letter of Credit
if, after giving effect to such issuance, (a) the L/C Obligations would exceed
the L/C Commitment or (b) the aggregate principal amount of outstanding
Revolving Credit Loans plus the aggregate amount of L/C Obligations would exceed
the Revolving Credit Commitment. Each Letter of Credit shall (i) be denominated
in Dollars in a minimum amount of $250,000 (provided that any Letter of Credit
issued by the Issuing Lender to replace any letter of credit existing under the
Existing Facility shall be in a minimum amount agreed to by the Administrative
Agent, Issuing Lender and the Borrowers), (ii) be a standby or a commercial
letter of credit issued to support obligations of the Borrowers or any of their
Subsidiaries, contingent or otherwise, incurred in the ordinary course of
business, (iii) expire on a date satisfactory to the Issuing Lender, which date
shall be no later than one year from the date of issuance (or if sooner, the
Revolving Credit Maturity Date) and (iv) be subject to the Uniform Customs and,
to the extent not inconsistent therewith, the laws of the State of North
Carolina. The Issuing Lender shall not at any time be obligated to issue any
Letter of Credit hereunder if such issuance would conflict with, or cause the
Issuing Lender or any L/C Participant to exceed any limits imposed by, any
Applicable Law. References herein to "issue" and derivations thereof with
respect to Letters of Credit shall also include extensions or modifications of
any existing Letters of Credit, unless the context otherwise requires.
SECTION 3.2 Procedure for Issuance of Letters of Credit. The Borrowers
may from time to time request that the Issuing Lender issue a Letter of Credit
by delivering to the Issuing Lender at its address for notices set forth herein
and to the Administrative Agent at the Administrative Agent's Office an
Application therefor, completed to the satisfaction of the Issuing Lender, and
such other certificates, documents and other papers and information as the
Issuing Lender may request. Upon receipt of any Application, the Issuing Lender
shall process such Application and the certificates, documents and other papers
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and information delivered to it in connection therewith in accordance with its
customary procedures and shall, subject to Section 3.1 and Article VI hereof,
promptly issue the Letter of Credit requested thereby (but in no event shall the
Issuing Lender be required to issue any Letter of Credit earlier than three (3)
Business Days after its receipt of the Application therefor and all such other
certificates, documents and other papers and information relating thereto) by
issuing the original of such Letter of Credit to the beneficiary thereof or as
otherwise may be agreed by the Issuing Lender and the Borrowers. The Issuing
Lender shall promptly furnish to the Borrowers a copy of such Letter of Credit
and promptly notify each Lender of the issuance and upon request by any Lender,
furnish to such Lender a copy of such Letter of Credit and the amount of such
Lender's L/C Participation therein.
SECTION 3.3 Commissions and Other Charges.
(a) The Borrowers shall pay to the Administrative Agent, for the
account of the Issuing Lender and the L/C Participants based upon their
respective Commitment Percentages, a letter of credit commission on a per annum
basis with respect to each Letter of Credit for as long as such Letter of Credit
is outstanding in an amount equal to the product of (i) the Applicable Margin
with respect to LIBOR Rate Loans in effect on the corresponding payment date and
(ii) the average face amount of such Letter of Credit for the corresponding
quarterly period. Such commission shall be payable quarterly in arrears on the
last Business Day of each calendar quarter and on the Revolving Credit Maturity
Date. The Administrative Agent shall, promptly following its receipt thereof,
distribute to the Issuing Lender and the L/C Participants all commissions
received by the Administrative Agent in accordance with their respective
Commitment Percentages.
(b) In addition to the foregoing commission, the Borrowers shall pay
the Issuing Lender for its account an issuance fee of .125% per annum of the
average face amount of each Letter of Credit for the corresponding quarterly
period, payable quarterly in arrears on the last Business Day of each calendar
quarter and on the Revolving Credit Maturity Date for as long as such Letter of
Credit is outstanding.
(c) In addition to the foregoing commissions, the Borrowers shall pay
or reimburse the Issuing Lender for such normal and customary costs and expenses
as are incurred or charged by the Issuing Lender in issuing, effecting payment
under, amending or otherwise administering any Letter of Credit.
SECTION 3.4 L/C Participations.
(a) The Issuing Lender irrevocably agrees to grant and hereby grants to
each L/C Participant, and, to induce the Issuing Lender to issue Letters of
Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase
and hereby accepts and purchases from the Issuing Lender, on the terms and
conditions hereinafter stated, for such L/C Participant's own account and risk
an undivided interest equal to such L/C Participant's Commitment Percentage in
the Issuing Lender's obligations and rights under each Letter of Credit issued
hereunder and the amount of each draft paid by the Issuing Lender thereunder.
Each L/C Participant unconditionally and irrevocably agrees with the Issuing
Lender that, if a draft is paid under any Letter of Credit for which the Issuing
Lender is not reimbursed in full by the Borrowers in accordance with the terms
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of this Agreement, such L/C Participant shall pay to the Issuing Lender upon
demand at the Issuing Lender's address for notices specified herein an amount
equal to such L/C Participant's Commitment Percentage of the amount of such
draft, or any part thereof, which is not so reimbursed.
(b) Upon becoming aware of any amount required to be paid by any L/C
Participant to the Issuing Lender pursuant to Section 3.4(a) in respect of any
unreimbursed portion of any payment made by the Issuing Lender under any Letter
of Credit, the Issuing Lender shall notify each L/C Participant of the amount
and due date of such required payment and such L/C Participant shall pay to the
Issuing Lender the amount specified on the applicable due date. If any such
amount is paid to the Issuing Lender after the date such payment is due, such
L/C Participant shall pay to the Issuing Lender on demand, in addition to such
amount, the product of (i) such amount, times (ii) the daily average Federal
Funds Rate as determined by the Administrative Agent during the period from and
including the date such payment is due to the date on which such payment is
immediately available to the Issuing Lender, times (iii) a fraction the
numerator of which is the number of days that elapse during such period and the
denominator of which is 360. A certificate of the Issuing Lender with respect to
any amounts owing under this Section 3.4(b) shall be conclusive in the absence
of manifest error. With respect to payment to the Issuing Lender of the
unreimbursed amounts described in this Section 3.4(b), if the L/C Participants
receive notice that any such payment is due (A) prior to 1:00 p.m. (Philadelphia
time) on any Business Day, such payment shall be due that Business Day, and (B)
after 1:00 p.m. (Philadelphia time) on any Business Day, such payment shall be
due on the following Business Day.
(c) Whenever, at any time after the Issuing Lender has made payment
under any Letter of Credit and has received from any L/C Participant its
Commitment Percentage of such payment in accordance with this Section 3.4, the
Issuing Lender receives any payment related to such Letter of Credit (whether
directly from the Borrowers or otherwise), or any payment of interest on account
thereof, the Issuing Lender will distribute to such L/C Participant its pro rata
share thereof; provided, that in the event that any such payment received by the
Issuing Lender shall be required to be returned by the Issuing Lender, such L/C
Participant shall return to the Issuing Lender the portion thereof previously
distributed by the Issuing Lender to it.
SECTION 3.5 Reimbursement Obligation of the Borrowers. The Borrowers
agree to reimburse the Issuing Lender on each date on which the Issuing Lender
notifies the Borrowers of the date and amount of a draft paid under any Letter
of Credit for the amount of (a) such draft so paid and (b) any taxes, fees,
charges or other costs or expenses incurred by the Issuing Lender in connection
with such payment. Each such payment shall be made to the Issuing Lender at its
address for notices specified herein in lawful money of the United States and in
immediately available funds. Interest shall be payable on any and all amounts
remaining unpaid by the Borrowers under this Article III from the date such
amounts become payable (whether at stated maturity, by acceleration or
otherwise) until payment in full at the rate which would be payable on any
outstanding Base Rate Loans which were then overdue. If the Borrowers fail to
timely reimburse the Issuing Lender on the date the Borrowers receive the notice
referred to in this Section 3.5, the Borrowers shall be deemed to have timely
given a Notice of Revolving Credit Loan Borrowing hereunder to the
Administrative Agent requesting the Lenders to make a Base Rate Loan on such
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date in an amount equal to the amount of such drawing and, regardless of whether
or not the conditions precedent specified in Article VI have been satisfied, the
Lenders shall make Base Rate Loans in such amount, the proceeds of which shall
be applied to reimburse the Issuing Lender for the amount of the related drawing
and costs and expenses.
SECTION 3.6 Obligations Absolute. The Borrowers' obligations under this
Article III (including without limitation the Reimbursement Obligation) shall be
absolute and unconditional under any and all circumstances and irrespective of
any set-off, counterclaim or defense to payment which the Borrowers may have or
have had against the Issuing Lender or any beneficiary of a Letter of Credit.
The Borrowers also agree with the Issuing Lender that the Issuing Lender shall
not be responsible for, and the Borrowers' Reimbursement Obligation under
Section 3.5 shall not be affected by, among other things, the validity or
genuineness of documents or of any endorsements thereon, except for errors or
omissions caused by the Issuing Lender's gross negligence or willful misconduct
even though such documents shall in fact prove to be invalid, fraudulent or
forged, or any dispute between or among the Borrowers and any beneficiary of any
Letter of Credit or any other party to which such Letter of Credit may be
transferred or any claims whatsoever of any Borrower against any beneficiary of
such Letter of Credit or any such transferee. The Issuing Lender shall not be
liable for any error, omission, interruption or delay in transmission, dispatch
or delivery of any message or advice, however transmitted, in connection with
any Letter of Credit, except for errors or omissions caused by the Issuing
Lender's gross negligence or willful misconduct. The Borrowers agree that any
action taken or omitted by the Issuing Lender under or in connection with any
Letter of Credit or the related drafts or documents, if done in the absence of
gross negligence or willful misconduct and in accordance with the standards of
care specified in the Uniform Customs and, to the extent not inconsistent
therewith, the UCC shall be binding on the Borrowers and shall not result in any
liability of the Issuing Lender to the Borrowers. The responsibility of the
Issuing Lender to the Borrowers in connection with any draft presented for
payment under any Letter of Credit shall, in addition to any payment obligation
expressly provided for in such Letter of Credit, be limited to determining that
the documents (including each draft) delivered under such Letter of Credit in
connection with such presentment are in conformity with such Letter of Credit.
SECTION 3.7 Effect of Application. To the extent that any provision of
any Application related to any Letter of Credit is inconsistent with the
provisions of this Article III, the provisions of this Article III shall apply.
ARTICLE IV
TERM LOAN FACILITY
SECTION 4.1 Term Loan. Subject to the terms and conditions of this
Agreement, each Lender severally agrees to make a Term Loan to the Borrowers on
a joint and several basis on the Closing Date. The Term Loan shall be funded by
each Lender in a principal amount equal to such Lender's Commitment Percentage
22
<PAGE>
of the aggregate principal amount of the Term Loans made on the Closing Date,
which aggregate principal amount shall equal the total Term Loan Commitment.
SECTION 4.2 Procedure for Advance of Term Loan. The Parent, on behalf
of the Borrowers, shall give the Administrative Agent irrevocable prior written
notice in the form attached hereto as Exhibit B-2 (a "Notice of Term Loan
Borrowing") prior to 11:00 a.m. (Philadelphia time) on the Closing Date
requesting that the Lenders make the Term Loan as Base Rate Loan on the Closing
Date. To the extent any conversion of the applicable interest rate is effected
pursuant to Section 5.2, each Base Rate Loan shall be in an aggregate principal
amount of at least $500,000 or any integral multiple of $250,000 in excess
thereof and each LIBOR Rate Loan shall be in an aggregate principal amount of
$500,000 or any integral multiple of $250,000 in excess thereof. Upon receipt of
such Notice of Term Loan Borrowing from the Parent, on behalf of the Borrowers,
the Administrative Agent shall promptly notify each Lender thereof. Not later
than 2:00 p.m. (Philadelphia time) on the Closing Date, each Lender will make
available to the Administrative Agent for the account of the Borrowers, at the
office of the Administrative Agent in immediately available funds, the amount of
such Loan to be made on such borrowing date. The Borrowers hereby irrevocably
authorize the Administrative Agent to disburse the proceeds of the Term Loan in
immediately available funds by wire transfer to such Person or Persons as may be
designated by the Borrowers.
SECTION 4.3 Repayment of Term Loan. The Borrowers shall repay the
aggregate outstanding principal amount of the Term Loan in consecutive quarterly
installments on the last Business Day of each of March 31, June 30, September 30
and December 31 commencing March 31, 2000 as set forth below, except as the
amounts of individual installments may be adjusted pursuant to Section 4.4
hereof:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
YEAR PAYMENT DATE PRINCIPAL TERM LOAN
INSTALLMENT COMMITMENT
($) ($)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 March 31, 1999 0 $20,000,000
---------------------------------------------------------------------------------------
June 30, 1999 0 $20,000,000
---------------------------------------------------------------------------------------
September 30, 1999 0 $20,000,000
---------------------------------------------------------------------------------------
December 31, 1999 0 $20,000,000
- ----------------------------------------------------------------------------------------------------------------------
2000 March 31, 2000 $ 500,000 $19,500,000
---------------------------------------------------------------------------------------
June 30, 2000 $ 500,000 $19,000,000
---------------------------------------------------------------------------------------
September 30, 2000 $ 500,000 $18,500,000
---------------------------------------------------------------------------------------
December 31, 2000 $ 500,000 $18,000,000
- ----------------------------------------------------------------------------------------------------------------------
2001 March 31, 2001 $1,000,000 $17,000,000
---------------------------------------------------------------------------------------
June 30, 2001 $1,000,000 $16,000,000
---------------------------------------------------------------------------------------
September 30, 2001 $1,000,000 $15,000,000
---------------------------------------------------------------------------------------
December 31, 2001 $1,000,000 $14,000,000
- ----------------------------------------------------------------------------------------------------------------------
2002 March 31, 2002 $1,500,000 $12,500,000
---------------------------------------------------------------------------------------
June 30, 2002 $1,500,000 $11,000,000
---------------------------------------------------------------------------------------
September 30, 2002 $1,500,000 $ 9,500,000
---------------------------------------------------------------------------------------
December 31, 2002 $1,500,000 $ 8,000,000
- ----------------------------------------------------------------------------------------------------------------------
2003 March 31, 2003 $2,000,000 $ 6,000,000
---------------------------------------------------------------------------------------
June 30, 2003 $2,000,000 $ 4,000,000
---------------------------------------------------------------------------------------
September 30, 2003 $2,000,000 $ 2,000,000
---------------------------------------------------------------------------------------
December 31, 2003 $2,000,000 0
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
If not sooner paid, the Term Loan shall be paid in full, together with accrued
interest thereon, on the Term Loan Maturity Date.
SECTION 4.4 Prepayments of Term Loan.
(a) Optional Prepayment of Term Loan. The Borrowers shall have the
right at any time and from time to time, upon delivery to the Administrative
Agent of a Notice of Prepayment at least three (3) Business Days prior to any
repayment of any LIBOR Rate Loan and at least one (1) Business Day prior to any
repayment of any Base Rate Loan, to prepay the Term Loan in whole or in part
without premium or penalty (except as referenced below in this paragraph). Each
optional prepayment of the Term Loan hereunder (other than the final payment
thereof) shall be in an aggregate principal amount of at least $500,000 or any
whole multiple of $250,000 in excess thereof, shall be applied to the
outstanding principal installments of the Term Loan in inverse order of maturity
thereof. Each repayment shall be accompanied by any amount required to be paid
pursuant to Section 5.9 hereof.
(b) Mandatory Prepayment of Term Loan.
(i) Debt Proceeds. The Borrowers shall make mandatory principal
prepayments of the Loans in the manner set forth in Section 4.4(b)(v) below in
amounts equal to one hundred percent (100%) of the aggregate Net Cash Proceeds
from any incurrence of Debt by any Borrower or any Subsidiary thereof pursuant
to Section 11.1(e). Such prepayment shall be made within three (3) Business Days
after the date of receipt of Net Cash Proceeds of any such transaction.
(ii) Equity Proceeds. The Borrowers shall make mandatory principal
prepayments of the Loans in the manner set forth in Section 4.4(b)(v) below in
amounts equal to one hundred percent (100%) of the aggregate Net Cash Proceeds
from any offering of equity securities by any Borrower or any Subsidiary
thereof. Such prepayment shall be made within three (3) Business Days after the
date of receipt of Net Cash Proceeds of any such transaction.
(iii) Asset Sale Proceeds. If any Borrower or any Subsidiary
thereof receives Net Cash Proceeds in excess of $1,000,000 from any sale or
other disposition or series of related sales or other dispositions of assets
completed thereby pursuant to Section 11.6(e) (or if any Borrower or any
Subsidiary thereof receives Net Cash Proceeds in any amount from any such sale
or other disposition during the continuance of any Default or Event of Default),
the Borrowers shall make mandatory principal prepayments of the Loans in the
manner set forth in Section 4.4(b)(v) below in amounts equal to one hundred
percent (100%) of all such Net Cash Proceeds (including the amount of Net Cash
Proceeds below $1,000,000). All such Net Cash Proceeds shall be applied to make
prepayments of the Loans, such prepayments to be made within three (3) Business
Days after the applicable Borrower's or Subsidiary's receipt of such Net Cash
Proceeds.
(iv) Insurance Proceeds. If any Borrower or any Subsidiary thereof
receives Net Cash Proceeds under any of the insurance policies maintained
pursuant to Section 9.3 ("Insurance Proceeds") in excess of $2,000,000 (or if
24
<PAGE>
any Borrower or any Subsidiary thereof receives Net Cash Proceeds under any such
insurance policies in any amount during the continuance of any Default or Event
of Default), the Borrowers shall make mandatory principal prepayments of the
Loans in the manner set forth in Section 4.4(b)(v) below in amounts equal to one
hundred percent (100%) of all such Insurance Proceeds (excluding the amount of
Insurance Proceeds below $2,000,000). All such Insurance Proceeds shall be
applied to make prepayments of the Loans, such prepayments to be made within
three (3) Business Days after the applicable Borrower's or Subsidiary's receipt
of such Insurance Proceeds.
(v) Notice; Manner of Payment. Upon the occurrence of any event
triggering the prepayment requirement under Sections 4.4(b)(i) through and
including 4.4(b)(iv), the Parent, on behalf of the Borrowers, shall promptly
deliver a Notice of Prepayment to the Administrative Agent and upon receipt of
such notice, the Administrative Agent shall promptly so notify the Lenders. Each
prepayment under Section 4.4(b)(i), (ii) and (iii) shall be applied as follows:
first, to reduce in inverse order of maturity the remaining scheduled principal
installments of the Term Loans required pursuant to Section 4.3 and second, to
the extent of any excess, to repay Revolving Credit Loans pursuant to Section
2.3(c). Each prepayment under Section 4.4(b)(iv) shall be applied first, to
repay Revolving Credit Loans pursuant to Section 2.3(d) and second, to the
extent of any excess, to reduce in inverse order of maturity the remaining
scheduled principal installments of the Term Loans required pursuant to Section
4.3. Amounts prepaid under the Term Loan pursuant to this Section 4.4 may not be
reborrowed. Each prepayment shall be accompanied by any amount required to be
paid pursuant to Section 5.9 hereof.
SECTION 4.5 Term Notes. Each Lender's Term Loan and the obligation of
the Borrowers to repay such Term Loan shall be evidenced by a Term Note payable
to the order of such Lender. Each Term Note shall be dated as of the Closing
Date and shall bear interest on the unpaid principal amount thereof at the
applicable interest rate per annum specified in Section 5.1.
ARTICLE V
GENERAL LOAN PROVISIONS
SECTION 5.1 Interest.
(a) Interest Rate Options. Subject to the provisions of this Section
5.1, at the election of the Parent, on behalf of the Borrowers, the aggregate
principal balance of any Revolving Credit Note and any Term Loan Note shall bear
interest at (A) the Base Rate plus the Applicable Margin as set forth in Section
5.1(c) or (B) the LIBOR Rate plus the Applicable Margin as set forth in Section
5.1(c); provided that the LIBOR Rate shall not be available until three (3)
Business Days after the Closing Date. The Parent, on behalf of the Borrowers,
shall select the rate of interest and Interest Period, if any, applicable to any
Loan at the time a Notice of Revolving Credit Loan Borrowing is given pursuant
to Section 2.2(a) or a Notice of Term Loan Borrowing is given pursuant to
Section 4.2 or at the time a Notice of Conversion/Continuation is given pursuant
to Section 5.2. Each Loan or portion thereof bearing interest based on the Base
Rate shall be a "Base Rate Loan", each Loan or portion thereof bearing interest
26
<PAGE>
based on the LIBOR Rate shall be a "LIBOR Rate Loan." Any Loan or any portion
thereof as to which the Parent, on behalf of the Borrowers, has not duly
specified an interest rate as provided herein shall be deemed a Base Rate Loan.
(b) Interest Periods. In connection with each LIBOR Rate Loan, the
Parent, on behalf of the Borrowers, by giving notice at the times described in
Section 5.1(a), shall elect an interest period (each, an "Interest Period") to
be applicable to such Loan, which Interest Period shall be a period of one (1),
two (2), three (3), or six (6) months with respect to each LIBOR Rate Loan;
provided that:
(i) the Interest Period shall commence on the date of advance of or
conversion to any LIBOR Rate Loan and, in the case of immediately
successive Interest Periods, each successive Interest Period shall
commence on the date on which the next preceding Interest Period
expires;
(ii) if any Interest Period would otherwise expire on a day that is
not a Business Day, such Interest Period shall expire on the next
succeeding Business Day; provided, that if any Interest Period with
respect to a LIBOR Rate Loan would otherwise expire on a day that is
not a Business Day but is a day of the month after which no further
Business Day occurs in such month, such Interest Period shall expire on
the next preceding Business Day;
(iii) any Interest Period with respect to a LIBOR Rate Loan that
begins on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month
at the end of such Interest Period) shall end on the last Business Day
of the relevant calendar month at the end of such Interest Period;
(iv) no Interest Period shall extend beyond the Revolving Credit
Maturity Date or the Term Loan Maturity Date, as applicable, and
Interest Periods shall be selected by the Parent, on behalf of the
Borrowers so as to permit the Borrowers to make mandatory reductions of
the Revolving Credit Commitment pursuant to Section 2.5(b) and the
quarterly principal installment payments pursuant to Section 4.3
without payment of any amounts pursuant to Section 5.9; and
(v) there shall be no more than five (5) Interest Periods in effect
at any time.
(c) Applicable Margin. The Applicable Margin provided for in Section
5.1(a) with respect to the Loans (the "Applicable Margin") shall (i) on the
Closing Date equal the percentages set forth in Level II below and (ii) for each
fiscal quarter thereafter be determined by reference to the Leverage Ratio as of
the end of the fiscal quarter immediately preceding the delivery of the
applicable Officer's Compliance Certificate as follows:
26
<PAGE>
Level Leverage Ratio Applicable Margin Per Annum
Base Rate + LIBOR Rate +
--------- -------------------- ---------------------------------
I > 2.50 1.00% 2.75%
-
II > 2.25 < 2.50 0.75% 2.50%
-
III > 2.00 < 2.25 0.50% 2.25%
-
IV > 1.50 < 2.00 0.25% 2.00%
-
V < 1.50 0.00% 1.75%
Adjustments, if any, in the Applicable Margin shall be made by the
Administrative Agent on the tenth (10th) Business Day after receipt by the
Administrative Agent of quarterly financial statements for the Parent and its
Subsidiaries and the accompanying Officer's Compliance Certificate setting forth
the Leverage Ratio of the Parent and its Subsidiaries as of the most recent
fiscal quarter end. Subject to Section 5.1(d), in the event the Borrowers fail
to deliver such financial statements and certificate within the time required by
Section 8.2 hereof, the Applicable Margin shall be the highest Applicable Margin
set forth above until the delivery of such financial statements and certificate.
(d) Default Rate. Subject to Section 12.3, at the discretion of the
Administrative Agent, upon the occurrence and during the continuance of an Event
of Default and upon delivery by the Administrative Agent to the Borrowers of
notice of such Event of Default, (i) the Borrowers shall no longer have the
option to request LIBOR Rate Loans, (ii) all outstanding LIBOR Rate Loans shall
bear interest at a rate per annum two percent (2%) in excess of the rate then
applicable to LIBOR Rate Loans, as applicable, until the end of the applicable
Interest Period and thereafter at a rate equal to two percent (2%) in excess of
the rate then applicable to Base Rate Loans, and (iii) all outstanding Base Rate
Loans shall bear interest at a rate per annum equal to two percent (2%) in
excess of the rate then applicable to Base Rate Loans. Interest shall continue
to accrue on the Notes after the filing by or against the Borrowers of any
petition seeking any relief in bankruptcy or under any act or law pertaining to
insolvency or debtor relief, whether state, federal or foreign.
(e) Interest Payment and Computation. Interest on each Base Rate Loan
shall be payable in arrears on the last Business Day of each calendar quarter
commencing March 31, 1999; and interest on each LIBOR Rate Loan shall be payable
on the last day of each Interest Period applicable thereto, and if such Interest
Period extends over three (3) months, at the end of each three (3) month
interval during such Interest Period. Interest on LIBOR Rate Loans and all fees
payable hereunder shall be computed on the basis of a 360-day year and assessed
for the actual number of days elapsed and interest on Base Rate Loans shall be
computed on the basis of a 365/66-day year and assessed for the actual number of
days elapsed.
(f) Maximum Rate. In no contingency or event whatsoever shall the
aggregate of all amounts deemed interest hereunder or under any of the Notes
charged or collected pursuant to the terms of this Agreement or pursuant to any
of the Notes exceed the highest rate permissible under any Applicable Law which
27
<PAGE>
a court of competent jurisdiction shall, in a final determination, deem
applicable hereto. In the event that such a court determines that the Lenders
have charged or received interest hereunder in excess of the highest applicable
rate, the rate in effect hereunder shall automatically be reduced to the maximum
rate permitted by Applicable Law and the Lenders shall at the Administrative
Agent's option (i) promptly refund to the Borrowers any interest received by
Lenders in excess of the maximum lawful rate or (ii) shall apply such excess to
the principal balance of the Obligations. It is the intent hereof that the
Borrowers not pay or contract to pay, and that neither the Administrative Agent
nor any Lender receive or contract to receive, directly or indirectly in any
manner whatsoever, interest in excess of that which may be paid by the Borrowers
under Applicable Law.
SECTION 5.2 Notice and Manner of Conversion or Continuation of Loans.
Provided that no Event of Default has occurred and is then continuing, the
Borrowers shall have the option to (a) convert at any time following the third
Business Day after the Closing Date all or any portion of its outstanding Base
Rate Loans in a principal amount equal to $500,000 or any whole multiple of
$250,000 in excess thereof into one or more LIBOR Rate Loans and (b) upon the
expiration of any Interest Period, (i) convert all or any part of its
outstanding LIBOR Rate Loans in a principal amount equal to $500,000 or a whole
multiple of $250,000 in excess thereof into Base Rate Loans or (ii) continue
such LIBOR Rate Loans as LIBOR Rate Loans. Whenever the Borrowers desire to
convert or continue Loans as provided above, the Parent, on behalf of the
Borrowers, shall give the Administrative Agent irrevocable prior written notice
in the form attached as Exhibit E (a "Notice of Conversion/Continuation") not
later than 11:00 a.m. (Philadelphia time) three (3) Business Days before the day
on which a proposed conversion or continuation of such Loan is to be effective
specifying (A) the Loans to be converted or continued, and, in the case of any
LIBOR Rate Loan to be converted or continued, the last day of the Interest
Period therefor, (B) the effective date of such conversion or continuation
(which shall be a Business Day), (C) the principal amount of such Loans to be
converted or continued, and (D) the Interest Period to be applicable to such
converted or continued LIBOR Rate Loan. The Administrative Agent shall promptly
notify the Lenders of such Notice of Conversion/Continuation.
SECTION 5.3 Fees.
(a) Commitment Fee. The Borrowers shall pay to the Administrative
Agent, for the account of the Lenders, a non-refundable commitment fee at a rate
per annum equal to 0.50% on the average daily unused portion of the Revolving
Credit Commitment; provided, that if at any time the Leverage Ratio as of the
immediately preceding fiscal quarter end is less than 2.00 to 1.00, the
commitment fee shall be calculated at a rate per annum equal to 0.375% on the
average daily unused portion of the Revolving Credit Commitment. The commitment
fee shall be payable in arrears on a quarterly basis on the last Business Day of
each calendar quarter during the term of this Agreement commencing March 31,
1999, and on the Revolving Credit Maturity Date. Such commitment fee shall be
distributed by the Administrative Agent to the Lenders pro rata in accordance
with the Lenders' respective Commitment Percentages.
(b) Upfront Fees. The Borrowers shall pay to the Administrative Agent,
for the account of the Lenders, a non-refundable upfront fee as referenced in
the Fee Letter in the aggregate amount set forth in the settlement statement
delivered on the Closing Date.
28
<PAGE>
(c) Arranger's and Administrative Agent's Fees. In order to compensate
Capital Markets for structuring and syndicating the Facilities, the Borrowers
agree to pay to Capital Markets, for its account, the arrangement fee set forth
in the Fee Letter. In addition, in order to compensate the Administrative Agent
for its obligations hereunder, the Borrowers agree to pay to the Administrative
Agent, for its account, on each anniversary of the Closing Date the
administrative fee set forth in the Fee Letter.
SECTION 5.4 Manner of Payment; Allocation of Commitment Deductions.
(a) Each payment by the Borrowers on account of the principal of or
interest on the Loans or of any fee, commission or other amounts (including the
Reimbursement Obligation) payable to the Lenders under this Agreement or any
Note shall be made not later than 1:00 p.m. (Philadelphia time) on the date
specified for payment under this Agreement to the Administrative Agent at the
Administrative Agent's Office for the account of the Lenders (other than as set
forth below) pro rata in accordance with their respective Commitment Percentages
(except as specified below), in Dollars, in immediately available funds and
shall be made without any set-off, counterclaim or deduction whatsoever. Any
payment received after such time but before 2:00 p.m. (Philadelphia time) on
such day shall be deemed a payment on such date for the purposes of Section
12.1, but for all other purposes shall be deemed to have been made on the next
succeeding Business Day. Any payment received after 2:00 p.m. (Philadelphia
time) shall be deemed to have been made on the next succeeding Business Day for
all purposes. Upon receipt by the Administrative Agent of each such payment, the
Administrative Agent shall distribute to each Lender at its address for notices
set forth herein its pro rata share of such payment in accordance with such
Lender's Commitment Percentage (except as specified below) and shall wire advice
of the amount of such credit to each Lender. Each payment to the Administrative
Agent of the Issuing Lender's fees or L/C Participants' commissions shall be
made in like manner, but for the account of the Issuing Lender or the L/C
Participants, as the case may be. Each payment to the Administrative Agent of
Administrative Agent's fees or expenses shall be made for the account of the
Administrative Agent and any amount payable to any Lender under Sections 5.8,
5.9, 5.10, 5.11 or 14.2 shall be paid to the Administrative Agent for the
account of the applicable Lender. Subject to Section 5.1(b)(ii) if any payment
under this Agreement or any Note shall be specified to be made upon a day which
is not a Business Day, it shall be made on the next succeeding day which is a
Business Day and such extension of time shall in such case be included in
computing any interest if payable along with such payment.
(b) Notwithstanding anything to the contrary contained in this
Agreement, at any time the sum of the outstanding balance of Term Loans made by
First Union and the Revolving Credit Commitment of First Union exceeds
$15,000,000, (i) all voluntary prepayments made by the Borrowers pursuant to
Section 4.4(a) and all voluntary Revolving Credit Commitment reductions (and any
corresponding repayments) made by the Borrowers pursuant to Section 2.5(a) shall
be applied solely to reduce the outstanding Term Loan balance of First Union and
the Revolving Credit Commitment of First Union (on a pro rata basis between such
amounts) until the sum thereof is equal to $15,000,000; provided that the total
Revolving Credit Commitment shall be reduced to the extent of any reduction of
the Revolving Credit Commitment of First Union. Thereafter, all voluntary
prepayments and commitment reductions made by the Borrowers pursuant to Sections
29
<PAGE>
4.4(a) and 2.5(a) shall be applied on a pro rata basis in accordance with the
Commitment Percentages of each Lender.
SECTION 5.5 Crediting of Payments and Proceeds. In the event that the
Borrowers shall fail to pay any of the Obligations when due and the Obligations
have been accelerated pursuant to Section 12.2, all payments received by the
Lenders upon the Notes and the other Obligations and all net proceeds from the
enforcement of the Obligations shall be applied first to all expenses then due
and payable by the Borrowers hereunder, then to all indemnity obligations then
due and payable by the Borrowers hereunder, then to all Administrative Agent's
and Issuing Lender's fees then due and payable, then to all commitment and other
fees and commissions then due and payable, then to accrued and unpaid interest
on the Notes, the Reimbursement Obligation and any termination payments due in
respect of a Hedging Agreement with any Lender (which Hedging Agreement is
permitted or required hereunder) (pro rata in accordance with all such amounts
due), then to the principal amount of the Notes and Reimbursement Obligation
(pro rata in accordance with all such amounts due) and then to the cash
collateral account described in Section 12.2(b) hereof to the extent of any L/C
Obligations then outstanding, in that order.
SECTION 5.6 Adjustments. Subject to the provisions of Section 5.4(b)
above, if any Lender (a "Benefitted Lender") shall at any time receive any
payment of all or part of the Obligations owing to it, or interest thereon, or
if any Lender shall at any time receive any collateral in respect to the
Obligations owing to it (whether voluntarily or involuntarily, by set-off or
otherwise) in a greater proportion than any such payment to and collateral
received by any other Lender, if any, in respect of the Obligations owing to
such other Lender, or interest thereon, such Benefitted Lender shall purchase
for cash from the other Lenders such portion of each such other Lender's
Extensions of Credit, or shall provide such other Lenders with the benefits of
any such collateral, or the proceeds thereof, as shall be necessary to cause
such Benefitted Lender to share the excess payment or benefits of such
collateral or proceeds ratably with each of the Lenders; provided, that if all
or any portion of such excess payment or benefits is thereafter recovered from
such Benefitted Lender, such purchase shall be rescinded, and the purchase price
and benefits returned to the extent of such recovery, but without interest. The
Borrowers agrees that each Lender so purchasing a portion of another Lender's
Extensions of Credit may exercise all rights of payment (including, without
limitation, rights of set-off) with respect to such portion as fully as if such
Lender were the direct holder of such portion.
SECTION 5.7 Nature of Obligations of Lenders Regarding Extensions of
Credit; Assumption by the Administrative Agent. The obligations of the Lenders
under this Agreement to make the Loans and issue or participate in Letters of
Credit are several and are not joint or joint and several. Unless the
Administrative Agent shall have received notice from a Lender prior to a
proposed borrowing date that such Lender will not make available to the
Administrative Agent such Lender's ratable portion of the amount to be borrowed
on such date (which notice shall not release such Lender of its obligations
hereunder), the Administrative Agent may assume that such Lender has made such
portion available to the Administrative Agent on the proposed borrowing date in
accordance with Sections 2.2(b) and 4.2, and the Administrative Agent may, in
30
<PAGE>
reliance upon such assumption, make available to the Borrowers on such date a
corresponding amount. If such amount is made available to the Administrative
Agent on a date after such borrowing date, such Lender shall pay to the
Administrative Agent on demand an amount, until paid, equal to the product of
(a) the amount not made available by such Lender in accordance with the terms
hereof, times (b) the daily average Federal Funds Rate during such period as
determined by the Administrative Agent, times (c) a fraction the numerator of
which is the number of days that elapse from and including such borrowing date
to the date on which such amount is made available by such Lender in accordance
with the terms hereof shall have become immediately available to the
Administrative Agent and the denominator of which is 360. A certificate of the
Administrative Agent with respect to any amounts owing under this Section 5.7
shall be conclusive, absent manifest error. If such Lender's Commitment
Percentage of such borrowing is not made available to the Administrative Agent
by such Lender within three (3) Business Days of such borrowing date, the
Administrative Agent shall be entitled to recover such amount made available by
the Administrative Agent with interest thereon at the rate per annum applicable
to the rate applicable to such borrowing hereunder, on demand, from the
Borrowers after notice thereto. The failure of any Lender to make available its
Commitment Percentage of any Loan requested by the Borrowers shall not relieve
it or any other Lender of its obligation, hereunder to make its Commitment
Percentage of such Loan available on the borrowing date, but no Lender shall be
responsible for the failure of any other Lender to make its Commitment
Percentage of such Loan available on the borrowing date.
SECTION 5.8 Changed Circumstances.
(a) Circumstances Affecting LIBOR Rate Availability. If with respect to
any Interest Period the Administrative Agent or any Lender (after consultation
with Administrative Agent) shall determine that, by reason of circumstances
affecting the foreign exchange and interbank markets generally, deposits in
eurodollars, in the applicable amounts are not being quoted via Telerate Page
3750 or offered to the Administrative Agent or such Lender for such Interest
Period, then the Administrative Agent shall forthwith give notice thereof to the
Borrowers. Thereafter, until the Administrative Agent notifies the Borrowers
that such circumstances no longer exist, the obligation of the Lenders to make
LIBOR Rate Loans and the right of the Borrowers to convert any Loan to or
continue any Loan as a LIBOR Rate Loan shall be suspended, and the Borrowers
shall repay in full (or cause to be repaid in full) the then outstanding
principal amount of each such LIBOR Rate Loans together with accrued interest
thereon, on the last day of the then current Interest Period applicable to such
LIBOR Rate Loan or convert the then outstanding principal amount of each such
LIBOR Rate Loan to a Base Rate Loan as of the last day of such Interest Period.
(b) Laws Affecting LIBOR Rate Availability. If, after the date hereof,
the introduction of, or any change in, any Applicable Law or any change in the
interpretation or administration thereof by any Governmental Authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Lender (or any of their respective Lending
Offices) with any request or directive (whether or not having the force of law)
of any such Authority, central bank or comparable agency, shall make it unlawful
or impossible for any of the Lenders (or any of their respective Lending
Offices) to honor its obligations hereunder to make or maintain any LIBOR Rate
Loan, such Lender shall promptly give notice thereof to the Administrative Agent
and the Administrative Agent shall promptly give notice to the Borrowers and the
other Lenders. Thereafter, until the Administrative Agent notifies the Borrowers
that such circumstances no longer exist, (i) the obligations of the Lenders to
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make LIBOR Rate Loans and the right of the Borrowers to convert any Loan or
continue any Loan as a LIBOR Rate Loan shall be suspended and thereafter the
Borrowers may select only Base Rate Loans hereunder, and (ii) if any of the
Lenders may not lawfully continue to maintain a LIBOR Rate Loan to the end of
the then current Interest Period applicable thereto as a LIBOR Rate Loan, the
applicable LIBOR Rate Loan shall immediately be converted to a Base Rate Loan
for the remainder of such Interest Period.
(c) Increased Costs. If, after the date hereof, the introduction of, or
any change in, any Applicable Law, or in the interpretation or administration
thereof by any Governmental Authority, central bank or comparable agency charged
with the interpretation or administration thereof, or compliance by any of the
Lenders (or any of their respective Lending Offices) with any request or
directive (whether or not having the force of law) of such Authority, central
bank or comparable agency:
(i) shall subject any of the Lenders (or any of their respective
Lending Offices) to any tax, duty or other charge with respect to any Note,
Letter of Credit or Application or shall change the basis of taxation of
payments to any of the Lenders (or any of their respective Lending Offices) of
the principal of or interest on any Note, Letter of Credit or Application or any
other amounts due under this Agreement in respect thereof (except for changes in
the rate of tax on the overall net income of any of the Lenders or any of their
respective Lending Offices imposed by the jurisdiction in which such Lender is
organized or is or should be qualified to do business or such Lending Office is
located); or
(ii) shall impose, modify or deem applicable any reserve
(including, without limitation, any imposed by the Board of Governors of the
Federal Reserve System), special deposit, insurance or capital or similar
requirement against assets of, deposits with or for the account of, or credit
extended by any of the Lenders (or any of their respective Lending Offices) or
shall impose on any of the Lenders (or any of their respective Lending Offices)
or the foreign exchange and interbank markets any other condition affecting any
Note; and the result of any of the foregoing is to increase the costs to any of
the Lenders of maintaining any LIBOR Rate Loan or issuing or participating in
Letters of Credit or to reduce the yield or amount of any sum received or
receivable by any of the Lenders under this Agreement or under the Notes in
respect of a LIBOR Rate Loan or Letter of Credit or Application, then such
Lender shall promptly notify the Administrative Agent, and the Administrative
Agent shall promptly notify the Borrowers of such fact and demand compensation
therefor and, within fifteen (15) days after such notice by the Administrative
Agent, the Borrowers shall pay to such Lender such additional amount or amounts
as will compensate such Lender or Lenders for such increased cost or reduction.
The Administrative Agent will promptly notify the Borrowers of any event of
which it has knowledge which will entitle such Lender to compensation pursuant
to this Section 5.8(c); provided, that the Administrative Agent shall incur no
liability whatsoever to the Lenders or the Borrowers in the event it fails to do
so. The amount of such compensation shall be determined, in the applicable
Lender's sole discretion, based upon the assumption that such Lender funded its
Commitment Percentage of the LIBOR Rate Loans in the London interbank market and
using any reasonable attribution or averaging methods which such Lender deems
appropriate and practical. A certificate of such Lender setting forth the basis
for determining such amount or amounts necessary to compensate such Lender shall
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be forwarded to the Borrowers through the Administrative Agent and shall be
conclusively presumed to be correct save for manifest error.
SECTION 5.9 Indemnity. The Borrowers hereby indemnify each of the
Lenders against any loss or expense which may arise or be attributable to each
Lender's obtaining, liquidating or employing deposits or other funds acquired to
effect, fund or maintain any Loan (a) as a consequence of any failure by the
Borrowers to make any payment when due of any amount due hereunder in connection
with a LIBOR Rate Loan, (b) due to any failure of the Borrowers to borrow on a
date specified therefor in a Notice of Revolving Credit Loan Borrowing, a Notice
of Term Loan Borrowing or a Notice of Continuation/Conversion or (c) due to any
payment, prepayment or conversion of any LIBOR Rate Loan on a date other than
the last day of the Interest Period therefor. The amount of such loss or expense
shall be determined, in the applicable Lender's sole discretion, based upon the
assumption that such Lender funded its Commitment Percentage of the LIBOR Rate
Loans in the London interbank market and using any reasonable attribution or
averaging methods which such Lender deems appropriate and practical. A
certificate of such Lender setting forth the basis for determining such amount
or amounts necessary to compensate such Lender shall be forwarded to the
Borrowers through the Administrative Agent and shall be conclusively presumed to
be correct save for manifest error.
SECTION 5.10 Capital Requirements. If either (a) the introduction of,
or any change in, or in the interpretation of, any Applicable Law or (b)
compliance with any guideline or request from any central bank or comparable
agency or other Governmental Authority (whether or not having the force of law),
has or would have the effect of reducing the rate of return on the capital of,
or has affected or would affect the amount of capital required to be maintained
by, any Lender or any corporation controlling such Lender as a consequence of,
or with reference to the Commitments and other commitments of this type, below
the rate which the Lender or such other corporation could have achieved but for
such introduction, change or compliance, then within five (5) Business Days
after written demand by any such Lender, the Borrowers shall pay to such Lender
from time to time as specified by such Lender additional amounts sufficient to
compensate such Lender or other corporation for such reduction. A certificate as
to such amounts submitted to the Borrowers and the Administrative Agent by such
Lender, shall, in the absence of manifest error, be presumed to be correct and
binding for all purposes.
SECTION 5.11 Taxes.
(a) Payments Free and Clear. Any and all payments by the Borrowers
hereunder or under the Notes or the Letters of Credit shall be made free and
clear of and without deduction for any and all present or future taxes, levies,
imposts, deductions, charges or withholding, and all liabilities with respect
thereto excluding, (i) in the case of each Lender and the Administrative Agent,
income and franchise taxes imposed by the jurisdiction under the laws of which
such Lender or the Administrative Agent (as the case may be) is organized or is
or should be qualified to do business or any political subdivision thereof, (ii)
in the case of each Lender, income and franchise taxes imposed by the
jurisdiction of such Lender's Lending Office or any political subdivision
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thereof and (iii) any other tax imposed on any Lender by any Governmental
Authority without regard to the Extensions of Credit of such Lender (all such
non-excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrowers shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder or under any Note or Letter of Credit to any Lender or the
Administrative Agent, (A) the sum payable shall be increased as may be necessary
so that after making all required deductions (including deductions applicable to
additional sums payable under this Section 5.11) such Lender or the
Administrative Agent (as the case may be) receives an amount equal to the amount
such party would have received had no such deductions been made, (B) the
Borrowers shall make such deductions, (C) the Borrowers shall pay the full
amount deducted to the relevant taxing authority or other authority in
accordance with applicable law, and (D) the Borrowers shall deliver to the
Administrative Agent evidence of such payment to the relevant taxing authority
or other authority in the manner provided in Section 5.11(d).
(b) Stamp and Other Taxes. In addition, the Borrowers shall pay any
present or future stamp, registration, recordation or documentary taxes or any
other similar fees or charges or excise or property taxes, levies of the United
States or any state or political subdivision thereof or any applicable foreign
jurisdiction which arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement, the
Loans, the Letters of Credit, the other Loan Documents, or the perfection of any
rights or security interest in respect thereto (hereinafter referred to as
"Other Taxes").
(c) Indemnity. The Borrowers shall indemnify each Lender and the
Administrative Agent for the full amount of Taxes and Other Taxes (including,
without limitation, any Taxes and Other Taxes imposed by any jurisdiction on
amounts payable under this Section 5.11) paid by such Lender or the
Administrative Agent (as the case may be) and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto,
whether or not such Taxes or Other Taxes were correctly or legally asserted.
Such indemnification shall be made within thirty (30) days from the date such
Lender or the Administrative Agent (as the case may be) makes written demand
therefor together with reasonable documentation of the tax due.
(d) Evidence of Payment. Within thirty (30) days after the date of any
payment of Taxes or Other Taxes, the Borrowers shall furnish to the
Administrative Agent, at its address referred to in Section 14.1, the original
or a certified copy of a receipt evidencing payment thereof or other evidence of
payment satisfactory to the Administrative Agent.
(e) Delivery of Tax Forms. Each Lender organized under the laws of a
jurisdiction other than the United States or any state thereof shall deliver to
the Borrowers, with a copy to the Administrative Agent, on the Closing Date or
concurrently with the delivery of the relevant Assignment and Acceptance, as
applicable, (i) two United States Internal Revenue Service Forms 4224 or Forms
1001, as applicable (or successor forms) properly completed and certifying in
each case that such Lender is entitled to a complete exemption from withholding
or deduction for or on account of any United States federal income taxes, and
(ii) an Internal Revenue Service Form W-8 or W-9 or successor applicable form,
as the case may be, to establish an exemption from United States backup
withholding taxes. Each such Lender further agrees to deliver to the Borrowers,
with a copy to the Administrative Agent, a Form 1001 or 4224 and Form W-8 or
W-9, or successor applicable forms or manner of certification, as the case may
be, on or before the date that any such form expires or becomes obsolete or
after the occurrence of any event requiring a change in the most recent form
previously delivered by it to the Borrowers, certifying in the case of a Form
1001 or 4224 that such Lender is entitled to receive payments under this
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Agreement without deduction or withholding of any United States federal income
taxes (unless in any such case an event (including without limitation any change
in treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders such forms inapplicable or
the exemption to which such forms relate unavailable and such Lender notifies
the Borrowers and the Administrative Agent that it is not entitled to receive
payments without deduction or withholding of United States federal income taxes)
and, in the case of a Form W-8 or W-9, establishing an exemption from United
States backup withholding tax.
(f) Survival. Without prejudice to the survival of any other agreement
of the Borrowers hereunder, the agreements and obligations of the Borrowers
contained in this Section 5.11 shall survive the payment in full of the
Obligations and the termination of the Commitments.
SECTION 5.12 Use of Proceeds. The Borrowers shall use the proceeds of
the Extensions of Credit (a) to finance a portion of the Shareholder
Distribution, (b) to refinance and terminate the Existing Facility, and (c) for
working capital and general corporate requirements of the Borrowers, including
the payment of fees and expenses incurred in connection herewith and the Equity
Purchase and related transactions. The Borrowers shall use the proceeds of the
initial loans to finance the Recapitalization in accordance with sources and
uses table set forth on Schedule 5.12.
SECTION 5.13 Security. The Obligations of the Borrowers shall be
secured as provided in the Security Documents.
ARTICLE VI
CLOSING; CONDITIONS OF CLOSING AND BORROWING
SECTION 6.1 Closing. The closing shall take place at the offices of
Pepper Hamilton LLP at 10:00 a.m. on February 5, 1999, or on such other date as
the parties hereto shall mutually agree.
SECTION 6.2 Conditions to Closing and Initial Extensions of Credit. The
obligation of the Lenders to close this Agreement and to make the initial Loan
or issue the initial Letter of Credit is subject to the satisfaction of each of
the following conditions:
(a) Executed Loan Documents. The following Loan Documents in form and
substance reasonably satisfactory to the Administrative Agent and each Lender:
(i) this Agreement;
(ii) the Revolving Credit Notes;
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(iii) the Term Notes;
(iv) the Security Agreement; and
(v) the Pledge Agreements;
shall have been duly authorized, executed and delivered to the Administrative
Agent by the parties thereto, shall be in full force and effect and no default
shall exist thereunder, and the Borrowers shall have delivered original
counterparts thereof to the Administrative Agent.
(b) Closing Certificates; etc.
(i) Officer's Certificate of the Parent. The Administrative Agent
shall have received a certificate from a Responsible Officer of the Parent, in
form and substance satisfactory to the Administrative Agent, to the effect that
all representations and warranties of the Borrowers contained in this Agreement
and the other Loan Documents are true, correct and complete; that the Borrowers
are not in violation of any of the covenants contained in this Agreement and the
other Loan Documents; that, after giving effect to the transactions contemplated
by this Agreement, no Default or Event of Default has occurred and is
continuing; and that the Borrowers have satisfied each of the closing conditions
to be satisfied thereby.
(ii) Certificate of Secretary of each Borrower. The Administrative
Agent shall have received a certificate of the secretary or assistant secretary
of each Borrower certifying as to the incumbency and genuineness of the
signature of each officer of such Borrower executing Loan Documents to which it
is a party and certifying that attached thereto is a true, correct and complete
copy of (A) the articles of incorporation of such Borrower and all amendments
thereto (x) with respect to the Company, certified as of a recent date by the
appropriate Governmental Authority in its jurisdiction of incorporation, and (y)
with respect to the Parent, a recorded copy certified thereby, (B) the bylaws of
such Borrower as in effect on the date of such certifications, (C) resolutions
duly adopted by the Board of Directors of such Borrower authorizing the
borrowings contemplated hereunder and the execution, delivery and performance of
this Agreement and the other Loan Documents to which it is a party, and (D) each
certificate required to be delivered pursuant to Section 6.2(b)(iii).
(iii) Investor Closing Documents. The Administrative Agent shall
have received in form and substance satisfactory thereto (A) the charter
documents, bylaws, limited partnership agreement, articles of organization or
operating agreement, as applicable, for each Investor which is a corporation,
partnership or limited liability company, duly certified by such Investor or the
recording jurisdiction therefor, or such other evidence requested by the
Administrative Agent of the due formation and valid existence of each such
Investor and (B) incumbency certificates, resolutions or other evidence
requested by the Administrative Agent that the Loan Documents executed by each
such Investor have been duly authorized, executed and delivered thereby.
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(iv) Certificates of Good Standing. The Administrative Agent shall
have received certificates as of a recent date of the subsistence of each
Borrower under the laws of its jurisdiction of organization and, to the extent
requested by the Administrative Agent, each other jurisdiction where such
Borrower is qualified to do business.
(v) Opinions of Counsel. The Administrative Agent shall have
received opinions of counsel reasonably satisfactory thereto from counsel to the
Investors and the Borrowers addressed to the Administrative Agent and the
Lenders (or on which they are expressly entitled to rely) with respect to the
Investors, the Borrowers, the Loan Documents, the Collateral, the Transactions
and such other matters as the Administrative Agent shall reasonably request.
(vi) Tax Forms. The Administrative Agent shall have received copies
of the United States Internal Revenue Service forms required by Section 5.11(e)
hereof (and furnished copies thereof to the Borrowers).
(c) Collateral.
(i) Filings and Recordings. All filings and recordations that are
necessary to perfect the security interests of the Lenders in the collateral
described in the Security Documents shall have been forwarded for filing in all
appropriate locations and the Administrative Agent shall have received evidence
satisfactory to the Administrative Agent that upon such filings and recordations
such security interests constitute valid and perfected first priority Liens
therein.
(ii) Pledged Collateral. The Administrative Agent shall have
received (A) original stock certificates or other certificates evidencing the
capital stock or other ownership interests pledged pursuant to the Pledge
Agreements, together with an undated stock power for each such certificate duly
executed in blank by the registered owner thereof and (B) appropriate
certificates and transfer instruments for any other certificated security
pledged pursuant to the Pledge Agreements.
(iii) Lien Searches. The Administrative Agent shall have received
the results of Lien searches (including a search as to judgments, pending
litigation and tax matters) made against the Borrowers under the Uniform
Commercial Code (or applicable judicial docket) as in effect in any state in
which any of its assets are located, indicating among other things that its
assets are free and clear of any Lien except for Liens permitted hereunder.
(iv) Hazard and Liability Insurance. The Administrative Agent shall
have received certificates of insurance, and, if requested by the Administrative
Agent, copies (certified by a Responsible Officer) of insurance policies in the
form required hereunder and under the Security Documents and otherwise in form
and substance reasonably satisfactory to the Administrative Agent.
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(d) Real Estate Security Documents.
(i) Documents. The Administrative Agent shall have received such
Real Estate Security Documents requested thereby with respect to each parcel of
real property so designated on Schedule 7.1(r) (each, a "Closing Date
Property").
(ii) Other Real Property Information. The Administrative Agent
shall have received such other certificates, documents and information as are
reasonably requested thereby with respect to each Closing Date Property,
including, without limitation, title insurance policies, flood hazard
certifications, surveys, environmental assessments, engineering and structural
reports, permanent certificates of occupancy and evidence of zoning compliance,
each in form and substance satisfactory to the Administrative Agent.
(e) Consents; Defaults.
(i) Governmental and Third Party Approvals. The Borrowers shall
have obtained all necessary approvals, authorizations and consents of any Person
and of all Governmental Authorities and courts having jurisdiction with respect
to the Transactions.
(ii) No Injunction, Etc. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or proposed
before any Governmental Authority to enjoin, restrain, or prohibit, or to obtain
substantial damages in respect of, or which is related to or arises out of any
of the Transactions, or which, in the Administrative Agent's reasonable
discretion, would make it inadvisable to consummate the transactions
contemplated by this Agreement and such other Loan Documents.
(iii) No Event of Default. No Default or Event of Default shall
have occurred and be continuing.
(f) Financial Matters.
(i) Financial Statements. The Administrative Agent shall have
received the most recent audited Consolidated financial statements of the
Company and its Subsidiaries, all in form and substance satisfactory to the
Administrative Agent.
(ii) Financial Condition Certificate. The Parent, on behalf of the
Borrowers, shall have delivered to the Administrative Agent a certificate, in
form and substance satisfactory to the Administrative Agent, and certified as
accurate by a Responsible Officer, that (A) the Parent and each of its
Subsidiaries are each Solvent, (B) the Borrowers' payables are current and not
past due, (C) attached thereto are calculations evidencing compliance on a pro
forma basis with the covenants contained in Article X hereof and (D) attached
thereto are calculations evidencing that EBITDA of the Company and its
Subsidiaries for the four (4) fiscal quarter period ending as of December 31,
1998 is at least $11,500,000.
(iii) Projections. The Administrative Agent shall have received
projected financial statements of the Parent and its Subsidiaries in form and
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substance reasonably satisfactory thereto for the Fiscal Years ending 1999
through and including 2007, including Consolidated balance sheets, statements of
income and cash flow statements of Parent and its Subsidiaries giving effect to
the Transactions, together with appropriate supporting details and such other
facts as relate to the ongoing business of the Parent and its Subsidiaries as
requested by the Administrative Agent.
(iv) Minimum Availability. After the initial Extensions of Credit
on the Closing Date, availability under the Revolving Credit Facility shall be
at least $8,250,000.
(v) No Material Adverse Change. Since December 31, 1997, there has
been no material adverse change in the properties, business, operations,
prospects, or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole and no event has occurred or condition arisen that
could reasonably be expected to have a Material Adverse Effect.
(vi) Payment at Closing; Fee Letters. The Borrowers shall have paid
the fees set forth or referenced in Section 5.3 and any other accrued and unpaid
fees or commissions due hereunder (including, without limitation, legal fees and
expenses) to the Administrative Agent and Lenders, and to any other Person such
amount as may be due thereto on the Closing Date in connection with the
transactions contemplated hereby, including all taxes, fees and other charges in
connection with the execution, delivery, recording, filing and registration of
any of the Loan Documents. The Administrative Agent shall have received duly
authorized and executed copies of the Fee Letter.
(g) Equity Purchase and Recapitalization.
(i) Recapitalization. The Recapitalization Documents shall be duly
executed by each party thereto and be in form and substance satisfactory to the
Administrative Agent and the Lenders. All conditions precedent to complete each
Recapitalization transaction under the Recapitalization Documents shall have
been satisfied to the satisfaction of the Administrative Agent and no default
shall exist under the Recapitalization Documents. The Statement With Respect to
Shares and all other charter amendments with respect to the Parent and the
Company shall have been recorded with the Pennsylvania Secretary of State and
the remaining Recapitalization transactions shall occur contemporaneously with
the initial funding under the Credit Facilities on the Closing Date.
(ii) Equity Purchase. The Parent shall have received at least
$35,000,000 in Net Cash Proceeds from the Equity Purchase on terms and
conditions satisfactory to the Administrative Agent.
(iii) Subchapter C Conversion. The Shareholder Distribution shall
be completed, and the Company shall become a Wholly-Owned Subsidiary of the
Parent and automatically convert to a subchapter C corporation under the Code,
in each case substantially contemporaneously with the initial funding of the
Credit Facility on the Closing Date.
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(iv) Existing Debt. The Existing Facility and any other
outstanding Debt of the Borrowers (excluding Debt permitted pursuant to Section
11.1) shall be repaid in full with the initial Extensions of Credit and any
agreement and other supplemental documents relating to such Debt shall be
terminated, and if requested thereby the Administrative Agent shall have
received pay-off letters in form and substance satisfactory to it evidencing
such repayment, termination and any corresponding collateral release.
(v) Approval of the Holders of Preferred Shares. The Administrative
Agent shall have received evidence, in form and substance reasonably
satisfactory thereto, that a majority of the outstanding shares of the Preferred
Stock have approved the borrowings contemplated hereunder and the execution,
delivery and performance of this Agreement and the other Loan Documents to which
the Parent is a party.
(vi) Termination of the Existing Shareholder Agreement. The
Administrative Agent shall have received evidence, in form and substance
reasonably satisfactory thereto, that the Existing Shareholder Agreement shall
have been terminated.
(h) Miscellaneous.
(i) Notice of Borrowing. The Administrative Agent shall have
received Notice of Revolving Credit Loan Borrowing and a Notice of Term Loan
Borrowing from the Parent, on behalf of the Borrowers, in accordance with
Section 2.2(a) and Section 4.2, and a Notice of Account Designation specifying
the account or accounts to which the proceeds of any Loans made after the
Closing Date are to be disbursed.
(ii) Proceedings and Documents. All opinions, certificates and
other instruments and all proceedings in connection with the Transactions shall
be satisfactory in form and substance to the Lenders. The Administrative Agent
and the Lenders shall have received copies of all other instruments and other
evidence as the Administrative Agent and the Lenders may reasonably request, in
form and substance satisfactory to the Administrative Agent and the Lenders,
with respect to the Transactions and the taking of all actions in connection
therewith.
(iii) Due Diligence and Other Documents. The Administrative Agent
and the Lenders shall have completed to their satisfaction their due diligence
review of the Parent, its Subsidiaries and Affiliates and the Transactions.
SECTION 6.3 Conditions to All Extensions of Credit. The obligations of
the Lenders to make any Extensions of Credit is subject to the satisfaction of
the following conditions precedent on the relevant borrowing or issue date, as
applicable:
(a) Continuation of Representations and Warranties. The representations
and warranties contained in Article VII shall be true and correct on and as of
such borrowing or issuance date with the same effect as if made on and as of
such date; except for any representation and warranty made as of an earlier
date, which representation and warranty shall remain true and correct as of such
earlier date.
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(b) No Existing Default. No Default or Event of Default shall have
occurred and be continuing hereunder (i) on the borrowing date with respect to
such Loan or after giving effect to the Loans to be made on such date or (ii) or
the issue date with respect to such Letter of Credit or after giving affect to
such Letters of Credit on such date.
(c) Officer's Compliance Certificate; Additional Documents. The
Administrative Agent shall have received the current Officer's Compliance
Certificate and each additional document, instrument, or other item of
information reasonably requested by it.
SECTION 6.4 Real Estate Post-Closing Covenants. Within sixty (60) days
of the Closing Date, the Borrowers shall execute (or have executed) and deliver
to the Administrative Agent such Real Estate Security Documents requested
thereby with respect to each parcel of real property not designated as a Closing
Date Property on Schedule 7.1(r). In addition, the Borrowers shall execute (or
have executed) and deliver to the Administrative Agent such other documents or
agreements consistent with Section 6.2(d) reasonably requested by the
Administrative Agent and, if requested thereby, duly record each applicable Real
Estate Security Document in such manner and in such places as are required by
the law to perfect and preserve the Liens in favor of the Administrative Agent
and the Lenders granted pursuant thereto.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF THE BORROWERS
SECTION 7.1 Representations and Warranties. To induce the
Administrative Agent and Lenders to enter into this Agreement and to induce the
Lenders to make Extensions of Credit, the Borrowers hereby represent and warrant
to the Administrative Agent and Lenders both before and after giving effect to
the transactions contemplated hereunder that:
(a) Organization; Power; Qualification. Each of the Parent and its
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or formation, has the power and
authority to own its properties and to carry on its business as now being and
hereafter proposed to be conducted and is duly qualified and authorized to do
business in each jurisdiction in which the character of its properties or the
nature of its business requires such qualification and authorization and where
such failure to qualify could not reasonably be expected to have a Material
Adverse Effect. The jurisdictions in which the Parent and its Subsidiaries are
organized and qualified to do business as of the Closing Date are described on
Schedule 7.1(a).
(b) Ownership. Each Subsidiary of the Parent as of the Closing Date is
listed on Schedule 7.1(b). As of the Closing Date, the capitalization of the
Parent and its Subsidiaries consists of the number of shares, authorized, issued
and outstanding, of such classes and series, with or without par value,
described on Schedule 7.1(b). All outstanding shares have been duly authorized
and validly issued and are fully paid and nonassessable. The shareholders of the
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Subsidiaries of the Parent and the number of shares owned by each as of the
Closing Date are described on Schedule 7.1(b). As of the Closing Date, there are
no outstanding stock purchase warrants, subscriptions, options, securities,
instruments or other rights of any type or nature whatsoever, which are
convertible into, exchangeable for or otherwise provide for or permit the
issuance of capital stock of the Parent or its Subsidiaries, except as described
on Schedule 7.1(b).
(c) Authorization of Agreement, Loan Documents and Borrowing. Each of
the Parent and its Subsidiaries has the right, power and authority and has taken
all necessary corporate and other action to authorize the execution, delivery
and performance of this Agreement and each of the other Loan Documents to which
it is a party in accordance with their respective terms. This Agreement and each
of the other Loan Documents have been duly executed and delivered by the duly
authorized officers of the Parent and each of its Subsidiaries party thereto,
and each such document constitutes the legal, valid and binding obligation of
the Parent or its Subsidiary party thereto, enforceable in accordance with its
terms, except as such enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar state or federal debtor relief laws from
time to time in effect which affect the enforcement of creditors' rights in
general and the availability of equitable remedies.
(d) Compliance of Agreement, Loan Documents and Borrowing with Laws,
Etc. The execution, delivery and performance by the Parent and its Subsidiaries
of the Loan Documents to which each such Person is a party, in accordance with
their respective terms, the borrowings hereunder and the transactions
contemplated hereby do not and will not, by the passage of time, the giving of
notice or otherwise, (i) require any Governmental Approval or violate any
Applicable Law relating to the Parent or any of its Subsidiaries, (ii) conflict
with, result in a breach of or constitute a default under the articles of
incorporation, bylaws or other organizational documents of the Parent or any of
its Subsidiaries, (iii) conflict with, result in a breach of or constitute a
default under any indenture, agreement or other instrument to which such Person
is a party or by which any of its properties may be bound or any Governmental
Approval relating to such Person, except where such conflict, breach or default
could not reasonably be expected to have a Material Adverse Effect, or (iv)
result in or require the creation or imposition of any Lien upon or with respect
to any property now owned or hereafter acquired by such Person other than Liens
arising under the Loan Documents.
(e) Compliance with Law; Governmental Approvals. Each of the Parent and
its Subsidiaries (i) has all Governmental Approvals required by any Applicable
Law for it to conduct its business, each of which is in full force and effect,
is final and not subject to review on appeal and is not the subject of any
pending or, to the best of its knowledge, threatened attack by direct or
collateral proceeding, and (ii) is in compliance with each Governmental Approval
applicable to it and in compliance with all other Applicable Laws relating to it
or any of its respective properties, except in each case where the failure to do
so or such non-compliance could not reasonably be expected to have a Material
Adverse Effect.
(f) Tax Returns and Payments. Each of the Parent and its Subsidiaries
has duly filed or caused to be filed all federal, state, local and other tax
returns required by Applicable Law to be filed, and has paid, or made adequate
provision for the payment of, all federal, state, local and other taxes,
assessments and governmental charges or levies upon it and its property, income,
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profits and assets which are due and payable, except where the failure to do so
could not reasonably be expected to have a Material Adverse Effect. No
Governmental Authority has asserted any Lien or other claim against the Parent
or Subsidiary thereof with respect to unpaid taxes which has not been discharged
or resolved. The charges, accruals and reserves on the books of the Parent and
any of its Subsidiaries in respect of federal, state, local and other taxes for
all Fiscal Years and portions thereof since the organization of the Parent and
any of its Subsidiaries are in the judgment of the Parent adequate, and the
Parent does not anticipate any additional taxes or assessments for any of such
years, which such additional taxes or assessments could reasonably be expected
to have a Material Adverse Effect.
(g) Intellectual Property Matters. Each of the Parent and its
Subsidiaries owns or possesses rights to use all franchises, licenses,
copyrights, copyright applications, patents, patent rights or licenses, patent
applications, trademarks, trademark rights, trade names, trade name rights,
copyrights and rights with respect to the foregoing which are required to
conduct its business. No event has occurred which permits, or after notice or
lapse of time or both would permit, the revocation or termination of any such
rights, and, except as set forth on Schedule 7.1(g) hereto, neither the Parent
nor any Subsidiary thereof is liable to any Person for infringement under
Applicable Law with respect to any such rights as a result of its business
operations.
(h) Environmental Matters.
(i) The properties currently owned, leased or operated by the
Parent and its Subsidiaries do not contain and the properties owned, leased or
operated in 9the past when so owned, leased or operated did not contain, and, to
the knowledge of the Borrowers, have not previously contained, any Hazardous
Materials in amounts or concentrations which (A) constitute or constituted a
violation of applicable Environmental Laws or (B) could give rise to liability
under applicable Environmental Laws;
(ii) Except as set forth on Schedule 7.1(h), the Parent, each
Subsidiary and such properties and all operations conducted in connection
therewith are in compliance, and have been in compliance, with all applicable
Environmental Laws, and there is no contamination at, under or about such
properties or such operations which could interfere with the continued operation
of such properties or impair the fair saleable value thereof;
(iii) Neither the Parent nor any Subsidiary thereof has received
any notice of violation, alleged violation, non-compliance, liability or
potential liability regarding environmental matters, Hazardous Materials, or
compliance with Environmental Laws, nor does the Parent or any Subsidiary
thereof have knowledge or reason to believe that any such notice will be
received or is being threatened;
(iv) Hazardous Materials have not been transported or disposed of
to or from the properties owned, leased or operated by of the Parent and its
Subsidiaries in violation of, or in a manner or to a location which could give
rise to liability under, Environmental Laws, nor have any Hazardous Materials
been generated, treated, stored or disposed of at, on or under any of such
properties in violation of, or in a manner that could give rise to liability
under, any applicable Environmental Laws;
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(v) No judicial proceedings or governmental or administrative
action is pending, or, to the knowledge of any Borrower, threatened, under any
Environmental Law to which the Parent or any Subsidiary thereof is or will be
named as a party, nor are there any consent decrees or other decrees, consent
orders, administrative orders or other orders, or other administrative or
judicial requirements outstanding under any Environmental Law with respect to
Parent, any Subsidiary or such properties or operations; and
(vi) There has been no release, or to the best of any Borrower's
knowledge, threat of release, of Hazardous Materials at or from properties
currently owned, leased or operated by the Parent or any Subsidiary or at or
from properties owned, leased or operated in the past when so owned, leased or
operated by the Parent or any Subsidiary in violation of or in amounts or in a
manner that could give rise to liability under Environmental Laws.
(i) ERISA.
(i) As of the Closing Date, neither the Parent nor any ERISA
Affiliate maintains or contributes to, or has any obligation under, any Employee
Benefit Plans other than those identified on Schedule 7.1(i);
(ii) The Parent and each ERISA Affiliate is in compliance with all
applicable provisions of ERISA and the regulations and published interpretations
thereunder with respect to all Employee Benefit Plans except for any required
amendments for which the remedial amendment period as defined in Section 401(b)
of the Code has not yet expired and except where such non-compliance could not
reasonably be expected to have a Material Adverse Effect. Each Employee Benefit
Plan that is intended to be qualified under Section 401(a) of the Code has been
determined by the Internal Revenue Service to be so qualified, and each trust
related to such plan has been determined to be exempt under Section 501(a) of
the Code. No liability has been incurred by the Parent or any ERISA Affiliate
which remains unsatisfied for any taxes or penalties with respect to any
Employee Benefit Plan or any Multiemployer Plan;
(iii) No Pension Plan has been terminated, nor has any accumulated
funding deficiency (as defined in Section 412 of the Code) been incurred
(without regard to any waiver granted under Section 412 of the Code), nor has
any funding waiver from the Internal Revenue Service been received or requested
with respect to any Pension Plan, nor has the Parent or any ERISA Affiliate
failed to make any contributions or to pay any amounts due and owing as required
by Section 412 of the Code, Section 302 of ERISA or the terms of any Pension
Plan prior to the due dates of such contributions under Section 412 of the Code
or Section 302 of ERISA, nor has there been any event requiring any disclosure
under Section 4041(c)(3)(C) or 4063(a) of ERISA with respect to any Pension
Plan;
(iv) Neither the Parent nor any ERISA Affiliate has: (A) engaged in
a nonexempt prohibited transaction described in Section 406 of the ERISA or
Section 4975 of the Code, (B) incurred any material liability to the PBGC which
remains outstanding other than the payment of premiums and there are no premium
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payments which are due and unpaid, (C) failed to make a required contribution or
payment to a Multiemployer Plan, or (D) failed to make a required installment or
other required payment under Section 412 of the Code;
(v) No Termination Event has occurred or is reasonably expected to
occur; and
(vi) No proceeding, claim, lawsuit and/or investigation is existing
or, to the best knowledge of the Parent after due inquiry, threatened concerning
or involving any (A) employee welfare benefit plan (as defined in Section 3(1)
of ERISA) currently maintained or contributed to by the Parent or any ERISA
Affiliate, (B) Pension Plan or (C) Multiemployer Plan.
(j) Margin Stock. Neither the Parent nor any Subsidiary thereof is
engaged principally or as one of its activities in the business of extending
credit for the purpose of "purchasing" or "carrying" any "margin stock" (as each
such term is defined or used in Regulation U of the Board of Governors of the
Federal Reserve System). No part of the proceeds of any of the Loans or Letters
of Credit will be used for purchasing or carrying margin stock or for any
purpose which violates, or which would be inconsistent with, the provisions of
Regulation T, U or X of such Board of Governors.
(k) Government Regulation. Neither the Parent nor any Subsidiary
thereof is an "investment company" or a company "controlled" by an "investment
company" (as each such term is defined or used in the Investment Company Act of
1940, as amended) and neither the Parent nor any Subsidiary thereof is, or after
giving effect to any Extension of Credit will be, subject to regulation under
the Public Utility Holding Company Act of 1935 or the Interstate Commerce Act,
each as amended, or any other Applicable Law which limits its ability to incur
or consummate the transactions contemplated hereby.
(l) Material Contracts. Schedule 7.1(l) sets forth a complete and
accurate list of all Material Contracts of the Parent and its Subsidiaries in
effect as of the Closing Date not listed on any other Schedule hereto; other
than as set forth in Schedule 7.1(l), each such Material Contract is, and after
giving effect to the consummation of the transactions contemplated by the Loan
Documents will be, in full force and effect in accordance with the terms
thereof. The Parent and its Subsidiaries have made available to the
Administrative Agent a true and complete copy of each Material Contract required
to be listed on Schedule 7.1(l) or any other Schedule hereto.
(m) Employee Relations. Each of the Parent and its Subsidiaries has a
stable work force in place and is not, as of the Closing Date, party to any
collective bargaining agreement nor has any labor union been recognized as the
representative of its employees except as set forth on Schedule 7.1(m). The
Parent knows of no pending, threatened or contemplated strikes, work stoppage or
other collective labor disputes involving its employees or those of its
Subsidiaries.
(n) Trade Relations. To the best knowledge of the Borrowers after due
inquiry, there exists no actual or threatened termination, cancellation or
limitation of, or any adverse modification or change in, the business
relationship of the Borrowers or their business with any customer or any group
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of customers whose purchases (individually or in the aggregate) are material to
the business of the Borrowers, or with any supplier whose sales to the Borrowers
(individually or in the aggregate) are material to the Borrowers. To the best
knowledge of the Borrowers, there exists no present condition or state of facts
or circumstances that could reasonably be expected to prevent the Borrowers from
conducting their business after the consummation of the Transactions in
substantially the same manner in which it has heretofore been conducted.
(o) Financial Statements. The (i) Consolidated balance sheets of the
Company and its Subsidiaries as of December 31, 1997 and the related statements
of income and retained earnings and cash flows for the Fiscal Years then ended
and (ii) unaudited Consolidated balance sheet of the Company and its
Subsidiaries as of September 30, 1998 and related unaudited interim statements
of revenue and retained earnings, copies of which have been furnished to the
Administrative Agent and each Lender, are complete and correct in all material
respects and fairly present the assets, liabilities and financial position of
the Company and its Subsidiaries as at such dates, and the results of the
operations and changes of financial position for the periods then ended. All
such financial statements, including the related schedules and notes thereto,
have been prepared in accordance with GAAP. The Parent and its Subsidiaries have
no Debt, obligation or other liability which is not fairly reflected in the
foregoing financial statements or in the notes thereto.
(p) No Material Adverse Change. Since December 31, 1997, there has been
no material adverse change in the properties, business, operations, prospects,
or condition (financial or otherwise) of the Parent and its Subsidiaries taken
as a whole and no event has occurred or condition arisen that could reasonably
be expected to have a Material Adverse Effect.
(q) Solvency. As of the Closing Date and after giving effect to each
Extension of Credit made hereunder, the Parent and each of its Subsidiaries will
be Solvent.
(r) Titles to Properties. Each of the Parent and its Subsidiaries has
such title to the real property owned by it as is necessary or desirable to the
conduct of its business and valid and legal title to all of its personal
property and assets, including, but not limited to, those reflected on the
balance sheets of the Company and its Subsidiaries delivered pursuant to Section
7.1(o), except those which have been disposed of by the Company or its
Subsidiaries subsequent to such date which dispositions have been in the
ordinary course of business or as otherwise expressly permitted hereunder.
Schedule 7.1(r) lists, as of the Closing Date, all real property owned or leased
by the Parent and each Subsidiary thereof. Each of the Parent and its
Subsidiaries enjoys peaceful and undisturbed possession under all of its leases
and such leases are valid and subsisting and in full force and effect and no
default exists thereunder.
(s) Liens. None of the properties and assets of the Parent or any
Subsidiary thereof is subject to any Lien, except Liens permitted pursuant to
Section 11.3 or Liens to be removed at closing. No financing statement under the
Uniform Commercial Code of any state which names the Parent or any Subsidiary
thereof or any of their respective trade names or divisions as debtor and which
has not been terminated, has been filed in any state or other jurisdiction and
neither the Parent nor any Subsidiary thereof has signed any such financing
statement or any security agreement authorizing any secured party thereunder to
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file any such financing statement, except to perfect those Liens permitted by
Section 11.3 hereof.
(t) Debt and Guaranty Obligations. Schedule 7.1(t) is a complete and
correct listing of all Debt and Guaranty Obligations of the Parent and its
Subsidiaries as of the Closing Date in excess of $250,000 (other than any Debt
and Guaranty Obligations of the Parent and its Subsidiaries being terminated on
the Closing Date). The Parent and its Subsidiaries have performed and are in
compliance with all of the terms of such Debt and Guaranty Obligations and all
instruments and agreements relating thereto, and no default or event of default,
or event or condition which with notice or lapse of time or both would
constitute such a default or event of default on the part of the Parent or its
Subsidiaries exists with respect to any such Debt or Guaranty Obligation.
(u) Litigation. Except for matters existing on the Closing Date and set
forth on Schedule 7.1(u) or covered by insurance, there are no actions, suits or
proceedings pending nor, to the knowledge of the Parent, threatened against or
in any other way relating adversely to or affecting the Parent or any Subsidiary
thereof or any of their respective properties in any court or before any
arbitrator of any kind or before or by any Governmental Authority which could
reasonably be expected to have a Material Adverse Effect.
(v) Absence of Defaults. No event has occurred or is continuing which
constitutes a Default or an Event of Default, or which constitutes, or which
with the passage of time or giving of notice or both would constitute, a default
or event of default by the Parent or any Subsidiary thereof under any Material
Contract or judgment, decree or order to which the Parent or its Subsidiaries is
a party or by which the Parent or its Subsidiaries or any of their respective
properties may be bound or which would require the Parent or its Subsidiaries to
make any payment thereunder prior to the scheduled maturity date therefor,
except where such default, event of default or obligation to make such a payment
could not reasonably be expected to have a Material Adverse Effect.
(w) Year 2000 Issues.
(i) As of the Closing Date, each Borrower and each Subsidiary
thereof (A) has initiated a review and assessment of all areas of its business
and operations (including those affected by information received from suppliers
and vendors) that may be adversely affected by a Year 2000 Problem, (B) has
developed or is in the process of developing a comprehensive and detailed
strategic plan to address its Year 2000 Problem, if any, and will, on a timely
basis (but in no event later than September 30, 1999), implement such plan and
(C) reasonably believes that the necessary expenditure of capital and resources
to eliminate any such Year 2000 Problem will not result in a Material Adverse
Effect.
(ii) As of the Closing Date, no Borrower has reason to believe that
any material supplier and vendor of such Borrower and each Subsidiary of such
Borrower thereof will not on a timely basis eliminate its Year 2000 Problem.
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(iii) "Year 2000 Problem" shall mean, with respect to any Person,
the possibility that the computer applications and software programs used by
such Person in the operation of its business will be unable to effectively
process data including data fields requiring references to dates on and after
January 1, 2000, and may experience or produce invalid or incorrect results or
abnormal operation related to or as a result of the occurrence of such dates.
(x) Recapitalization Documents. The Company delivered to the
Administrative Agent true, complete and correct copies of the Recapitalization
Documents, together with all amendments and modifications thereto, on the
Closing Date. The Recapitalization Documents (including the schedules and
exhibits thereto) comprise a full and complete copy of all agreements between
the parties thereto with respect to the subject matter thereof and all
transactions related thereto, and there are no agreements or understandings,
oral or written, or side agreements not contained therein that relate to or
modify the substance thereof. The Recapitalization Documents have been duly
authorized by all necessary corporate action on the part of each Borrower and
each of its Subsidiaries party thereto, and, when executed and delivered by such
Borrower and each such Subsidiary, shall be enforceable in accordance with their
respective terms except as such enforcement may be limited by bankruptcy,
insolvency, fraudulent conveyance, moratorium or similar state or federal debtor
relief laws which affect the enforcement of creditors' rights in general and the
availability of equitable remedies. The representations and warranties made by
each Borrower and each of its Subsidiaries party thereto, and to the best
knowledge of each Borrowers and each of its Subsidiaries after due inquiry, the
representations and warranties made by any other Person contained in the
Recapitalization Documents, are true and correct and no default or event of
default exists thereunder.
(y) Accuracy and Completeness of Information. No written information,
written statements, reports and other papers and data produced by or on behalf
of each Borrower or any Subsidiary thereof and furnished to the Administrative
Agent or the Lenders by or on behalf of any Borrower or any Subsidiary thereof
in connection with the negotiation, preparation or execution of this Agreement
or any of the Loan Documents (other than the financial statements delivered
pursuant to Section 6.2(f)(i), which are subject to the representations and
warranties contained in Section 7.1(o) and the financial projections delivered
pursuant to Section 6.2(f)(iii), which are subject to the certificate delivered
pursuant to such Section) contains or will contain any untrue statement of a
fact material to the creditworthiness of such Borrower or its Subsidiaries or
omits or will omit to state a material fact necessary in order to make the
statements contained therein not misleading in the circumstances in which made.
SECTION 7.2 Survival of Representations and Warranties, Etc. All
representations and warranties set forth in this Article VII and all
representations and warranties contained in any certificate, or any of the Loan
Documents (including but not limited to any such representation or warranty made
in or in connection with any amendment thereto) shall constitute representations
and warranties made under this Agreement. All representations and warranties
made under this Agreement shall be made or deemed to be made at and as of the
Closing Date, shall survive the Closing Date and shall not be waived by the
execution and delivery of this Agreement, any investigation made by or on behalf
of the Lenders or any borrowing hereunder.
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ARTICLE VIII
FINANCIAL INFORMATION AND NOTICES
Until all the Obligations have been paid and satisfied in full and the
Commitments terminated, unless consent has been obtained in the manner set forth
in Section 14.11 hereof, the Parent will furnish or cause to be furnished to the
Administrative Agent and to the Lenders at their respective addresses as set
forth on Schedule 1.1(a), or such other office as may be designated by the
Administrative Agent and Lenders from time to time:
SECTION 8.1 Financial Statements and Projections.
(a) Monthly Financial Statements. As soon as practicable and in any
event within thirty (30) days after the end of each calendar month, an unaudited
Consolidated and consolidating balance sheet of the Parent and its Subsidiaries
as of the close of such calendar month and unaudited Consolidated and
consolidating statements of income, retained earnings and cash flows for the
calendar month then ended and that portion of the Fiscal Year then ended,
including the notes thereto, all in reasonable detail (and commencing with the
monthly statements for March 2000 setting forth in comparative form the
corresponding figures for the applicable month of the preceding Fiscal Year) and
prepared by the Parent in accordance with GAAP and, if applicable, containing
disclosure of the effect on the financial position or results of operations of
any change in the application of accounting principles and practices during the
period, and certified by the chief financial officer of the Parent to present
fairly in all material respects the financial condition of the Parent and its
Subsidiaries as of their respective dates and the results of operations of the
Parent and its Subsidiaries for the respective periods then ended, subject to
normal year end adjustments.
(b) Quarterly Financial Statements. As soon as practicable and in any
event within forty-five (45) days after the end of the first three fiscal
quarters, an unaudited Consolidated and consolidating balance sheet of the
Parent and its Subsidiaries as of the close of such fiscal quarter and unaudited
Consolidated and consolidating statements of income, retained earnings and cash
flows for the fiscal quarter then ended and that portion of the Fiscal Year then
ended, including the notes thereto, all in reasonable detail (and commencing
with the quarterly statements for March 2000 setting forth in comparative form
the corresponding figures for the applicable fiscal quarter of the preceding
Fiscal Year) and prepared by the Parent in accordance with GAAP and, if
applicable, containing disclosure of the effect on the financial position or
results of operations of any change in the application of accounting principles
and practices during the period, and certified by the chief financial officer of
the Parent to present fairly in all material respects the financial condition of
the Parent and its Subsidiaries as of their respective dates and the results of
operations of the Parent and its Subsidiaries for the respective periods then
ended, subject to normal year end adjustments.
(c) Annual Financial Statements. As soon as practicable and in any
event within ninety (90) days after the end of each Fiscal Year, an audited
Consolidated balance sheet of the Parent and its Subsidiaries as of the close of
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such Fiscal Year and audited Consolidated statements of income, retained
earnings and cash flows for the Fiscal Year then ended, including the notes
thereto, all in reasonable detail setting forth in comparative form the
corresponding figures for the preceding Fiscal Year and prepared by an
independent certified public accounting firm acceptable to the Administrative
Agent in accordance with GAAP and, if applicable, containing disclosure of the
effect on the financial position or results of operation of any change in the
application of accounting principles and practices during the year, and
accompanied by a report thereon by such certified public accountants that is not
qualified with respect to scope limitations imposed by the Parent or any of its
Subsidiaries or with respect to accounting principles followed by the Parent or
any of its Subsidiaries not in accordance with GAAP.
(d) Annual Business Plan and Financial Projections. As soon as
practicable and in any event within forty-five (45) days prior to the beginning
of each Fiscal Year, a business plan of the Parent and its Subsidiaries for the
ensuing Fiscal Year, such plan to be prepared in accordance with GAAP and to
include, on a quarterly basis, the following: a quarterly operating and capital
budget, a projected income statement, statement of cash flows and balance sheet
and a report containing management's discussion and analysis of such
projections, accompanied by a certificate from the chief financial officer of
the Parent to the effect that, to the best of such officer's knowledge, such
projections are good faith estimates of the financial condition and operations
of the Parent and its Subsidiaries for such four (4) fiscal quarter period.
SECTION 8.2 Officer's Compliance Certificate. At each time financial
statements are delivered pursuant to Sections 8.1 (b) or (c), and at such other
times as the Administrative Agent shall reasonably request, a certificate of the
chief financial officer or the treasurer of the Parent in the form of Exhibit F
attached hereto (an "Officer's Compliance Certificate").
SECTION 8.3 Accountants' Certificate. At each time financial statements
are delivered pursuant to Section 8.1(c), a certificate of the independent
public accountants certifying such financial statements addressed to the
Administrative Agent for the benefit of the Lenders:
(a) stating that in making the examination necessary for the
certification of such financial statements, they obtained no knowledge of any
Default or Event of Default or, if such is not the case, specifying such Default
or Event of Default and its nature and period of existence; and
(b) including the calculations prepared by such accountants required to
establish whether or not the Parent and its Subsidiaries are in compliance with
the financial covenants set forth in Article X hereof as at the end of each
respective period.
SECTION 8.4 Other Reports.
(a) Auditors' Letter. Promptly upon receipt thereof, copies of all
reports, if any, submitted to the Parent or any Subsidiary or any Board of
Directors thereof by their independent public accountants in connection with
their auditing function, including, without limitation, any management report
and any management responses thereto;
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(b) Financial Reports. Promptly upon distribution thereof, copies of
all financial statements and reports that any Borrower shall send to its
shareholders and copies of all registration statements and all regular or
periodic reports (including, without limitation, any applicable annual report on
Form 10-K and quarterly report on Form 10-Q) which any Borrower shall file with
the Securities and Exchange Commission or any successor commission.
(c) Financing Transaction Terms. Promptly upon distribution thereof, a
copy of any written offer made to the Investors pursuant to Section 2(a) of the
Investor Rights Agreement for the purpose of raising capital, incurring
indebtedness for borrowed money or otherwise engaging in a financial
transaction.
(d) Other Information. Such other information regarding the operations,
business affairs and financial condition of the Parent or any of its
Subsidiaries as the Administrative Agent or any Lender may reasonably request.
SECTION 8.5 Notice of Litigation and Other Matters. Prompt (but in no
event later than ten (10) days after an officer of any Borrower obtains
knowledge thereof) telephonic and written notice of:
(a) the commencement of all proceedings and investigations by or before
any Governmental Authority and all actions and proceedings in any court or
before any arbitrator against or involving a Borrower or any Subsidiary thereof
or any of their respective properties, assets or businesses;
(b) any notice of any violation received by a Borrower or any
Subsidiary thereof from any Governmental Authority including, without
limitation, any notice of violation of Environmental Laws which in any such case
could reasonably be expected to have a Material Adverse Effect;
(c) any labor controversy that has resulted in, or threatens to result
in, a strike or other work action against a Borrower or any Subsidiary thereof
which controversy can reasonably be expected to have a Material Adverse Effect;
(d) any attachment, judgment, lien, levy or order exceeding $250,000
that may be assessed against or threatened against a Borrower or any Subsidiary
thereof;
(e) any Default or Event of Default, or any event which constitutes or
which with the passage of time or giving of notice or both would constitute a
default or event of default by a Borrower or any Subsidiary thereof under any
Material Contract to which a Borrower or any Subsidiary thereof is a party or by
which a Borrower or any Subsidiary thereof or any of their respective properties
may be bound;
(f) (i) any unfavorable determination letter from the Internal Revenue
Service regarding the qualification of an Employee Benefit Plan under Section
401(a) of the Code (along with a copy thereof), (ii) all notices received by a
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Borrower or any ERISA Affiliate of the PBGC's intent to terminate any Pension
Plan or to have a trustee appointed to administer any Pension Plan, (iii) all
notices received by a Borrower or any ERISA Affiliate from a Multiemployer Plan
sponsor concerning the imposition or amount of withdrawal liability pursuant to
Section 4202 of ERISA and (iv) a Borrower obtaining knowledge or reason to know
that a Borrower or any ERISA Affiliate has filed or intends to file a notice of
intent to terminate any Pension Plan under a distress termination within the
meaning of Section 4041(c) of ERISA; and
(g) any event which makes any of the representations set forth in
Section 6.1 inaccurate in any respect.
SECTION 8.6 Accuracy of Information. All written information, reports,
statements and other papers and data furnished by or on behalf of the Borrowers
to the Administrative Agent or any Lender (other than financial forecasts)
whether pursuant to this Article VIII or any other provision of this Agreement,
or any of the Security Documents, shall, at the time the same is so furnished,
comply with the representations and warranties set forth in Section 7.1(y). All
financial forecasts delivered by or on behalf of the Borrowers to the
Administrative Agent or any Lender pursuant to the Agreement or any other Loan
Document shall be based on reasonable estimates and assumptions, all of which
are fair in light of the conditions which existed at the time the forecasts were
made, have been prepared on the basis of the assumptions stated therein, and
reflect, as of the time so furnished, the reasonable estimate of the Parent and
its Subsidiaries of the results of the operations and other information
projected therein.
ARTICLE IX
AFFIRMATIVE COVENANTS
Until all of the Obligations have been paid and satisfied in full and
the Commitments terminated, unless consent has been obtained in the manner
provided for in Section 14.11, the Parent will, and will cause each of its
Subsidiaries to:
SECTION 9.1 Preservation of Corporate Existence and Related Matters.
Except as permitted by Section 11.5, preserve and maintain its separate
corporate existence and all rights, franchises, licenses and privileges
necessary to the conduct of its business, and qualify and remain qualified as a
foreign corporation and authorized to do business in each jurisdiction in which
the failure to so qualify would have a Material Adverse Effect.
SECTION 9.2 Maintenance of Property. In addition to the requirements of
any of the Security Documents, protect and preserve all properties useful in and
material to its business as currently conducted, including copyrights, patents,
trade names and trademarks; maintain in good working order (reasonable wear and
tear excepted) and condition all buildings, equipment and other tangible real
and personal property; and from time to time make or cause to be made all
renewals, replacements and additions to such property necessary for the conduct
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of its business, so that the business carried on in connection therewith may be
properly and advantageously conducted at all times.
SECTION 9.3 Insurance. Maintain insurance with financially sound and
reputable insurance companies against such risks and in such amounts as are
customarily maintained by similar businesses and as may be required by
Applicable Law and as are required by any Security Documents, and on the Closing
Date and from time to time thereafter deliver to the Administrative Agent upon
its request a detailed list of the insurance then in effect, stating the names
of the insurance companies, the amounts and rates of the insurance, the dates of
the expiration thereof and the properties and risks covered thereby.
SECTION 9.4 Accounting Methods and Financial Records. Maintain a system
of accounting, and keep such books, records and accounts (which shall be true
and complete in all material respects) as may be required or as may be necessary
to permit the preparation of financial statements in accordance with GAAP and in
compliance with the regulations of any Governmental Authority having
jurisdiction over it or any of its properties.
SECTION 9.5 Payment and Performance of Obligations. Pay and perform all
Obligations under this Agreement and the other Loan Documents, and pay or
perform (a) all taxes, assessments and other governmental charges that may be
levied or assessed upon it or any of its property, and (b) all other
indebtedness, obligations and liabilities in accordance with customary trade
practices; provided, that the Parent or such Subsidiary may contest any item
described in clauses (a) or (b) of this Section 9.5 in good faith so long as
adequate reserves are maintained with respect thereto in accordance with GAAP.
SECTION 9.6 Compliance With Laws and Approvals. Observe and remain in
compliance with all Applicable Laws and maintain in full force and effect all
Governmental Approvals, in each case applicable to the conduct of its business,
except where the failure to so comply could not reasonably be expected to have a
Material Adverse Effect.
SECTION 9.7 Environmental Laws. In addition to and without limiting the
generality of Section 9.6, (a) comply in all material respects with, and use its
best efforts to ensure such compliance by all tenants and subtenants with all
applicable Environmental Laws and obtain and comply with and maintain in all
material respects, and use its best efforts to ensure that all tenants and
subtenants obtain and comply with and maintain, any and all licenses, approvals,
notifications, registrations or permits required by applicable Environmental
Laws, (b) conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws, and promptly comply with all lawful orders and directives of
any Governmental Authority regarding Environmental Laws, and (c) defend,
indemnify and hold harmless the Administrative Agent and the Lenders, and their
respective parents, Subsidiaries, Affiliates, employees, agents, officers and
directors, from and against any claims, demands, penalties, fines, liabilities,
settlements, damages, costs and expenses of whatever kind or nature known or
unknown, contingent or otherwise, arising out of, or in any way relating to the
presence of Hazardous Materials, or the violation of, noncompliance with or
liability under any Environmental Laws applicable to the operations of the
Parent or such Subsidiary, or any orders, requirements or demands of
Governmental Authorities related thereto, including, without limitation,
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reasonable attorney's and consultant's fees, investigation and laboratory fees,
response costs, court costs and litigation expenses, except to the extent that
any of the foregoing directly result from the gross negligence or willful
misconduct of the party seeking indemnification therefor.
SECTION 9.8 Compliance with ERISA. In addition to and without limiting
the generality of Section 9.6, (a) comply with all applicable provisions of
ERISA and the regulations and published interpretations thereunder with respect
to all Employee Benefit Plans to the full extent necessary to avoid any Material
Adverse Effect, (b) not take any action or fail to take action the result of
which could be a liability to the PBGC or to a Multiemployer Plan, (c) not
participate in any prohibited transaction that could result in any civil penalty
under ERISA or tax under the Code, (d) operate each Employee Benefit Plan in
such a manner that will not incur any tax liability under Section 4980B of the
Code or any liability to any qualified beneficiary as defined in Section 4980B
of the Code which (in either case) could reasonably be expected to have a
Material Adverse Effect, except in each such case where the failure to do so
could not reasonably be expected to have a Material Adverse Effect and (e)
furnish to the Administrative Agent upon the Administrative Agent's request such
additional information about any Employee Benefit Plan as may be reasonably
requested by the Administrative Agent.
SECTION 9.9 Compliance With Agreements. Comply in all respects with
each term, condition and provision of all leases, agreements and other
instruments entered into in the conduct of its business including, without
limitation, any Material Contract except where the failure to comply could not
reasonably be expected to have a Material Adverse Effect; provided, that the
Parent or such Subsidiary may contest any such lease, agreement or other
instrument in good faith through applicable proceedings so long as adequate
reserves are maintained in accordance with GAAP.
SECTION 9.10 Conduct of Business. Engage only in businesses in
substantially the same fields as the businesses conducted on the Closing Date.
SECTION 9.11 Visits and Inspections. Permit representatives of the
Administrative Agent or any Lender, from time to time, to visit and inspect its
properties; inspect, audit and make extracts from its books, records and files,
including, but not limited to, management letters prepared by independent
accountants; and discuss with its principal officers, and its independent
accountants, its business, assets, liabilities, financial condition, results of
operations and business prospects, provided that such visits and discussions
shall be upon prior reasonable notice and for a reasonable duration.
SECTION 9.12 Additional Borrowers and Collateral.
(a) Within ten (10) Business Days after the creation or the acquisition
of any Subsidiary of any Borrower, cause to be executed and delivered to the
Administrative Agent (i) a Joinder Agreement duly executed by the Parent, such
Subsidiary and (if a separate Person) the parent of such Subsidiary pursuant to
which (A) such Subsidiary shall become a Borrower hereunder, (B) such Subsidiary
shall become a Grantor under the Security Agreement and (C) such Subsidiary
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shall become an Issuer or Partnership/LLC under the Borrower Pledge Agreement,
(ii) replacement Notes duly executed by such Subsidiary and each other Borrower
then party hereto, (iii) such closing documents, closing certificates and
opinions of counsel consistent with Section 6.2 hereof as may reasonably be
requested by the Administrative Agent, and (iv) such other documents reasonably
requested by the Administrative Agent in order that such Subsidiary shall become
bound by all of the terms, covenants and agreements contained in the Credit
Agreement, the Security Agreement, the Borrower Pledge Agreement and any other
Loan Document applicable to such Subsidiary and the assets of such Subsidiary
shall constitute Collateral hereunder and under the Loan Documents.
(b) Upon the acquisition by any Borrower or any Subsidiary thereof of
any real property (whether owned in fee or leased) not listed on Schedule
7.1(r), the Borrowers shall provide to the Administrative Agent copies of the
purchase or lease documents, as applicable, and any other information reasonably
requested by the Administrative Agent with respect thereto. Promptly at the
request of the Administrative Agent or the Required Lenders, grant to the
Administrative Agent for the ratable benefit of itself and the Lenders a Lien on
any real property owned or leased by any Borrower or any Subsidiary thereof (not
then subject to any such Lien) pursuant to any applicable Real Estate Security
Documents requested by the Administrative Agent and deliver such other documents
or agreements consistent with Section 6.2(d) as requested by the Administrative
Agent. In addition, if requested by the Administrative Agent, such Real Estate
Security Documents shall be duly recorded by the Borrowers in such manner and in
such places as are required by law to perfect and preserve the Liens in favor of
the Administrative Agent and the Lenders granted pursuant to such Real Estate
Security Documents.
SECTION 9.13 Hedging Agreement. Maintain, for a period of two (2) years
from the Closing Date, a Hedging Agreement with minimum notional amount at any
date of determination equal to fifty percent (50%) of the outstanding principal
balance on the Term Loans at an interest rate, with a counterparty and upon
other terms and conditions reasonably satisfactory to the Administrative Agent.
SECTION 9.14 Year 2000 Compatibility. Take all actions reasonably
necessary to assure that Borrower's computer based systems are able to operate
and effectively process data which includes dates on and after January 1, 2000.
At the request of the Administrative Agent, the Parent shall provide reasonable
assurances satisfactory to the Administrative Agent that the foregoing actions
are being or have been taken.
SECTION 9.15 Further Assurances. Make, execute and deliver all such
additional and further acts, things, deeds and instruments as the Administrative
Agent or any Lender may reasonably require to document and consummate the
transactions contemplated hereby and to vest completely in and insure the
Administrative Agent and the Lenders their respective rights under this
Agreement, the Notes, the Letters of Credit and the other Loan Documents.
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ARTICLE X
FINANCIAL COVENANTS
Until all of the Obligations have been paid and satisfied in full and
the Commitments terminated, unless consent has been obtained in the manner set
forth in Section 14.11 hereof, the Parent and its Subsidiaries on a Consolidated
basis will not:
SECTION 10.1 Leverage Ratio: As of any fiscal quarter end during the
applicable period set below, permit the ratio of (a) Total Funded Debt on such
date to (b) EBITDA (the "Leverage Ratio") for the period of four (4) consecutive
fiscal quarters ending on such date to be greater than the corresponding ratio
set forth below:
Period Ratio
------ -----
Closing Date through and
Including September 30, 1999 2.85 to 1.00
October 1, 1999 through and
Including September 30, 2000 2.50 to 1.00
October 1, 2000 and thereafter 2.25 to 1.00
SECTION 10.2 Fixed Charge Coverage Ratio: As of any fiscal quarter end
during the applicable period set forth below, permit the ratio of (a) EBITDA for
the period of four (4) consecutive fiscal quarters ending on such date (except
as otherwise provided below) to (b) Fixed Charges for such period of four (4)
consecutive fiscal quarters (except as provided below) to be less than the
corresponding ratio set forth below:
Period Ratio
------ -----
Closing Date through and
Including March 31, 1999 .70 to 1.00
April 1, 1999 through and
Including September 30, 1999 .90 to 1.00
October 1, 1999 and
thereafter 1.10 to 1.00
For the purposes of calculating EBITDA (and Fixed Charges) under this Section
10.2, (i) with respect to the fiscal quarter ending March 31, 1999, EBITDA shall
be equal to EBITDA (and Fixed Charges shall be equal to Fixed Charges) for the
fiscal quarter ending on such date, (ii) with respect to the fiscal quarter
ending June 30, 1999, EBITDA shall be equal to EBITDA (and Fixed Charges shall
be equal to Fixed Charges) for the period of two (2) consecutive fiscal quarters
ending on such date and (iii) with respect to the fiscal quarter ending
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September 30, 1999, EBITDA shall be equal to EBITDA (and Fixed Charges shall be
equal to Fixed Charges) for the period of three (3) consecutive fiscal quarters
ending on such date.
SECTION 10.3. Minimum EBITDA. As of any fiscal quarter end during the
applicable period set forth below, permit EBITDA for the period of four (4)
consecutive fiscal quarters ending on such date (except as otherwise provided
below) to be less than the corresponding amount set forth below:
Period Minimum EBITDA
------ --------------
Closing Date through and
Including March 31, 1999 $ 1,300,000
April 1, 1999 through and
Including June 30, 1999 $ 4,300,000
July 1, 1999 through and
Including September 30, 1999 $ 6,500,000
October 1, 1999 through and
Including December 31, 1999 $12,000,000
January 1, 2000 through and
Including March 31, 2000 $12,500,000
April 1, 2000 through and
Including June 30, 2000 $14,000,000
July 1, 2000 through and
Including September 30, 2000 $14,500,000
October 1, 2000 through and
Including December 31, 2000 $16,000,000
For the purposes of calculating EBITDA under this Section 10.3, (i) with respect
to the fiscal quarter ending March 31, 1999, EBITDA shall be to equal EBITDA for
the fiscal quarter ending on such date, (ii) with respect to the fiscal quarter
ending June 30, 1999, EBITDA shall be equal to EBITDA for the period of two (2)
consecutive fiscal quarters ending on such date and (iii) with respect to the
fiscal quarter ending September 30, 1999, EBITDA shall be equal to EBITDA for
the period of three (3) consecutive fiscal quarters ending on such date.
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ARTICLE XI
NEGATIVE COVENANTS
Until all of the Obligations have been paid and satisfied in full and
the Commitments terminated, unless consent has been obtained in the manner set
forth in Section 14.11 hereof, the Parent shall not and shall not permit any of
its Subsidiaries to:
SECTION 11.1 Limitations on Debt. Create, incur, assume or suffer to
exist any Debt except:
(a) the Obligations;
(b) Debt incurred in connection with a Hedging Agreement (i) with a
counterparty and upon terms and conditions (including interest rate) reasonably
satisfactory to the Administrative Agent or (ii) required pursuant to Section
9.13;
(c) Debt of the Parent and its Subsidiaries incurred in connection with
Capitalized Leases and purchase money Debt of the Parent and its Subsidiaries in
an aggregate amount not to exceed $1,500,000 on any date of determination;
(d) Debt consisting of Guaranty Obligations permitted by Section 11.2;
and
(e) Debt not otherwise referred to in this Section 11.1 in an aggregate
amount not to exceed $1,000,000 or any date of determination.
provided, that no agreement or instrument with respect to Debt permitted to be
incurred by this Section 11.1 shall restrict, limit or otherwise encumber (by
covenant or otherwise) the ability of any Subsidiary of the Parent to make any
payment to the Parent or any other Borrower (in the form of dividends,
intercompany advances or otherwise) for the purpose of enabling the Parent or
such Borrower to pay the Obligations.
SECTION 11.2 Limitations on Guaranty Obligations. Create, incur, assume
or suffer to exist any Guaranty Obligations except:
(a) Guaranty Obligations in favor of the Administrative Agent, for the
benefit of itself and the Lenders; and
(b) Guaranty Obligations incurred in the ordinary course of business in
an aggregate amount not to exceed $500,000 at any date of determination.
SECTION 11.3 Limitations on Liens. Create, incur, assume or suffer to
exist, any Lien on or with respect to any of its assets or properties (including
without limitation shares of capital stock or other ownership interests), real
or personal, whether now owned or hereafter acquired, except:
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(a) Liens for taxes, assessments and other governmental charges or
levies (excluding any Lien imposed pursuant to any of the provisions of ERISA or
Environmental Laws) not yet due or as to which the period of grace (not to
exceed thirty (30) days), if any, related thereto has not expired or which are
being contested in good faith and by appropriate proceedings if adequate
reserves are maintained to the extent required by GAAP;
(b) the claims of materialmen, mechanics, carriers, warehousemen,
processors or landlords for labor, materials, supplies or rentals incurred in
the ordinary course of business, (i) which are not overdue for a period of more
than thirty (30) days or (ii) which are being contested in good faith and by
appropriate proceedings;
(c) Liens consisting of deposits or pledges made in the ordinary course
of business in connection with, or to secure payment of, obligations under
workers' compensation, unemployment insurance or similar legislation or
obligations under customer service contracts;
(d) Liens constituting encumbrances in the nature of zoning
restrictions, easements and rights or restrictions of record on the use of real
property, which in the aggregate are not substantial in amount and which do not,
in any case, detract from the value of such property or impair the use thereof
in the ordinary conduct of business;
(e) Liens of the Administrative Agent for the benefit of the
Administrative Agent and the Lenders;
(f) Liens not otherwise permitted by or referred to in this Section
11.3 and in existence on the Closing Date and described on Schedule 11.3; and
(g) Liens securing purchase money Debt permitted under Section 11.1(d);
provided that (i) such Liens shall be created substantially simultaneously with
the acquisition of the related asset, (ii) such Liens do not at any time
encumber any property other than the property financed by such Debt, (iii) the
amount of Debt secured thereby is not increased and (iv) the principal amount of
Debt secured by any such Lien shall at no time exceed one hundred percent (100%)
of the original purchase price of such property at the time it was acquired.
SECTION 11.4 Limitations on Loans, Advances, Investments and
Acquisitions. Purchase, own, invest in or otherwise acquire, directly or
indirectly, any capital stock, interests in any partnership or joint venture
(including without limitation the creation or capitalization of any Subsidiary),
evidence of Debt or other obligation or security, substantially all or a portion
of the business or assets of any other Person or any other investment or
interest whatsoever in any other Person, or make or permit to exist, directly or
indirectly, any loans, advances or extensions of credit to, or any investment in
cash or by delivery of property in, any Person except:
(a) investments in any Borrower and the existing loans, advances and
investments not otherwise permitted or referred to in this Section 11.4 and
described on Schedule 11.4;
(b) investments in (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency thereof
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maturing within 120 days from the date of acquisition thereof, (ii) commercial
paper maturing no more than 120 days from the date of creation thereof and
currently having the highest rating obtainable from either Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. or Moody's
Investors Service, Inc., (iii) certificates of deposit maturing no more than 120
days from the date of creation thereof issued by commercial banks incorporated
under the laws of the United States of America, each having combined capital,
surplus and undivided profits of not less than $500,000,000 and having a rating
of "A" or better by a nationally recognized rating agency; provided, that the
aggregate amount invested in such certificates of deposit shall not at any time
exceed $5,000,000 for any one such certificate of deposit and $10,000,000 for
any one such bank, or (iv) time deposits maturing no more than 30 days from the
date of creation thereof with commercial banks or savings banks or savings and
loan associations each having membership either in the FDIC or the deposits of
which are insured by the FDIC and in amounts not exceeding the maximum amounts
of insurance thereunder;
(c) loans and advances to employees in the ordinary course of business
in an aggregate amount not to exceed $250,000 at any time; and
(d) investments by the Parent or any Subsidiary thereof in the form of
acquisitions of all or substantially all of the business or a line of business
(whether by the acquisition of capital stock, assets or any combination thereof)
of any other Person if such acquisition has been previously approved in writing
by the Required Lenders and, as required by the Statement With Respect to
Shares, a majority of the outstanding shares of Preferred Stock (a "Permitted
Acquisition"); provided that the approval of the Required Lenders shall not be
required with respect to any Permitted Acquisition for which the aggregate
consideration given in connection therewith does not exceed a total amount of
$5,000,000 during any Fiscal Year as long as the following requirements are met:
(i) no Default or Event of Default shall have occurred and be continuing both
before and after giving effect to such acquisition, (ii) the Borrowers shall
have delivered to the Administrative Agent an Officer's Compliance Certificate
on or before the closing date of such acquisition demonstrating, in form and
substance reasonably satisfactory thereto, pro forma compliance with each
covenant contained in Articles X and XI and (iii) the Borrowers shall have
delivered to the Administrative Agent on or before such closing date a
description of such acquisition.
SECTION 11.5 Limitations on Mergers and Liquidation. Merge, consolidate
or enter into any similar combination with any other Person or liquidate,
wind-up or dissolve itself (or suffer any liquidation or dissolution) except:
(a) any Subsidiary Borrower may merge with any other Subsidiary
Borrower;
(b) any Wholly-Owned Subsidiary may merge into the Person such
Subsidiary was formed to acquire in connection with a Permitted Acquisition; and
(c) any Wholly-Owned Subsidiary of the Parent may wind-up into the
Parent or another Borrower.
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SECTION 11.6 Limitations on Sale of Assets. Convey, sell, lease,
assign, transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, the sale of any receivables and leasehold
interests and any sale-leaseback or similar transaction), whether now owned or
hereafter acquired except:
(a) the sale of inventory in the ordinary course of business;
(b) the sale of obsolete assets no longer used or usable in the
business of the Parent or any of its Subsidiaries;
(c) the transfer of assets to any Borrower by any other Borrower
pursuant to Section 11.5;
(d) the sale or discount without recourse of accounts receivable
arising in the ordinary course of business in connection with the compromise or
collection thereof; and
(e) any other sale of assets in the ordinary course of business as long
as the Net Cash Proceeds thereof are applied as set forth in Section 4.4
(b)(iii).
SECTION 11.7 Limitations on Dividends, Distributions and Redemptions.
Declare or pay any dividends upon any of its capital stock or other equity
interests; purchase, redeem, retire or otherwise acquire, directly or
indirectly, any shares of its capital stock or other equity interests, or make
any distribution of cash, property or assets among the holders of shares of its
capital stock or other equity interests; provided that:
(a) any Borrower or any Subsidiary may pay dividends in shares of its
own capital stock;
(b) any Subsidiary may pay cash dividends to any Borrower; and
(c) the Company may redeem shares of its capital stock on the Closing
Date in connection with the Recapitalization; and
(d) the Parent may complete Permitted Repurchases (as defined in the
Statement With Respect to Shares) in connection with the termination of the
corresponding employees and the Parent may pay cash adjustments for fractional
shares (but make no other cash dividend or distribution) in connection with both
(i) the conversion of the Preferred Stock into common stock of the Parent and
(ii) the exercise of any Warrants.
SECTION 11.8 Limitations on Exchange and Issuance of Capital Stock.
Issue, sell or otherwise dispose of any class or series of capital stock that,
by its terms or by the terms of any security into which it is convertible or
exchangeable, is, or upon the happening of an event or passage of time would be,
(a) convertible or exchangeable into Debt or (b) required to be redeemed or
repurchased prior to the later of the Revolving Credit Maturity Date or the Term
Loan Maturity Date, including at the option of the holder, in whole or in part,
or has, or upon the happening of an event or passage of time would have, a
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redemption or similar payment due prior to the later of the Revolving Credit
Maturity Date or the Term Loan Maturity Date.
SECTION 11.9 Transactions with Affiliates. Directly or indirectly (a)
make any loan or advance to, or purchase or assume any note or other obligation
to or from, any of its officers, directors, shareholders or other Affiliates, or
to or from any member of the immediate family of any of its officers, directors,
shareholders or other Affiliates, or (b) enter into, or be a party to, any other
transaction with any of its Affiliates, except in each case pursuant to the
reasonable requirements of its business and upon fair and reasonable terms that
are fully disclosed to and approved in writing by the Required Lenders prior to
the consummation thereof and are no less favorable to it than it would obtain in
a comparable arm's length transaction with a Person not its Affiliate (other
than the renewal of any lease with respect to which the separate consent of
holders of the Preferred Stock is not required).
SECTION 11.10 Certain Accounting Changes. Change its Fiscal Year end,
or make any change in its accounting treatment and reporting practices except as
required by GAAP.
SECTION 11.11 Charter Documents; Capitalization. (a) Amend or modify
its articles of incorporation (including, without limitation, the Articles of
Incorporation), agreement of limited partnership, by-laws, or other charter
documents, or any Recapitalization Document or its corporate structure or
capitalization structure, in each case in any way that could reasonably be
expected to have a Material Adverse Effect or (b) notwithstanding clause (a) of
this Section 11.12, amend or modify in any way the Warrants or the Statement
With Respect to Shares.
SECTION 11.12 Restrictive Agreements. Enter into any Debt which
contains any negative pledge on assets or any covenants more restrictive than
the provisions of Articles IX, X and XI hereof, or which restricts, limits or
otherwise encumbers its ability to incur Liens on or with respect to any of its
assets or properties other than the assets or properties securing such Debt.
ARTICLE XII
DEFAULT AND REMEDIES
SECTION 12.1 Events of Default. Each of the following shall constitute
an Event of Default, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment or order of any court or any order, rule or regulation of any
Governmental Authority or otherwise:
(a) Default in Payment of Principal of Loans and Reimbursement
Obligations. The Borrowers shall default in any payment of principal of any
Loan, Note or Reimbursement Obligation when and as due (whether at maturity, by
reason of acceleration or otherwise).
(b) Other Payment Default. The Borrowers shall default in the payment
when and as due (whether at maturity, by reason of acceleration or otherwise) of
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interest on any Loan, Note or Reimbursement Obligation or the payment of any
other Obligation, and such default shall continue unremedied for five (5)
Business Days.
(c) Misrepresentation. Any representation or warranty made or deemed to
be made by the Parent or any Subsidiary under this Agreement, any Loan Document
or any amendment hereto or thereto, shall at any time prove to have been
incorrect or misleading in any material respect when made or deemed made.
(d) Default in Performance of Certain Covenants. The Parent or any
Subsidiary shall default in the performance or observance of any covenant or
agreement contained in Section 8.5(e) or Articles X or XI of this Agreement.
(e) Default in Performance of Other Covenants and Conditions. The
Parent or any Subsidiary shall default in the performance or observance of any
term, covenant, condition or agreement contained in this Agreement (other than
as specifically provided for otherwise in this Section 12.1) or any other Loan
Document and such default shall continue for a period of thirty (30) days after
written notice thereof has been given to the Parent by the Administrative Agent.
(f) Hedging Agreement. Any termination payment shall be due by any
Borrower under any Hedging Agreement and such amount is not paid within thirty
(30) Business Days after the due date thereof.
(g) Debt Cross-Default. The Parent or any Subsidiary shall (i) default
in the payment of any Debt (other than the Notes or any Reimbursement
Obligation) the aggregate outstanding amount of which Debt is in excess of
$250,000 beyond the period of grace if any, provided in the instrument or
agreement under which such Debt was created, or (ii) default in the observance
or performance of any other agreement or condition relating to any Debt (other
than the Notes or any Reimbursement Obligation) the aggregate outstanding amount
of which Debt is in excess of $250,000 or contained in any instrument or
agreement evidencing, securing or relating thereto or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such Debt (or a
trustee or agent on behalf of such holder or holders) to cause, with the giving
of notice if required, any such Debt to become due prior to its stated maturity
(any applicable grace period having expired).
(h) Other Cross-Defaults. The Parent or any Subsidiary shall default in
the payment when due, or in the performance or observance, of any obligation or
condition of any Material Contract which could reasonably be expected to result
in liability to be paid greater than $250,000 unless, but only as long as, the
existence of any such default is being contested by the Parent or such
Subsidiary in good faith by appropriate proceedings and adequate reserves in
respect thereof have been established on the books of the Parent or such
Subsidiary to the extent required by GAAP.
(i) Change in Control. Other than as a result of a Qualified Public
Offering (as defined in the Statement With Respect to Shares), (i) any person or
group of persons (within the meaning of Section 13(d) of the Securities Exchange
Act of 1934, as amended), other than the Founders or the Advent Purchasers,
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shall obtain ownership or control in one or more series of transactions of more
than thirty-five percent (35%) of the common stock or thirty-five percent (35%)
of the voting power of the Parent entitled to vote in the election of members of
the board of directors of the Parent or (ii) the Founders shall fail to hold
such executive positions and exercise management responsibility as held and
exercised thereby on the Closing Date or (iii) the Advent Purchasers and the
Founders, collectively, shall fail to own greater fifty-one percent (51%) of the
common stock and fifty-one percent (51%) of the voting power of the Parent
entitled to vote in the elections of members of the board of directors of the
Parent or (iv) any Borrower (other than the Parent) shall fail to be a
Wholly-Owned Subsidiary of the Parent or (v) there shall have occurred under the
Warrants any Change in Control (as defined therein) (any such event, a "Change
in Control").
(j) Voluntary Bankruptcy Proceeding. The Parent or any Subsidiary shall
(i) commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (ii) file a petition seeking to take advantage of any
other laws, domestic or foreign, relating to bankruptcy, insolvency,
reorganization, winding up or composition for adjustment of debts, (iii) consent
to or fail to contest in a timely and appropriate manner any petition filed
against it in an involuntary case under such bankruptcy laws or other laws, (iv)
apply for or consent to, or fail to contest in a timely and appropriate manner,
the appointment of, or the taking of possession by, a receiver, custodian,
trustee, or liquidator of itself or of a substantial part of its property,
domestic or foreign, (v) admit in writing its inability to pay its debts as they
become due, (vi) make a general assignment for the benefit of creditors, or
(vii) take any corporate action for the purpose of authorizing any of the
foregoing.
(k) Involuntary Bankruptcy Proceeding. A case or other proceeding shall
be commenced against the Parent or any Subsidiary in any court of competent
jurisdiction seeking (i) relief under the federal bankruptcy laws (as now or
hereafter in effect) or under any other laws, domestic or foreign, relating to
bankruptcy, insolvency, reorganization, winding up or adjustment of debts, or
(ii) the appointment of a trustee, receiver, custodian, liquidator or the like
for the Parent or any Subsidiary thereof or for all or any substantial part of
their respective assets, domestic or foreign, and such case or proceeding shall
continue without dismissal or stay for a period of sixty (60) consecutive days,
or an order granting the relief requested in such case or proceeding (including,
but not limited to, an order for relief under such federal bankruptcy laws)
shall be entered.
(l) Failure of Agreements. Any material provision of this Agreement or
of any other Loan Document shall for any reason cease to be valid and binding on
the Parent or any Subsidiary party thereto or any such Person shall so state in
writing, or this Agreement or any other Loan Document shall for any reason cease
to create a valid and perfected first priority Lien on, or security interest in,
any of the collateral purported to be covered thereby, in each case other than
in accordance with the express terms hereof or thereof.
(m) Termination Event. The occurrence of any of the following events:
(i) the Parent or any ERISA Affiliate fails to make full payment when due of all
amounts which, under the provisions of any Pension Plan or Section 412 of the
Code, the Parent or any ERISA Affiliate is required to pay as contributions
thereto, (ii) an accumulated funding deficiency in excess of $250,000 occurs or
exists, whether or not waived, with respect to any Pension Plan, (iii) a
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Termination Event or (iv) the Parent or any ERISA Affiliate as employers under
one or more Multiemployer Plan makes a complete or partial withdrawal from any
such Multiemployer Plan and the plan sponsor of such Multiemployer Plans
notifies such withdrawing employer that such employer has incurred a withdrawal
liability requiring payments in an amount exceeding $250,000.
(n) Judgment. A judgment or order for the payment of money not covered
by insurance which causes the aggregate amount of all such judgments to exceed
$250,000 in any Fiscal Year shall be entered against the Parent or any of its
Subsidiaries by any court and such judgment or order shall continue without
discharge or stay for a period of thirty (30) days.
SECTION 12.2 Remedies. Upon the occurrence of an Event of Default, with
the consent of the Required Lenders, the Administrative Agent may, or upon the
request of the Required Lenders, the Administrative Agent shall, by notice to
the Parent, on behalf of the Borrowers:
(a) Acceleration; Termination of Facilities. Declare the principal of
and interest on the Loans, the Notes and the Reimbursement Obligations at the
time outstanding, and all other amounts owed to the Lenders and to the
Administrative Agent under this Agreement or any of the other Loan Documents
(other than any Hedging Agreement) (including, without limitation, all L/C
Obligations, whether or not the beneficiaries of the then outstanding Letters of
Credit shall have presented the documents required thereunder) and all other
Obligations (other than obligations owing under any Hedging Agreement), to be
forthwith due and payable, whereupon the same shall immediately become due and
payable without presentment, demand, protest or other notice of any kind, all of
which are expressly waived, anything in this Agreement or the other Loan
Documents to the contrary notwithstanding, and terminate the Credit Facility and
any right of the Borrowers to request borrowings or Letters of Credit
thereunder; provided, that upon the occurrence of an Event of Default specified
in Section 12.1(j) or (k), the Credit Facility shall be automatically terminated
and all Obligations (other than obligations owing under any Hedging Agreement)
shall automatically become due and payable.
(b) Letters of Credit. With respect to all Letters of Credit with
respect to which presentment for honor shall not have occurred at the time of an
acceleration pursuant to the preceding paragraph, require the Borrowers at such
time to deposit in a cash collateral account opened by the Administrative Agent
an amount equal to the aggregate then undrawn and unexpired amount of such
Letters of Credit. Amounts held in such cash collateral account shall be applied
by the Administrative Agent to the payment of drafts drawn under such Letters of
Credit, and the unused portion thereof after all such Letters of Credit shall
have expired or been fully drawn upon, if any, shall be applied to repay the
other Obligations. After all such Letters of Credit shall have expired or been
fully drawn upon, the Reimbursement Obligation shall have been satisfied and all
other Obligations shall have been paid in full, the balance, if any, in such
cash collateral account shall be returned to the Borrowers.
(c) Rights of Collection. Exercise on behalf of the Lenders all of its
other rights and remedies under this Agreement, the other Loan Documents and
Applicable Law, in order to satisfy all of the Borrowers' Obligations.
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SECTION 12.3 Rights and Remedies Cumulative; Non-Waiver; etc. The
enumeration of the rights and remedies of the Administrative Agent and the
Lenders set forth in this Agreement is not intended to be exhaustive and the
exercise by the Administrative Agent and the Lenders of any right or remedy
shall not preclude the exercise of any other rights or remedies, all of which
shall be cumulative, and shall be in addition to any other right or remedy given
hereunder or under the Loan Documents or that may now or hereafter exist in law
or in equity or by suit or otherwise. No delay or failure to take action on the
part of the Administrative Agent or any Lender in exercising any right, power or
privilege shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, power or privilege preclude other or further
exercise thereof or the exercise of any other right, power or privilege or shall
be construed to be a waiver of any Event of Default. No course of dealing
between the Borrowers, the Administrative Agent and the Lenders or their
respective agents or employees shall be effective to change, modify or discharge
any provision of this Agreement or any of the other Loan Documents or to
constitute a waiver of any Event of Default.
ARTICLE XIII
THE ADMINISTRATIVE AGENT
SECTION 13.1 Appointment. Each of the Lenders hereby irrevocably
designates and appoints First Union as Administrative Agent of such Lender under
this Agreement and the other Loan Documents for the term hereof and each such
Lender irrevocably authorizes First Union as Administrative Agent for such
Lender, to take such action on its behalf under the provisions of this Agreement
and the other Loan Documents and to exercise such powers and perform such duties
as are expressly delegated to the Administrative Agent by the terms of this
Agreement and such other Loan Documents, together with such other powers as are
reasonably incidental thereto. Notwithstanding any provision to the contrary
elsewhere in this Agreement or such other Loan Documents, the Administrative
Agent shall not have any duties or responsibilities, except those expressly set
forth herein and therein, or any fiduciary relationship with any Lender, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or the other Loan Documents or
otherwise exist against the Administrative Agent. Any reference to the
Administrative Agent in this Article XIII shall be deemed to refer to the
Administrative Agent solely in its capacity as Administrative Agent and not in
its capacity as a Lender.
SECTION 13.2 Delegation of Duties. The Administrative Agent may execute
any of its respective duties under this Agreement and the other Loan Documents
by or through agents or attorneys-in-fact and shall be entitled to advice of
counsel concerning all matters pertaining to such duties. The Administrative
Agent shall not be responsible for the negligence or misconduct of any agents or
attorneys-in-fact selected by the Administrative Agent with reasonable care.
SECTION 13.3 Exculpatory Provisions. Neither the Administrative Agent
nor any of its officers, directors, employees, agents, attorneys-in-fact,
Subsidiaries or Affiliates shall be (a) liable for any action lawfully taken or
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omitted to be taken by it or such Person under or in connection with this
Agreement or the other Loan Documents (except for actions occasioned solely by
its or such Person's own gross negligence or willful misconduct), or (b)
responsible in any manner to any of the Lenders for any recitals, statements,
representations or warranties made by the Borrowers or any of their Subsidiaries
or any officer thereof contained in this Agreement or the other Loan Documents
or in any certificate, report, statement or other document referred to or
provided for in, or received by the Administrative Agent under or in connection
with, this Agreement or the other Loan Documents or for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
the other Loan Documents or for any failure of any Borrower or any of its
Subsidiaries to perform its obligations hereunder or thereunder. The
Administrative Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement, or to inspect the
properties, books or records of any Borrower or any of its Subsidiaries.
SECTION 13.4 Reliance by the Administrative Agent. The Administrative
Agent shall be entitled to rely, and shall be fully protected in relying, upon
any note, writing, resolution, notice, consent, certificate, affidavit, letter,
cablegram, telegram, telecopy, telex or teletype message, statement, order or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the proper Person or Persons and upon advice
and statements of legal counsel (including, without limitation, counsel to the
Borrowers), independent accountants and other experts selected by the
Administrative Agent. The Administrative Agent may deem and treat the payee of
any Note as the owner thereof for all purposes unless such Note shall have been
transferred in accordance with Section 14.10 hereof. The Administrative Agent
shall be fully justified in failing or refusing to take any action under this
Agreement and the other Loan Documents unless it shall first receive such advice
or concurrence of the Required Lenders (or, when expressly required hereby or by
the relevant other Loan Document, all the Lenders) as it deems appropriate or it
shall first be indemnified to its satisfaction by the Lenders against any and
all liability and expense which may be incurred by it by reason of taking or
continuing to take any such action except for its own gross negligence or
willful misconduct. The Administrative Agent shall in all cases be fully
protected in acting, or in refraining from acting, under this Agreement and the
Notes in accordance with a request of the Required Lenders (or, when expressly
required hereby, all the Lenders), and such request and any action taken or
failure to act pursuant thereto shall be binding upon all the Lenders and all
future holders of the Notes.
SECTION 13.5 Notice of Default. The Administrative Agent shall not be
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default hereunder unless it has received notice from a Lender or the Borrowers
referring to this Agreement, describing such Default or Event of Default and
stating that such notice is a "notice of default". In the event that the
Administrative Agent receives such a notice, it shall promptly give notice
thereof to the Lenders. The Administrative Agent shall take such action with
respect to such Default or Event of Default as shall be reasonably directed by
the Required Lenders; provided that unless and until the Administrative Agent
shall have received such directions, the Administrative Agent may (but shall not
be obligated to) take such action, or refrain from taking such action, with
respect to such Default or Event of Default as it shall deem advisable in the
best interests of the Lenders, except to the extent that other provisions of
this Agreement expressly require that any such action be taken or not be taken
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only with the consent and authorization or the request of the Lenders or
Required Lenders, as applicable.
SECTION 13.6 Non-Reliance on the Administrative Agent and Other
Lenders. Each Lender expressly acknowledges that neither the Administrative
Agent nor any of its respective officers, directors, employees, agents,
attorneys-in-fact, Subsidiaries or Affiliates has made any representations or
warranties to it and that no act by the Administrative Agent hereinafter taken,
including any review of the affairs of the Borrower or any of its Subsidiaries,
shall be deemed to constitute any representation or warranty by the
Administrative Agent to any Lender. Each Lender represents to the Administrative
Agent that it has, independently and without reliance upon the Administrative
Agent or any other Lender, and based on such documents and information as it has
deemed appropriate, made its own appraisal of and investigation into the
business, operations, property, financial and other condition and
creditworthiness of the Borrowers and their Subsidiaries and made its own
decision to make its Loans and issue or participate in Letter of Credit
hereunder and enter into this Agreement. Each Lender also represents that it
will, independently and without reliance upon the Administrative Agent or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis, appraisals
and decisions in taking or not taking action under this Agreement and the other
Loan Documents, and to make such investigation as it deems necessary to inform
itself as to the business, operations, property, financial and other condition
and creditworthiness of the Borrowers and their Subsidiaries. Except for
notices, reports and other documents expressly required to be furnished to the
Lenders by the Administrative Agent hereunder or by the other Loan Documents,
the Administrative Agent shall not have any duty or responsibility to provide
any Lender with any credit or other information concerning the business,
operations, property, financial and other condition or creditworthiness of the
Borrowers or any of their Subsidiaries which may come into the possession of the
Administrative Agent or any of its respective officers, directors, employees,
agents, attorneys-in-fact, Subsidiaries or Affiliates.
SECTION 13.7 Indemnification. The Lenders agree to indemnify the
Administrative Agent in its capacity as such and (to the extent not reimbursed
by the Borrowers and without limiting the obligation of the Borrowers to do so),
ratably according to the respective amounts of their Commitment Percentages,
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind whatsoever which may at any time (including, without limitation, at any
time following the payment of the Notes or any Reimbursement Obligation) be
imposed on, incurred by or asserted against the Administrative Agent in any way
relating to or arising out of this Agreement or the other Loan Documents, or any
documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the
Administrative Agent under or in connection with any of the foregoing; provided
that no Lender shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting solely from the Administrative
Agent's bad faith, gross negligence or willful misconduct. The agreements in
this Section 13.7 shall survive the payment of the Notes, any Reimbursement
Obligation and all other amounts payable hereunder and the termination of this
Agreement.
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SECTION 13.8 The Administrative Agent in Its Individual Capacity. The
Administrative Agent and its respective Subsidiaries and Affiliates may make
loans to, accept deposits from and generally engage in any kind of business with
the Borrowers as though the Administrative Agent were not an Administrative
Agent hereunder. With respect to any Loans made or renewed by it and any Note
issued to it and with respect to any Letter of Credit issued by it or
participated in by it, the Administrative Agent shall have the same rights and
powers under this Agreement and the other Loan Documents as any Lender and may
exercise the same as though it were not an Administrative Agent, and the terms
"Lender" and "Lenders" shall include the Administrative Agent in its individual
capacity.
SECTION 13.9 Resignation of the Administrative Agent; Successor
Administrative Agent. Subject to the appointment and acceptance of a successor
as provided below, the Administrative Agent may resign at any time by giving
notice thereof to the Lenders and the Borrowers. Upon any such resignation, the
Required Lenders shall have the right to appoint a successor Administrative
Agent, which successor shall have minimum capital and surplus of at least
$500,000,000. If no successor Administrative Agent shall have been so appointed
by the Required Lenders and shall have accepted such appointment within thirty
(30) days after the Administrative Agent's giving of notice of resignation, then
the Administrative Agent may, on behalf of the Lenders, appoint a successor
Administrative Agent, which successor shall have minimum capital and surplus of
at least $500,000,000. Upon the acceptance of any appointment as Administrative
Agent hereunder by a successor Administrative Agent, such successor
Administrative Agent shall thereupon succeed to and become vested with all
rights, powers, privileges and duties of the retiring Administrative Agent, and
the retiring Administrative Agent shall be discharged from its duties and
obligations hereunder. After any retiring Administrative Agent's resignation
hereunder as Administrative Agent, the provisions of this Section 13.9 shall
continue in effect for its benefit in respect of any actions taken or omitted to
be taken by it while it was acting as Administrative Agent.
SECTION 13.10 Syndication Agent. The Syndication Agent, in its capacity
as Syndication Agent, shall have no duties or responsibilities under this
Agreement or any other Loan Document.
ARTICLE XIV
MISCELLANEOUS
SECTION 14.1 Notices.
(a) Method of Communication. Except as otherwise provided in this
Agreement, all notices and communications hereunder shall be in writing, or by
telephone subsequently confirmed in writing. Any notice shall be effective if
delivered by hand delivery or sent via telecopy, recognized overnight courier
service or certified mail, return receipt requested, and shall be presumed to be
received by a party hereto (i) on the date of delivery if delivered by hand or
sent by telecopy, (ii) on the next Business Day if sent by recognized overnight
courier service and (iii) on the third Business Day following the date sent by
certified mail, return receipt requested. A telephonic notice to the
Administrative Agent as understood by the Administrative Agent will be deemed to
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be the controlling and proper notice in the event of a discrepancy with or
failure to receive a confirming written notice.
(b) Addresses for Notices. Notices to any party shall be sent to it at
the following addresses, or any other address as to which all the other parties
are notified in writing.
If to the Borrowers: Dollar Express, Inc.
1700 Tomlinson Road
Philadelphia, Pennsylvania 19116
Attention: Bernard Spain
Telephone No.: (215) 969-7888
Telecopy No.: (215) 676-1166
With copies to: Advent International Corporation
75 State Street
Boston, Massachusetts
Attention: William Woo
Telephone No.: (617) 951-9439
Telecopy No.: (617) 443-0322
If to First Union as First Union National Bank
Administrative Agent: 1345 Chestnut Street
Widener Building, 8th Floor
Philadelphia, Pennsylvania 19107-4843
Attention: John D. Brady
Telephone No.: (215) 786-2160
Telecopy No.: (215) 786-2877
If to any Lender: To the Address set forth on Schedule 1.1(a)
hereto
(c) Administrative Agent's Office. The Administrative Agent hereby
designates its office located at the address set forth above, or any subsequent
office which shall have been specified for such purpose by written notice to the
Borrowers and the Lenders, as the Administrative Agent's Office referred to
herein, to which payments due are to be made and at which Loans will be
disbursed and Letters of Credit issued.
SECTION 14.2 Expenses; Indemnity. The Borrowers will (a) pay all
out-of-pocket expenses of the Administrative Agent in connection with (i) the
preparation, execution and delivery of this Agreement and each other Loan
Document, whenever the same shall be executed and delivered, including without
limitation all out-of-pocket syndication and due diligence expenses and
reasonable fees and disbursements of counsel for the Administrative Agent and
(ii) the preparation, execution and delivery of any waiver, amendment or consent
by the Administrative Agent or the Lenders relating to this Agreement or any
other Loan Document, including without limitation reasonable fees and
disbursements of counsel for the Administrative Agent, (b) pay all reasonable
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out-of-pocket expenses of the Administrative Agent in connection with the
administration of the Credit Facility, (c) pay all reasonable out of pocket
expenses of the Administrative Agent and each Lender actually incurred in
connection with the administration and enforcement of any rights and remedies of
the Administrative Agent and Lenders under the Credit Facility, including
consulting with appraisers, accountants, engineers, attorneys and other Persons
concerning the nature, scope or value of any right or remedy of the
Administrative Agent or any Lender hereunder or under any other Loan Document or
any factual matters in connection therewith, which expenses shall include
without limitation the reasonable fees and disbursements of such Persons, and
(d) defend, indemnify and hold harmless the Administrative Agent and the
Lenders, and their respective parents, Subsidiaries, Affiliates, employees,
Administrative Agents, officers and directors, from and against any losses,
penalties, fines, liabilities, settlements, damages, costs and expenses,
suffered by any such Person in connection with any claim, investigation,
litigation or other proceeding (whether or not the Administrative Agent or any
Lender is a party thereto) and the prosecution and defense thereof, arising out
of or in any way connected with the Agreement, any other Loan Document or the
Loans, including without limitation reasonable attorney's and consultant's fees,
except to the extent that any of the foregoing directly result from the gross
negligence or willful misconduct of the party seeking indemnification therefor.
SECTION 14.3 Set-off. In addition to any rights now or hereafter
granted under Applicable Law and not by way of limitation of any such rights,
upon and after the occurrence of any Event of Default and during the continuance
thereof, the Lenders and any assignee or participant of a Lender in accordance
with Section 14.10 are hereby authorized by the Borrowers at any time or from
time to time, without notice to the Borrowers or to any other Person, any such
notice being hereby expressly waived, to set off and to appropriate and to apply
any and all deposits (general or special, time or demand, including, but not
limited to, indebtedness evidenced by certificates of deposit, whether matured
or unmatured) and any other indebtedness at any time held or owing by the
Lenders, or any such assignee or participant to or for the credit or the account
of the Borrowers against and on account of the Obligations irrespective of
whether or not (a) the Lenders shall have made any demand under this Agreement
or any of the other Loan Documents or (b) the Administrative Agent shall have
declared any or all of the Obligations to be due and payable as permitted by
Section 12.2 and although such Obligations shall be contingent or unmatured.
SECTION 14.4 Governing Law. This Agreement, the Notes and the other
Loan Documents, unless otherwise expressly set forth therein, shall be governed
by, construed and enforced in accordance with the laws of the Commonwealth of
Pennsylvania, without reference to the conflicts or choice of law principles
thereof.
SECTION 14.5 Consent to Jurisdiction. Each Borrower hereby irrevocably
consents to the personal jurisdiction of the state and federal courts located in
Philadelphia, Pennsylvania, in any action, claim or other proceeding arising out
of any dispute in connection with this Agreement, the Notes and the other Loan
Documents, any rights or obligations hereunder or thereunder, or the performance
of such rights and obligations. Each Borrower hereby irrevocably consents to the
service of a summons and complaint and other process in any action, claim or
proceeding brought by the Administrative Agent or any Lender in connection with
this Agreement, the Notes or the other Loan Documents, any rights or obligations
hereunder or thereunder, or the performance of such rights and obligations, on
behalf of itself or its property, in the manner specified in Section 14.1.
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Nothing in this Section 14.5 shall affect the right of the Administrative Agent
or any Lender to serve legal process in any other manner permitted by Applicable
Law or affect the right of the Administrative Agent or any Lender to bring any
action or proceeding against any Borrower or its properties in the courts of any
other jurisdictions.
SECTION 14.6 Binding Arbitration; Waiver of Jury Trial.
(a) Binding Arbitration. Upon demand of any party, whether made before
or after institution of any judicial proceeding, any dispute, claim or
controversy arising out of, connected with or relating to the Notes or any other
Loan Documents ("Disputes"), between or among parties to the Notes or any other
Loan Document shall be resolved by binding arbitration as provided herein.
Institution of a judicial proceeding by a party does not waive the right of that
party to demand arbitration hereunder. Disputes may include, without limitation,
tort claims, counterclaims, claims brought as class actions, claims arising from
Loan Documents executed in the future, disputes as to whether a matter is
subject to arbitration, or claims concerning any aspect of the past, present or
future relationships arising out of or connected with the Loan Documents.
Arbitration shall be conducted under and governed by the Commercial Financial
Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration
Association and Title 9 of the U.S. Code. All arbitration hearings shall be
conducted in Philadelphia, Pennsylvania. The expedited procedures set forth in
Rule 51, et seq. of the Arbitration Rules shall be applicable to claims of less
than $1,000,000. All applicable statutes of limitation shall apply to any
Dispute. A judgment upon the award may be entered in any court having
jurisdiction. Notwithstanding anything foregoing to the contrary, any
arbitration proceeding demanded hereunder shall begin within ninety (90) days
after such demand thereof and shall be concluded within one hundred and twenty
(120) days after such demand. These time limitations may not be extended unless
a party hereto shows cause for extension and then such extension shall not
exceed a total of sixty (60) days. The panel from which all arbitrators are
selected shall be comprised of licensed attorneys. The single arbitrator
selected for expedited procedure shall be a retired judge from the highest court
of general jurisdiction, state or federal, of the state where the hearing will
be conducted. The parties hereto do not waive any applicable Federal or state
substantive law except as provided herein. Notwithstanding the foregoing, this
paragraph shall not apply to any Hedging Agreement that is a Loan Document.
(b) Jury Trial. THE ADMINISTRATIVE AGENT, EACH LENDER AND EACH BORROWER
HEREBY ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE IRREVOCABLY
WAIVED THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM
OR OTHER PROCEEDING ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS
AGREEMENT, THE NOTES OR THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS
HEREUNDER OR THEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
(c) Preservation of Certain Remedies. Notwithstanding the preceding
binding arbitration provisions, the parties hereto and the other Loan Documents
preserve, without diminution, certain remedies that such Persons may employ or
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exercise freely, either alone, in conjunction with or during a Dispute. Each
such Person shall have and hereby reserves the right to proceed in any court of
proper jurisdiction or by self help to exercise or prosecute the following
remedies: (i) all rights to foreclose against any real or personal property or
other security by exercising a power of sale granted in the Loan Documents or
under applicable law or by judicial foreclosure and sale, (ii) all rights of
self help including peaceful occupation of property and collection of rents, set
off, and peaceful possession of property, (iii) obtaining provisional or
ancillary remedies including injunctive relief, sequestration, garnishment,
attachment, appointment of receiver and in filing an involuntary bankruptcy
proceeding, and (iv) when applicable, a judgment by confession of judgment.
Preservation of these remedies does not limit the power of an arbitrator to
grant similar remedies that may be requested by a party in a Dispute.
SECTION 14.7 Reversal of Payments. To the extent any Borrower makes a
payment or payments to the Administrative Agent for the ratable benefit of the
Lenders or the Administrative Agent receives any payment or proceeds of the
collateral which payments or proceeds or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then, to
the extent of such payment or proceeds repaid, the Obligations or part thereof
intended to be satisfied shall be revived and continued in full force and effect
as if such payment or proceeds had not been received by the Administrative
Agent.
SECTION 14.8 Injunctive Relief; Punitive Damages.
(a) The Borrowers recognize that, in the event the Borrowers fail to
perform, observe or discharge any of their obligations or liabilities under this
Agreement, any remedy of law may prove to be inadequate relief to the Lenders.
Therefore, the Borrowers agree that the Lenders, at the Lenders' option, shall
be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving actual damages.
(b) The Administrative Agent, Lenders and each Borrower (on behalf of
itself and its Subsidiaries) hereby agree that no such Person shall have a
remedy of punitive or exemplary damages against any other party to a Loan
Document and each such Person hereby waives any right or claim to punitive or
exemplary damages that they may now have or may arise in the future in
connection with any Dispute, whether such Dispute is resolved through
arbitration or judicially.
(c) The parties agree that they shall not have a remedy of punitive or
exemplary damages against any other party in any Dispute and hereby waive any
right or claim to punitive or exemplary damages they have now or which may arise
in the future in connection with any Dispute whether the Dispute is resolved by
arbitration or judicially.
SECTION 14.9 Accounting Matters. All financial and accounting
calculations, measurements and computations made for any purpose relating to
this Agreement, including, without limitation, all computations utilized by the
Parent or any Subsidiary to determine compliance with any covenant contained
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herein, shall, except as otherwise expressly contemplated hereby or unless there
is an express written direction by the Administrative Agent to the contrary
agreed to by the Parent, be performed in accordance with GAAP as in effect on
the Closing Date. In the event that changes in GAAP shall be mandated by the
Financial Accounting Standards Board, or any similar accounting body of
comparable standing, or shall be recommended by the Parent's certified public
accountants, to the extent that such changes would modify such accounting terms
or the interpretation or computation thereof, such changes shall be followed in
defining such accounting terms only from and after the date the Parent and the
Lenders shall have amended this Agreement to the extent necessary to reflect any
such changes in the financial covenants and other terms and conditions of this
Agreement.
SECTION 14.10 Successors and Assigns; Participations.
(a) Benefit of Agreement. This Agreement shall be binding upon and
inure to the benefit of the Borrowers, the Administrative Agent and the Lenders,
all future holders of the Notes, and their respective successors and assigns,
except that no Borrower shall assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of each
Lender.
(b) Assignment by Lenders. Each Lender may, with the consent of the
Borrowers (so long as no Default or Event of Default has occurred and is
continuing) and the consent of the Administrative Agent, which consents shall
not be unreasonably withheld, assign to one or more Eligible Assignees all or a
portion of its interests, rights and obligations under this Agreement
(including, without limitation, all or a portion of the Extensions of Credit at
the time owing to it and the Notes held by it); provided that:
(i) each such assignment shall be of a constant, and not a varying,
percentage of all the assigning Lender's rights and obligations under this
Agreement;
(ii) if less than all of the assigning Lender's Commitment is to be
assigned, the Commitment so assigned shall not be less than $5,000,000;
(iii) the parties to each such assignment shall execute and deliver
to the Administrative Agent, for its acceptance and recording in the Register,
an Assignment and Acceptance in the form of Exhibit G attached hereto (an
"Assignment and Acceptance"), together with any Note or Notes subject to such
assignment;
(iv) such assignment shall not, without the consent of the
Borrowers, require the Borrowers to file a registration statement with the
Securities and Exchange Commission or apply to or qualify the Loans or the Notes
under the blue sky laws of any state; and
(v) the assigning Lender shall pay to the Administrative Agent an
assignment fee of $3,000 upon the execution by such Lender of the Assignment and
Acceptance; provided that no such fee shall be payable upon any assignment by a
Lender to an Affiliate thereof.
Upon such execution, delivery, acceptance and recording, from and after the
effective date specified in each Assignment and Acceptance, which effective date
74
<PAGE>
shall be at least five (5) Business Days after the execution thereof, (A) the
assignee thereunder shall be a party hereto and, to the extent provided in such
Assignment and Acceptance, have the rights and obligations of a Lender hereby
and (B) the Lender thereunder shall, to the extent provided in such assignment,
be released from its obligations under this Agreement.
(c) Rights and Duties Upon Assignment. By executing and delivering an
Assignment and Acceptance, the assigning Lender thereunder and the assignee
thereunder confirm to and agree with each other and the other parties hereto as
set forth in such Assignment and Acceptance.
(d) Register. The Administrative Agent shall maintain a copy of each
Assignment and Acceptance delivered to it and a register for the recordation of
the names and addresses of the Lenders and the amount of the Extensions of
Credit with respect to each Lender from time to time (the "Register"). The
entries in the Register shall be conclusive, in the absence of manifest error,
and the Borrowers, the Administrative Agent and the Lenders may treat each
person whose name is recorded in the Register as a Lender hereunder for all
purposes of this Agreement. The Register shall be available for inspection by
the Borrowers or Lenders at any reasonable time and from time to time upon
reasonable prior notice.
(e) Issuance of New Notes. Upon its receipt of an Assignment and
Acceptance executed by an assigning Lender and an Eligible Assignee together
with any Note or Notes subject to such assignment and the written consent to
such assignment, the Administrative Agent shall, if such Assignment and
Acceptance has been completed and is substantially in the form of Exhibit G:
(i) accept such Assignment and Acceptance;
(ii) record the information contained therein in the Register;
(iii) give prompt notice thereof to the Lenders and the Borrowers;
and
(iv) promptly deliver a copy of such Assignment and Acceptance to
the Parent, on behalf of the Borrowers.
Within five (5) Business Days after receipt of notice, the Borrowers shall
execute and deliver to the Administrative Agent, in exchange for the surrendered
Note or Notes, a new Note or Notes to the order of such Eligible Assignee in
amounts equal to the Commitment assumed by it pursuant to such Assignment and
Acceptance and a new Note or Notes to the order of the assigning Lender in an
amount equal to the Commitment retained by it hereunder. Such new Note or Notes
shall be in an aggregate principal amount equal to the aggregate principal
amount of such surrendered Note or Notes, shall be dated the effective date of
such Assignment and Acceptance and shall otherwise be in substantially the form
of the assigned Notes delivered to the assigning Lender. Each surrendered Note
or Notes shall be canceled and returned to the Borrowers.
75
<PAGE>
(f) Participations. Each Lender may sell participations to one or more
banks or other entities in all or a portion of its rights and obligations under
this Agreement (including, without limitation, all or a portion of its
Extensions of Credit and the Notes held by it); provided that:
(i) each such participation shall be in an amount not less than
$5,000,000;
(ii) such Lender's obligations under this Agreement (including,
without limitation, its Commitment) shall remain unchanged;
(iii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations;
(iv) such Lender shall remain the holder of the Notes held by it
for all purposes of this Agreement;
(v) the Borrowers, the Administrative Agent and the other Lenders
shall continue to deal solely and directly with such Lender in connection with
such Lender's rights and obligations under this Agreement;
(vi) such Lender shall not permit such participant the right to
approve any waivers, amendments or other modifications to this Agreement or any
other Loan Document other than waivers, amendments or modifications which would
reduce the principal of or the interest rate on any Loan or Reimbursement
Obligation, extend the term or increase the amount of the Commitment, reduce the
amount of any fees to which such participant is entitled, extend any scheduled
payment date for principal of any Loan or, except as expressly contemplated
hereby or thereby, release substantially all of the Collateral; and
(vii) any such disposition shall not, without the consent of the
Borrowers, require the Borrowers to file a registration statement with the
Securities and Exchange Commission to apply to qualify the Loans or the Notes
under the blue sky law of any state.
(g) Disclosure of Information; Confidentiality.
(i) The Administrative Agent and the Lenders agree that all
confidential non-public information regarding the Borrowers or the Transactions,
including, without limitation, all analyses, compilations, studies or other
documents (whether in writing or electronic storage), which contain or otherwise
reflect such confidential non-public information, received prior to the earlier
of the Closing Date and the termination of the Commitments, from the Borrowers,
the Investors, or their respective legal counsel or other advisors
(collectively, the "Confidential Information"), will be held and treated by
them, for the twenty-four (24) month period immediately subsequent to the
Closing Date, in accordance with their respective customary procedures for
handling their own confidential information, and will be held and treated by
them, thereafter, in accordance with their respective customary procedures for
handling confidential information of third parties; provided, that such
Confidential Information may be provided to any employees, attorneys and
consultants or Affiliates of the Administrative Agent, the Lenders and
prospective Lenders on a need to know basis, who are participating, or
evaluating participating, in the transactions contemplated by this Agreement,
and provided further, that the Administrative Agent may disclose information
related to this Agreement to Gold Sheets and other similar bank trade
publications, such information to consist of deal terms and other information
76
<PAGE>
customarily found in such publications. Further, any Confidential Information
may be disclosed by the Administrative Agent or any Affiliate thereof in any
case in which disclosure is required by law or requested by any regulatory
authority; provided, however, in any case in which disclosure is so required or
requested during the twenty-four (24) month period immediately subsequent to the
date hereof, the Administrative Agent shall provide the Borrowers with such
notice of any such disclosure as may be legally permissible and reasonably
practicable under the circumstances and the Administrative Agent shall
cooperate, to the extent possible and at the Borrowers' expense to obtain an
appropriate protective order or other reliable assurance that confidential
treatment will be accorded the Confidential Information to be disclosed. In any
event, the Confidential Information will not be used by the Administrative Agent
and the Lenders other than in connection with evaluating whether or not to
extend credit to the Borrowers. The term "Confidential Information" does not
include information which (i) becomes generally available to the public other
than as a result of a disclosure by the Administrative Agent or the Lenders,
(ii) was available to the Administrative Agent or the Lenders on a
non-confidential basis from a source other than the Borrowers or the Investors;
provided that the recipient is not aware such source is bound by a
confidentiality agreement with the Borrowers or the Investors or otherwise
prohibited from transmitting the information to the Administrative Agent or the
Lenders by a contractual, legal or fiduciary obligation.
(ii) Nothing contained herein shall limit or preclude the
Administrative Agent or any Lender or any of their Affiliates (i) from carrying
on any business with, providing banking or other financial services to, or from
participating in any capacity, including as an equity investor, in any party
whatsoever, including, without limitation, any competitor, supplier or customer
of any Investor or any Borrower, or any other party which may have interests
different than or adverse to the Investors and the Borrowers or (ii) from
carrying on its business as currently conducted or as such business may be
conducted in the future. The foregoing shall not limit or change the obligations
of confidentiality and nondisclosure contained herein.
(h) Certain Pledges or Assignments. Nothing herein shall prohibit any
Lender from pledging or assigning any Note to any Federal Reserve Bank in
accordance with Applicable Law.
SECTION 14.11 Amendments, Waivers and Consents. Except as set forth
below, any term, covenant, agreement or condition of this Agreement or any of
the other Loan Documents (other than any Hedging Agreement, the terms and
conditions of which may be amended, modified or waived by the parties thereto)
may be amended or waived by the Lenders, and any consent given by the Lenders,
if, and only if, such amendment, waiver or consent is in writing signed by the
Required Lenders (or by the Administrative Agent with the consent of the
Required Lenders) and delivered to the Administrative Agent and, in the case of
an amendment, signed by the Parent, on behalf of the Borrowers; provided, that
no amendment, waiver or consent shall (a) increase the amount or extend the time
of the obligation of the Lenders to make Loans or issue or participate in
Letters of Credit, (b) extend the originally scheduled time or times of payment
of the principal of any Loan or Reimbursement Obligation or the time or times of
78
<PAGE>
payment of interest on any Loan or Reimbursement Obligation, (c) reduce the rate
of interest or fees payable on any Loan or Reimbursement Obligation, (d) reduce
the principal amount of any Loan or Reimbursement Obligation, (e) permit any
subordination of the principal or interest on any Loan or Reimbursement
Obligation, (f) permit any assignment (other than as specifically permitted in
this Agreement) of any of the Borrowers' rights and obligations hereunder, (g)
release any material portion of the Collateral or release any Security Document
(other than as specifically permitted in this Agreement or the applicable
Security Document) or (h) amend the provisions of this Section 14.11 or the
definition of Required Lenders, without the prior written consent of each
Lender. In addition, no amendment, waiver or consent to the provisions of (a)
Article XIII shall be made without the written consent of the Administrative
Agent and (b) Article III shall be made without the written consent of the
Issuing Lender.
SECTION 14.12 Performance of Duties. The Borrowers' obligations under
this Agreement and each of the Loan Documents shall be performed by the
Borrowers at their sole cost and expense.
SECTION 14.13 All Powers Coupled with Interest. All powers of attorney
and other authorizations granted to the Lenders, the Administrative Agent and
any Persons designated by the Administrative Agent or any Lender pursuant to any
provisions of this Agreement or any of the other Loan Documents shall be deemed
coupled with an interest and shall be irrevocable so long as any of the
Obligations remain unpaid or unsatisfied or the Credit Facility has not been
terminated.
SECTION 14.14 Survival of Indemnities. Notwithstanding any termination
of this Agreement, the indemnities to which the Administrative Agent and the
Lenders are entitled under the provisions of this Article XIV and any other
provision of this Agreement and the Loan Documents shall continue in full force
and effect and shall protect the Administrative Agent and the Lenders against
events arising after such termination as well as before.
SECTION 14.15 Titles and Captions. Titles and captions of Articles,
Sections and subsections in this Agreement are for convenience only, and neither
limit nor amplify the provisions of this Agreement.
SECTION 14.16 Severability of Provisions. Any provision of this
Agreement or any other Loan Document which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
of such prohibition or unenforceability without invalidating the remainder of
such provision or the remaining provisions hereof or thereof or affecting the
validity or enforceability of such provision in any other jurisdiction.
SECTION 14.17 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and shall be
binding upon all parties, their successors and assigns, and all of which taken
together shall constitute one and the same agreement.
SECTION 14.18 Parent as Agent for Borrowers. The Borrowers hereby
irrevocably appoint and authorize the Parent (i) to provide the Administrative
78
<PAGE>
Agent with all notices with respect to Extensions of Credit obtained for the
benefit of any Borrower and all other notices and instructions under this
Agreement and (ii) to take such action on behalf of the Borrowers as the Parent
deems appropriate on its behalf to obtain Extensions of Credit and to exercise
such other powers as are reasonably incidental thereto to carry out the purposes
of this Agreement.
SECTION 14.19 Obligations Joint and Several; Contribution.
(a) All of the Borrowers shall be jointly and severally liable for the
Obligations, however incurred. References to the Borrowers with respect to the
Obligations or any portion thereof shall mean each Borrower on a joint and
several basis.
(b) To the extent any Borrower is required, by reason of its
Obligations hereunder, to pay to the Administrative Agent or any Lender or to
any other Borrower an amount greater than the amount of the Extensions of Credit
actually made available to or for the account of such Borrower, such Borrower
shall have an enforceable right of contribution and indemnity against the
remaining Borrowers, and the remaining Borrowers shall be jointly and severally
liable to such Borrower, for repayment of the full amount of such excess
payment. Such Borrower shall be subrogated to any and all rights of the
Administrative Agent and the Lenders against the remaining Borrowers to the
extent of such excess payment. The rights of any Borrower to contribution,
subrogation and indemnity under this Section 14.19 or under Applicable Law shall
in all events and all respects be subject and subordinate to the rights of the
Administrative Agent and the Lenders under this Agreement and the other Loan
Documents and subject to the prior full, final and indefeasible payment to the
Administrative Agent and the Lenders of all Obligations.
(c) Notwithstanding anything to the contrary in this Agreement, the
amount of any Borrower's obligations under this Section 14.19 shall in all
events be limited to, but not in excess of, the maximum amount thereof not
subject to avoidance or recovery by operation of Applicable Law governing
bankruptcy, reorganization, receivership, arrangement, adjustment of debts,
relief of debtors, dissolution, insolvency, fraudulent transfers or conveyances
or other similar laws (including, without limitation, 11 U.S.C. ss.546, ss.547,
ss.548, ss.550 and other "avoidance" provisions of Title 11 of the United States
Code) applicable at any time to such Borrower and this Agreement.
SECTION 14.20 Inconsistencies with Other Documents; Independent Effect
of Covenants.
(a) In the event there is a conflict or inconsistency between this
Agreement and any other Loan Document, the terms of this Agreement shall
control; provided, that any provision of the Security Documents which imposes
additional burdens on the Borrowers or their Subsidiaries or further restricts
the rights of the Borrowers or their Subsidiaries or gives the Administrative
Agent or Lenders additional rights shall not be deemed to be in conflict or
inconsistent with this Agreement and shall be given full force and effect.
(b) The Borrowers expressly acknowledge and agree that each covenant
contained in Articles IX, X, or XI hereof shall be given independent effect.
79
<PAGE>
Accordingly, the Borrowers shall not engage in any transaction or other act
otherwise permitted under any covenant contained in Articles IX, X, or XI if,
before or after giving effect to such transaction or act, the Borrowers shall or
would be in breach of any other covenant contained in Articles IX, X, or XI.
SECTION 14.21 Term of Agreement. This Agreement shall remain in effect
from the Closing Date through and including the date upon which all Obligations
shall have been paid and satisfied in full. The Administrative Agent is hereby
permitted to release all Liens on the Collateral in favor of the Administrative
Agent, for the ratable benefit of itself and the Lenders, upon repayment of the
outstanding principal of and all accrued interest on the Loans, payment of all
outstanding fees and expenses hereunder and the termination of the Lender's
Commitments. No termination of this Agreement shall affect the rights and
obligations of the parties hereto arising prior to such termination.
[Signature pages to follow]
80
<PAGE>
Credit Agreement Signature Pages
Credit Agreement Signature Pages
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers, all as of the day and
year first written above.
[CORPORATE SEAL] DE&S HOLDING CO., as Borrower
By: /s/ Murray Spain
----------------------------------------
Name: Murray Spain
Title: President
[CORPORATE SEAL] DOLLAR EXPRESS, INC., as Borrower
By: /s/ Murray Spain
----------------------------------------
Name: Murray Spain
Title: President
[Signature pages continued on the next page]
<PAGE>
[CORPORATE SEAL] FIRST UNION NATIONAL BANK, as
Administrative Agent and Lender
By: /s/ John D. Brady
----------------------------------------
Name: John D. Brady
Title: Vice President
[Signature pages continued on the next page]
<PAGE>
BANKBOSTON, N.A., as Syndication Agent and
as Lender
By: /s/ Kathleen A. Dimock
----------------------------------------
Name: Kathleen A. Dimock
Title: Vice President
<PAGE>
Schedule 1.1(a)
(Lenders and Commitments)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
LENDER REVOLVING TERM LOAN TOTAL COMMITMENT
CREDIT COMMITMENT COMMITMENT PERCENTAGE
COMMITMENT
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Union National Bank
One First Union Center, TW-10
301 South College Street
Charlotte, North Carolina 28288-0608 $12,500,000 $12,500,000 $25,000,000 62.50000000%
Attention: Syndication Agency Services
Telephone No.: (704) 374-2698
Telecopy No.: (704) 383-0288
- --------------------------------------------------------------------------------------------------
BankBoston, N.A.
100 Federal Street
Mail Code 01-09-05 $ 7,500,000 $ 7,500,000 $15,000,000 37.50000000%
Boston, Massachusetts 02110
Attention: Kathy Dimock
Telephone No.: (617) 434-3830
Telecopy No.: 434-6685
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
December 23, 1999
Securities and Exchange Commission
Washington, D.C. 20549
Re: Dollar Express, Inc.
File No. 0-XXXX
Dear Sir or Madam:
We have read the Change in Principal Accountants section of the Form
S-1 of Dollar Express, Inc. and agree with the statements contained therein.
Very truly yours,
/s/ GRANT THORNTON LLP
<PAGE>
Exhibit 21
SUBSIDIARIES OF DOLLAR EXPRESS, INC.
Name State of Incorporation
- ---- ----------------------
Dollar Express Stores, Inc. Pennsylvania
Dollar Express Royalties, Inc. Delaware
DE&S Finance Company Delaware
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated December 14, 1999 accompanying the
financial statements of Dollar Express Stores, Inc. (formerly Dollar Express,
Inc. and Spain's, Inc.) contained in the Registration Statement and Prospectus.
We consent to the use of the aforementioned report in the Registration Statement
and Prospectus, and to the use of our name as it appears under the caption
"Experts."
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
December 23, 1999
<PAGE>
Exhibit 23.3
CONSENT
I, David A. Cohen hereby consent to being named in the Form S-1 of Dollar
Express, Inc., as a director of Dollar Express Inc., to be elected upon
completion of the offering, and the disclosures relating thereto.
/s/ David A. Cohen
---------------------
David A. Cohen
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-30-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 10,070 2,907
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 12,013 23,768
<CURRENT-ASSETS> 22,564 29,112
<PP&E> 20,378 24,838
<DEPRECIATION> 11,420 13,164
<TOTAL-ASSETS> 31,581 43,590
<CURRENT-LIABILITIES> 13,891 29,759
<BONDS> 0 0
0 31,295
0 0
<COMMON> 65 65
<OTHER-SE> 15,522 (44,643)
<TOTAL-LIABILITY-AND-EQUITY> 31,581 43,590
<SALES> 130,802 100,438
<TOTAL-REVENUES> 130,802 100,438
<CGS> 92,307 71,297
<TOTAL-COSTS> 92,307 71,297
<OTHER-EXPENSES> 27,546 23,202
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 291 1,640
<INCOME-PRETAX> 10,853 4,112
<INCOME-TAX> 50 (333)
<INCOME-CONTINUING> 10,803 4,445
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,803 4,445
<EPS-BASIC> 1.67 (0.10)
<EPS-DILUTED> 1.67 (0.10)
</TABLE>
