SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
Commission File #1-7090
PHARMHOUSE CORP.
- - -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2634868
- - ---------------------------------- ----------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
860 Broadway, New York, New York 10003
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(Address of principal executive offices) (Zip Code)
(212) 477-9400
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- - -----------------------------------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Shares,
par value $.01 per share
-------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K.
YES X NO
---- ----
The aggregate market value of the Registrant's Common Shares held
by persons (other than officers and directors and their
affiliates) of the Registrant at April 15, 1998, was
approximately $7,834,307.
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock as of April 15, 1998.
Class Number of Shares
---------------------- ----------------
Common Shares
par value $.01 per share 2,594,841
Documents incorporated by Reference:
The Registrant's Annual Report on Form 10-K for the fiscal year
ended February 3, 1996.
The Registrant's Annual Report on Form 10-K for the fiscal year
ended February 1, 1997.
The Registrant's Current Report on Form 8-K dated February 6,
1997.
The Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended November 1, 1997.
PART I
Item 1. Business
Pharmhouse Corp. (the "Registrant" or the "Company") operates a
chain of 32 discount drug stores, 13 of which are operated under
the name Pharmhouse (the "Pharmhouse Stores") and 19 of which are
operated under the name The Rx Place (the "Rx Stores"). The
Registrant's stores are located primarily in the mid-Atlantic and
New England states and emphasize a pricing policy of everyday
discount prices on all merchandise. The Pharmhouse Stores
average approximately 35,000 square feet in size and the Rx
Stores average approximately 25,000 square feet. The Registrant
maintains one distribution center in Pennsylvania to support its
store operations. In prior years, the Registrant characterized
its stores as "deep discount stores", but management has recently
determined that the term "discount stores" more accurately
describes its current operations.
(a) General Development of the Registrant's Business Since
Commencement of the Fiscal Year Ended January 31, 1998
("fiscal 1998")
Since the commencement of fiscal 1998, the following significant
events have occurred with respect to the Registrant and its
business:
(i) Final Disposition of the Woolworth Dispute
On January 31, 1997, the Registrant and Woolworth entered
into a Mutual Release and Settlement Agreement resolving all
outstanding disputes and settling all legal proceedings arising
out of the acquisition by the Registrant of 24 Rx Stores from
Woolworth. (For information concerning the acquisition of the 24
Rx Stores see Item 1 of the Registrant's Annual Report on Form 10-
K for the fiscal year ended February 3, 1996 (the "1996 Form 10-
K")). On June 24, 1997, the Registrant and Woolworth amended the
Mutual Release and Settlement Agreement (such agreement and
amendment are collectively referred to herein as the "Woolworth
Settlement") to provide for the final disposition of seven of the
Rx Stores (the "Affected Stores") that were part of the dispute.
A summary of the principal terms of the Woolworth Settlement
is as follows:
(A) Woolworth surrendered for cancellation two of the three
outstanding Purchase Money Notes in principal amounts totaling
$5.5 million and modified the third such Note (in the original
principal amount of $2.9 million, and originally due April 1998)
so that such Note constitutes a non-interest bearing contingent
note obligation of $1 million which will be surrendered by
Woolworth for cancellation on July 30, 1998, subject to certain
conditions. Woolworth also released the Registrant from its $1.1
million accrued interest obligation under the Purchase Money
Notes.
(B) The Registrant received an option to terminate its
occupancy and obligations under the leases governing the
Affected Stores, subject to certain conditions. Woolworth
further agreed to pay the rental and other fixed monthly
charges and occupancy costs for the Affected Stores through
stipulated dates. Pursuant to the Woolworth Settlement, the
Registrant has closed five of the Affected Stores and
reassigned to Woolworth the leases for these stores. (Prior
to returning these five stores to Woolworth, the Registrant
liquidated and/or transferred to its other stores the
inventory and other assets located therein). Of the two
remaining Affected Stores, the Registrant operated one such
store with the assistance of the Woolworth rent and
occupancy subsidy until September 1997, at which time the
Registrant negotiated a new lease with the landlord of the
property and has continued to operate this store without any
further subsidy or other obligation from Woolworth. With
respect to the remaining Affected Store, the Registrant
continues to operate this store for which Woolworth is
providing a subsidy for the rent and other occupancy costs.
Pursuant to the Woolworth Settlement, either party has the
option to terminate this arrangement under certain notice
provisions until the lease governing such store expires in
fiscal 2001. (In addition, during fiscal 1998, the
Registrant closed one under-performing Pharmhouse store that
was not part of the Woolworth Settlement).
For further information concerning the Woolworth Settlement,
reference is made to (i) Item 1 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 1, 1997 ("fiscal
1997") (the "1997 Form 10-K"); (ii) the Registrant's Current
Report on Form 8-K dated February 6, 1997; and (iii) the
Registrant's Quarterly Report on Form on 10-Q for the quarterly
period ended November 1, 1997, all incorporated herein by
reference. See also Item 2 "Properties" in this Report.
(ii) Fiscal 1998 net loss of $3.7 million
Reference is made to the Selected Financial Data, in Item 6
of this Report, Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A"), in Item 7 of this
Report, and the Registrant's Consolidated Financial Statements
contained in Part IV of this Report, concerning the Registrant's
net loss of $3.7 million in fiscal 1998.
(iii) Financing
On May 14, 1998, the Registrant and Foothill Capital
Corporation ("Foothill") entered into a Loan and Security
Agreement (the "New Senior Credit Facility" or "New Facility")
providing for aggregate credit to the Registrant of up to $35
million. The New Facility consists of (i) a Term Loan up to $3
million and (ii) revolving advances equal to the lesser of (a) 65%
of eligible inventory (at cost) or (b) $35 million less the
outstanding principal amount of the Term Loan. Under the New Facility,
subject to the foregoing formula, the maximum revolving advances
could increase up to an aggregate of $35 million as the
outstanding principal amount of the term loan is reduced. The
duration of both the revolving and term loans under the New
Senior Credit Facility is five years. The total loans which may
be advanced by Foothill to the Registrant is subject to an
increase to an aggregate of $40 million upon the satisfaction of
certain conditions. The initial funds advanced under the New
Facility were used to pay outstanding borrowings, charges, fees
and temporary cash collateral account aggregating $22.6 million
owing by the Registrant to its prior secured lender ("Prior
Lender"). The cash collateral of $1 million, less any potential
draw-downs, will be returned to the Registrant within thirty
days.
Indebtedness under the New Senior Credit Facility is secured
by a first priority lien on substantially all of the Registrant's
assets and, among other conditions, restricts the payment of
dividends and requires that the Registrant maintain specified
minimum tangible net worth and EBITDA (earnings before interest,
taxes, depreciation and amortization) levels.
For further information concerning the terms of the New
Senior Credit Facility, reference is made to Exhibit 10.15.
The Registrant is also the borrower under a subordinated
loan in the original amount of $3 million, payable to an
unaffiliated trade supplier, which is being repaid in monthly
installments of $50,000 and a balloon payment of $1.25 million
due on April 28, 1998. Pursuant to an agreement dated April 24,
1998 between the Registrant and the subordinated lender, the
terms for the balloon payment have been amended as follows: the
Registrant will make three consecutive monthly installments of
$50,000 commencing on May 1, 1998 and a final installment of $1.1
million on August 1, 1998. The parties are currently negotiating
to have the August 1, 1998 due date for the balloon payment
extended further; however, there can be no assurance that the
Registrant will be successful in that regard. The subordinated
lender has been granted a second priority lien on substantially
all of the Registrant's assets.
During the third quarter of fiscal 1998, the Registrant and
McKesson Corporation ("McKesson") consummated an agreement
whereby, effective September 4, 1997, McKesson purchased a major
portion of the Registrant's pharmaceutical third party plan
receivables outstanding as of such date and the ongoing third
party plan receivables generated by the Registrant subsequent to
such date. The funding by McKesson under this agreement is made
available to the Registrant two business days after the third
party plan receivables are generated. The funding provided under
this agreement is subject to recourse with respect to third party
plan receivables not collected within 90 days.
For further information concerning the foregoing matters,
reference is hereby made to Note 4 to the Registrant's
Consolidated Financial Statements included in this Report and
MD&A - "Liquidity and Capital Resources" in Item 7 of this
Report.
(b) Financial Information About Line of Business
The Registrant is currently engaged in one line of business.
For further information with regard to the Registrant's store
operations, reference is made to MD&A, Item 7 of this Report, and
to the Notes to the Consolidated Financial Statements contained
in Part IV of this Report.
(c) Narrative Description of Business
(i) Retail Operations
The Registrant's discount drug stores focus on offering
various types of merchandise at everyday discount prices.
Merchandise is sold primarily on a cash-and-carry basis although
certain credit cards and checks are accepted.
Ten Pharmhouse stores are located in smaller communities
(rather than major metropolitan centers) in small strip shopping
centers or free-standing facilities on major thoroughfares with
substantial parking facilities. (For further information
concerning the premises occupied by these ten stores, reference
is made to Item 2 (b) of this Report). The Registrant opened two
Pharmhouse stores in 1992 and one Pharmhouse store in 1993 in
areas more densely populated than the locations in which its
other ten Pharmhouse stores are situated, reflecting management's
decision to expand its operations into such markets. The
Pharmhouse Stores are located in single-story, air conditioned
facilities and occupy on average 35,000 square feet per store.
The Rx Stores are located in more densely populated areas than
the older Pharmhouse Stores and occupy approximately 25,000
square feet each.
The Registrant's stores have pharmacies staffed by licensed
pharmacists and are open seven days per week. However, during
fiscal 1998, the Registrant closed the pharmacy in one of its
Pharmhouse stores due to the relatively low volume of pharmacy
revenues generated in this location.
To some extent, the Registrant's revenues are affected by
the same pattern of seasonality common to most retail businesses.
Similar to other retail businesses, the Registrant's operations
have generally been adversely affected by recessions and
unfavorable local economic developments, as well as by adverse
weather conditions which result in reduced consumer spending in
the markets served by the stores.
(ii) Merchandise
The Registrant's stores offer health and beauty care
products, prescription drugs, cosmetics, stationery, video
rentals, housewares, pet supplies, greeting cards, food, snacks,
beverages and certain other merchandise. The Registrant's stores
also offer certain merchandise on a seasonal basis, such as
garden, patio, Easter and Christmas items. Such merchandise is
sold at everyday discount prices. Except as described below, all
merchandise is sold or, in the case of video rentals, rented
through departments operated by the Registrant.
The following table sets forth information concerning the
approximate percentages of the Company's revenues attributable to
major merchandise categories:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fiscal Fiscal Fiscal
Merchandise Category 1998 1997 1996
- - --------------------- ------ ------ ------
Pharmacy 32.3% 28.5% 28.7%
Health & Beauty Care
and Related Items 23.2% 24.3% 26.1%
------ ------ ------
55.5% 52.8% 54.8%
Other Merchandise Categories
(no one category
accounting for more than 10%) 44.5% 47.2% 45.2%
------ ------ ------
Total 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
Most merchandise is ordered from unaffiliated suppliers
through the Registrant's buying office, although certain
merchandise is ordered at store level by store management and
through unaffiliated rack jobbers. Where possible, as part of
its discount merchandise pricing policy, the Registrant seeks to
purchase merchandise in bulk at special prices from product
manufacturers and other suppliers. Reorders of certain
merchandise are processed at store level subject to review by the
buying office staff. In addition, the Registrant consolidates
the shipment of a significant percentage of its merchandise at a
cross-docking distribution center operated by the Registrant in a
leased facility in Pottstown, Pennsylvania in order to improve
the coordination of shipments of merchandise to its stores.
(iii) Suppliers
The Registrant purchases merchandise from a large number of
unaffiliated suppliers and, except as described below, has no
long-term contracts or commitments with any of these suppliers.
During fiscal 1998, the Registrant purchased approximately 39.8%
of its total merchandise from McKesson Drug Company ("McKesson"),
a leading wholesale distributor of pharmaceutical and health and
beauty care products. No other supplier accounted for more than
10% percent of the Registrant's total merchandise purchases
during fiscal 1998.
In April 1995, the Registrant and McKesson entered into a
three-year merchandise supply agreement (the "Supply Agreement")
governing future purchases of merchandise by the Registrant and
providing for deferred payment by the Registrant of $1 million of
existing trade payables during a period of 12 to 18 months
following the closing date of the Acquisition (all of such
deferred payments were made during fiscal 1997). The Supply
Agreement provides that the Registrant will purchase a minimum of
90% of its pharmaceutical and certain other merchandise from
McKesson. The Registrant and McKesson are currently in
negotiations to extend the Supply Agreement. However, there can
be no assurance that the Registrant will be successful in such
efforts.
The Registrant has several other long-term contracts with
unaffiliated suppliers, none of which accounted for more than 5%
of total purchases during fiscal 1998.
(iv) Competition
The Registrant's discount drug stores currently compete in
their markets with local and discount drug chains, discount
department stores, local pharmacies, supermarkets and other food
stores, wholesale clubs and other retail outlets which offer
similar merchandise. Certain of the Registrant's competitors
have far greater financial resources and a far greater number of
retail outlets than the Registrant currently has or expects to
have in the foreseeable future. Management believes that the
competitive factors which affect the business of the Registrant's
stores primarily consist of price, depth of merchandise in
certain categories, store location and store environment.
(v) Advertising and Marketing
Advertising for the Registrant's stores consists primarily
of direct-mail circulars or newspaper inserts distributed monthly
except during the third and fourth quarter when they are
distributed bi-weekly. The Registrant stresses the everyday
nature of its discount prices in its advertising to attract
customers and does not generally rely on periodic sales or
promotional pricing in its circulars. The Registrant maintains
its own advertising department which designs its multi-colored
circulars. The printing and distribution of such materials is
performed by unaffiliated contractors.
The Registrant anticipates that a portion of its advertising
costs will continue to be offset by advertising allowances from
unaffiliated suppliers in amounts which cannot be determined at
this time. During fiscal 1998, the Registrant spent
approximately $2.9 million for advertising and promotion, net of
amounts contributed by suppliers through advertising allowances.
During the third and fourth quarters of fiscal 1998,
management of the Registrant implemented several new marketing
and sales programs which were designed to increase customer
counts and revenues. Among these programs was the re-
merchandising of stores. As of the date of this Report, the
Registrant has completed the re-merchandising of two stores and
has expanded its re-merchandising efforts to four additional
stores.
(vi) Employees
As of April 10, 1998, the Registrant employed 1,686 persons,
including a substantial number of part-time employees. The
Registrant is not a party to any collective bargaining
agreements.
For further information with respect to the Registrant's
retail operations, reference is made to MD&A in Item 7 of this
Report.
(vii) Financial Information about Foreign and Domestic
Operations and Export Sales
Not applicable.
Item 2. Properties
(a) Stores
The following table sets forth the number of Pharmhouse
stores and Rx stores in operation in each of the following states
as of April 15, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Pharmhouse Rx Total
stores stores stores
------ ------ ------
Maryland 1 - 1
New Jersey 2 9 11
New York 5 3 8
Pennsylvania 2 2 4
Virginia 3 - 3
Connecticut - 1 1
Massachusetts - 2 2
Rhode Island - 2 2
------ ------ ------
Total Stores 13 19 32
====== ====== ======
</TABLE>
Of the Registrant's thirty-two stores currently in
operation, thirty-one are located in leased premises and one is
located in premises owned by the Registrant in Winchester,
Virginia.
With respect to the leases governing the Registrant's store
properties, twenty-seven expire during the five year period from
fiscal 1999 through fiscal 2003, three expire during the period
from fiscal 2004 through fiscal 2008 and one is operated on a
month-to-month basis. In addition, one lease, originally due to
expire during fiscal 1999, will be converted to a month-to-month
lease effective in May 1998 in connection with the settlement of
certain litigation related to this store, as more fully described
in Item 3 and Note 12 to the Consolidated Financial Statements
contained in Part IV of this Report. Twenty-nine of the
Registrant's store leases have one or more renewal options for
periods totaling from five to twenty years.
Existing store leases provide for contingent rental payments
based on a percentage of revenues at varying rates of up to a
maximum of two percent, subject to minimum revenue levels and
other conditions. During fiscal 1998, rentals (including
contingent rentals of $34,000) paid by the Registrant for all of
its leased store locations aggregated approximately $6,444,000,
net of sublease revenue of $788,000.
(b) Unoccupied Space in Pharmhouse Stores
Eight Pharmhouse stores currently occupy only a portion of
the space under lease. A substantial portion of the space not
being used in the operation of the Pharmhouse Stores was sublet
or licensed during fiscal 1998 to a total of 23 unaffiliated
tenants for aggregate annual rent revenue of approximately
$788,000.
(c) Executive Office
The Registrant's principal executive office is located in
leased premises at 860 Broadway, New York, New York and occupies
approximately 12,000 square feet at an annual base rental of
$150,000. The lease for the premises expires on June 30, 1998.
The Company is currently negotiating with the landlord for an
extension of this lease.
(d) Distribution Facility
The Registrant operates a distribution facility in
Pottstown, Pennsylvania in leased premises occupying
approximately 100,000 square feet at an annual rental of
approximately $336,000. The lease for this facility expires in
April 2001.
Item 3. Legal Proceedings
On January 31, 1997, the Registrant and Woolworth entered
into the Woolworth Settlement (subsequently amended on June 24,
1997) pursuant to which the Registrant and Woolworth resolved
their outstanding disputes arising out of the April 1995
acquisition of 24 Rx Stores from Woolworth. For further
information, reference is made to Item 1(a), MD&A Item 7 and
Notes to the Consolidated Financial Statements contained in Part
IV of the Registrant's 1997 Form 10-K, incorporated herein by
reference.
On January 31, 1998, the Registrant and a landlord of one of
the Registrant's Pharmhouse stores reached an out-of-court
settlement of certain litigation related to the lease for such
store. Under the terms of the settlement agreement with the
landlord, as amended on May 1, 1998, the Registrant will receive
the sum of $1,675,000 ($200,000 of which was paid by the landlord
on May 1, 1998 and $1,475,000 of which is payable on May 31,
1998), plus accrued interest on the outstanding balance since
January 31, 1998, in exchange for waiving its exclusive right to
use its space to operate a discount drugstore or discount
pharmacy, thereby permitting the landlord to lease out space in
the shopping center to any other tenant who operates a drugstore
or pharmacy, discount or otherwise. The terms of the agreement
also provide for the following: effective on May 1, 1998, the
Registrant's present fixed monthly rent obligation for this store
will convert to a percentage rent calculation; and effective on
September 30, 1998, the Registrant has the right to terminate the
lease for this store upon 90 days prior notice to the landlord
and the landlord has the right to recapture the premises for this
store upon 120 days prior notice to the Registrant. In
connection with this transaction, the Registrant has recorded in
its fiscal 1998 fourth quarter other income, net of related legal
expenses, amounting to $1,346,000.
The Registrant is also subject to various legal proceedings
and claims which arise in the ordinary course of its business.
In the opinion of management, the amount of the Registrant's
ultimate liability, if any, arising out of such actions will not
materially affect the financial condition or operations of the
Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of the Registrant's
security holders during the fourth quarter of fiscal 1998.
PART II.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
(a) Identification of Principal Market
The Registrant's Common Shares, $.01 par value, are
currently traded on The Nasdaq SmallCap Market, a segment of The
Nasdaq Stock Market, under the symbol "PHSE". The following
table sets forth the high and low bid and asked quotations of the
Registrant's Common Shares for each quarterly period during the
last two fiscal years as reported on the Nasdaq SmallCap Market.
Bid and Asked Quotations
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Fiscal Bid Asked
Quarter ---------------- -----------------
Ending High Low High Low
------ ---- ---- ---- ----
5/04/96 3 3/8 2 1/4 4 2 5/8
8/03/96 5 3 5 3/8 3
11/02/96 5 3/8 3 5 7/8 3 3/8
2/01/97 8 3/4 4 1/2 9 1/4 4 3/4
5/03/97 8 1/2 6 1/4 9 1/4 6 3/4
8/02/97 9 1/8 6 9 1/4 6 7/8
11/01/97 7 5/8 4 3/4 7 7/8 5 1/4
1/31/98 6 1/2 4 7/8 6 3/4 5 1/2
</TABLE>
On April 15, 1998, the last reported sale price for the Company's
Common Stock on the Nasdaq SmallCap Market was $4.50 per share.
(b) Holders of Common Shares
The approximate number of holders of record of Common Shares
of the Registrant as of January 31, 1998 was 2,312.
(c) Dividend History
During the past three fiscal years and through the date of
this Report, the Registrant has not declared any cash or stock
dividends and was, and continues to be, subject to restrictions
against the payment of cash dividends under its agreements with
its senior and subordinated lenders.
Item 6. Selected Financial Data
The selected financial data presented below should be read
in conjunction with the Consolidated Financial Statements and
Related Notes, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial
information included elsewhere in this Report. The data as of
January 31, 1998 and February 1, 1997 and for each of fiscal
1998, fiscal 1997 and fiscal 1996 are derived from the
Registrant's audited consolidated financial statements included
elsewhere in this Report. The data as of February 3, 1996,
January 28, 1995 and January 29, 1994 and for each of fiscal 1995
and fiscal 1994 are derived from the Registrant's audited
consolidated financial statements not included in this Report.
<TABLE>
<CAPTION>
(all amounts in thousands, except per share data)
FISCAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996(1)(2) 1995 1994
------ ------ ---------- ------ ------
Income Statement Data:
Revenues $200,751 $231,729 $209,529 $ 89,602 $ 98,241
Operating income(loss) $ (2,190)(3) $ (1,005)(3) $ 419 $ (1,037) $ (2,769)(3)
Interest expense $ 3,032 $ 4,230 $ 3,544 $ 960 $ 861
Other income $ 1,346(4) $ - $ - $ - $ -
Extraordinary gain $ - $ 7,142(5) $ 618(5) $ - $ -
Net income (loss) $ (3,691) $ 1,334 $ (2,507) $ (1,997) $ (3,386)
Basic earnings (loss)
per common share $ (1.48) $ 0.59 $ (1.13) $ (0.90) $ (1.60)
January 31, February 1, February 3, January 28, January 29,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Working capital $ 18,166(6) $ 24,882 $ 24,741 $ 4,732 $ 6,983
Total assets $ 53,692 $ 70,503 $ 73,210 $ 26,677 $ 30,465
Long-term borrowings $ 19,154 $ 24,400(6) $ 25,950 $ 300 $ 800
Stockholders' equity $ 4,894 $ 8,351 $ 6,824 $ 9,004 $ 10,781
Dividends declared None None None None None
Store Data (# of stores operating at year-end):
Pharmhouse Stores 13 13 14 14 14
Rx Stores 19 22 24 - -
</TABLE>
(1)Includes operations of 38 stores effective April 28, 1995.
(2)Fifty-three week fiscal year.
(3)Excludes provision for store closure of $(185) in fiscal 1998,
$573 in fiscal 1997 and $(244) in fiscal 1994.
(4)Other income represents income from a settlement of litigation
related to a lease of one of the Registrant's Pharmhouse stores
(for further information, reference is made to Item 3 and to Note
12 in the notes to the consolidated financial statements included
in this Report).
(5)Extraordinary gain resulted from the following: in fiscal
1997, debt and interest cancellation, net of related costs and
provisions in connection with the Woolworth Settlement; in fiscal
1997, from early retirement of debt.
(6)Amount includes a $1 million contingent obligation which is
scheduled to be canceled by Woolworth in July 1998 in connection
with the Woolworth Settlement.
For further information concerning the provisions of the
Woolworth Settlement, reference is made to paragraph (a)(i) in
Item 1 of this Report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with the
selected financial data presented in Item 6 of this Report and
the Consolidated Financial Statements and the Notes to the
Consolidated Financial Statements appearing in Item 8 of this
Report.
Overview
The Registrant (or the "Company") reported a net loss of $3.7
million in fiscal 1998 compared with net income of $1.3 million
in fiscal 1997. The results for both fiscal years were favorably
affected by non-recurring items, including other income of $1.3
million in fiscal 1998 related to a settlement of litigation for
one of the Registrant's stores and an extraordinary gain of $7.1
million in fiscal 1997 related to the Woolworth Settlement.
Exclusive of non-recurring items, the Registrant's financial
performance during fiscal 1998 improved $.8 million compared with
the prior year. Overall fiscal 1998 results were favorably
affected by a $1.2 million reduction in interest expense in
connection with Woolworth's debt forgiveness at the end of fiscal
1997 and by lower borrowing requirements related to the closing
of six stores during the last twelve months. On an operating
basis, the Registrant reported an operating loss of $2 million in
fiscal 1998 compared with an operating loss of $1.6 million in
fiscal 1997. Fiscal 1998 operating results were negatively
impacted by a decrease in gross profit, which resulted from a
5.7% same-store revenue decline and a 1.3% decrease in the gross
profit percentage, attributable to factors described under
Results of Operations pertaining to fiscal 1998 set forth under
this Item. Reduced selling, general and administrative expenses
(as a percentage of revenues) during fiscal 1998 compared with
fiscal 1997 mitigated a substantial portion of the decline in
gross profit.
The significant remaining aspects of the Woolworth Settlement
include the cancellation by Woolworth of a $1 million Contingent
Note obligation which is scheduled to occur on July 30, 1998. As
of January 31, 1998, such amount was included in the current
portion of long-term debt. Upon the scheduled cancellation of
the Contingent Note, the Registrant will report a $1 million
extraordinary gain in its second quarter of fiscal 1999. In
addition, the Registrant continues to receive a rent subsidy for
one Rx store being operated by the Registrant which remains
subject to the Woolworth Settlement.
The Registrant generated $10.1 million in operating cash flow
during fiscal 1998 (representing an increase of $8.1 million in
operating cash flow compared with fiscal 1997) which is primarily
attributable to the liquidation of inventory in stores closed, a
reduction in average per store inventory levels and the sale of
third party plan receivables. A significant portion of cash
generated from operations during fiscal 1998 was used to reduce
borrowings under the Senior Credit Facility.
For further information with respect to the operations of and
other developments affecting the Registrant during fiscal 1998
and the Woolworth Settlement, reference is made to Item 1(a)(i)
and to the Notes to the Consolidated Financial Statements
included in Part IV of this Report.
Results of Operations
The following table sets forth, for the periods indicated,
certain selected data appearing in the Company's Consolidated
Statements of Operations expressed as a percentage of revenues:
Fiscal Fiscal Fiscal
1998 1997 1996
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Cost of merchandise sold 77.4 76.1 76.1
------ ------ ------
Gross profit 22.6 23.9 23.9
Operating expenses:
Selling, general and administrative 23.7 24.3 23.7
Provision for store closure (0.1) 0.3 -
------ ------ ------
Operating income (loss) (1.0) (0.7) 0.2
Interest expense 1.5 1.8 1.7
Other income (0.7) - -
------ ------ ------
Loss before extraordinary gain (1.8) (2.5) (1.5)
Extraordinary gain, net - 3.1 0.3
------ ------ ------
Net income (loss) (1.8)% 0.6% (1.2)%
====== ====== ======
Results of Operations - Fiscal Year Ended January 31, 1998
("fiscal 1998") Compared To Fiscal Year Ended February 1, 1997
("fiscal 1997")
Revenues
Fiscal 1998 revenues (including video rental, service and other
income) were $200.8 million compared with $231.7 million in
fiscal 1997, a decrease of $30.9 million. The reduction
primarily resulted from the operation of a reduced number of
stores and pharmacies (32 stores were in operation at the end of
fiscal 1998 compared with 38 stores at the end of fiscal 1997; in
addition, one pharmacy was closed in a store which the Company
continues to operate). On a same store basis (consisting of 32
stores which were open for both full fiscal years) revenues
decreased 5.7% compared with fiscal 1997. Management attributes
the same-store revenue decrease to several factors including:
increased competition; supply interruptions for certain non-
pharmacy merchandise categories; price deflation in generic
pharmacy and grocery merchandise product; and other factors.
Management has responded to the decrease in revenues by
implementing programs to stimulate an increase in customer
traffic and revenues. These programs include the re-merchandising
of stores, more fully described in Item 1 (c)(5) of this Report.
Gross Profit
The fiscal 1998 gross profit (total revenues less costs of
merchandise and services sold and freight/distribution services
provided) was $45.3 million compared with $55.3 million in the
prior year, a decrease of $10 million. The reduction primarily
resulted from the operation of a reduced number of stores and
pharmacies and, to a lesser extent, from a decrease in the
Company's gross profit percentage. The Company's fiscal 1998
gross profit as a percentage of revenues was 22.6% compared with
23.9% in fiscal 1997, a decrease of 1.3%. The gross profit
margin was negatively impacted by several factors including:
reduced reimbursement rates from third party insurance plans
which comprise an increasing proportion of the Company's pharmacy
business; and, during the fourth quarter of fiscal 1998, the
Company recorded an adjustment to inventory of $1.7 million to
reflect inventory shrink in excess of amounts previously accrued.
As a result of shrink in excess of amounts previously accrued
during fiscal 1998, the Company has increased its shrink accrual
rate effective in fiscal 1999.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense decreased
$8.8 million, or 15.6%, to $47.5 million during fiscal 1998 from
$56.3 million during fiscal 1997, resulting from the operation of
a reduced number of stores and pharmacies and cost reductions
achieved throughout the Company.
SG&A expense as a percentage of revenues decreased to 23.7% in
fiscal 1998 from 24.3% during fiscal 1997. The decline in SG&A
expense is attributed to continued cost reduction, the closing of
six under-performing stores during the last twelve months (all of
which had high occupancy costs relative to revenues) and rental
subsidies received from Woolworth in connection with the
Woolworth Settlement. The Company continues to receive a rent
subsidy for one Rx store which remains subject to the Woolworth
Settlement. The percentage decrease in SG&A expense in fiscal
1998 was achieved despite the decrease in same-store revenues
described above.
Operating Income(Loss)
The Company sustained an operating loss of $2 million during
fiscal 1998 compared with an operating loss of $1.6 million in
the prior year. The increase in the Company's operating loss
resulted from a decrease in gross profit attributable to
decreases in same-store revenues and the gross profit percentage
partially offset by reduced SG&A expenses.
Interest Expense
Interest expense in fiscal 1998 decreased to $3 million from $4.2
million in fiscal 1997. The interest expense reduction resulted
primarily from the effects of the Woolworth Settlement which
provided for the cancellation of $8.4 million in interest-bearing
debt ($1 million of which was converted to a non-interest bearing
Contingent Note). Also contributing to the reduction in interest
expense were lower inventory levels and borrowing requirements
resulting from the operation of a reduced number of stores during
fiscal 1998 compared with fiscal 1997.
Provision for Income Taxes
The Company is not subject to federal income taxes in fiscal 1998
as the Company did not generate taxable earnings. The Company
has significant net operating loss carryforwards (See Note 5 in
the "Notes to the Consolidated Financial Statements") which are
available to offset future taxable income. State and local
income taxes, which are computed on a basis other than income
(e.g., capital stock, etc.), are not material and such amounts
are included in SG&A expense.
Net Loss
The Company reported a net loss in fiscal 1998 of $3.7 million,
or $1.48 per share, compared with net income of $1.3 million, or
$0.59 per share, in fiscal 1997. The Company reported a loss
before extraordinary gain in fiscal 1997 of $5.8 million, or
$2.56 per share.
Results of Operations - Fiscal Year Ended February 1, 1997
("fiscal 1997") Compared To Fiscal Year Ended February 3, 1996
("fiscal 1996")
Revenues
Fiscal 1997 revenues (including video rental, service and other
income) were $231.7 million compared with $209.5 million in
fiscal 1996, an increase of $22.2 million, or 10.6%. The
revenue growth is attributable to the Company's operation of the
Rx Stores for a full year in fiscal 1997 compared to operating
these stores for nine months during the prior fiscal year (the Rx
Stores were acquired on April 28, 1995, one day prior to the end
of the Company's fiscal 1996 first quarter).
During fiscal 1997 (a 52 week fiscal year), same-store revenues
(stores open for a full year in both fiscal years - consisting of
14 Pharmhouse stores) decreased $2.8 million, or 3.3%, compared
to fiscal 1996 (a 53 week fiscal year). Management estimates
that, after adjustment for a shorter fiscal year, fiscal 1997
same-store revenues decreased approximately $1.1 million, or
1.3%, compared with fiscal 1996. (Despite the decline in same-
store store revenues, the fiscal 1997 gross profit generated by
the Pharmhouse Stores remained unchanged from the prior year
resulting from an improved gross profit percentage (described
below)). Excluding one Pharmhouse store being closed, fiscal
1997 same-store revenues for 13 Pharmhouse stores decreased $1.4
million, or 1.7%, compared with fiscal 1996. Management estimates
that, after adjustment for a shorter fiscal year, fiscal 1997
same-store revenues for the 13 continuing Pharmhouse stores
increased approximately 0.2% compared with fiscal 1996.
Same-store revenues for the 24 Rx Stores during the fiscal 1997
second, third and fourth quarters decreased 9.0% compared with
the comparable nine month period during fiscal 1996 consisting of
a 12.6% same-store revenue decrease for the seven Affected Stores
and a same-store revenue decrease of 7.9% for the remaining 17 Rx
Stores. Management estimates that, after adjustment for a
shorter fiscal period, same-store revenues decreased 5.6% for 17
Rx Stores (excluding the seven Affected Stores).
Gross Profit
The fiscal 1997 gross profit (total revenues less costs of
merchandise and services sold and freight/distribution services
provided) was $55.3 million compared to $50.0 million in the
prior year, an increase of $5.3 million, or 10.6%. The increase
in gross profit is attributable to the contribution made by the
Rx Stores which the Company operated for all of fiscal 1997
compared with approximately nine months during fiscal 1996. As a
percentage of revenues, the Company's fiscal 1997 gross profit of
23.9% remained unchanged compared with fiscal 1996. Improved
gross margin generated by the Pharmhouse Stores (26.3% in fiscal
1997 versus 25.5% in fiscal 1996) was offset by lower gross
margin generated by the Rx Stores (21.9% in fiscal 1997 versus
22.8% in fiscal 1996). During the fourth quarter of fiscal 1997,
the Company recorded an adjustment to inventory of $.9 million,
primarily related to the Rx Stores, to reflect inventory shrink
in excess of amounts previously accrued. The shrink accrual rate
used in fiscal 1997 was consistent with the Company's historical
accrual rate for prior fiscal years.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense was $56.3
million during fiscal 1997 compared to $49.6 million in the prior
year, an increase of $6.7 million, or 13.5%. The increase in
SG&A expense is primarily attributable to store expenses incurred
in connection with operating 24 additional stores for the full
year during fiscal 1997 compared with operating these stores for
approximately nine months during fiscal 1996.
As a percentage of revenues, SG&A expense increased to 24.3% in
fiscal 1997 compared with 23.7% in fiscal 1996, resulting
primarily from a .6% increase in occupancy costs for the Rx
Stores and, in particular, the Affected Stores. Other items
impacting SG&A expense include a .3% increase in costs to operate
the Company's new distribution facility (primarily increased
occupancy costs and warehouse payroll, a portion of which is
attributable to the start-up of this facility during the fiscal
1997 first quarter as well as to this facility performing
additional functions such as the operation of a break-pack
department) and a .3% increase in general and administrative
salaries, primarily to fill two senior level executive positions
which were vacant prior to November 1995. Partially offsetting
the SG&A expense increase was a .4% reduction in advertising
expense which resulted from a significant increase in coop-
advertising allowances received from vendors.
The Company phased-in store payroll expense reductions during
fiscal 1997. By the end of the fiscal 1997 fourth quarter, as a
percentage of revenues, the Company's store payroll was reduced
approximately .5% compared with the percentage in the fourth
quarter of fiscal 1996.
Operating Income(Loss)
In fiscal 1997, the Company sustained an operating loss of $1.6
million compared with operating income of $.4 million in the
prior year. The fiscal 1997 operating loss includes a provision
for store closure of $.6 million for one Pharmhouse store, $.7
million in operating loss sustained by the seven Affected Stores
(attributable to a significant increase in occupancy costs and a
decrease in same-store revenue in these stores) and increases in
certain SG&A expenses as noted in the above discussion. For
further information concerning the Affected Stores and other
provisions of the Woolworth Settlement, reference is made to
Woolworth Settlement in Item 1(a)(i) of this Report.
Interest Expense
Interest expense in fiscal 1997 was $4.2 million compared with
$3.5 million in fiscal 1996, an increase of $ 0.7 million. The
increased interest expense in fiscal 1997 compared with fiscal
1996 resulted from higher levels of borrowing to fund the
increased working capital requirements for the operation of 24
additional stores for all of fiscal 1997 versus operating these
stores for approximately nine months during fiscal 1996 (the Rx
Stores were acquired in late April 1995) and interest accrued at
the default rates for the Purchase Money Notes.
Extraordinary Gain
By reason of the Woolworth Settlement, the Company realized an
extraordinary gain of $7.1 million which resulted from
Woolworth's debt forgiveness totaling $8.5 million (such amount
includes $7.4 million in Purchase Money Notes arising out of the
Acquisition and $1.1 million in accrued interest thereon), net of
a store closure provision of $1 million for two closing Rx
Stores, litigation settlement expenses of $.3 million and a
related provision for income taxes of $.1 million. For further
information concerning the Woolworth Settlement, reference is
made to Item 1(a)(i) of this Report.
Provision for Income Taxes
Although the Company has net operating loss carryforwards (See
Note 5 in the "Notes to the Consolidated Financial Statements")
which are in amounts sufficient to offset the Company's fiscal
1997 net income, a portion of the extraordinary gain realized in
connection with the Woolworth Settlement is subject to an
alternative minimum tax ("AMT"). Accordingly, the Company has
accrued income taxes of $.1 million in connection with the AMT
and such amount has been netted against the extraordinary gain.
State and local income taxes, which are computed on a basis other
than income (e.g., capital stock, etc.), are not material and
such amounts are included in SG&A expense.
Net Loss
The Company reported net income in fiscal 1997 of $1.3 million,
or $0.59 per share, compared with a net loss of $2.5 million, or
$1.13 per share, in fiscal 1996. The Company reported a loss
before extraordinary gain in fiscal 1997 of $5.8 million, or
$2.56 per share, compared with a loss before extraordinary gain
of $3.1 million, or $1.41 per share, in fiscal 1996.
Liquidity and Capital Resources
Operating Activities
During fiscal 1998, the Company generated $10.1 million in cash
flows from operating activities resulting primarily from
reductions in inventory of $12.5 million and accounts receivable
of $2.8 million which were partially offset by reductions in
accounts payable, accrued expenses and provision for store
closure aggregating $5.8 million. The reduction in inventory
resulted primarily from store closings described elsewhere
herein. A substantial portion of the reduction in accounts
receivable resulted from the sale of a significant portion of the
Company's third-party plan receivables, as more fully described
below.
During the third quarter of fiscal 1998, the Company and McKesson
Corporation ("McKesson") consummated an agreement whereby,
effective September 4, 1997, McKesson purchased a major portion
of the Company's pharmaceutical third party plan receivables
outstanding as of such date, amounting to approximately $2
million, and the ongoing third party plan receivables generated
by the Company subsequent to such date. The funding by McKesson
under this agreement is made available to the Company two
business days after the third party plan receivables are
generated. The funding provided under this agreement is subject
to recourse with respect to third party plan receivables not
collected within 90 days.
Capital Expenditures
Additions to property and equipment totaled $.4 million in fiscal
1998, $.2 million of which was devoted to the restructuring of
two stores in conjunction with the Company's re-merchandising
program. Expenditures for video rental inventory during fiscal
1998 decreased $.5 million to $1.3 million compared with
expenditures of $1.8 million in fiscal 1997. The decrease
primarily resulted from the closing of the video departments in
the six stores which were closed during the last twelve months
and from the closing of two video departments in stores which the
Company continues to operate. The Company has continued to defer
other major capital improvements until such time as the Company
achieves operating profitability.
Financing Activities
Net borrowings under the Senior Credit Facility decreased $7.6
million during fiscal 1998, primarily resulting from reduced
borrowing requirements related to the operation of a reduced
number of stores.
Summary of Borrowings
New Senior Credit Facility
On May 14, 1998, the Company and Foothill Capital Corporation
("Foothill") entered into a Loan and Security Agreement (the "New
Senior Credit Facility" or "New Facility") providing for
aggregate credit to the Company of up to $35 million. The New
Facility consists of (i) a Term Loan up to $3 million and
(ii) revolving advances equal to the lesser of (a)65% of eligible
inventory (at cost) or (b) $35 million less the outstanding
principal amount of the Term Loan. Under the New Facility,
subject to the foregoing formula, the maximum revolving
advances could increase up to an aggregate of $35 million as
the outstanding principal amount of the term loan is reduced.
The duration of both the revolving and term loans under the New
Senior Credit Facility is five years. The total loans which may
be advanced by Foothill to the Company is subject to an
increase to an aggregate of $40 million upon the satisfaction of
certain conditions. The initial funds advanced under the New
Facility were used to pay outstanding borrowings, charges,
fees and temporary cash collateral account aggregating $22.6
million owing by the Company to its Prior Lender. The cash
collateral of $1 million, less any potential draw-downs, will be
returned by the Prior Lender to the Company within thirty days.
In addition, the Company incurred other transaction fees of
approximately $1 million.
Indebtedness under the New Senior Credit Facility is secured by a
first priority lien on substantially all of the Company's assets
and, among other conditions, restricts the payment of dividends
and requires that the Company maintain specified minimum tangible
net worth and EBITDA (earnings before interest, taxes,
depreciation and amortization) levels. The New Facility is at a
borrowing rate of prime plus 1.125%, subject to decrease if the
Company reaches certain EBITDA levels during the term of the
facility.
For further information concerning the terms of the New Senior
Credit Facility, reference is made to Exhibit 10.15 to this
Report.
Senior Credit Facility
The borrowing availability with the Company's Prior Lender was
based on the lesser of 60% of eligible inventory at cost or $45
million. The weighted average interest rate under the prior
senior credit facility during fiscal 1998, including the effect
of facility fees, was 11.2%. During fiscal 1998, the highest
borrowing level under this facility was $30 million, which
borrowing occurred in February 1997, and the lowest borrowing
level was $18.8 million, which borrowing occurred in January
1998. During the fourth quarter of fiscal 1998, the Company's net
worth fell below the minimum level established under the prior
senior credit facility. The Company was advised by its Prior
Lender that it would amend such minimum net worth requirement
as of January 31, 1998 and subsequent periods. By that time,
however, the Company had elected to enter into the New Senior
Credit Facility with Foothill on May 14, 1998 and thereby
repaid all outstanding indebtedness to the Prior Lender
because, among other considerations, the New Facility provides
the Company with greater borrowing availability.
During the first quarter of fiscal 1999, the Company's Prior
Lender extended an over-advance to the Company in the amount of
$1.4 million, the outstanding balance of which was fully repaid
out of the proceeds of the New Senior Credit Facility on May 15,
1998.
Subordinated Loan
The Subordinated Loan, payable to an unaffiliated supplier, is
being repaid in monthly installments of $50,000 and a balloon
payment of $1.25 million due on April 28, 1998. Pursuant to an
agreement dated April 24, 1998 between the Company and the
subordinated lender, the terms for the balloon payment have been
amended as follows: the Company will make three consecutive
monthly installments of $50,000 commencing on May 1, 1998 and a
final installment of $1.1 million on August 1, 1998. The parties
are currently negotiating to have the August 1, 1998 due date for
the balloon payment extended further; however, there can be no
assurance that the Registrant will be successful in that regard.
The subordinated lender has been granted a second priority lien
on substantially all of the Company's assets.
Contingent Note
In connection with the Woolworth Settlement, the Purchase Money
Note due in April 1998 (in the original principal amount of $2.9
million) was modified so that such Note constitutes a $1 million
non-interest bearing contingent obligation which is to be
forgiven by Woolworth on July 30, 1998, subject to certain
conditions. For further information concerning the Woolworth
Settlement, reference is made to "Final Disposition of the
Woolworth Dispute", in Item 1(a)(i) of this Report.
Working Capital
Working capital amounted to $18.2 million at January 31, 1998
compared to $24.9 million at February 1, 1997. For a discussion
of items affecting working capital at January 31, 1998, reference
is made to Overview in this Item 7.
The ratio of current assets to current liabilities at the end of
fiscal 1998 and fiscal 1997 was 1.6 and 1.7, respectively.
Assuming the continuing availability of (a) trade credit at
current levels and (b) the combination of greater borrowing
availability under the Company's New Senior Credit Facility
(which facility became effective on May 14, 1998) and cash
generated by the Company's operations, in the opinion of
management, the Company will be able to meet its estimated
working capital requirements for at least the forthcoming twelve
months.
For further information concerning the terms of the New Senior
Credit Facility, see Item 1(a)(iii) of this Report.
Inflation
Inflation has been modest in recent years and has not had a
significant effect on the Company. If merchandise costs were to
increase because of inflation, management believes such increases
could be recovered through higher selling prices, since virtually
all competitors would likely be similarly affected.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, costs and expenses for each
fiscal period. Actual results could differ from those estimated.
Forward-Looking Statements
This Report contains certain "forward-looking statements" that
are subject to certain risks and uncertainties which could cause
the Company's actual results or performance to differ materially
from those set forth in such statements. In addition to general
economic conditions and their effect upon levels of consumer
spending, these risks and uncertainties include the extent of
competition in the markets served by the Company's stores,
changes in the health-care regulatory environment affecting the
Company, significant changes in the level of interest and finance
charges borne by the Company and the success of its cost-cutting
and planned merchandising and advertising programs. The Company
assumes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events
or otherwise.
Year 2000
The Company has taken action to understand the nature and extent
of the work required to make its systems and infrastructure Year
2000 compliant. In addition, the Company is communicating with
its major suppliers and service providers to determine whether
they are actively involved in projects to ensure that their
products and business systems will be Year 2000 compliant. The
Company anticipates that its Year 2000 issues will be addressed
on a timely basis and at a cost that will not be material to the
Company's operations or financial condition. However, in the
event that the Year 2000 issues of the Company and/or third
parties with whom the Company transacts business are not
addressed on a timely basis, it is possible that such issues
could have an adverse impact on the Company's operations and/or
financial condition.
Recently Issued Accounting Standards
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. It is calculated
as net income available to common shareholders divided by the
weighted average number of common shares outstanding. All
earnings (loss) per share amounts for all periods have been
presented to conform to SFAS No. 128 requirements. Diluted
earnings (loss) per share is not reported because such amounts
are anti-dilutive.
In February 1997, the FASB issued SFAS No. 129, "Disclosure about
Capital Structure". This Statement, which established standards
for disclosing information about an entity's capital structure,
had no effect on the disclosures in the Company's fiscal 1998
consolidated financial statements as the Company's capital
structure is not complex.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which is effective for the Company's
fiscal 1998 consolidated financial statements. This Statement
established standards for reporting and display of comprehensive
income and its components in a full set of general-purpose
financial statements. SFAS No. 130 had no effect on the Company's
fiscal 1998 financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which is
effective for the Company's fiscal 1998 consolidated financial
statements. This Statement requires enterprises to report
certain financial information on segments that would be
determined based on the Company's internal reporting. As the
Company has only one business segment, retail, SFAS No. 131 did
not have an effect on disclosures in the notes to the fiscal 1998
financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits".
This Statement, which revises disclosures about pensions and
other post-retirement benefit plans, is effective for financial
statements with periods beginning after December 15, 1997.
Restatement of disclosures for earlier periods is required upon
adoption. The Company anticipates that the adoption of SFAS No.
132 will not have a significant effect on its 1999 financial
statements.
Item 8. Financial Statements and Supplementary Data
The following documents are filed on the pages listed below as a
part of this report.
1. Financial Statements
Report of Independent Accountants F-1
Consolidated Statements of Operations
for each of the three years in the
period ended January 31, 1998 F-2
Consolidated Balance Sheets at
January 31, 1998 and
February 1, 1997 F-3
Consolidated Statements of Cash Flows
for each of the three years in the
period ended January 31, 1998 F-4
Consolidated Statements of Shareholders'
Equity for each of the three years
in the period ended January 31, 1998 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedule
Report of Independent Accountants on
Financial Statement Schedule F- 20
I. Valuation and Qualifying Accounts F- 21
All other schedules have been omitted because either they are not
applicable or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
Item 9. Disagreements on Accounting and Financial Disclosure
Within the 24 months prior to the date of the Registrant's most
recent financial statements, there were no reports on Form 8-K
filed or required to be filed by the Registrant involving a
reporting disagreement on any matter of accounting principles or
practices or financial statement disclosure.
PART III.
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
The following table contains information regarding all current
directors of the Registrant.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other Positions with the Period Served
Registrant; as a Director
Occupation(s) or of the
Name Age Employment Registrant
- - ---------------------------------------------------------------------------------
Manfred Brecker 71 Chairman of the Board of the Registrant Since 1968
since 1983; Chief Executive Officer
from 1983 to 1989; President and Chief
Operating Officer of the Registrant
from 1971 until 1983.
Kenneth A. Davis 49 President, Chief Executive Officer Since 1979
and Chief Operating Officer
of the Registrant since January 1990;
President and Chief Operating Officer
from 1983 to December 1989; from 1980 to
1983, Vice-President of the Registrant;
an employee of the Registrant since 1979.
Joseph Keller 52 Senior Vice President-Administration Since 1991
and Operations since May 1995;
Senior Vice President-Operations
since October 1985; Vice President from
September 1984 to September 1985;
an employee of the Registrant since 1963.
Marcie B. Davis 45 Executive Vice President/Secretary & Since 1995
Treasurer; Executive Vice President
since November 1995. Senior Vice
President-Finance from 1991 to October
1995; Chief Financial Officer from January
1995 to October 1995; Secretary of the
Registrant since 1990, Treasurer since
1988 and Vice President since 1984; an
employee of the Registrant since 1971.
Melvin Katz 66 Partner, law firm of Maloney, Mehlman Since 1972
& Katz since April 1994; prior thereto
practicing attorney in New York City
for more than 35 years and served
as a partner in various firms.
Raymond L. Steele 63 Retired. From August 1990 until Since 1991
September 1993, Executive Vice
President of Pacholder Associates, Inc.,
Cincinnati, Ohio; prior thereto Executive
Advisor at The Nickert Group from 1989
through 1990; Vice President, Trust Officer
and Chief Investment Officer of The
Provident Bank, Cincinnati, Ohio from 1984
through 1988.
Peter Gerard 52 Managing Director of Rauscher Pierce Since 1995
& Clark, Inc., a London based investment
banking firm, resident in Dallas, Texas,
since July 1995; Managing Partner of
Llama Associates, a provider of mezzanine
and bridge financing, since 1990; Chairman
and Chief Executive Officer of Spinnaker
Partners, Westbrooke Hospitality
Corporation and affiliates since 1984;
prior to 1984 , Senior Vice President-
Corporate Finance of Schneider Bernet
& Hickman, an investment banking and
brokerage organization.
Michael A. Feder 46 Managing Director in the Investment Since 1995
Banking Department of Credit Suisse First
Boston, an international investment
banking firm with which Mr. Feder has been
associated in the areas of investment
banking and capital markets since 1980;
prior thereto, a Vice President of the
Chase Manhattan Bank.
</TABLE>
Arrangements or Understandings With Regard to Selection
of Directors or Nominees
None.
(b) Identification of Executive Officers
The executive officers of the Registrant and their ages and
offices with the Registrant are as follows:
Name and Age Positions with Registrant
------------------- ---------------------------------
Manfred Brecker (71) Chairman of the Board
Kenneth A. Davis (49) President, Chief Executive
Officer, Chief Operating Officer
and a director
Marcie B. Davis (45) Executive Vice President,
Secretary, Treasurer and a director
Joseph Keller (52) Senior Vice President-Administration
and Operations and a director
Richard A. Davis (45) Senior Vice President-Finance and
Chief Financial Officer
Eileen Abbate (50) Vice President-Advertising
Amparo Castro (41) Vice President-Controller and
Assistant Treasurer
Daniel Thigpen (47) Vice President-Store Operations
Richard Davis has been an employee of the Registrant since
November 1995. From February 1990 to October 1995, he was a
Senior Associate at BDO Seidman, LLP, an international accounting
and consulting firm. Mr. Davis is a Certified Public Accountant.
Eileen Abbate has been an employee of the Registrant since April
1990, other than during a brief period while she was employed
elsewhere. She was elected Vice President-Advertising in April
1992. Prior to joining the Registrant, she was the Advertising
Director of Drug Fair/Cost Cutters from 1988 to March 1990.
Amparo Castro has been an employee of the Registrant since June
1989, other than during a brief period while she was employed
elsewhere. She was elected Vice President and Assistant
Treasurer of the Registrant in 1996 and Controller of the
Registrant in August 1991. Prior to joining the Registrant, she
was manager of financial reporting of Henri Bendel Inc., a
division of The Limited Inc., from 1987 to June 1989.
Daniel Thigpen has been an employee of the Registrant since 1972.
He was elected Vice President of Store Operations of the
Registrant in April 1995. Prior thereto, he held various
management positions of the Registrant including Director of
Store Special Projects from 1992 to 1995 and District Manager
from 1985 to 1992. Mr. Thigpen held various store level
positions of the Registrant from 1972 to 1985.
For information regarding officers of the Registrant who are also
directors, reference is hereby made to Item 10(a) of this Report.
(c) Identification of Certain Significant Employees
None.
(d) Family Relationships
Kenneth A. Davis is the son-in-law of Manfred Brecker; Marcie B.
Davis is the daughter of Manfred Brecker and the wife of Kenneth
A. Davis; Richard A. Davis is the brother of Kenneth A. Davis.
(e) Business Experience
See Items 10(a) and 10(b) above.
(f) Involvement in Certain Legal Proceedings
None.
Item 11. Executive Compensation
(a) General
The following sets forth certain information with respect to
executive compensation.
(b) Summary Compensation Table
The following table sets forth certain information concerning the
annual and long-term compensation paid or accrued on behalf of
the Chairman of the Board, the Chief Executive Officer and the
three other most highly compensated Executive Officers (the
"Named Executive Officers") for each of the Registrant's last
three completed fiscal years:
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------------ -------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
NAME AND RESTRICTED OPTIONS ALL
PRINCIPAL FISCAL STOCK (# OF LTIP OTHER
POSITION YEAR SALARY BONUS AWARDS SHARES) PAYOUTS COMP
- - ------------------------------------------------------------------------------
Kenneth 1998 $311,539 $118,000 $ - - $ - $1,118
Davis 1997 225,000 - - 125,000 - 1,164
President 1996 225,000 - 48,772 - - 1,171
CEO, COO
Manfred 1998 175,000 25,000 - - - 1,041
Brecker 1997 175,000 25,000 - 75,000 - 1,164
Chairman 1996 153,845 25,000 - - - 1,254
of the Board
Marcie 1998 125,000 - - - - 703
B.Davis 1997 143,750 - - 50,000 - 732
Executive VP 1996 92,500 15,000 19,791 - - 743
Sec, Treas
Joseph 1998 120,000 - - - - 821
Keller 1997 108,243 - - 15,000 - 864
S VP 1996 108,270 7,500 24,739 - - 875
Admin &
Operations
Richard 1998 122,307 - - - - 910
A. Davis 1997 110,000 - - 25,000 - -
S VP 1996 25,384(*) - - 50,000 - -
Finance &
CFO
</TABLE>
(*) Employment of Richard A. Davis commenced on November 5, 1995.
The foregoing table does not include severance compensation of
$110,000 paid to a former executive officer of the Registrant
whose employment with the Registrant terminated in 1996, all of
which was accrued in the Registrant's 1997 fiscal year. For
further information concerning the compensation and prior
employment arrangements of this former officer, reference is made
to Item 11 of the Registrant's 1997 Form 10-K.
YEAR - Refers to fiscal years ended January 31, 1998, February 1,
1997 and February 3, 1996, respectively.
SALARY - The Registrant leases a number of automobiles that are
made available to certain of its executive officers as well as to
other members of management and supervisory employees for use in
the performance of their duties. The Summary Compensation Table
does not include the value the executive officers derived from
their personal use of these automobiles, which in any event would
not exceed the lesser of $25,000 per year or 10% of the salary
reported in the Summary Compensation Table as to any Named
Executive Officer.
RESTRICTED STOCK AWARDS - The amounts set forth under this
column represent the excess of the fair market value of the
restricted shares vested during the fiscal year over the purchase
price of such restricted shares. The restricted shares were sold
to certain of the Named Executive Officers in December 1991. A
portion of the shares purchased by each such officer vested over
the subsequent four year period.
LTIP PAYOUTS - None paid. No plan in place.
ALL OTHER COMPENSATION - Includes contributions made by the
Registrant to its 401(k) plan on behalf of the Named Executive
Officers.
(c) Fiscal 1998 Option and Stock Appreciation Right ("SAR")
Grants
No options or Stock Appreciation Rights were granted by the
Registrant to the Named Executive Officers during fiscal 1998.
(d) Options Exercised and Fiscal Year-End Option Values
The following table sets forth certain information concerning
options exercised and the options outstanding at January 31, 1998
held by the Named Executive Officers:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Shares
Acquired Number of Securities Value of Unexercised
on Value Underlying Unexercised In-The-Money
Name Exercise Realized Options/SARs Options/SARs (*)
- - ------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
---------- ----------- ---------- ---------
Kenneth A. Davis - - 213,215 119,862 $968,564 $242,245
Manfred Brecker - - - 75,000 - 149,528
Marcie B. Davis - - 59,678 50,000 271,955 99,685
Joseph Keller - - 38,874 15,000 157,040 34,688
Richard A. Davis - - 33,333 41,667 - 57,813
</TABLE>
(*) Market value of securities underlying in-the-money
options at the end of fiscal 1998 (based on $5.50 per share,
the closing price of Common Shares on the Nasdaq SmallCap
Market on 1/30/98) minus the exercise price.
(e) Long-term incentive plan
None.
(f) Defined benefit or actuarial plan
None.
(g) Compensation of directors
Each member of the Board who is not an officer or employee of the
Registrant or any of its subsidiaries (an "Independent Director")
is entitled to receive certain remuneration for services
rendered.
Pursuant to the Independent Directors Plan, as amended, a total
of 50,000 Common Shares were reserved for issuance to Independent
Directors. The Independent Directors Plan provides that each
Independent Director elected by shareholders to serve as a member
of the Board, through the 1998 Annual Meeting of Shareholders, is
entitled to an award of 2,500 common shares upon his or her
election or re-election. Each annual award of Common Shares
under the Independent Directors Plan is effected automatically on
the business day next succeeding each of the annual meetings of
shareholders (or special meetings in lieu thereof) at which an
Independent Director is elected.
The Board of Directors of the Registrant further amended the
Directors Plan to increase the number of shares reserved under
such plan to 80,000 and to provide that each Independent
Director, at his or her election, may receive, in lieu of cash
fees of $500 per Board Meeting, and in lieu of cash fees of $250
per Committee Meeting, Common Shares of the Registrant for each
Board Meeting and Committee Meeting attended by such Independent
Director during each year of his incumbency as a Director. The
number of such Common Shares per Board Meeting and per Committee
Meeting attended shall be determined by dividing the sum of $500
($250 for Committee Meetings) by the closing price of the Common
Shares on the NASDAQ SmallCap Market on the trading day
immediately preceding each such Meeting. The total number of
such Common Shares so issuable to each Independent Director shall
be determined within ten days after the date of each Annual
Meeting of the Board of Directors. This amendment, which is
subject to shareholder ratification, became effective as of the
date of the Board of Directors Meeting held on January 22, 1998.
All of the Independent Directors of the Registrant elected to
accept Common Shares in lieu of cash fees for attendance at that
Board Meeting and for all subsequent Board Meetings and Committee
Meetings to be held during their current terms as Directors.
Pursuant to such amendment, the termination date of the Directors
Plan was extended to the date immediately preceding the date of
the Shareholder's Meeting of the Registrant in the year 2001 in
which directors are elected.
(h) Employment contracts and termination of employment and
change in control arrangements
In July 1995, the Registrant entered into Executive Employment
Agreements with each of Manfred Brecker, Chairman of the Board,
and Kenneth A. Davis, President and Chief Executive Officer of
the Registrant. Each such agreement provides for an employment
term continuing through the end of the Registrant's 1999 fiscal
year (i.e., January 30, 1999). Under his employment agreement,
Mr. Brecker is paid an annual base salary of $175,000, subject to
annual cost of living increases, and a special bonus, in
consideration of services rendered and to be rendered, in the
amount of $100,000, payable in four equal annual installments
commencing in 1995. Pursuant to his employment agreement, Mr.
Davis is to be paid annual base salary of $225,000 increased to
$250,000 effective January 31, 1996, subject to annual cost of
living increases, and an annual bonus equal to $10,000 for every
$.05 per share of pre-tax income for the appropriate fiscal
year. Mr. Davis' base salary will further increase to $300,000
retroactively to the first day of the fiscal year in which the
Company achieves profitability. The employment agreements with
Messrs. Brecker and Davis also provide that, if such executive's
employment with the Company is terminated (i) by the Registrant
in breach of the agreement or (ii) by the executive for "Good
Reason", as defined in the agreement to include, among other
events, the occurrence of a change in control of the Registrant,
such executive shall be entitled to continue to be paid his base
salary then in effect for a period of three years from the date
of termination of employment or, in lieu thereof, a lump sum
amount equal to the discounted present value of such three years
of base salary.
In November 1995, the Registrant entered into an Executive
Employment Agreement with Richard A. Davis with respect to
his employment as the Registrant's Senior Vice President-Finance
and Chief Financial Officer continuing through January 30, 1999.
Pursuant to this employment agreement, Mr. Davis: (a) currently
receives an annual base salary of $132,300, which reflects
increases from his initial base salary of $110,000 plus annual
increases based on cost of living adjustments; and (b) was
granted options to purchase 50,000 Common Shares of the
Registrant at an exercise price equal to the fair market value of
such shares as of the date of their grant. The options granted to
Mr. Davis vest ratably over a three year period commencing with
the first anniversary date of Mr. Davis' employment with the
Registrant. The employment agreement with Mr. Davis also
provides for one year's additional compensation based on similar
termination provisions as are described in the preceding
paragraph with respect to Mr. Brecker's and Mr. Kenneth Davis'
employment agreements.
(i) Re-pricing of options
None.
(j) Additional information with respect to Compensation
Committee Interlocks and Insider Participation in compensation
decisions. See Item 13(b) of this Report.
The Registrant has a Compensation Committee none of whose members
is an officer or employee of the Registrant. The members of the
Compensation Committee are Melvin Katz, Michael Feder and Raymond
Steele. The Compensation Committee is involved in the
development of criteria to determine future compensation of the
Chief Executive Officer and other executive officers of the
Registrant.
(k) Board compensation report on executive compensation
Pursuant to the instructions for this Item, no response is
required.
(l) Performance graph
Pursuant to the instructions for this Item, no response is
required.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The following table provides information as of April 15, 1998
with respect to holdings of the Registrant's Common Shares by all
persons known by the Registrant to be the beneficial owners of
more than 5% of the total number of Common Shares outstanding as
of that date. Each beneficial owner has sole voting and
investment power with respect to the shares set forth opposite
his or her name in the following table, except as otherwise
disclosed in the footnotes to the table:
Name and Address Amount and Nature Percentage
of Beneficial Owner of Beneficial Ownership of Class *
- - ---------------------- ---------------------- ---------
Anne Brecker 487,336 (1) 16.3%
860 Broadway
New York, New York 10003
Kenneth A. Davis 392,519 (2) 13.1%
860 Broadway
New York, New York 10003
Hemisphere Trading Co., Inc. 260,000 (3) 8.7%
5796 Shelby Oaks Drive
Memphis, TN 38134-7333
*Calculation based upon 2,997,263 Common Shares and Common
Share Equivalents outstanding as of April 15, 1998 (including
total non-qualified options of 215,273 and total incentive
options of 187,149, all of which are exercisable within 60 days).
(1) Includes 481,542 shares owned by Mrs. Brecker and 5,794
shares held by trusts, of which she is the trustee, for the
benefit of her children. Mrs. Brecker disclaims beneficial
ownership of the shares held by such trusts. Does not include
1,281 shares beneficially owned by Mrs. Brecker's husband,
Manfred Brecker, the Chairman of the Board of the Registrant,
with respect to which Mrs. Brecker disclaims beneficial
ownership.
(2) Includes 153,663 shares subject to options granted to Mr.
Davis pursuant to Registrant's 1991 Non-Qualified Stock Option
Plan (the "Non-Qualified Plan") and 59,552 shares subject to
options granted pursuant to the Registrant's 1991 Incentive Stock
Option Plan (the "Incentive Option Plan"), all of which are
exercisable within 60 days. Does not include 122,472 shares
beneficially owned by Mr. Davis' wife. Mr. Davis disclaims
beneficial ownership of the shares held by his wife.
(3) As reported on Amendment #1 to Schedule 13D filed by
Hemisphere Trading Co. Inc. ("Hemisphere") on April 7, 1997.
According to such Schedule 13D, Hemisphere has shared voting
power and shared dispositive power with respect to all 260,000 of
these shares.
(b) Security Ownership of Management
The following table sets forth certain information as of April
15, 1998 with respect to holdings of the Registrant's Common
Shares beneficially owned by each of the Registrant's directors
and Named Executive Officers and by all officers and directors of
the Registrant as a group.
Name of Amount and Nature Percentage
Beneficial Owner of Beneficial Ownership of Class
- - ----------------- ------------------------- ----------
Manfred Brecker 1,281 (1) *
Kenneth A. Davis 392,519 (2) 13.1%
Joseph Keller 108,153 (3) 3.6%
Marcie B. Davis 122,472 (4) 4.1%
Richard A. Davis 33,333 (5) 1.1%
Melvin Katz 7,960 *
Michael A. Feder 7,500 *
Peter Gerard 7,500 *
Raymond L. Steele 8,879 *
Officers and directors as a
group (consisting of 12
persons) 726,745 (6) 24.2%
* Less than 1%
(1) Does not include 481,542 shares owned by Mr. Brecker's wife,
Anne Brecker, or 5,794 shares held by trusts for the benefit of
Mr. Brecker's adult children, of which his wife is the trustee.
Mr. Brecker disclaims beneficial ownership of the shares held by
his wife and shares held by the trusts.
(2) Includes 153,663 shares subject to options granted to Mr.
Davis pursuant to the Registrant's Non-Qualified Plan and 59,552
shares subject to options granted pursuant to the Registrant's
Incentive Option Plan, all of which are exercisable within 60
days. Does not include 122,472 shares beneficially owned by Mr.
Davis' wife. Mr. Davis disclaims beneficial ownership of the
shares held by his wife.
(3) Includes 12,874 shares subject to options granted to Mr.
Keller under the Non-Qualified Plan and 26,000 shares subject to
options granted under the Incentive Option Plan, all of which are
exercisable within 60 days.
(4) Includes 42,299 shares subject to options granted to Ms.
Davis pursuant to the Registrant's Non-Qualified Plan and 17,379
shares subject to options granted under the Incentive Option
Plan, all of which are exercisable within 60 days. Does not
include 392,519 shares beneficially owned by Ms. Davis' husband.
Ms. Davis disclaims beneficial ownership of the shares held by
her husband.
(5) Includes 33,333 shares subject to options granted to Mr.
Richard A. Davis pursuant to the Registrant's Incentive Option
Plan, all of which are exercisable within 60 days.
(6) Includes an aggregate of 215,273 shares subject to options
granted under the Registrant's Non-Qualified Plan and 152,724
options granted under the Incentive Option Plan, all of which are
exercisable within 60 days.
(c) Changes in Control
None
Item 13. Certain Relationships and Related Transactions
(a) Transactions with Management and Others
None.
(b) Certain Business Relationships
Maloney, Mehlman & Katz, a law firm of which Melvin Katz, a
director of the Registrant, is currently a member, currently
provides legal services to the Registrant, and received fees for
services rendered to the Registrant during fiscal 1998 totaling
approximately $79,000.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
Pursuant to the instructions for this Item, no response is
required.
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements
Report of Independent Accountants F-1
Consolidated Statements of Operations
for each of the three years in the
period ended January 31, 1998 F-2
Consolidated Balance Sheets at
January 31, 1998 and February 1, 1997 F-3
Consolidated Statements of Cash Flows
for each of the three years in the
period ended January 31, 1998 F-4
Consolidated Statements of Shareholders'
Equity for each of the three years
in the period ended January 31, 1998 F-5
Notes to Consolidated Financial Statements F-6
2.Financial Statement Schedule
Report of independent accountants on
financial statement schedule F-20
I. Valuation and Qualifying Accounts F-21
All other schedules have been omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
3. Exhibits
3.1 Restated Certificate of Incorporation, as amended, of the
Registrant (incorporated by reference to Exhibit 3.1 to the
Registrant's Current Report on Form 8-K dated December 24,
1991, Commission File No. 1-7090).
3.2 Certificate of Amendment of Certificate of Incorporation of
the Registrant dated April 1, 1993 (incorporated by reference
to Exhibit 3.1 to the Registrant's Current Report on Form 8-K
dated April 9, 1993, Commission File No. 1090).
3.3 By-Laws, as amended, of the Registrant (incorporated by
reference from Exhibit 3.2 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 3, 1990,
Commission File No. 1-7090).
Exhibits 10.1 through 10.5 were filed as Exhibits 10.4 and 10.9
through 10.12, respectively, to the Registrant's Current Report
on Form 8-K dated December 24, 1991, Commission File Number 1-
7090, Exhibits 10.6 through 10.12 were filed as Exhibits 10.6
through 10.12, respectively, to the Registrant's 1996 Form 10-K
Report dated May 3, 1996, Commission File Number 1-7090 and
Exhibit 10.13 was filed as Exhibit 10.13 to the Registrant's 1997
Form 10-K Report dated May 2, 1997, Commission File Number 1-
7090, all of which are incorporated herein by reference thereto:
10.1 Warrant Agreement dated as of December 24, 1991 by and
between the Registrant and Rosenthal & Rosenthal, Inc.
10.2 S.E. Nichols Inc. 1991 Incentive Stock Option Plan.
10.3 S.E. Nichols 1991 Non-Qualified Stock Option Plan.
10.4 Form of Agreement under S.E. Nichols Inc. 1991 Non-
Qualified Stock Option Plan.
10.5 Form of Restricted Stock Purchase Agreement and
Memorandum.
10.6 Pharmhouse Corp. 1995 Stock Option Plan previously
filed with the Registrant's Definitive Proxy Statement
filed with the Commission on October 11, 1995.
10.7 Amendment to 1992 Equity Compensation Plan for Non-
Employee Directors previously filed with the Registrant's
Definitive Proxy Statement filed with the Commission on
October 11, 1995.
10.8 Warrant Agreement dated January 23, 1996 between the
Registrant and Brenner Securities Corporation.
10.9 Employment Agreement dated July 14, 1995 between the
Registrant and Kenneth A.Davis.
10.10 Employment Agreement dated July 14, 1995 between the
Registrant and Manfred Brecker.
10.11 Employment Agreement dated December 15, 1995 between
the Registrant and Gerald Katz.
10.12 Employment Agreement dated November 6, 1995 between the
Registrant and Richard A. Davis.
10.13 Mutual Release and Woolworth Settlement dated January
31, 1997 between the Registrant and Woolworth.
10.14 Amendment to Mutual Release and Settlement Agreement
dated June 24, 1997 between the Registrant and Woolworth.
10.15 $40,000,000 Loan and Security Agreement dated May 14,
1998 between the Registrant and Foothill Capital Corporation.
Unless otherwise noted, all references to the "Commission" in
this index shall mean the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Pharmhouse Corp.
(Registrant)
By: /s/ Kenneth A. Davis
--------------------------
Kenneth A. Davis
President, Chief Executive
Officer and Chief Operating
Officer
By: /s/ Richard A. Davis
--------------------------
Richard A. Davis
Senior Vice President-Finance
and Chief Financial Officer
Dated: May 18, 1998
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ Manfred Brecker Chairman of the Board of Directors May 13, 1998
- - -------------------
Manfred Brecker
/s/ Kenneth A. Davis President, Chief Executive May 13, 1998
- - ------------------- Officer, Chief Operating
Kenneth A. Davis Officer and a Director
/s/ Marcie B. Davis Executive Vice President, May 13, 1998
- - ------------------- Secretary, Treasurer and
Marcie B. Davis a Director
/s/ Joseph Keller Senior Vice President- May 13, 1998
- - ------------------- Administration & Operations
Joseph Keller and a Director
/s/ Melvin Katz Director May 13, 1998
- - ------------------
Melvin Katz
/s/Michael A. Feder Director May 13, 1998
- - --------------------
Michael A. Feder
/s/Peter Gerard Director May 13, 1998
- - --------------------
Peter Gerard
/s/ Raymond L. Steele Director May 13, 1998
- - --------------------
Raymond L. Steele
EXHIBIT 22.1
Subsidiaries of the Registrant
Name State of Incorporation
- - --------------------- ----------------------
Nichols Realty, Inc. Pennsylvania
Rx Realty Corp. Delaware
<Page F-1>
Report of Independent Accountants
To the Board of Directors andShareholders of Pharmhouse Corp.In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Pharmhouse Corp. and its subsidiaries at January 31, 1998 and February 1,
1997 and the results of their operations and their cash flows for each of
the fiscal years ended January 31, 1998, February 1, 1997 and February 3,
1996 in conformity with generally accepted accounting principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
April 24, 1998, except as to Note 4 and Note 13, which is as of May 14, 1998
<Page F-2>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
---------------------------------------
Revenues:
Net sales $ 194,658 $ 224,292 $ 203,130
Video rental, service
and other income 6,093 7,437 6,399
---------------------------------------
200,751 231,729 209,529
---------------------------------------
Costs and Expenses:
Cost of merchandise sold 155,393 176,390 159,528
Selling, general and
administrative expense 47,548 56,344 49,582
Provision for store closure (185) 573 -
---------------------------------------
202,756 233,307 209,110
---------------------------------------
Operating income (loss) (2,005) (1,578) 419
Interest expense (3,032) (4,230) (3,544)
Other income, net 1,346 - -
---------------------------------------
Loss before extraordinary gain (3,691) (5,808) (3,125)
Extraordinary gain, net - 7,142 618
---------------------------------------
Net earnings (loss) $(3,691) $ 1,334 $(2,507)
=======================================
Basic earnings (loss) per share:
Loss before extraordinary gain$ (1.48) $ (2.56) $ (1.41)
Extraordinary gain, net - 3.15 0.28
---------------------------------------
Net earnings (loss) $ (1.48) $ 0.59 $ (1.13)
=======================================
Average number of shares 2,491 2,267 2,217
=======================================
See accompanying Notes to Consolidated Financial Statements.
<Page F-3>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
January 31, February 1,
1998 1997
------- -------
ASSETS
Current assets
Cash $ 3,296 $ 2,915
Receivables, net of allowances
of $1,075 and $987, respectively 4,518 7,307
Merchandise inventory 37,332 49,796
Prepaid expenses and other 1,292 1,861
------- -------
Total current assets 46,438 61,879
Property, fixtures and equipment, net 4,795 5,580
Video rental inventory, net 1,972 2,531
Other assets 487 256
------- -------
Total assets $53,692 $70,246
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 4,647 $ 7,640
Accounts payable 20,713 24,155
Provision for store closure 284 1,615
Accrued expenses and other liabilities 2,628 3,586
------- -------
Total current liabilities 28,272 36,966
Long-term debt, net of current portion 19,154 24,400
Other liabilities 1,372 498
------- -------
Total liabilities 48,798 61,894
------- -------
COMMITMENTS AND CONTIGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par; authorized
and unissued 2,500,000 shares
Common stock, $.01 par; authorized
25,000,000 shares; issued 2,594,841
and 2,359,064 shares, respectively 26 23
Additional paid-in capital 21,728 21,498
Accumulated deficit (16,859) (13,168)
------- -------
4,895 8,353
Treasury stock, at cost 1 1
------- -------
Total shareholders' equity 4,894 8,352
------- -------
Total liabilities and shareholders' equity $53,692 $70,246
======= =======
See accompanying Notes to Consolidated Financial Statements
<Page F-4>
<TABLE>
<CAPTION>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<S> <C> <C> <C>
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
-----------------------------------
Cash Flows provided by Operating Activities:
Net income (loss) $ (3,691) $ 1,334 $ (2,507)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Depreciation and amortization 3,135 2,775 2,013
Provision for store closure (185) 573 -
Increase (decrease)in deferred liabilities 1,128 (27) (86)
Share grants to directors and restricted
share awards 69 113 78
Gain on early retirement of debt - - (618)
Gain on forgiveness of debt, net - (7,142) -
Changes in operating assets and liabilities
exclusive of amounts arising from Acquisition:
Decrease (increase) in:
Accounts receivable, net 2,788 (1,470) (3,409)
Merchandise inventory 12,464 3,982 1,389
Prepaid expenses and other 419 (211) (833)
Other assets (231) 949 (1,086)
(Decrease) increase in:
Accounts Payable (3,442) 2,006 14,549
Accrued expenses and other liabilities (1,212) (905) 3,270
Provision for store closure (1,146) - -
-----------------------------
Net Cash Flows provided by Operating Activities 10,096 1,977 12,760
-----------------------------
Cash Flows used by Investing Activities:
Acquired business, net of store cash acquired - - (39,538)
Capital expenditures (373) (993) (1,868)
Purchase of video rental inventory, net of
disposals (1,268) (2,036) (1,555)
-----------------------------
Net Cash Flows used by Investing Activities (1,641) (3,029) (42,961)
-----------------------------
Cash Flows (used) provided by Financing Activities:
Revolver borrowings, net (7,639) 1,552 8,568
Pay-down of Subordinated Loan (600) (550) -
Borrowings to finance acquisition - - 34,460
Retirement of debt - - (7,481)
Prepayment of Purchase Money Note - - (3,951)
Proceeds from issuance of common stock and
exercise of stock options and warrants 165 81 176
-----------------------------
Net Cash Flows (used) provided by Financing
Activities (8,074) 1,083 31,772
-----------------------------
Net increase in cash 381 31 1,571
Cash, beginning of year 2,915 2,884 1,313
-----------------------------
Cash, end of year 3,296 2,915 2,884
=============================
Supplemental information:
Income taxes paid - - -
Interest payments 3,038 3,381 3,329
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<Page F-5>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued Additional Treasury Stock
Number of paid-in Number of Accumulated
shares Par value capital shares Cost deficit Total
-----------------------------------------------------------------------------
Balance, January 28,1995 2,235,631 $ 22 $ 20,978 (16,734) $(1) $(11,995) $9,004
Fiscal 1996:
Issuance of warrants 176 176
Share grants to dire 12,500 78 78
Amortization of unearned
compensation relating
to share grants 73 73
Cancellation of S.E. Nichols
pre-filing shares (2,416)
Net loss for the year (2,507) (2,507)
----------------------------------------------------------------------------------------
Balance, February 3, 1996 2,245,715 22 21,305 (16,734) (1) (14,502) 6,824
Fiscal 1997:
Exercise of warrants 85,867 1 80 81
Share grants to director 10,000 38 38
Restricted share awards 17,500 75 75
Purchase of fractional shares (18) -
Net income for the year 1,334 1,334
-------------------------------------------------------------------------------------
Balance, February 1, 1997 2,359,064 23 21,498 (16,734) (1) (13,168) 8,352
Fiscal 1998:
Exercise of warrants 209,195 2 111 113
Share grants to directors 10,000 69 69
Exercise of stock options 16,592 1 50 51
Purchase of fractional shares (10) -
Net loss for the year (3,691) (3,691)
-------------------------------------------------------------------------
Balance, January 31, 1998 2,594,841 $ 26 $ 21,728 (16,734) $(1) $(16,859) $4,894
======================================================================================================
</TABLE>
<Page F-6>
PHARMHOUSE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business and Background
Pharmhouse Corp. (the "Company" or "Pharmhouse") operates a
chain of 32 discount drug stores located in eight states in the
mid-Atlantic and New England regions of the United States, 13
of which operate under the name Pharmhouse (the "Pharmhouse
Stores") and 19 of which operate under the name Rx Place (the
"Rx Stores"), the latter stores having been acquired from F. W.
Woolworth Co., a subsidiary of Woolworth Corporation
(collectively "Woolworth"), in late April 1995. Pursuant to the
settlement terms of certain litigation between Pharmhouse and
Woolworth, the Company has ceased operating and has returned to
Woolworth five of the 24 Rx Stores purchased from Woolworth.
The Company presently has an option to reassign to Woolworth
the lease for one Rx Store which remains subject to the
settlement agreement. In prior years, the Company has
characterized its stores as "deep discount stores", but
management has recently determined that the term "discount
stores" more accurately describes its current store operations.
During the last three fiscal years, except for 24 stores
acquired from Woolworth during fiscal 1996, the Company has not
opened new stores. The Company closed six stores during fiscal
1998. Five of such six closed stores were returned to
Woolworth in connection with the settlement agreement with
Woolworth. One of the closed stores was a Pharmhouse store
(such closing was unrelated to the settlement agreement). For
further information concerning the settlement agreement with
Woolworth, see "Final Disposition of the Woolworth Dispute" in
Note 2.
Fiscal Year
The fiscal year is the 52 or 53 week reporting period ending on
the Saturday closest to January 31 of each year. References to
fiscal 1998, 1997 and 1996 refer to the fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996,
respectively. Fiscal 1996 comprised a 53 week reporting period
whereas fiscal 1998 and 1997 each comprised 52 weeks.
Principles of Consolidation
These consolidated financial statements include the accounts of
Pharmhouse Corp. and its two wholly-owned real estate
subsidiaries, Nichols Realty, Inc. and Rx Realty Corp.
(collectively the "Company"). All inter-company transactions
and balances have been eliminated.
Reclassification
Certain fiscal 1997 and fiscal 1996 amounts have been
reclassified to conform with the presentation used in fiscal
1998.
Use of Estimates
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles which
require management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements. Actual results could differ from these estimates.
During the fourth quarter of fiscal 1998, the Company recorded
an adjustment to inventory of $1.7 million, primarily related
to the Rx Stores, to reflect inventory shrinkage in excess of
amounts previously accrued. The shrinkage accrual rate used in
fiscal 1998 was consistent with the Company's historical
accrual experience. The Company has increased its shrinkage
accrual rate beginning in fiscal 1999.
Receivables
Receivables are primarily generated by third party pharmacy
revenues (i.e., Medicare, Medicaid and health insurance plans).
Reference is made to Item 1 (a) (iii) of this Report for
information concerning the sale by the Company of such third
party receivable. Receivables also include vendor coupons and
advertising and promotional allowances receivable and, at
January 31, 1998, a receivable arising from the settlement of
litigation (see Note 12).
Merchandise Inventory
Merchandise inventory is carried at the lower of cost or
market, with cost determined on the first-in first-out retail
inventory method.
Pre-opening Costs
Store pre-opening costs are expensed in the fiscal year in
which the store is opened.
Property, Fixtures and Equipment and Video Rental Inventory,
Net
Property, fixtures and equipment, including significant
improvements thereto, are recorded at cost. Expenditures for
repairs and maintenance are charged to expense as incurred.
The cost of property, fixtures and equipment is depreciated
over estimated useful lives of 5 to 25 years using the straight-
line method. Leasehold improvements are amortized over the
shorter of the estimated useful life of the asset or the
remaining term of the lease. Video rental inventory is
amortized over two years.
Provision for Store Closure
Provision is made for net costs and expenses associated with
store closures when a decision is made to close the store.
Stock-Based Compensation
The Company accounts for stock-based compensation under the
requirements of Accounting Principles Board Opinion No. 25 and,
in accordance with Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Awards of Stock-Based
Compensation to Employees", which was adopted by the Company
during fiscal 1997, has provided the additional required
disclosures in the Notes to the Consolidated Financial
Statements (Note 6).
Income Taxes
Income taxes are provided based on the liability method of
accounting pursuant to SFAS No.109, "Accounting for Income
Taxes". Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax
basis of assets and liabilities and their financial reporting
amounts at each year-end. Where appropriate, valuation
reserves are recorded.
Basic and Diluted Earnings (Loss) per Share
In 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share". SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible
securities. It is calculated as net income available to common
shareholders divided by the weighted average number of common
shares outstanding. All earnings (loss) per share amounts for
all periods have been presented to conform to SFAS 128
requirements. Diluted earnings (loss) per share has not been
presented because such amounts are anti-dilutive.
Leased Department Revenues
Leased department revenues of $27,000, $229,000, and $103,000
in fiscal 1998, 1997 and 1996, respectively, is included in
other income.
Significant Supplier
Approximately 40%, 30% and 28% of the Company's total purchases
in fiscal years 1998, 1997 and 1996, respectively, represented
purchases from one unaffiliated supplier.
Recently Issued Accounting Standards
In February 1997, the FASB issued SFAS No. 129, "Disclosure
about Capital Structure". This Statement, which established
standards for disclosing information about an entity's capital
structure, had no effect on the disclosures in the Company's
fiscal 1998 financial statements as the Company's capital
structure is not complex.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which is effective for the Company's
fiscal 1998 consolidated financial statements. This Statement
established standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 had no
effect on the Company's fiscal 1998 financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which is
effective for the Company's fiscal 1998 consolidated financial
statements. The Statement requires enterprises to report
certain financial information on segments that would be
determined based on the Company's internal reporting. As the
Company has only one business segment, retail, SFAS No. 131 did
not have an effect on disclosures in the notes to the fiscal
1998 financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits".
This Statement, which revises disclosures about pensions and
other post-retirement benefit plans, is effective for financial
statements with periods beginning after December 15, 1997.
Restatement of disclosures for earlier periods is required upon
adoption. The Company anticipates that the adoption of SFAS
No. 132 will not have a significant effect on its 1999
financial statements.
NOTE 2 - ACQUISITION, LITIGATION AND FINAL DISPOSITION OF THE
WOOLWORTH DISPUTE
Acquisition
On April 28, 1995, the Company acquired, and accounted for as a
purchase, the assets and business of the 24 Rx Place discount
drug stores (the "Acquisition") from Woolworth. The total cost
of the Acquisition was $39.5 million, including $23.5 million
in cash, $12.5 million in notes issued to Woolworth (the
"Purchase Money Notes") and $2.9 million for the related costs
of acquisition (includes cost of issuance of warrants to the
Company's financial advisor, see Note 7). The Company also
assumed Woolworth's obligations under the leases of the
acquired stores. The Acquisition, consisting primarily of
merchandise inventory and store property and equipment, was
financed through a senior secured revolving credit facility
(the "Senior Credit Facility") provided by a financial
institution, a $3 million secured subordinated term loan (the
"Subordinated Loan") provided by an unaffiliated trade supplier
and the Purchase Money Notes.
Litigation
In January 1996, the Company instituted legal action against
Woolworth in the Supreme Court of the State of New York
seeking, among other relief, damages and indemnification
arising out of Woolworth's alleged fraud and breach of certain
covenants, representations and warranties made by Woolworth in
connection with the Acquisition. Pending resolution of the
Company's claims, the Company withheld payment of all further
installments of principal and interest arising out of the
Purchase Money Notes held by Woolworth.
Final Disposition of the Woolworth Dispute
On January 31, 1997, the Company and Woolworth entered into a
Mutual Release and Settlement Agreement resolving all
outstanding disputes and settling all legal proceedings arising
out of the Acquisition. On June 24, 1997, the Company and
Woolworth amended the Mutual Release and Settlement Agreement
(such agreement and amendment are collectively referred to
herein as the "Woolworth Settlement") to provide for a final
disposition of the seven Rx Stores (the "Affected Stores") that
were part of the dispute. The major aspects of the Woolworth
Settlement include:
Debt and Interest Forgiveness - Woolworth surrendered for
cancellation two of the three outstanding Purchase Money
Notes in principal amounts totaling $5.5 million and
modified the third such Note (in the original principal
amount of $2.9 million, and originally due April 1998) so
that such Note constitutes a non-interest bearing
contingent note obligation of $1 million which will be
surrendered by Woolworth for cancellation on July 30,
1998, subject to certain conditions. Woolworth also
released the Company from its $1.1 million accrued
interest obligation on the Purchase Money Notes. In
fiscal 1997, by reason of the foregoing, the Company
recorded an extraordinary gain of $7.1 million consisting
of $8.5 million in debt and interest forgiveness less
certain costs and provisions (including a $1 million store
closure provision related to two Affected Stores).
Return of Stores and Reimbursement of Rental and Occupancy
Costs - The Company received an option to terminate its
occupancy and obligations under the leases governing the
Affected Stores, subject to certain conditions. Woolworth
further agreed to pay the rent and other fixed monthly
charges and occupancy costs for the Affected Stores
through stipulated dates. Pursuant to the Woolworth
Settlement, the Company has closed five of the Affected
Stores and reassigned to Woolworth the leases for these
stores. (Prior to returning such five stores to
Woolworth, the Company liquidated and/or transferred to
its other stores the inventory and other assets located
therein). Of the two remaining Affected Stores, the
Company operated one such store with the assistance of the
Woolworth subsidy until September 1997, at which time the
Company negotiated a new lease with the landlord of the
property and has continued to operate this store without
any further subsidy or other obligation from Woolworth.
With respect to the last remaining Affected Store, the
Company has continued to operate such store for which
Woolworth is providing a subsidy for the rent and
occupancy costs. Pursuant to the Woolworth Settlement,
either party has the option to terminate this arrangement
under certain notice provisions until the lease governing
such store expires in January 2001.
Use of "The Rx Place" Name - Woolworth agreed to extend
the Company's license to use the service mark "The Rx
Place" for an additional three year period through April
28, 2001, subject to the Company's right to extend such
license for one additional year upon proper notification,
as defined in the agreement.
NOTE 3-PROPERTY, FIXTURES AND EQUIPMENT AND VIDEO RENTAL
INVENTORY, NET
A summary of property, fixtures and equipment and video rental
inventory, net at January 31, 1998 and February 1, 1997 follows
(000's omitted):
January 31, February 1,
1998 1997
---------- ----------
Property, fixtures and equipment $ 11,874 $ 11,690
Less accumulated depreciation
and amortization 7,079 6,110
---------- ----------
$ 4,795 $ 5,580
========== ==========
January 31, February 1,
1998 1997
---------- ----------
Video rental inventory $ 6,435 $ 5,441
Less accumulated amortization 4,463 2,910
---------- ----------
$ 1,972 $ 2,531
========== ==========
Total depreciation and amortization expense of property,
fixtures and equipment and video rental inventory was
$2,985,000, $2,775,000 and $1,940,000 in fiscal 1998, 1997 and
1996, respectively. Included in these amounts is amortization
expense of video rental inventory of $1,827,000, $1,629,000 and
$997,000 in fiscal 1998, 1997 and 1996, respectively.
For information concerning the return of stores to Woolworth
and other provisions of the Woolworth Settlement, see Note 2.
NOTE 4 - BORROWINGS
A summary of the Company's borrowings at January 31, 1998 and
February 1, 1997 is set forth below (000's omitted):
January 31, 1998 February 1, 1997
---------------------------- ---------------------------
Current Non-current Current Non-current
Total portion portion Total portion portion
---------------------------- ---------------------------
Senior Credit
Facility (*) $21,401 $2,247 $19,154 $29,040 $7,040 $22,000
Subordinated Loan 1,400 1,400 - 2,000 600 1,400
Contingent Note 1,000 1,000 - 1,000 - 1,000
------------------------ -----------------------
Total $23,801 $4,647 $19,154 $32,040 $7,640 $24,400
======================== =======================
(*) Effective May 14, 1998, this Senior Credit Facility was
replaced and refinanced by the New Senior Credit Facility whose
provisions are described below.
New Senior Credit Facility
On May 14, 1998, the Company and Foothill Capital Corporation
("Foothill") entered into a Loan and Security Agreement (the
"New Senior Credit Facility" or "New Facility") providing for
aggregate credit to the Company of up to $35 million. The New
Facility consists of: (i) a Term Loan up to $3 million and
(ii) revolving advances equal to the lesser of (a) 65% of
eligible inventory (at cost) or (b) $35 million less the
outstanding principal amount of the Term Loan. Under the New
Facility, subject to the foregoing formula, the maximum
revolving advances could increase up to an aggregate of $35
million as the outstanding principal amount of the term loan is
reduced. The duration of both the revolving and term loans
under the New Senior Credit Facility is five years. The total
loans which may be advanced by Foothill to the Company is
subject to an increase to an aggregate of $40 million upon
the satisfaction of certain conditions. The initial funds
advanced under the New Facility were used to pay outstanding
borrowings, charges, fees and temporary cash collateral
account aggregating $22.6 million owing by the Company to its
prior senior secured lender ("Prior Lender"). The cash
collateral of $1 million, less any potential draw-downs,
will be returned by the Prior Lender to the Company within
thirty days. In addition, the Company incurred other
transaction fees of approximately $1 million.
Indebtedness under the New Senior Credit Facility is secured by
a first priority lien on substantially all of the Company's
assets and, among other conditions, restricts the payment of
dividends and requires that the Company maintain specified
minimum tangible net worth and EBITDA (earnings before
interest, taxes, depreciation and amortization) levels. The
New Facility is at a borrowing rate of prime plus 1.125%,
subject to decrease if the Company reaches certain EBITDA
levels during the term of the facility.
Senior Credit Facility
The borrowing availability with the Company's Prior Lender was
based on the lesser of 60% of eligible inventory at cost or $45
million. The weighted average interest rate under the Senior
Credit Facility during fiscal 1998, including the effect of
facility fees, was 11.2%. During fiscal 1998, the highest
borrowing level under the Senior Credit Facility was $30
million, which borrowing occurred in February 1997, and the
lowest borrowing level was $18.8 million, which borrowing
occurred in January 1998. During the fourth quarter of fiscal
1998, the Company's net worth fell below the minimum level
established under the Senior Credit Facility. The Company was
advised by its Prior Lender that it would amend such minimum
net worth requirement as of January 31, 1998 and subsequent
periods. By that time, however, the Company had elected to
enter into the New Senior Credit Facility with Foothill on
May 14, 1998 and thereby repaid all outstanding indebtedness
to the Prior Lender because, among other considerations,
the New Facility provides the Company with greater borrowing
availability.
During the first quarter of fiscal 1999, the Company's Prior
Lender extended an over-advance to the Company in the amount of
$1.4 million, the outstanding balance of which was fully repaid
out of the proceeds of the New Senior Credit Facility on May
15, 1998.
Subordinated Loan
The Subordinated Loan payable to an unaffiliated trade supplier
is being repaid in monthly installments of $50,000 with a $1.25
million balloon payment due on April 28, 1998. Pursuant to an
agreement dated April 24, 1998 between the Company and the
subordinated lender, the terms for the balloon payment have
been amended as follows: the Company will make three
consecutive monthly installments of $50,000 commencing on May
1, 1998 and a final installment of $1.1 million on August 1,
1998. The parties are currently negotiating to have the amended
August 1, 1998 due date for the balloon payment extended
further; however, there can be no assurance that the Company
will be successful in that regard. The subordinated lender has
been granted a second priority lien on substantially all of the
Company's assets. The loan has a borrowing rate of prime plus
3%.
Contingent Note
In connection with the Woolworth Settlement, Woolworth
surrendered for cancellation two of the three then outstanding
Purchase Money Notes in the aggregate amount of $5.5 million
and modified the third Note (in the original principal amount
of $2.9 million and originally due in April 1998) so that such
Note constitutes a contingent non-interest bearing obligation
of $1 million which will be surrendered by Woolworth for
cancellation on July 30, 1998, subject to certain conditions.
For further information concerning the Woolworth Settlement,
see discussion under "Acquisition, Litigation and Final
Disposition of the Woolworth Dispute" in Note 2.
NOTE 5 - INCOME TAXES
The Company is not subject to federal income taxes in fiscal
1998 as the Company did not generate taxable earnings. The
Company has significant net operating loss carryforwards which
are available to offset future taxable income. State and local
income taxes, which are computed on a basis other than income
(e.g., capital stock, etc.), are not material and such amounts
are included in SG&A expense.
The Company has available two classes of net operating loss
("NOL") which may be used to offset future taxable income. NOL
Class #1 is the NOL generated pre-petition (e.g., prior to the
1990 Chapter 11 filing of the Company). The Company's use of
NOL Class #1 is limited by formula, pursuant to the federal
income tax code, to $255,000 per annum, plus the unused carry-
forward balance (which, at January 31, 1998, was $442,000).
The total available NOL Class #1 at January 31, 1998 amounts to
approximately $2.7 million which expires in 2006.
NOL Class #2 is the NOL generated subsequent to the filing and
is not subject to annual limitation. The NOL Class #2
available at January 31, 1998 amounts to approximately $12.7
million.
Deferred income tax temporary differences are determined in
accordance with SFAS No. 109. The temporary differences giving
rise to deferred taxes primarily relate to property and
equipment, employee stock options and allowances for doubtful
accounts. At January 31, 1998 and February 1, 1997, the
Company has established a valuation allowance of 100% since it
does not appear more likely than not that a tax asset will be
realized.
NOTE 6 - STOCK OPTION AND COMPENSATION PLANS
The Company has three stock option plans (a 1991 Non-Qualified
Stock Option Plan; a 1991 Incentive Stock Option Plan; and a
1995 Stock Option Plan (collectively the "Stock Option Plans"))
and one equity compensation plan in effect, all of which have
been approved by the Company's shareholders.
1991 Non-Qualified Stock Option Plan
Under the 1991 Non-Qualified Stock Option Plan (the "Non-
Qualified Plan"), a total of 274,604 Common Shares were
reserved for issuance to employees of the Company. The
exercise price of such options is not less than 25% of the fair
market value of the Common Shares subject to such options on
the date of grant.
Participation in the Non-Qualified Plan was voluntary but an
election to participate was irrevocable. Seven employees of the
Company elected to participate (two such employees are no
longer employed by the Company), each of whom specified the
dollar amount by which his or her respective annual salary was
reduced during each of the Company's three fiscal years
commencing February 2, 1992. In return for such salary
reductions, each employee participating in the Non-Qualified
Plan received discounted stock options entitling each to
purchase Common Shares at 25% of the fair market value of such
common shares on the date of grant of the options. On June 30,
1992, 253,525 of the options available for grant under the Non-
Qualified Plan were granted at an exercise price of $.544 per
Common Share (equal to 25% of the fair market value on the date
of grant), of which 34,942 were subsequently forfeited.
During fiscal 1997, 45,000 restricted Common Shares were
granted to an executive at a nominal purchase price. As a
result of the termination of this executive's employment,
15,000 of such shares were issued to him and 30,000 were
forfeited pursuant to vesting provisions governing their
issuance. As of January 31, 1998, 64,942 of the options
granted under the Non-Qualified Plan were forfeited, 15,000
were exercised and 218,583 remain exercisable.
1991 Incentive Stock Option Plan
Under the 1991 Incentive Stock Option Plan (the "Incentive
Plan"), a total of 298,850 Common Shares were reserved for
issuance to employees of the Company. Each of the options
granted under the Incentive Plan is an incentive stock option,
as that term is defined in Section 422 of the Internal Revenue
Code of 1986, as amended, the exercise price of which is the
fair market value of the Common Shares on the date the options
were granted. Of the options available for grant under the
Incentive Plan, 286,902 were granted in December 1991 at an
exercise price of $1.914 per Common Share, of which 92,149 of
such options were subsequently canceled. During fiscal 1997,
70,415 options under the Incentive Plan were granted at
exercise prices per Common Share ranging from $3.19 to $3.75,
such amounts being equal to or above the fair market values on
the dates of the respective grants. As of January 31, 1998,
113,804 of the options granted under the Incentive Plan lapsed
owing to the termination of optionees' employment, 19,879 were
exercised and 223,634 remain exercisable.
1995 Stock Option Plan
Under the 1995 Stock Option Plan (the "1995 Plan"), a total of
500,000 Common Shares have been reserved for issuance upon the
exercise of stock options and related stock appreciation rights
("SARs").
Pursuant to the 1995 Plan, the Company may grant incentive
stock options ("ISOs"), non-qualified stock options ("NSOs")
and SAR's to officers, directors and key employees of the
Company. The 1995 Plan is administered by the Compensation
Committee of the Company's Board of Directors which selects the
optionees, authorizes the grant of options and determines the
exercise price and other terms of the options, including the
vesting schedule thereof, if any. The per share exercise price
of each ISO granted under the 1995 Plan must be at least 100%
of the fair market value of a Common Share (and not less than
110% of the fair market value in the case of any optionee of an
ISO who beneficially owns more than 10% of the total combined
voting power of the Company) on the date such option is
granted. The per share exercise price of an NSO must be at
least 25% of the fair market value of a Common Share on the
date such option is granted.
The 1995 Plan also provides for the grant of SAR's, which may
be granted on a stand-alone basis or in tandem with stock
options, which may be surrendered to the Company in exchange
for cash, Common Shares or a combination thereof, as determined
by the committee administering the 1995 Plan, having a value
equal to the dollar amount obtained by multiplying (x) the
number of shares subject to the surrendered SAR or option by
(y) the amount by which the fair market value per Common Share
exceeds the exercise price per share specified in the agreement
governing the surrendered SAR's or options.
As of January 31, 1998, 472,585 options had been issued under
the 1995 Option Plan, at exercise prices of $3.1875 to $3.5063
(such amounts being equal to the fair market values on the date
of grant), 21,000 lapsed owing to the termination of optionees'
employment resulting in 451,585 options outstanding.
The combined activity in the Stock Option Plans for the three
fiscal years ended January 31, 1998 was as follows:
Number of
shares Exercise price per share
-------- ------------------------
Outstanding at January 28, 1995 422,549 $0.544 - $1.914
Fiscal 1996 Activity:
Granted -
Exercised -
Canceled (5,776) $0.544 - $1.914
---------
Outstanding at February 3, 1996 416,773
Fiscal 1997 Activity:
Granted 588,000 $3.188 - $5.875
Exercised -
Canceled (16,724) $0.544 - $1.914
--------
Outstanding at February 1, 1997 988,049
Fiscal 1998 Activity:
Granted -
Exercised 31,592) $1.914 - $3.750
Canceled (62,655) $1.914 - $3.750
--------
Available for grant at January 31, 1998 893,802
========
1992 Equity Compensation Plan for Non-Employee Directors
Under the 1992 Equity Compensation Plan for Non-Employee
Directors, as amended in fiscal 1996, (the "Independent
Directors Plan"), a total of 50,000 Common Shares were reserved
for issuance to members of the Board of Directors of the
Company who do not serve as officers or employees of the
Company or any of its subsidiaries (the "Independent
Directors"). The Independent Directors Plan provides that each
Independent Director elected by shareholders, commencing with
the shareholders meeting held June 30, 1992 through the 1998
shareholders' meeting, shall be entitled to an award of 2,000
Common Shares (2,500 effective in fiscal 1996) upon his or her
election or re-election. The fair market value of such shares
is expensed upon issuance and added to Additional Paid-in
Capital.
The Board of Directors further amended the Directors Plan to
increase the number of shares reserved under such plan to
80,000 and to provide that each Independent Director, at his or
her election, may receive, in lieu of cash fees of $500 per
Board Meeting, and in lieu of cash fees of $250 per Committee
Meeting, Common Shares of the Company for each Board Meeting
and Committee Meeting attended by such Independent Director
during each year of his or her incumbency as a Director. The
number of such Common Shares per Board Meeting and per
Committee Meeting attended shall be determined by dividing the
sum of $500 ($250 for Committee Meetings) by the closing price
of the Common Shares on the NASDAQ SmallCap Market on the
trading day immediately preceding each such Meeting. This
amendment, which is subject to shareholder ratification, became
effective as of the date of the Board of Directors Meeting held
on January 22, 1998. All of the Independent Directors of the
Company elected to accept Common Shares in lieu of cash fees
for attendance at that Board Meeting and for all subsequent
Board Meetings and Committee Meetings to be held during their
current terms as Directors. Pursuant to such amendment, the
termination date of the Directors Plan was extended to the date
immediately preceding the date of the Shareholders' meeting of
the Company in the year 2001 in which directors are elected.
During fiscal 1997, the Company issued 2,500 Common Shares to a
former director for past services rendered to the Company.
Application of SFAS No. 123 - Pro Forma Net Income and Net
Income Per Common Share
SFAS No. 123 requires the Company to disclose pro forma net
income and net income per share determined as if the Company
had accounted for stock-based compensation awards granted after
December 31, 1994 under the fair value method of that
Statement. The fair values of options under SFAS No. 123 were
estimated at each grant date using a Black-Scholes option
pricing model with the following assumptions: a risk-free
interest rate of 6.1%, a dividend yield of zero, a volatility
factor of the expected market price of the Company's common
stock of 1.05 and an expected option life of seven and one-half
years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options.
For these pro forma disclosures, the estimated fair value of
options and other stock-based awards is amortized to expense
over the award's vesting period. The Company's fiscal 1998 and
fiscal 1997 reported and pro forma information is as follows:
Fiscal 1998 Fiscal 1997
----------- -----------
Net income (loss), as reported $(3,691,000) $1,334,000
Pro forma net income (loss) $(4,027,000) $1,007,000
Net income (loss) per share,
as reported $ (1.48) $ 0.59
Pro forma net income(loss)
per share $ (1.61) $ 0.44
In fiscal 1996, there were no stock-based compensation awards
granted under the Stock Option Plans. Accordingly, no
adjustment to the Company's fiscal 1996 pro forma results is
required under SFAS No. 123.
NOTE 7 - WARRANTS
In April 1995, in connection with the Acquisition, the Company
issued 85,867 warrants to purchase the Company's Common Shares
to its financial advisor (such amount being equal to 3% of the
Company's issued and outstanding shares, including Common Share
equivalents), subject to certain anti-dilution protection, for
a per share exercise price of approximately $0.94. The
difference between the fair market value of the warrants on the
date of grant and the exercise price was included in the
acquisition cost of the Rx Stores (see Note 2). All of such
warrants were exercised during fiscal 1997.
In December 1991, the Company issued warrants to its previous
secured lender to purchase 209,195 of its Common Shares at
varying exercise prices ranging from $.19 to $1.91. In June
1997, the Company filed a Registration Statement under the
Securities Act of 1933 relating to the offer and sale of such
securities by that lender. As of August 2, 1997, all of such
warrants had been exercised. The exercise of the warrants
resulted in an increase to paid-in capital of $111,127, net of
related expenses.
NOTE 8 - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) savings plan
which allows employees to contribute a percentage of
compensation not to exceed amounts permitted under the
Internal Revenue Code. The Company matches 100% of the first
$1 of employee contribution each week plus 25% of any
additional compensation contributed, up to a maximum of 3% of
annual compensation. The Company's contribution into the
401(k) savings plan amounted to $111,000, $105,000 and $81,000
in fiscal 1998, 1997 and 1996, respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS
One of the Company's directors is a member of a law firm which
provided legal services to the Company for fees and
disbursements aggregating $79,000, $71,000 and $328,000 in
fiscal 1998, 1997 and 1996, respectively.
NOTE 10 - PROVISION FOR STORE CLOSURE
During fiscal 1997, the Company recorded a $1.6 million
provision for estimated costs related to the closing of three
stores, including two Rx stores which were returned to
Woolworth in connection with the Woolworth Settlement. During
fiscal 1998, the Company closed three additional Rx stores in
connection with the Woolworth Settlement. No additional
provision for store closure was provided for these stores as
the unused provision remaining from fiscal 1997 is estimated to
be sufficient to cover the anticipated closure costs for these
three Rx stores. The provision for store closure primarily
includes costs for inventory mark-downs, employee severance and
miscellaneous wind-down expenses.
The following table summarizes activity during the last three
fiscal years with respect to the provision for store closure
(000's):
1998 1997 1996
------ ------- ------
Balance, beginning of year $1,615 $ - $ -
Activity:
Provision - 1,615 -
Amounts charged against accrual (1,146) - -
Reversal of prior year
over-accrual (185) - -
------ ------- ------
Balance, end of year $ 284 $ 1,615 $ -
====== ======= ======
For further information concerning the return of stores to
Woolworth and other provisions of the Woolworth Settlement, see
Note 2.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company's operating leases are principally for retail store
locations, a distribution facility and the executive offices.
At January 31, 1998, future minimum rental payments required
under operating leases that have initial or remaining non-
cancelable lease terms in excess of one year, without regard to
potential sublease revenue, is set forth below (000's):
Fiscal Year Amount
----------- ---------
1999 $ 6,657
2000 6,433
2001 6,304
2002 6,598
2003 6,251
Thereafter 51,553
Rent expense, excluding certain real estate tax and maintenance
costs, for all operating leases is comprised of the following
(000's):
Fiscal Fiscal Fiscal
1998 1997 1996
------ ------ ------
Minimum rentals $7,198 $8,466 $6,781
Contingent rentals 34 93 117
Sublease revenue (788) (904) (927)
------- ------- -------
$6,444 $7,655 $ 5,971
======= ======= =======
Legal Matters
For information concerning the terms of a recent settlement of
litigation between the Company and one of its landlords for a
leased store, see Note 12.
In the normal course of business, the Company is subject to
various legal proceedings and claims. In the opinion of
management, any ultimate liability arising from or related to
these claims should not have a material adverse effect on
future results of operations or the consolidated financial
position of the Company.
Supply Agreement
The Company is a party to a three year supply agreement with
McKesson Drug Company pursuant to which the Company is required
to purchase a minimum of 90% of its pharmaceutical and certain
other merchandise from McKesson.
Letters of Credit
The Company had letters of credit outstanding of approximately
$1 million at January 31, 1998.
NOTE 12 - OTHER INCOME, NET
On January 31, 1998, the Company and a landlord for one of the
Company's Pharmhouse stores reached an out-of-court settlement
of certain litigation related to a lease for such store. Under
the terms of the settlement agreement with the landlord, as
amended on May 1, 1998, the Company will receive the sum of
$1,675,000 ($200,000 of which was paid by the landlord on May
1, 1998 and $1,475,000 of which is payable on May 31, 1998)
plus accrued interest on the outstanding balance since January
31, 1998, in exchange for waiving its exclusive right to use
its space to operate a discount drugstore or discount pharmacy,
thereby permitting the landlord to lease out space in the
shopping center to any other tenant who operates a drugstore or
pharmacy, discount or otherwise. The terms of the agreement
also provide for the following: effective on May 1, 1998, the
Company's present fixed monthly rent obligation for this store
will convert to a percentage rent calculation; and effective on
September 30, 1998, the Company has the right to terminate the
lease upon 90 days prior notice to the landlord and the
landlord has the right to recapture the premises for this store
upon 120 days prior notice to the Company.
In connection with this transaction, the Company has recorded
in its fiscal 1998 fourth quarter other income, net of related
legal expenses, of $1,346,000.
NOTE 13 - SUBSEQUENT EVENT
On May 14, 1998, the Company and Foothill entered into the New
Senior Credit Facility providing for aggregate credit to the
Company of up to $35 million. The New Facility consists of
(i) a Term Loan up to $3 million and (ii) revolving advances
equal to the lesser of (a) 65% of eligible inventory (at cost)
or (b) $35 million less the outstanding principal amount of the
term loan. Under the New Facility, subject to the foregoing
formula, the maximum revolving advances could increase up to an
aggregate of $35 million as the outstanding principal amount of
the term loan is reduced. The duration of both the revolving
and term loans under the New Senior Credit Facility is five
years. The total loans which may be advanced by Foothill to
the Company is subject to an increase to an aggregate of $40
million upon the satisfaction of certain conditions. The
initial funds advanced under the New Facility were used to
repay outstanding borrowings, charges, transaction fees and
temporary cash collateral account aggregating $22.6 million
owing by the Company to its Prior Lender. The cash collateral
of $1 million, less any potential draw-downs, will be returned
to the Company within thirty days. In addition, the Company
incurred other transaction fees of approximately $1 million.
Indebtedness under the New Senior Credit Facility is secured by
a first priority lien on substantially all of the Registrant's
assets and, among other conditions, restricts the payment of
dividends and requires that the Registrant maintain specified
minimum tangible net worth and EBITDA levels. The New Facility
is at a borrowing rate of prime plus 1.125%, subject to
decrease if the Company reaches certain EBITDA levels during
the term of the facility.
<Page F-20>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors and
Shareholders of Pharmhouse Corp.
Our audits of the consolidated financial statements referred to
in our report dated April 24, 1998 and May 14, 1998 appearing
on page F-1 of the 1998 Annual Report on Form 10-K of
Pharmhouse Corp. for the year ended January 31, 1998 also
included an audit of the Financial Statement Schedule listed in
Item 14(a) of this Form 10-K. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements.
PRICE WATERHOUSE LLP
New York, New York
May 14, 1998
<Page F-21>
PHARMHOUSE CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions Deductions
Balance at Charged to Balance
beginning costs and Bad debt Bad debt at end of
of period expenses write offs recoveries period
Reserves deducted in
balance sheet
January 31, 1998:
Allowance for
doubtful accounts $ 987 $ 281 $ (193) $ - $1,075
February 1, 1997:
Allowance for
doubtful accounts $ 918 $ 219 $ (150) $ - $ 987
February 3, 1996:
Allowance for
doubtful accounts $ 618 $ 383 $ (37) $ (46) $ 918
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 3,296
<SECURITIES> 0
<RECEIVABLES> 4,518
<ALLOWANCES> 0
<INVENTORY> 37,332
<CURRENT-ASSETS> 46,438
<PP&E> 6,767
<DEPRECIATION> 3,135
<TOTAL-ASSETS> 53,692
<CURRENT-LIABILITIES> 28,272
<BONDS> 0
0
1
<COMMON> 26
<OTHER-SE> (16,859)
<TOTAL-LIABILITY-AND-EQUITY> 53,692
<SALES> 194,658
<TOTAL-REVENUES> 6,093
<CGS> 155,393
<TOTAL-COSTS> 202,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 185
<INTEREST-EXPENSE> 3,032
<INCOME-PRETAX> (3,691)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,691)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 10.14
AMENDMENT TO MUTUAL RELEASE AND
SETTLEMENT AGREEMENT
AMENDMENT TO MUTUAL RELEASE AND SETTLEMENT AGREEMENT,
made as of June 24, 1997 (the "Amendment"), by and between
Pharmhouse Corp. ("Pharmhouse"), Rx Realty Corp. ("Rx
Realty"), their respective affiliates and successors
(jointly and severally the "Pharmhouse Entities") and F.W.
Woolworth Co. and Woolworth Corporation and their respective
affiliates and successors (collectively "Woolworth").
WITNESSETH:
WHEREAS, the parties hereto have heretofore entered
into the certain Mutual Release and Settlement Agreement,
dated January 31, 1997 (the "Settlement Agreement"):
WHEREAS, the Pharmhouse Entities and Woolworth hereby
wish to amend the Settlement Agreement in certain respects,
as hereinafter provided.
NOW, THEREFORE, in consideration of the premises and
the mutual agreements and covenants contained in the
Settlement Agreement and this Amendment, the parties hereto
agree that the Settlement Agreement is amended as follows:
1. Regarding the Option Leases (as such term is
defined in the Settlement Agreement) for the stores known as
#3014, Capital City Plaza, Camp Hill, Pennsylvania; #3019,
Colonial Common Shopping Center, Harrisburg, Pennsylvania;
#3026, Hills Plaza, Dewitt, New York; and #3035 Carousel
Commons, Syracuse, New York, the parties agree that
effective August 1, 1997:
(a) The Pharmhouse Entities shall remain in possession of
each of the stores referenced above subject to Paragraph
1(c) hereof.
(b) Woolworth shall continue to accommodate the payment of
current rent and other fixed monthly sums, as required under
the Settlement Agreement, on the same basis as prior to July
31, 1997, except that the Pharmhouse Entities shall
contribute toward the monthly accommodation payments by
permitting Woolworth to deduct therefrom, the following
amounts:
(i) #3014, Capital City Plaza, Camp Hill
Pennsylvania, - $10,000.00/per month;
(ii) #3019, Colonial Common Shopping Center
Harrisburg, Pennsylvania - $7,500.00/per
month;
(iii) #3026, Hills Plaza, Dewitt, New
York
$6,500.00 per month; and
(iv) #3035, Carousel Mall, Syracuse, New York
$15,000.00/per month
(c) Either the Pharmhouse Entities or Woolworth shall
be permitted to terminate any or all of the leases
for the stores referenced above at any time upon not
less than seventy-five (75) days prior written
notice to the other. Notwithstanding the foregoing
to the contrary, Woolworth shall be permitted to
terminate any or all of the leases for the stores
referenced above at least sixty (60) days prior
written notice to the Pharmhouse Entities, if
Woolworth has sublet or assigned the premises to a
third party or entered into an agreement with a
landlord for the termination or entered into an
agreement with a landlord for the termination of a
lease who, as a condition to taking such space by
assignment, sublet or termination requires
possession of the premises prior to the expiration
of such seventy-five (75) day notice period and
confirms such requirement in a letter sent to the
Pharmhouse Entities.
2. Market Fair North Shopping Center, Clay, New York,
(store #3025) shall be reassigned to Woolworth on or before
August 31, 1997 and Woolworth shall continue to make
payments for the month of August 1997, to accommodate the
current rent and other fixed monthly sums, as provided in
the Settlement Agreement with respect to store #3025, on the
same basis as prior to July 31, 1997. Except for the
foregoing, store #3025 will be reassigned to Woolworth in
accordance with the terms and conditions of the Settlement
Agreement.
3. Exhibit G to the Settlement Agreement is hereby
amended as set forth in the revised Exhibit G, attached
hereto and made a part hereof. The Pharmhouse Entities
shall pay to Woolworth upon execution of this Amendment all
unpaid rents, less offsets, as set forth in the revised
Exhibit G.
4. Except as specifically provided herein and in
Pharmhouse's letters of May 29, 1997 and June 10, 1997
regarding the return of store #3015 in Albany, New York, the
Settlement Agreement shall remain in full force and effect
in accordance with its express terms.
5. Upon the full execution and delivery of this
Amendment, this Amendment shall supersede that certain
letter delivered to Woolworth by the Pharmhouse Entities
dated June 11, 1997, with respect to the reassignment of the
Option Leases (as such term is defined in the Settlement
Agreement).
IN WITNESS WHEREOF, the parties hereto have been duly
executed this Amendment as of the day and year first above
written.
F.W. WOOLWORTH CO.
By: /s/ John H. Cannon
--------------------------
Name: John H. Cannon
Title: Vice President
WOOLWORTH CORPORATION
By: /s/ John H. Cannon
------------------------------
- - -
Name: John H. Cannon
Title: Vice President
PHARMHOUSE CORP.
By: /s/ Marcie B. Davis
------------------------------
- - -
Name: Marcie B. Davis
Title: Executive Vice
President
RX REALTY CORP.
By: /s/ Marcie B. Davis
------------------------------
- - -
Name: Marcie B. Davis
Title: Executive Vice
President
Exhibit 10.15
$40,000,000
LOAN AND SECURITY AGREEMENT
by and between
PHARMHOUSE CORP.,
and
FOOTHILL CAPITAL CORPORATION
Dated as of May 15, 1998
<Page i>
TABLE OF CONTENTS
Page(s)
1. DEFINITIONS AND CONSTRUCTION 1
1.1 Definitions 1
1.2 Accounting Terms 14
1.3 Code 14
1.4 Construction 14
1.5 Schedules and Exhibits 14
2. LOAN AND TERMS OF PAYMENT 14
2.1 Revolving Advances 14
2.2 Letters of Credit 15
2.3 Term Loan 17
2.4 Intentionally Omitted 17
2.5 Overadvances 17
2.6 Interest and Letter of Credit Fees: Rates,
Payments, and Calculations. 18
2.7 Collection of Accounts 19
2.8 Crediting Payments; Application of Collections 20
2.9 Designated Account 21
2.10 Maintenance of Loan Account; Statements of
Obligations 21
2.11 Fees 21
2.12 Capital Adequacy 22
2.13 Credit Line Amount 22
3. CONDITIONS; TERM OF AGREEMENT 22
3.1 Conditions Precedent to the Initial Advance,
Letter of Credit and the Term Loan 22
3.2 Conditions Precedent to all Advances,
all Letters of Credit and the Term Loan 25
3.3 Condition Subsequent 25
3.4 Term 25
3.5 Effect of Termination 26
3.6 Early Termination by Borrower 26
3.7 Termination Upon Event of Default 26
4. CREATION OF SECURITY INTEREST 26
4.1 Grant of Security Interest 26
4.2 Negotiable Collateral 27
4.3 Collection of Accounts, General Intangibles,
and Negotiable Collateral. 27
4.4 Delivery of Additional Documentation Required 27
4.5 Power of Attorney 27
4.6 Right to Inspect 28
4.7 Release of Health Care Receivables 28
5. REPRESENTATIONS AND WARRANTIES 28
5.1 No Encumbrances 29
5.2 Intentionally Omitted 29
<Page ii>
5.3 Eligible Inventory 29
5.4 Equipment 29
5.5 Location of Inventory and Equipment 29
5.6 Inventory Records 29
5.7 Location of Chief Executive Office; FEIN 29
5.8 Due Organization and Qualification; Subsidiaries 29
5.9 Due Authorization; No Conflict 30
5.10 Litigation 30
5.11 No Material Adverse Change 31
5.12 Solvency 31
5.13 Employee Benefits 31
5.14 Environmental Condition 31
5.15 License Arrangements 32
5.16 Credit Card Agreements 32
6. AFFIRMATIVE COVENANTS 32
6.1 Accounting System 32
6.2 Collateral Reporting 32
6.3 Financial Statements, Reports, Certificates 33
6.4 Tax Returns 34
6.5 Guarantor Reports 34
6.6 Intentionally Omitted 34
6.7 Title to Equipment 34
6.8 Maintenance of Equipment 34
6.9 Taxes 34
6.10 Insurance 35
6.11 No Setoffs or Counterclaims 36
6.12 Location of Inventory and Equipment 36
6.13 Compliance with Laws 36
6.14 Employee Benefits 36
6.15 Leases 37
6.16 Year 2000 Compliance 37
6.17 Credit Card Agreements 37
7. NEGATIVE COVENANTS 38
7.1 Indebtedness 38
7.2 Liens 39
7.3 Restrictions on Fundamental Changes 39
7.4 Disposal of Assets 39
7.5 Change Name 39
7.6 Guarantee 39
7.7 Nature of Business 40
7.8 Prepayments and Amendments 40
7.9 Change of Control 40
7.10 Consignments 40
7.11 Distributions 40
7.12 Accounting Methods; Fiscal Year 40
7.13 Investments 40
7.14 Transactions with Affiliates 40
7.15 Suspension 40
7.16 Intentionally Omitted 40
<Page iii>
7.17 Use of Proceeds 41
7.18 Change in Location of Chief Executive Office;
Inventory and Equipment with Bailees 41
7.19 No Prohibited Transactions Under ERISA 41
7.20 Financial Covenants 42
7.21 Capital Expenditures 42
8. EVENTS OF DEFAULT 43
9. FOOTHILL'S RIGHTS AND REMEDIES 44
9.1 Rights and Remedies 44
9.2 Remedies Cumulative 46
9.3 Script Files and Pharmaceuticals 47
10. TAXES AND EXPENSES 47
11. WAIVERS; INDEMNIFICATION 47
11.1 Demand; Protest; etc 47
11.2 Foothill's Liability for Collateral 47
11.3 Indemnification 48
12. NOTICES 48
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER 49
14. DESTRUCTION OF BORROWER'S DOCUMENTS 50
15. GENERAL PROVISIONS 50
15.1 Effectiveness 50
15.2 Successors and Assigns 50
15.3 Section Headings 50
15.4 Interpretation 50
15.5 Severability of Provisions 50
15.6 Amendments in Writing 50
15.7 Counterparts; Telefacsimile Execution 51
15.8 Revival and Reinstatement of Obligations 51
15.9 Integration 51
15.10 Time is of the Essence 52
15.11 Confidentiality 52
<Page iv>
SCHEDULES AND EXHIBITS
Schedule E-1 Eligible Inventory Locations
Schedule P-1 Permitted Liens
Schedule R-1 Real Property Collateral
Schedule 2.7(b) Armored Car Services
Schedule 5.8 Subsidiaries; Shareholders
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 5.16 Credit Card Agreements
Schedule 6.12 Location of Inventory and Equipment
Exhibit C-1 Form of Compliance Certificate
<Page 1>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is
entered into as of May 15, 1998, between FOOTHILL CAPITAL
CORPORATION, a California corporation ("Foothill"), with a
place of business located at 11111 Santa Monica Boulevard,
Suite 1500, Los Angeles, California 90025-3333 and PHARMHOUSE
CORP., a New York corporation ("Borrower"), with its chief
executive office located at 860 Broadway, New York, New York
10003.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement,
the following terms shall have the following definitions:
"Account Debtor" means any Person who is or who
may become obligated under, with respect to, or on account of,
an Account.
"Accounts" means all currently existing and
hereafter arising accounts, contract rights, and all other
forms of obligations owing to Borrower arising out of the sale
or lease of goods or the rendition of services by Borrower,
irrespective of whether earned by performance, and any and all
credit insurance, guaranties, or security therefor, including,
without limitation, Credit Card Receivables and Health Care
Receivables.
"Advances" has the meaning set forth in Section
2.1(a).
"Affiliate" means, as applied to any Person,
any other Person who directly or indirectly controls, is
controlled by, is under common control with or is a director
or officer of such Person. For purposes of this definition,
"control" means the possession, directly or indirectly, of the
power to vote 20% or more of the securities having ordinary
voting power for the election of directors or the direct or
indirect power to direct the management and policies of a
Person.
"Agreement" has the meaning set forth in the
preamble hereto.
"Armored Car Services" shall mean the armored
car services listed on Schedule 2.7(b) hereto and their
respective successors and assigns or any other armored car
service selected by Borrower after the date hereof and
reasonably acceptable to Borrower.
"Authorized Person" means any officer or other
employee of Borrower.
"Average Unused Portion of Maximum Amount"
means, as of any date of determination, (a) the Credit Line
Amount, minus (b) the sum of (i) the average Daily Balance of
Advances that were outstanding during the immediately
preceding month, plus (ii) the average Daily Balance of the
undrawn Letters of Credit that were outstanding during the
immediately preceding month, plus (iii) the average Daily
Balance of the principal of the Term Loan; provided, however,
that if such difference is a negative number, the Average
Unused Portion of Maximum Amount shall be deemed to be zero.
<Page 2>
"Bankruptcy Code" means the United States
Bankruptcy Code (11 U.S.C. 101 et seq.), as amended, and any
successor statute.
"Benefit Plan" means a "defined benefit plan"
(as defined in Section 3(35) of ERISA) for which Borrower, any
Subsidiary of Borrower, or any ERISA Affiliate has been an
"employer" (as defined in Section 3(5) of ERISA) within the
past six years.
"Blocked Account" shall mean the special
deposit account established by Borrower at the Blocked Account
Bank pursuant to the Blocked Account Agreement, into which
Borrower shall cause all proceeds of the Collateral and all
cash received by it to be transferred or deposited in
accordance with Section 2.7(a) hereof.
"Blocked Account Agreement" means that certain
Blocked Account Agreement, in form and substance satisfactory
to Foothill, among Borrower, Foothill and the Blocked Account
Bank.
"Blocked Account Bank" means Sterling National
Bank and Trust Company of New York and/or any other bank
mutually acceptable to Borrower and Foothill.
"Borrower" has the meaning set forth in the
preamble to this Agreement.
"Borrower's Books" means all of Borrower's
books and records including: ledgers; records indicating,
summarizing, or evidencing Borrower's properties or assets
(including the Collateral) or liabilities; all information
relating to Borrower's business operations or financial
condition; and all computer programs, disk or tape files,
printouts, runs, or other computer prepared information.
"Borrowing Base" has the meaning set forth in
Section 2.1(a).
"Business Day" means any day that is not a
Saturday, Sunday, or other day on which national banks are
authorized or required to close.
"Change of Control" shall mean (a) all or
substantially all of the assets of Borrower are sold, in one
or in a series of transactions, to any "Person" or "Group" (as
such terms are used in Sections 14(d)(2) and 13(d)(3),
respectively, of the federal Securities Exchange Act of 1934,
as amended); (b) Manfred Brecker, Anne Brecker, Kenneth A.
Davis, or Marcie B. Davis shall at any time own and control
less than twenty percent (20%), on a fully diluted basis, of
the combined voting power of the then outstanding securities
of Borrower ordinarily (and apart from rights accruing to the
holders of one or more classes of preferred securities under
certain circumstances) having the right to vote in the
election of directors; or (c) after the Closing Date, the
replacement of two-thirds (2/3) of the Board of Directors of
Borrower from the directors who constitute the Board of
Directors during any one (1) year period during the term of
this Agreement.
"Closing Date" means the date of the first to
occur of the making of the initial Advance, the issuance of
the initial Letter of Credit or the funding of the Term Loan.
"Code" means the Uniform Commercial Code as in
effect in the State of New York from time to time.
<Page 3>
"Collateral" means, all real and personal
property of the Borrower, whether now existing or hereafter
acquired, including without limitation each of the following:
(a) the Accounts,
(b) Borrower's Books,
(c) the Equipment,
(d) the General Intangibles,
(e) the Inventory,
(f) the Negotiable Collateral,
(g) the Real Property Collateral,
(h) any money, or other assets of
Borrower that now or hereafter come into the possession,
custody, or control of Foothill,
(i) the Investment Property;
(j) the Script Files; and
(k) the proceeds and products, whether
tangible or intangible, of any of the foregoing, including
proceeds of insurance covering any or all of the Collateral,
and any and all Accounts, Borrower's Books, Equipment, General
Intangibles, Inventory, Negotiable Collateral, Real Property,
money, deposit accounts, or other tangible or intangible
property resulting from the sale, exchange, collection, or
other disposition of any of the foregoing, or any portion
thereof or interest therein, and the proceeds thereof.
"Collateral Access Agreement" means a landlord
waiver, mortgagee waiver, bailee letter, or acknowledgment
agreement of any warehouseman, processor, lessor, consignee,
or other Person in possession of, having a Lien upon, or
having rights or interests in the Equipment or Inventory, in
each case, in form and substance satisfactory to Foothill.
"Collections" means all cash, checks, notes,
instruments, and other items of payment (including, insurance
proceeds, proceeds of cash sales, rental proceeds, and tax
refunds).
"Compliance Certificate" means a certificate
substantially in the form of Exhibit C-1 and delivered by the
chief accounting officer of Borrower to Foothill.
"Cost" means, with respect to any Eligible
Inventory, the lower of cost or market value of such Eligible
Inventory as determined on a basis consistent with Borrower's
current and historical accounting practices.
"Credit Card Acknowledgments" shall mean,
individually and collectively, the agreements by Credit Card
Issuers or Credit Card Processors who are parties to Credit
<Page 4>
Card Agreements in favor of Foothill acknowledging Foothill's
first priority security interest in the monies due and to
become due to Borrower (including, without limitation, credits
and reserves) under the Credit Card Agreements, and agreeing
to transfer all such amounts to the Blocked Account.
"Credit Card Agreements" shall mean all
agreements now or hereafter entered into by Borrower with any
Credit Card Issuer or any Credit Card Processor, as the same
now exist or may hereafter be amended, modified, supplemented,
extended, renewed, restated or replaced.
"Credit Card Issuer" shall mean any Person
(other than Borrower) who issues or whose members issue credit
cards, including, without limitation, MasterCard or VISA bank
credit or debit cards or other bank credit or debit cards, and
American Express, Discover, Diners Club, Carte Blanche and
other non-bank credit or debit cards.
"Credit Card Processor" shall mean any
servicing or processing agent or any factor or financial
intermediary who facilitates, services, processes or manages
the credit authorization, billing transfer and/or payment
procedures with respect to any of Borrower's sales
transactions involving credit card or debit card purchases by
customers using credit cards or debit cards issued by any
Credit Card Issuer.
"Credit Card Receivables" shall mean all
Accounts consisting of the present and future rights of
Borrower to payment for Inventory sold and delivered to
customers who have purchased such goods using a credit card or
a debit card issued by a Credit Card Issuer.
"Credit Line Amount" shall mean Thirty Five
Million Dollars ($35,000,000) or such greater amount (not to
exceed the Maximum Amount) as provided in Section 2.13 of this
Agreement.
"Daily Balance" means the amount of an
Obligation owed at the end of a given day.
"Default" means an event, condition, or default
that, with the giving of notice, the passage of time, or both,
would be an Event of Default.
"Designated Account" means account number
312032301 of Borrower maintained with Borrower's Designated
Account Bank, or such other deposit account of Borrower
(located within the United States) which has been designated,
in writing and from time to time, by Borrower to Foothill
pursuant to Section 2.9 hereof.
"Designated Account Bank" means Sterling
National Bank and Trust Company of New York, whose office is
located at 425 Park Avenue, New York, New York 10022, and
whose ABA number is 026007773, or such other bank pursuant to
Section 2.9 hereof.
"Disbursement Letter" means an instructional
letter executed and delivered by Borrower to Foothill
regarding the extensions of credit to be made on the Closing
Date, the form and substance of which shall be satisfactory to
Foothill.
"Dollars or $" means United States dollars.
<Page 5>
"Early Termination Premium" has the meaning set
forth in Section 3.6.
"EBITDA" means, with respect to Borrower for
any period, the Net Income for such period, plus, without
duplication and to the extent deducted in determining Net
Income for such period, the sum of (a) income taxes, (b)
interest expense for such period determined in accordance with
GAAP, including, without limitation, financing fees and
investment banking fees and (c) depreciation and amortization
expense.
"Eligible Inventory" means Inventory consisting
of salable finished goods held for sale in the ordinary course
of Borrower's business, that are located at Borrower's
premises identified on Schedule E-1, that strictly comply with
each and all of the representations and warranties respecting
Inventory made by Borrower to Foothill in the Loan Documents,
and that are and at all times continue to be acceptable to
Foothill in all respects; provided, however, upon notice to
and after consultation with the Borrower, the standards of
eligibility may be fixed and revised from time to time by
Foothill in Foothill's reasonable credit judgment. In
determining the amount to be so included, Inventory shall be
valued at the lower of cost or market on a basis consistent
with Borrower's current and historical accounting practices.
An item of Inventory shall not be included in Eligible
Inventory if:
(a) it is not owned solely by Borrower or
Borrower does not have good, valid, and marketable title
thereto;
(b) it is not located at one of the locations set forth
on Schedule E-1;
(c) it is not subject to a valid and perfected first
priority security interest in favor of Foothill;
(d) it consists of damaged goods returned or rejected by
Borrower's customers or goods in transit;
(e) it consists of Video Rental Inventories;
(f) it is obsolete or slow moving, a restrictive or
custom item, a component that is not part of finished goods,
or constitutes spare parts, packaging and shipping materials,
supplies used or consumed in Borrower's business, Inventory
subject to a Lien in favor of any third Person, bill and hold
goods, defective goods, "seconds," or Inventory acquired on
consignment;
(g) it consists of milk or bread;
(h) it consists of pharmaceuticals which are out-of-date;
and
(i) it consists of used video tapes intended for resale in
excess of $100,000 in the aggregate.
"Equipment" means all of Borrower's present and
hereafter acquired machinery, machine tools, motors,
equipment, furniture, furnishings, fixtures, vehicles
(including motor vehicles and trailers), tools, parts, goods
(other than consumer goods, farm products, or Inventory),
wherever located, including, (a) any interest of Borrower in
any of the foregoing, and (b) all attachments, accessories,
accessions, replacements, substitutions, additions, and
improvements to any of the foregoing.
<Page 6>
"ERISA" means the Employee Retirement Income
Security Act of 1974, 29 U.S.C. 1000 et seq., amendments
thereto, successor statutes, and regulations or guidance
promulgated thereunder.
"ERISA Affiliate" means (a) any corporation
subject to ERISA whose employees are treated as employed by
the same employer as the employees of Borrower under IRC
Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer
as the employees of Borrower under IRC Section 414(c),
(c) solely for purposes of Section 302 of ERISA and
Section 412 of the IRC, any organization subject to ERISA that
is a member of an affiliated service group of which Borrower
is a member under IRC Section 414(m), or (d) solely for
purposes of Section 302 of ERISA and Section 412 of the IRC,
any party subject to ERISA that is a party to an arrangement
with Borrower and whose employees are aggregated with the
employees of Borrower under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with
respect to any Benefit Plan or Multiemployer Plan, (b) the
withdrawal of Borrower, any of its Subsidiaries or ERISA
Affiliates from a Benefit Plan during a plan year in which it
was a "substantial employer" (as defined in Section 4001(a)(2)
of ERISA), (c) the providing of notice of intent to terminate
a Benefit Plan in a distress termination (as described in
Section 4041(c) of ERISA), (d) the institution by the PBGC of
proceedings to terminate a Benefit Plan or Multiemployer Plan,
(e) any event or condition (i) that provides a basis under
Section 4042(a)(1), (2), or (3) of ERISA for the termination
of, or the appointment of a trustee to administer, any Benefit
Plan or Multiemployer Plan, or (ii) that may result in
termination of a Multiemployer Plan pursuant to Section 4041A
of ERISA, (f) the partial or complete withdrawal within the
meaning of Sections 4203 and 4205 of ERISA, of Borrower, any
of its Subsidiaries or ERISA Affiliates from a Multiemployer
Plan, or (g) providing any security to any Plan under
Section 401(a)(29) of the IRC by Borrower or its Subsidiaries
or any of their ERISA Affiliates.
"Event of Default" has the meaning set forth in
Section 8.
"Existing Lender" means Congress Financial
Corporation, a California corporation.
"FEIN" means Federal Employer Identification
Number.
"Foothill" has the meaning set forth in the
preamble to this Agreement.
"Foothill Account" has the meaning set forth in
Section 2.7.
"Foothill Expenses" means all: costs or
expenses (including taxes, and insurance premiums) required to
be paid by Borrower under any of the Loan Documents that are
paid or incurred by Foothill; reasonable fees or charges paid
or incurred by Foothill in connection with Foothill's
transactions with Borrower, including, fees or charges for
photocopying, notarization, couriers and messengers,
telecommunication, public record searches (including tax lien,
litigation, and UCC searches and including searches with the
patent and trademark office, the copyright office, or the
department of motor vehicles), filing, recording, publication,
appraisal (including periodic Personal Property Collateral or
Real Property Collateral appraisals), real estate surveys,
real estate title policies and endorsements, and environmental
<Page 7>
audits; reasonable costs and expenses incurred by Foothill in
the disbursement of funds to Borrower (by wire transfer or
otherwise); reasonable charges paid or incurred by Foothill
resulting from the dishonor of checks; costs and expenses paid
or incurred by Foothill to correct any default or enforce any
provision of the Loan Documents, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling,
preparing for sale, or advertising to sell the Personal
Property Collateral or the Real Property Collateral, or any
portion thereof, irrespective of whether a sale is
consummated; costs and expenses paid or incurred by Foothill
in examining Borrower's Books; costs and expenses of third
party claims or any other suit paid or incurred by Foothill in
enforcing or defending the Loan Documents or in connection
with the transactions contemplated by the Loan Documents or
Foothill's relationship with Borrower or any guarantor; and
Foothill's reasonable attorneys fees and expenses incurred in
advising, structuring, drafting, reviewing, administering,
amending, terminating, enforcing (including attorneys fees and
expenses incurred in connection with a "workout," a
"restructuring," or an Insolvency Proceeding concerning
Borrower or any guarantor of the Obligations), defending, or
concerning the Loan Documents, irrespective of whether suit is
brought; provided, however, that Foothill's Expenses incurred
on or prior to the Closing Date in connection with the closing
of the transactions contemplated by this Loan Agreement and
the Loan Documents shall not exceed $75,000.
"GAAP" means generally accepted accounting
principles as in effect from time to time in the United
States, consistently applied.
"General Intangibles" means all of Borrower's
present and future general intangibles and other personal
property (including contract rights, rights arising under
common law, statutes, or regulations, choses or things in
action, goodwill, patents, trade names, trademarks,
servicemarks, copyrights, blueprints, drawings, purchase
orders, customer lists, monies due or recoverable from pension
funds, route lists, rights to payment and other rights under
any royalty or licensing agreements, infringement claims,
computer programs, information contained on computer disks or
tapes, literature, reports, catalogs, deposit accounts,
insurance premium rebates, tax refunds, and tax refund
claims), other than goods, Accounts, and Negotiable
Collateral.
"Governing Documents" means the certificate or
articles of incorporation, by-laws, or other organizational or
governing documents of any Person.
"Hazardous Materials" means (a) substances that
are defined or listed in, or otherwise classified pursuant to,
any applicable laws or regulations as "hazardous substances,"
"hazardous materials," "hazardous wastes," "toxic substances,"
or any other formulation intended to define, list, or classify
substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity,
reproductive toxicity, or "EP toxicity", (b) oil, petroleum,
or petroleum derived substances, natural gas, natural gas
liquids, synthetic gas, drilling fluids, produced waters, and
other wastes associated with the exploration, development, or
production of crude oil, natural gas, or geothermal resources,
(c) any flammable substances or explosives or any radioactive
materials, and (d) asbestos in any form or electrical
equipment that contains any oil or dielectric fluid containing
levels of polychlorinated biphenyls in excess of 50 parts per
million.
"Health Care Payor" shall mean any debtor or
obligor in any way obligated on or in connection with any of
<PAge 8>
the Health Care Receivables, including, without limitation,
any fiscal intermediary or governmental agency or authority
that is responsible for handling payments under Medicare or
Medicaid or any private insurance company.
"Health Care Receivables" shall mean any
Accounts arising from the sale of pharmaceutical products for
which Borrower is to receive payment from a Health Care Payor.
"Indebtedness" means: (a) all obligations of
Borrower for borrowed money, (b) all obligations of Borrower
evidenced by bonds, debentures, notes, or other similar
instruments and all reimbursement or other obligations of
Borrower in respect of letters of credit, bankers acceptances,
interest rate swaps, or other similar financial products,
(c) all obligations of Borrower under leases which have been,
or should be, in accordance with GAAP recorded as capital
leases, (d) all obligations or liabilities of others secured
by a Lien on any property or asset of Borrower, irrespective
of whether such obligation or liability is assumed, and (e)
any obligation of Borrower guaranteeing or intended to
guarantee (whether guaranteed, endorsed, co-made, discounted,
or sold with recourse to Borrower) any indebtedness, lease,
dividend, letter of credit, or other obligation of any other
Person.
"Insolvency Proceeding" means any proceeding
commenced by or against any Person under any provision of the
Bankruptcy Code or under any other bankruptcy or insolvency
law, assignments for the benefit of creditors, formal or
informal moratoria, compositions, extensions generally with
creditors, or proceedings seeking reorganization, arrangement,
or other similar relief.
"Intangible Assets" means, with respect to any
Person, that portion of the book value of all of such Person's
assets that would be treated as intangibles under GAAP.
"Inventory" means all present and future
inventory in which Borrower has any interest, including goods
held for sale or to be furnished under a contract of service
and all of Borrower's present and future goods, and packing
and shipping materials, wherever located.
"Inventory Letter of Credit" means a
documentary Letter of Credit issued to support the purchase by
Borrower of Inventory prior to transit to a location set forth
on Schedule E-1, that provides that all draws thereunder must
require presentation of customary documentation (including, if
applicable, commercial invoices, packing list, certificate of
origin, bill of lading or airwaybill, customs clearance
documents, quota statement, inspection certificate,
beneficiaries statement, and bill of exchange, bills of
lading, dock warrants, dock receipts, warehouse receipts, or
other documents of title) in form and substance satisfactory
to Foothill and reflecting the passage to Borrower of title to
saleable Inventory conforming to Borrower's contract with the
seller thereof. Any such Letter of Credit shall cease to be
an "Inventory Letter of Credit" at such time, if any, as the
goods purchased thereunder become Eligible Inventory.
"Inventory Reserves" means reserves for (a) the
estimated costs relating to unpaid freight charges,
warehousing or storage charges, taxes, duties, and other
similar unpaid costs associated with the acquisition of
Eligible Inventory by Borrower, plus (b) the reasonable
estimate of reclamation claims, as such term is defined in the
Code, of unpaid sellers of Inventory sold to Borrower.
<Page 9>
"Investment Property" means, with respect to
any Person, all "investment property," as such term is defined
in the Code, now owned or hereafter acquired by such Person
and, in any event, including, without limitation, all
securities, whether certificated or uncertificated, security
entitlements, securities accounts, commodity contracts and
commodity accounts.
"IRC" means the Internal Revenue Code of 1986,
as amended, and the regulations thereunder.
"L/C" has the meaning set forth in Section
2.2(a).
"L/C Guaranty" has the meaning set forth in
Section 2.2(a).
"Letter of Credit" means an L/C or an L/C
Guaranty, as the context requires.
"Lien" means any interest in property securing
an obligation owed to, or a claim by, any Person other than
the owner of the property, whether such interest shall be
based on the common law, statute, or contract, whether such
interest shall be recorded or perfected, and whether such
interest shall be contingent upon the occurrence of some
future event or events or the existence of some future
circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance,
pledge, hypothecation, assignment, deposit arrangement,
security agreement, adverse claim or charge, conditional sale
or trust receipt, or from a lease, consignment, or bailment
for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases, and other title
exceptions and encumbrances affecting Real Property.
"Liquidation Value" means the orderly
liquidation value determined from time to time by an appraiser
satisfactory to Foothill in its sole discretion, provided that
after advance consultation with Borrower, Foothill shall
notify Borrower of its choice of appraiser.
"Loan Account" has the meaning set forth in
Section 2.10.
"Loan Documents" means this Agreement, the
Disbursement Letter, the Letters of Credit, the Blocked
Account Agreements, the Mortgages, the McKesson Intercreditor
Agreement, the Trademark Security Agreement, the Pledge
Agreement, the Nichols Guaranty, the Nichols Security
Agreement, the Rx Guaranty, the Rx Security Agreement, the
Validity Agreement, any note or notes executed by Borrower and
payable to Foothill, and any other agreement entered into, now
or in the future, in connection with this Agreement.
"Margin" has the meaning set forth in Section
2.6(a).
"Material Adverse Change" means (a) a material
adverse change in the business, operations, results of
operations, assets, liabilities or condition (financial or
otherwise) of Borrower, (b) the material impairment of
Borrower's ability to perform its obligations under the Loan
Documents to which it is a party or of Foothill to enforce the
Obligations or realize upon the Collateral, (c) a material
adverse effect on the value of the Collateral or the amount
that Foothill would be likely to receive (after giving
<Page 10>
consideration to delays in payment and costs of enforcement)
in the liquidation of such Collateral, or (d) a material
impairment of the priority of Foothill's Liens with respect to
the Collateral.
"Maximum Amount" means, as of any date of
determination, Forty Million Dollars ($40,000,000).
"Maximum Revolving Amount" means the Credit
Line Amount less the outstanding principal balance of the Term
Loan.
"McKesson" shall mean McKesson Corporation, a
Delaware corporation.
"McKesson Intercreditor Agreement" means that
certain Intercreditor and Subordination Agreement between
McKesson and Foothill, in form and substance satisfactory to
Foothill.
"McKesson Receivables Agreement" means that
certain Receivables Purchase and Credit Agreement (Recourse)
dated August 26, 1997 between McKesson and Borrower, as the
same shall be amended, modified or supplemented from time to
time.
"Medicaid" shall mean the health care financial
assistance program jointly financed and administered by the
Federal and State governments under Title IX of the Social
Security Act.
"Medicare" shall mean the health care financial
assistance program under Title XVIII of the Social Security
Act.
"Mortgages" means one or more mortgages, deeds
of trust, or deeds to secure debt, executed by Borrower or its
Subsidiaries in favor of Foothill, the form and substance of
which shall be satisfactory to Foothill, that encumber the
Real Property Collateral and the related improvements thereto.
"Multiemployer Plan" means a "multiemployer
plan" (as defined in Section 4001(a)(3) of ERISA) to which
Borrower, any of its Subsidiaries, or any ERISA Affiliate has
contributed, or was obligated to contribute, within the past
six years.
"Negotiable Collateral" means all of Borrower's
present and future letters of credit, notes, drafts,
instruments, investment property, security entitlements,
securities (including the shares of stock of Subsidiaries of
Borrower), documents, personal property leases (wherein
Borrower is the lessor), chattel paper, and Borrower's Books
relating to any of the foregoing.
"Net Income" means with respect to Borrower for
any period, the net income (or deficit) of Borrower for such
period, determined in accordance with GAAP.
"Nichols" means Nichols Realty, Inc., a
Pennsylvania corporation.
"Nichols Guaranty" means that certain Guaranty
of even date herewith between Nichols and Foothill, in form
and substance satisfactory to Foothill.
<Page 11>
"Nichols Security Agreement" means that certain
Subsidiary Security Agreement of even date herewith between
Nichols and Foothill, in form and substance satisfactory to
Foothill.
"Obligations" means all loans, Advances, debts,
principal, interest (including any interest that, but for the
provisions of the Bankruptcy Code, would have accrued),
contingent reimbursement obligations under any outstanding
Letters of Credit, premiums (including Early Termination
Premiums), liabilities (including all amounts charged to
Borrower's Loan Account pursuant hereto), obligations, fees,
charges, costs, or Foothill Expenses (including any fees or
expenses that, but for the provisions of the Bankruptcy Code,
would have accrued), lease payments, guaranties, covenants,
and duties owing by Borrower to Foothill of any kind and
description (whether pursuant to or evidenced by the Loan
Documents or pursuant to any other agreement between Foothill
and Borrower, and irrespective of whether for the payment of
money), whether direct or indirect, absolute or contingent,
due or to become due, now existing or hereafter arising, and
including any debt, liability, or obligation owing from
Borrower to others that Foothill may have obtained by
assignment or otherwise, and further including all interest
not paid when due and all Foothill Expenses that Borrower is
required to pay or reimburse by the Loan Documents, by law, or
otherwise.
"Overadvance" has the meaning set forth in
Section 2.5.
"Participant" means any Person to which
Foothill has sold a participation interest in its rights under
the Loan Documents.
"Pay-Off Letter" means a letter, in form and
substance reasonably satisfactory to Foothill, from Existing
Lender respecting the amount necessary to repay in full all of
the obligations of Borrower owing to Existing Lender and
obtain a termination or release of all of the Liens existing
in favor of Existing Lender in and to the properties or assets
of Borrower.
"PBGC" means the Pension Benefit Guaranty
Corporation as defined in Title IV of ERISA, or any successor
thereto.
"Permitted Liens" means (a) Liens held by
Foothill, (b) Liens for unpaid taxes that either (i) are not
yet due and payable or (ii) are the subject of Permitted
Protests, (c) Liens set forth on Schedule P-1, (d) the
interests of lessors under operating leases and purchase money
security interests and Liens of lessors under capital leases
to the extent that the acquisition or lease of the underlying
asset is permitted under Section 7.21 and so long as the Lien
only attaches to the asset purchased or acquired and only
secures the purchase price of the asset, (e) Liens arising by
operation of law in favor of warehousemen, landlords,
carriers, mechanics, materialmen, laborers, or suppliers,
incurred in the ordinary course of business of Borrower and
not in connection with the borrowing of money, and which Liens
either (i) are for sums not yet due and payable, or (ii) are
the subject of Permitted Protests, (f) Liens arising from
deposits made in connection with obtaining worker's
compensation or other unemployment insurance, (g) Liens or
deposits to secure performance of bids, tenders, or leases,
incurred in the ordinary course of business of Borrower and
not in connection with the borrowing of money, (h) Liens
arising by reason of security for surety or appeal bonds in
the ordinary course of business of Borrower, (i) Liens of or
resulting from any judgment or award that would not cause a
Material Adverse Change and as to which the time for the
appeal or petition for rehearing of which has not yet expired,
<Page 12>
or in respect of which Borrower is in good faith prosecuting
an appeal or proceeding for a review, and in respect of which
a stay of execution pending such appeal or proceeding for
review has been secured, (j) Liens with respect to the Real
Property Collateral that are exceptions to the commitments for
title insurance issued in connection with the Mortgages, as
accepted by Foothill, and (k) with respect to any Real
Property that is not part of the Real Property Collateral,
easements, rights of way, zoning and similar covenants and
restrictions, and similar encumbrances that customarily exist
on properties of Persons engaged in similar activities and
similarly situated and that in any event do not materially
interfere with or impair the use or operation of the
Collateral by Borrower or the value of Foothill's Lien thereon
or therein, or materially interfere with the ordinary conduct
of the business of Borrower.
"Permitted Protest" means the right of Borrower
to protest any Lien (other than any such Lien that secures the
Obligations), tax (other than payroll taxes or taxes that are
the subject of a United States federal tax lien), or rental
payment, provided that (a) a reserve with respect to such
obligation is established on the books of Borrower in an
amount that is reasonably satisfactory to Foothill or in
accordance with GAAP, (b) any such protest is instituted and
diligently prosecuted by Borrower in good faith, and
(c) Foothill is satisfied that, while any such protest is
pending, there will be no impairment of the enforceability,
validity, or priority of any of the Liens of Foothill in and
to the Collateral.
"Person" means and includes natural persons,
corporations, limited liability companies, limited
partnerships, general partnerships, limited liability
partnerships, joint ventures, trusts, land trusts, business
trusts, or other organizations, irrespective of whether they
are legal entities, and governments and agencies and political
subdivisions thereof.
"Personal Property Collateral" means all
Collateral other than the Real Property Collateral.
"Plan" means any employee benefit plan,
program, or arrangement maintained or contributed to by
Borrower or with respect to which it may incur liability.
"Pledge Agreement" means that certain Stock
Pledge Agreement of even date herewith between Borrower and
Foothill, pursuant to which Borrower grants to Foothill a
first priority Lien on and security interest in all capital
stock of Borrower's Subsidiaries, in form and substance
satisfactory to Foothill.
"Real Property" means any estates or interests
in real property now owned or hereafter acquired by Borrower,
including, without limitation, the real property owned by
Borrower or its Subsidiaries located in Winchester, Virginia.
"Real Property Collateral" means the parcel or
parcels of real property and the related improvements thereto
identified on Schedule R-1, and any Real Property hereafter
acquired by Borrower or its Subsidiaries.
"Reference Rate" means the variable rate of
interest, per annum, most recently announced by Norwest Bank
Minnesota, National Association, or any successor thereto, as
its "base rate," irrespective of whether such announced rate
is the best rate available from such financial institution.
<Page 13>
"Reportable Event" means any of the events
described in Section 4043(c) of ERISA or the regulations
thereunder other than a Reportable Event as to which the
provision of 30 days notice to the PBGC is waived under
applicable regulations.
"Retiree Health Plan" means an "employee
welfare benefit plan" within the meaning of Section 3(1) of
ERISA that provides benefits to individuals after termination
of their employment, other than as required by Section 601 of
ERISA.
"Rx" means Rx Realty Corp., a Delaware
corporation.
"Rx Guaranty" means that certain Guaranty of
even date herewith between Rx and Foothill, in form and
substance satisfactory to Foothill.
"Rx Security Agreement" means that certain
Subsidiary Security Agreement of even date herewith between Rx
and Foothill, in form and substance satisfactory to Foothill.
"Script File" means the information with
respect to prescriptions sold by the Borrower.
"Solvent" means, with respect to any Person on
a particular date, that on such date (a) at fair valuations,
all of the properties and assets of such Person are greater
than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the
properties and assets of such Person is not less than the
amount that will be required to pay the probable liability of
such Person on its debts as they become absolute and matured,
(c) such Person is able to realize upon its properties and
assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal
course of business, (d) such Person does not intend to, and
does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such
Person is not engaged in business or a transaction, and is not
about to engage in business or a transaction, for which such
Person's properties and assets would constitute unreasonably
small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In
computing the amount of contingent liabilities at any time, it
is intended that such liabilities will be computed at the
amount that, in light of all the facts and circumstances
existing at such time, represents the amount that reasonably
can be expected to become an actual or matured liability.
"Subsidiary" of a Person means a corporation,
partnership, limited liability company, or other entity in
which that Person directly or indirectly owns or controls the
shares of stock or other ownership interests having ordinary
voting power to elect a majority of the board of directors (or
appoint other comparable managers) of such corporation,
partnership, limited liability company, or other entity.
"Tangible Net Worth" means, as of any date of
determination, the difference of (a) Borrower's total
stockholder's equity, minus (b) the sum of: (i) all
Intangible Assets of Borrower and (ii) all amounts due to
Borrower from Affiliates.
"Termination Date" has the meaning set forth in
Section 3.4.
"Term Loan" has the meaning set forth in
Section 2.3.
<Page 14>
"Trademark Security Agreement" means that
certain Trademark Security Agreement of even date herewith
between the Borrower and Foothill, in form and substance
satisfactory to Foothill.
"Video Rental Inventories" means video tapes
held for rental.
"Voidable Transfer" has the meaning set forth
in Section 15.8.
1.2 Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance
with GAAP. When used herein, the term "financial statements"
shall include the notes and schedules thereto. Whenever the
term "Borrower" is used in respect of a financial covenant or
a related definition, it shall be understood to mean Borrower
on a consolidated basis unless the context clearly requires
otherwise.
1.3 Code. Any terms used in this Agreement
that are defined in the Code shall be construed and defined as
set forth in the Code unless otherwise defined herein.
1.4 Construction. Unless the context of this
Agreement clearly requires otherwise, references to the plural
include the singular, references to the singular include the
plural, the term "including" is not limiting, and the term
"or" has, except where otherwise indicated, the inclusive
meaning represented by the phrase "and/or." The words
"hereof," "herein," "hereby," "hereunder," and similar terms
in this Agreement refer to this Agreement as a whole and not
to any particular provision of this Agreement. An Event of
Default shall "exist," "continue" or be "continuing" until
such Event of Default has been waived in writing by Foothill.
Section, subsection, clause, schedule, and exhibit references
are to this Agreement unless otherwise specified. Any
reference in this Agreement or in the Loan Documents to this
Agreement or any of the Loan Documents shall include all
alterations, amendments, changes, extensions, modifications,
renewals, replacements, substitutions, and supplements,
thereto and thereof, as applicable.
1.5 Schedules and Exhibits. All of the
schedules and exhibits attached to this Agreement shall be
deemed incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 Revolving Advances.
(a) Subject to the terms and conditions
of this Agreement, Foothill agrees to make advances
("Advances") to Borrower in an amount outstanding not to
exceed at any one time the lesser of (i) the Maximum Revolving
Amount less the outstanding balance of all undrawn or
unreimbursed Letters of Credit, or (ii) the Borrowing Base
less (A) the aggregate amount of all undrawn or unreimbursed
Letters of Credit (other than Inventory Letters of Credit),
less (B) thirty-five percent (35%) of the aggregate amount of
all undrawn or unreimbursed Inventory Letters of Credit. For
purposes of this Agreement, "Borrowing Base", as of any date
of determination, shall mean the result of:
(x) (i) the Cost of Eligible Inventory
minus the Inventory Reserves, multiplied by (ii)
sixty-five percent (65%); provided that such advance
rate applicable to Eligible Inventory shall at no
time exceed ninety percent (90%) of the Liquidation
Value of Inventory; minus
<Page 15>
(y) the aggregate amount of reserves, if
any, established by Foothill under Sections 2.1(b),
6.15 and 10.
(b) Anything to the contrary in Section
2.1(a) above notwithstanding, Foothill may create reserves
against the Borrowing Base or reduce its advance rates based
upon Eligible Inventory without declaring an Event of Default
if it determines that there has occurred a Material Adverse
Change.
(c) Foothill shall have no obligation to
make Advances hereunder to the extent they would cause the
outstanding Obligations (other than under the Term Loan) to
exceed the Maximum Revolving Amount.
(d) Amounts borrowed pursuant to this
Section 2.1 may be repaid and, subject to the terms and
conditions of this Agreement, reborrowed at any time during
the term of this Agreement.
2.2 Letters of Credit.
(a) Subject to the terms and conditions
of this Agreement, Foothill agrees to issue letters of credit
for the account of Borrower (each, an "L/C") or to issue
guarantees of payment (each such guaranty, an "L/C Guaranty")
with respect to letters of credit issued by an issuing bank
for the account of Borrower. Foothill shall have no
obligation to issue a Letter of Credit if any of the following
would result:
(i) the sum of 35% of the aggregate
amount of all undrawn and unreimbursed Inventory Letters of
Credit plus 100% of the aggregate amount of all other types of
undrawn and unreimbursed Letters of Credit, would exceed the
Borrowing Base less the amount of outstanding Advances less
the aggregate amount of Inventory Reserves and reserves
established under Section 2.1(b); or
(ii) the aggregate amount of all
undrawn or unreimbursed Letters of Credit (including Inventory
Letters of Credit) would exceed the lower of: (x) the Maximum
Revolving Amount less the amount of outstanding Advances less
the aggregate amount of Inventory Reserves and reserves
established under Section 2.1(b); or (y) Five Million Dollars
($5,000,000); or
(iii) the outstanding Obligations
would exceed the Maximum Revolving Amount.
Borrower expressly understands and agrees that Foothill shall
have no obligation to arrange for the issuance by issuing
banks of the letters of credit that are to be the subject of
L/C Guarantees. Borrower and Foothill acknowledge and agree
that certain of the letters of credit that are to be the
subject of L/C Guarantees may be outstanding on the Closing
Date. Each Letter of Credit shall have an expiry date no
later than 60 days prior to the date on which this Agreement
is scheduled to terminate under Section 3.4 and all such
Letters of Credit shall be in form and substance acceptable to
Foothill in its sole discretion. If Foothill is obligated to
advance funds under a Letter of Credit, Borrower immediately
shall reimburse such amount to Foothill and, in the absence of
such reimbursement, the amount so advanced immediately and
automatically shall be deemed to be an Advance hereunder and,
thereafter, shall bear interest at the rate then applicable to
Advances under Section 2.6.
<Page 16>
(b) Borrower hereby agrees to indemnify,
save, defend, and hold Foothill harmless from any loss, cost,
expense, or liability, including payments made by Foothill,
expenses, and reasonable attorneys fees incurred by Foothill
arising out of or in connection with any Letter of Credit,
except in the event of gross negligence or wilful misconduct
by Foothill. Borrower agrees to be bound by the issuing
bank's regulations and interpretations of any Letters of
Credit guarantied by Foothill and opened to or for Borrower's
account or by Foothill's interpretations of any L/C issued by
Foothill to or for Borrower's account, even though this
interpretation may be different from Borrower's own, and
Borrower understands and agrees that Foothill shall not be
liable for any error, negligence, or mistake, whether of
omission or commission, in following Borrower's instructions
or those contained in the Letter of Credit or any
modifications, amendments, or supplements thereto. Borrower
understands that the L/C Guarantees may require Foothill to
indemnify the issuing bank for certain costs or liabilities
arising out of claims by Borrower against such issuing bank.
Borrower hereby agrees to indemnify, save, defend, and hold
Foothill harmless with respect to any loss, cost, expense
(including reasonable attorneys fees), or liability incurred
by Foothill under any L/C Guaranty as a result of Foothill's
indemnification of any such issuing bank, except for the gross
negligence or wilful misconduct by Foothill.
(c) Borrower hereby authorizes and
directs any bank that issues a letter of credit guaranteed by
Foothill to deliver to Foothill all instruments, documents,
and other writings and property received by the issuing bank
pursuant to such letter of credit, and to accept and rely upon
Foothill's instructions and agreements with respect to all
matters arising in connection with such letter of credit and
the related application.
(d) Any and all charges, commissions,
fees, and costs incurred by Foothill relating to the letters
of credit guaranteed by Foothill shall be considered Foothill
Expenses for purposes of this Agreement and immediately shall
be reimbursable by Borrower to Foothill.
(e) Immediately upon the termination of
this Agreement, Borrower agrees to either (i) provide cash
collateral to be held by Foothill in an amount equal to 102%
of the maximum amount of Foothill's obligations under Letters
of Credit, or (ii) cause to be delivered to Foothill releases
of all of Foothill's obligations under outstanding Letters of
Credit. At Foothill's discretion, any proceeds of Collateral
received by Foothill after the occurrence and during the
continuation of an Event of Default may be held as the cash
collateral required by this Section 2.2(e).
(f) If by reason of (i) any change
in any applicable law, treaty, rule, or regulation or any
change in the interpretation or application by any
governmental authority of any such applicable law, treaty,
rule, or regulation, or (ii) compliance by the issuing bank or
Foothill with any direction, request, or requirement
(irrespective of whether having the force of law) of any
governmental authority or monetary authority including,
without limitation, Regulation D of the Board of Governors of
the Federal Reserve System as from time to time in effect (and
any successor thereto):
(i) any reserve, deposit, or similar
requirement is or shall be imposed or modified in respect of
any Letters of Credit issued hereunder, or
<Page 17>
(ii) there shall be imposed on the
issuing bank or Foothill any other condition regarding any
letter of credit, or Letter of Credit, as applicable, issued
pursuant hereto;
and the result of the foregoing is to increase, directly or
indirectly, the cost to the issuing bank or Foothill of
issuing, making, guaranteeing, or maintaining any letter of
credit, or Letter of Credit, as applicable, or to reduce the
amount receivable in respect thereof by such issuing bank or
Foothill, then, and in any such case, Foothill may, at any
time within a reasonable period after the additional cost is
incurred or the amount received is reduced, notify Borrower,
and Borrower shall pay on demand such amounts as the issuing
bank or Foothill may specify to be necessary to compensate the
issuing bank or Foothill for such additional cost or reduced
receipt, together with interest on such amount from the date
of such demand until payment in full thereof at the rate set
forth in Section 2.7(a) or (c)(i), as applicable. The
determination by the issuing bank or Foothill, as the case may
be, of any amount due pursuant to this Section 2.2(f), as set
forth in a certificate setting forth the calculation thereof
in reasonable detail, shall, in the absence of manifest or
demonstrable error, be final and conclusive and binding on all
of the parties hereto.
2.3 Term Loan.
(a) Term Loan. Subject to the terms and
conditions of this Agreement, Foothill agrees to make a term
loan ("Term Loan") to Borrower on the Closing Date, in an
amount equal to the lesser of (i) Three Million Dollars
($3,000,000) and (ii) ninety percent (90%) of the Liquidation
Value of the Borrower's Script Files, as determined per the
Schottenstein Bernstein Capital Group, LLC appraisal dated
April 17, 1998, or as determined from time to time per any
subsequent revaluation pursuant to Section 4.6 of this
Agreement. Upon satisfaction of the applicable conditions
precedent set forth in Sections 3.1 and 3.2, Foothill shall
make the proceeds of such Term Loan available to Borrower on
the Closing Date by transferring same day funds equal to the
proceeds of such Term Loan to the Designated Deposit Account.
All amounts outstanding under the Term Loan shall constitute
Obligations. Upon any revaluation of the Borrower's Script
Files after the Closing Date pursuant to Section 4.6 of this
Agreement which reduces the available Term Loan limit, the
Borrower shall repay immediately to Foothill any amount
necessary to reduce the outstanding Term Loan to its available
limit.
(b) Principal and Interest Payments.
Interest only on the Term Loan shall be due and payable
monthly on the first day of each month in arrears commencing
on the first day of the first month following the Closing Date
and continuing on the first day of each succeeding month. On
the termination of this Agreement, whether by its terms, by
prepayment, by acceleration, or otherwise, the outstanding
principal balance, and all accrued and unpaid interest under
the Term Loan shall be due and payable in full.
(c) Prepayment of Term Loan. The unpaid
principal balance of the Term Loan may be prepaid in whole or
in part without penalty or premium at any time during the term
of this Agreement upon 10 days prior written notice by
Borrower to Foothill.
2.4 Intentionally Omitted.
2.5 Overadvances. If, at any time or for any
reason, the amount of Obligations owed by Borrower to Foothill
pursuant to Sections 2.1 and 2.2 is greater than either the
Dollar or percentage limitations set forth in Sections 2.1 and
<Page 18>
2.2 (an "Overadvance"), Borrower immediately shall pay to
Foothill, in cash, the amount of such excess to be used by
Foothill to reduce the Obligations.
2.6 Interest and Letter of Credit Fees:
Rates, Payments, and Calculations.
(a) Interest Rate. Except as provided in
clause (b), below, all Obligations (except for undrawn Letters
of Credit and the Term Loan) shall bear interest at a per
annum rate equal to the Reference Rate plus the Margin. As of
the Closing Date and through and including the date on which
the audited financial statements are delivered to Foothill
pursuant to Section 6.3(b) (the "Audited Financials Delivery
Date") for the fiscal year 1998, the Margin shall be the per
annum rate of one and one-eighth percent (1.125%). On the day
following the Audited Financials Delivery Date for the fiscal
year 1998 and on the day following each Audited Financials
Delivery Date thereafter, the Margin shall be adjusted to the
interest rate margin based upon the EBITDA for the most recent
fiscal year end, as reflected in such audited financial
statements, expressed as a per annum rate of interest as
follows:
EBITDA for the prior year is: Then the Margin shall be:
Less than $5,750,000 one and one-eighth
percentage point (1.125%)
Equal to or greater than one percentage point (1.00%)
$5,750,000 but equal to
but equal to or less than
$6,250,0000
Greater than $6,250,000 but three-quarters of one
equal to or less than $7,000,000 percentage point (0.75%)
Greater than $7,000,000 one-quarter of one
percentage point (0.25%)
In the event that Borrower fails to timely provide the
financial statements referred to above in accordance with the
terms of Section 6.3(b) hereof, and without prejudice to any
additional rights under Section 9.1 hereof, the Margin shall
be one and one-eighth percentage point (1.125%) until two
Business Days after the actual delivery of such statements.
The Term Loan shall bear interest at a per annum rate of
eleven and three-quarters percent (11.75%).
(b) Letter of Credit Fee. Borrower shall
pay Foothill a fee (in addition to the charges, commissions,
fees, and costs set forth in Section 2.2(d)) equal to one and
one-half percent (1.50%) per annum times the aggregate undrawn
amount of all outstanding Letters of Credit.
(c) Default Rate. Upon the occurrence
and during the continuation of an Event of Default, (i) all
Obligations (except for undrawn Letters of Credit and the Term
Loan) shall bear interest at a per annum rate equal to the
Reference Rate plus the Margin then in effect plus three
percentage points (3.0%), (ii) the Term Loan shall bear
interest at a per annum rate equal to fourteen and three-
quarters percent (14.75%), and (iii) the Letter of Credit fee
provided in Section 2.6(b) shall be increased to four and one-
half percentage points (4.50%) per annum times the amount of
the undrawn Letters of Credit that were outstanding during the
immediately preceding month.
<Page 19>
(d) Minimum Interest. In no event shall
the rate of interest chargeable hereunder for any day be less
than seven percent (7.0%) per annum. To the extent that
interest accrued hereunder at the rate set forth herein would
be less than the foregoing minimum daily rate, the interest
rate chargeable hereunder for such day automatically shall be
deemed increased to the minimum rate. To the extent that
interest accrued hereunder at the rate set forth herein
(including the minimum interest rate) would yield less than
the foregoing minimum amount, the interest rate chargeable
hereunder for the period in question automatically shall be
deemed increased to that rate that would result in the minimum
amount of interest being accrued and payable hereunder.
(e) Payments. Interest and Letter of
Credit fees payable hereunder shall be due and payable, in
arrears, on the first day of each month during the term
hereof. Borrower hereby authorizes Foothill, at its option,
without prior notice to Borrower, to charge such interest and
Letter of Credit fees, all Foothill Expenses (as and when
incurred), the charges, commissions, fees, and costs provided
for in Section 2.2(d) (as and when accrued or incurred), the
fees and charges provided for in Section 2.11 (as and when
accrued or incurred), and all installments or other payments
due under the Term Loan or any Loan Document to Borrower's
Loan Account, which amounts thereafter shall accrue interest
at the rate then applicable to Advances hereunder. Any
interest not paid when due shall be compounded and shall
thereafter accrue interest at the rate then applicable to
Advances hereunder.
(f) Computation. The Reference Rate as
of the date of this Agreement is eight and one-half percent
(8.50%) per annum. In the event the Reference Rate is changed
from time to time hereafter, the applicable rate of interest
hereunder automatically and immediately shall be increased or
decreased by an amount equal to such change in the Reference
Rate. All interest and fees chargeable under the Loan
Documents shall be computed on the basis of a 360 day year for
the actual number of days elapsed.
(g) Intent to Limit Charges to Maximum
Lawful Rate. In no event shall the interest rate or rates
payable under this Agreement, plus any other amounts paid in
connection herewith, exceed the highest rate permissible under
any law that a court of competent jurisdiction shall, in a
final determination, deem applicable. Borrower and Foothill,
in executing and delivering this Agreement, intend legally to
agree upon the rate or rates of interest and manner of payment
stated within it; provided, however, that, anything contained
herein to the contrary notwithstanding, if said rate or rates
of interest or manner of payment exceeds the maximum allowable
under applicable law, then, ipso facto as of the date of this
Agreement, Borrower is and shall be liable only for the
payment of such maximum as allowed by law, and payment
received from Borrower in excess of such legal maximum,
whenever received, shall be applied to reduce the principal
balance of the Obligations to the extent of such excess.
2.7 Collection of Accounts.
(a) Borrower shall cause all proceeds of the
Collateral and all Collections received by Borrower and
deposited in any bank account to be deposited to or wire
transferred to the Blocked Account daily. Cash received by
Borrower at any retail store location may be deposited by
Borrower into any bank account, provided such cash shall be
sent by electronic funds transfer (including, but not limited
to, ACH transfers) on a daily basis to the Blocked Account.
Borrower shall irrevocably authorize and direct in writing, in
form and substance satisfactory to Foothill, each of the banks
<Page 20>
into which proceeds from the sales of Collateral from each
retail store location of Borrower are at any time deposited to
send all funds deposited in such accounts by electronic funds
transfer on a daily basis to the Blocked Account and such
banks shall agree in writing to do so. Such authorization and
direction shall not be rescinded, revoked or modified without
the prior written consent of Foothill. Additionally, no
Blocked Account Agreement or arrangement contemplated thereby
shall be modified by Borrower without the prior written
consent of Foothill. Upon the terms and subject to the
conditions set forth in the Blocked Account Agreement, all
amounts received in the Blocked Account shall be wired each
Business Day into an account (the "Foothill Account")
maintained by Foothill at a depository selected by Foothill.
(b) To the extent Borrower may elect, at Borrower's
option, to use an Armored Car Service to pick up and collect
cash or other proceeds of sales of Inventory from a retail
store location, Borrower shall deliver to the Armored Car
Service all proceeds from sales of Inventory and other
Collateral from such retail store location of Borrower.
Borrower shall irrevocably authorize and direct such Armored
Car Service in writing, in form and substance satisfactory to
Foothill, to deposit all such proceeds at any time received by
the Armored Car Service directly into the Blocked Account, to
any other account of Borrower the contents of which are to be
transferred to the Blocked Account as provided in Section
2.7(a) hereof, or as Foothill may otherwise direct. Such
authorization and direction shall not be rescinded, revoked or
modified without the prior written consent of Foothill. As of
the date hereof, the only Armored Car Services used by
Borrower are set forth on Schedule 2.7(b) hereto. Borrower
shall not use any other Armored Car Service for any purpose,
except if (A) Foothill shall have received not less than
thirty (30) days prior written notice of the intention of
Borrower to use such other Armored Car Service, (B) Foothill
shall have received an agreement in writing from such other
Armored Car Service, in form and substance satisfactory to
Foothill, duly authorized, executed and delivered by such
other Armored Car Service, (C) no Event of Default shall exist
or have occurred and (D) such Armored Car Service is
reasonably acceptable to Foothill.
2.8 Crediting Payments; Application of
Collections. The receipt of any Collections by Foothill
(whether from transfers to Foothill by the Blocked Account
Bank pursuant to the Blocked Account Agreement or otherwise)
immediately shall be applied provisionally to reduce the
Obligations outstanding under Section 2.1, but shall not be
considered a payment on account unless such Collection item is
a wire transfer of immediately available federal funds and is
made to the Foothill Account or unless and until such
Collection item is honored when presented for payment. From
and after the Closing Date, Foothill shall be entitled to
charge Borrower for one (1) Business Day of `clearance' or
`float' at the rate set forth in Section 2.6(a)(i) or
Section 2.6(c)(i), as applicable, on all Collections that are
received by Foothill (regardless of whether forwarded by the
Blocked Account Banks to Foothill, whether provisionally
applied to reduce the Obligations under Section 2.1, or
otherwise). This across-the-board one (1) Business Day
clearance or float charge on all Collections is acknowledged
by the parties to constitute an integral aspect of the pricing
of Foothill's financing of Borrower, and shall apply
irrespective of the characterization of whether receipts are
owned by Borrower or Foothill, and whether or not there are
any outstanding Advances, the effect of such clearance or
float charge being the equivalent of charging one (1) Business
Day of interest on such Collections. Should any Collection
item not be honored when presented for payment, then Borrower
shall be deemed not to have made such payment, and interest
shall be recalculated accordingly. Anything to the contrary
contained herein notwithstanding, any Collection item shall be
deemed received by Foothill only if it is received into the
Foothill Account on a Business Day on or before 11:00 a.m.
California time. If any Collection item is received into the
<Page 21>
Foothill Account on a non-Business Day or after 11:00 a.m.
California time on a Business Day, it shall be deemed to have
been received by Foothill as of the opening of business on the
immediately following Business Day.
2.9 Designated Account. Foothill is
authorized to make the Advances, the Letters of Credit and the
Term Loan under this Agreement based upon telephonic or other
instructions received from anyone purporting to be an
Authorized Person, or without instructions if pursuant to
Section 2.6(e). Borrower agrees to establish and maintain the
Designated Account with the Designated Account Bank for the
purpose of receiving the proceeds of the Advances requested by
Borrower and made by Foothill hereunder. Borrower may at any
time change the Designated Account Bank and the Designated
Account upon five (5) days prior written notice to Foothill.
Unless otherwise agreed by Foothill and Borrower, any Advance
requested by Borrower and made by Foothill hereunder shall be
made to the Designated Account.
2.10 Maintenance of Loan Account; Statements of
Obligations. Foothill shall maintain an account on its books
in the name of Borrower (the "Loan Account") on which Borrower
will be charged with all Advances and the Term Loan made by
Foothill to Borrower or for Borrower's account, including,
accrued interest, Foothill Expenses, and any other payment
Obligations of Borrower. In accordance with Section 2.7, the
Loan Account will be credited with all payments received by
Foothill from Borrower or for Borrower's account, including
all amounts received in the Foothill Account from any Blocked
Account Bank. Foothill shall render statements regarding the
Loan Account to Borrower, including principal, interest, fees,
and including an itemization of all charges and expenses
constituting Foothill Expenses owing, and such statements
shall be conclusively presumed to be correct and accurate and
constitute an account stated between Borrower and Foothill
unless, within 30 days after receipt thereof by Borrower,
Borrower shall deliver to Foothill written objection thereto
describing the error or errors contained in any such
statements.
2.11 Fees. Borrower shall pay to Foothill the
following fees:
(a) Closing Fee. On the Closing Date, a
closing fee in an amount equal to three-quarters of one
percent (0.75%) times the Credit Line Amount on the Closing
Date, which fee shall be fully earned when due, payable at
closing, and non-refundable when paid.
(b) Unused Line Fee. On the first day of
each month during the term of this Agreement, an unused line
fee in an amount equal to three-eighths of one percentage
point (0.375%) per annum times the Average Unused Portion of
Maximum Amount, which fee shall be computed on the basis of a
360 day year for actual number of days elapsed, fully earned
when due, and non-refundable when paid.
(c) First Anniversary Facility Fee. On
the first anniversary of the Closing Date, a first anniversary
facility fee in an amount equal to one-quarter of one percent
(0.25%) of the Credit Line Amount, which fee shall be fully
earned upon the Closing Date and shall be payable on the
earlier of (i) the Termination Date or (ii) the first
anniversary of the Closing Date;
(d) Financial Examination, Documentation,
and Appraisal Fees. Foothill's customary fee of $650 per day
per examiner, plus out-of-pocket expenses for each financial
analysis and examination (i.e., audits) of Borrower performed
<Page 22>
by personnel employed by Foothill; an appraisal fee of $1,500
per day per appraiser, plus out-of-pocket expenses for each
appraisal of the Collateral performed by personnel employed by
Foothill; and, the actual charges paid or incurred by Foothill
if it elects to employ the services of one or more third
Persons to perform such financial analyses and examinations
(i.e., audits) of Borrower or to appraise the Collateral,
which fees shall be fully earned when due and non-refundable
when paid; and
(e) Servicing Fee. On the first day of
each month during the term of this Agreement, and thereafter
so long as any Obligations are outstanding, a servicing fee in
an amount equal to Three Thousand Dollars ($3,000), which fee
shall be fully earned when due and non-refundable when paid.
2.12 Capital Adequacy. If after the date
hereof, any Lender or any Affiliate of such Lender shall have
reasonably determined that the adoption of any applicable law,
governmental rule, regulation or order regarding the capital
adequacy of banks or bank holding companies, or any change
therein, 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
Affiliate of such Lender with any request or directive
regarding capital adequacy (whether or not having the force of
law) of any such governmental authority, central bank or
comparable agency, has or would have the effect of reducing
the rate of return on such Lender's or any Affiliate's of such
Lender capital as a consequence of the Lender's Commitment or
obligations hereunder to a level below that which it could
have achieved but for such adoption, change or compliance
(taking into consideration such Lender's or any Affiliate's of
such Lender policies with respect to capital adequacy
immediately before such adoption, change or compliance and
assuming that such Lender's or any Affiliate's of such Lender,
capital was fully utilized prior to such adoption, change or
compliance), then, upon demand by such Lender, the Borrower
shall immediately pay to the Lender such additional amounts as
shall be sufficient to compensate such Lender for any such
reduction actually suffered. A certificate of such Lender
setting forth the amount to be paid to such Lender by the
Borrower as a result of any event referred to in this
paragraph shall, absent manifest error, be conclusive.
2.13 Credit Line Amount. At any time after the
Closing Date, the Borrower may increase the Credit Line Amount
up to the Maximum Amount, provided that the following
conditions have been satisfied: (i) no Event of Default shall
exist and be continuing under this Agreement or any of the
Loan Documents, (ii) Foothill shall have arranged for the
syndication for such amount to be provided by a third-party
lender and (iii) the Borrower shall pay to Foothill an amount
equal to three-quarters of one percent (0.75%) times the
amount of such increase in the Credit Line Amount.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 Conditions Precedent to the Initial
Advance, Letter of Credit and the Term Loan. The obligation
of Foothill to make the initial Advance, to issue the initial
Letter of Credit and to make the Term Loan is subject to the
fulfillment, to the satisfaction of Foothill and its counsel,
of each of the following conditions on or before the Closing
Date:
(a) the Closing Date shall occur on or
before May 15, 1998;
(b) Foothill shall have received searches
reflecting the filing of its financing statements and fixture
filings;
<Page 23>
(c) Foothill shall have received each of
the following documents, duly executed, and each such document
shall be in full force and effect:
a. the Blocked Account Agreements;
b. the Disbursement Letter;
c. the Pay-Off Letter, together with UCC
termination statements and other documentation evidencing the
termination by Existing Lender of its Liens in and to the
properties and assets of Borrower;
d. the Mortgages;
e. the Pledge Agreement;
f. Rx Guaranty;
g. Nichols Guaranty;
h. Rx Security Agreement;
i. Nichols Security Agreement;
j. McKesson Intercreditor Agreement; and
k. Trademark Security Agreement;
(d) Foothill shall have received a
certificate from the Secretary of Borrower attesting to the
resolutions of Borrower's Board of Directors authorizing its
execution, delivery, and performance of this Agreement and the
other Loan Documents to which Borrower is a party and
authorizing specific officers of Borrower to execute the same;
(e) Foothill shall have received copies
of each of Borrower's, Nichol's and Rx's Governing Documents,
as amended, modified, or supplemented to the Closing Date,
certified by the Secretary of Borrower;
(f) Foothill shall have received a
certificate of status with respect to Borrower, Nichols and
Rx, dated within 10 days of the Closing Date, such certificate
to be issued by the appropriate officer of the jurisdiction of
organization of Borrower, which certificate shall indicate
that Borrower is in good standing in such jurisdiction;
(g) Foothill shall have received
certificates of status with respect to Borrower, Nichols and
Rx, each dated within 15 days of the Closing Date, such
certificates to be issued by the appropriate officer of the
jurisdictions in which its failure to be duly qualified or
licensed would constitute a Material Adverse Change, which
certificates shall indicate that Borrower is in good standing
in such jurisdictions;
(h) Foothill shall have received a
certificate of insurance, together with the endorsements
thereto, as are required by Section 6.10, the form and
substance of which shall be satisfactory to Foothill and its
counsel;
<Page 24>
(i) Foothill shall have received duly
executed certificates of title with respect to that portion of
the Collateral that is subject to certificates of title;
(j) Foothill shall have received such
Collateral Access Agreements from lessors, warehousemen,
bailees, and other third persons as Foothill may require;
(k) Foothill shall have received an
opinion of Borrower's counsel in form and substance
satisfactory to Foothill in its sole discretion;
(l) Foothill shall have received (i)
appraisals of the Real Property Collateral, satisfactory to
Foothill, and (ii) mortgagee title insurance policies (or
marked commitments to issue the same) for the Real Property
Collateral issued by a title insurance company satisfactory to
Foothill (each a "Mortgage Policy" and, collectively, the
"Mortgage Policies") in amounts satisfactory to Foothill
assuring Foothill that the Mortgages on such Real Property
Collateral are valid and enforceable first priority mortgage
Liens on such Real Property Collateral free and clear of all
defects and encumbrances except Permitted Liens, and the
Mortgage Policies shall otherwise be in form and substance
reasonably satisfactory to Foothill;
(m) Foothill shall have received
appraisals of the Inventory, including, without limitation, an
appraisal of the Script Files, in each case satisfactory to
Foothill;
(n) Foothill shall have received both a
phase-I environmental report and a phase-II environmental
report and a real estate survey shall have been completed with
respect to the Real Property Collateral and copies thereof
delivered to Foothill; the environmental consultants and
surveyors retained for such reports or surveys, the scope of
the reports or surveys, and the results thereof shall be
acceptable to Foothill in its sole discretion;
(o) Foothill shall have received
satisfactory evidence that all tax returns required to be
filed by Borrower have been timely filed and all taxes upon
Borrower or its properties, assets, income, and franchises
(including real property taxes and payroll taxes) have been
paid prior to delinquency, except such taxes that are the
subject of a Permitted Protest;
(p) After giving effect to the making of
the Term Loan and the requested initial Advance hereunder,
Borrower shall have demonstrated that it has, on the Closing
Date, (i) funds available to be borrowed hereunder, less (ii)
the aggregate deterioration, if any, in Borrower's accounts
payable since Foothill's prospect audit, in an aggregate
amount equal to or greater than Two Million Seven Hundred
Fifty Thousand Dollars ($2,750,000);
(q) Foothill shall have received a draft
Form 10-K for the fiscal year ended January 31, 1998.
<Page 25>
(r) all other documents and legal matters
in connection with the transactions contemplated by this
Agreement shall have been delivered, executed, or recorded and
shall be in form and substance satisfactory to Foothill and
its counsel.
3.2 Conditions Precedent to all Advances, all
Letters of Credit and the Term Loan. The following shall be
conditions precedent to all Advances, all Letters of Credit
and the Term Loan hereunder:
(a) the representations and warranties
contained in this Agreement and the other Loan Documents shall
be true and correct in all respects on and as of the date of
such extension of credit, as though made on and as of such
date (except to the extent that such representations and
warranties relate solely to an earlier date);
(b) no Default or Event of Default shall
have occurred and be continuing on the date of such extension
of credit, nor shall either result from the making thereof;
and
(c) no injunction, writ, restraining
order, or other order of any nature prohibiting, directly or
indirectly, the extending of such credit shall have been
issued and remain in force by any governmental authority
against Borrower, Foothill or any of their Affiliates.
3.3 Condition Subsequent. As a condition
subsequent to initial closing hereunder, Borrower shall
perform or cause to be performed the following (the failure by
Borrower to so perform or cause to be performed constituting
an Event of Default):
(a) within 30 days of the Closing Date,
deliver to Foothill the copies of the policies of insurance,
together with the endorsements thereto, as are required by
Section 6.10, the form and substance of which shall be
satisfactory to Foothill and its counsel.
(b) on or before August 31, 1998,
Borrower shall receive at least One Million Dollars
($1,000,000) in net proceeds from an increase in the loan with
McKesson.
(c) Borrower shall use its best efforts
to obtain within 30 days of the Closing Date a tenant
estoppel, in form and substance reasonably satisfactory to
Foothill, for any lease in connection with the Real Property
Collateral.
(d) Within 30 days of the Closing Date,
Foothill shall have received agreements by the Armored Car
Services in favor of Foothill acknowledging Foothill's first
priority security interest in the monies held by them, and
agreeing to transfer all such amounts to the Blocked Account.
(e) Within 30 days of the Closing Date,
Foothill shall have received Credit Card Acknowledgments, in
each case, duly authorized, executed and delivered by the
Credit Card Issuers and Credit Card Processors.
<Page 26>
(f) Within 30 days of the Closing Date,
Borrower shall deliver to Foothill certified copies of the
articles of incorporation of Nichols, a certificate of good
standing for Borrower in the State of New Jersey and a
certificate of good standing for Rx in the State of
Massachusetts.
3.4 Term. This Agreement shall become
effective upon the execution and delivery hereof by Borrower
and Foothill and shall continue in full force and effect for a
term ending on the date (the "Termination Date") that is five
(5) years from the Closing Date. The foregoing
notwithstanding, Foothill shall have the right to terminate
its obligations under this Agreement immediately and without
notice upon the occurrence and during the continuation of an
Event of Default.
3.5 Effect of Termination. On the date of
termination of this Agreement, all Obligations (including
contingent reimbursement obligations of Borrower with respect
to any outstanding Letters of Credit) immediately shall become
due and payable without notice or demand. No termination of
this Agreement, however, shall relieve or discharge Borrower
of Borrower's duties, Obligations, or covenants hereunder, and
Foothill's continuing security interests in the Collateral
shall remain in effect until all Obligations have been fully
and finally discharged and Foothill's obligation to provide
additional credit hereunder is terminated.
3.6 Early Termination by Borrower. Borrower
has the option, at any time upon 30 days prior written notice
to Foothill, to terminate this Agreement by paying to
Foothill, in cash, the Obligations (including, either (i) cash
collateral to be held by Foothill in an amount equal to 102%
of the maximum amount of Foothill's obligations under any
outstanding Letters of Credit or (ii) the delivery to Foothill
of releases of all of Foothill's obligations under outstanding
Letters of Credit), in full, together with a premium (the
"Early Termination Premium") equal to Three Hundred Fifty
Thousand Dollars ($350,000) multiplied by the number of full
or partial years remaining until the Termination Date,
provided that, such Early Termination Premium shall not be due
within six (6) months prior the Termination Date. In the
event this Agreement is terminated (i) as a result of a
majority of the assets or the capital stock of the Borrower
being acquired by another Person or (ii) as a result of a
merger, consolidation or other business combination with
another Person having a book value of its assets equal to or
greater than the book value of the assets of Borrower as of
the date of such transaction (whether or not the Borrower is
the surviving entity after giving effect to such transaction),
the Early Termination Premium shall be (x) Two Hundred
Thousand Dollars ($200,000) if such termination occurs on or
prior to the first anniversary of the Closing Date or (y) if
such termination occurs after the first anniversary of the
Closing Date, in an amount equal to One Hundred Seventy Five
Thousand Dollars ($175,000) multiplied by the number of full
or partial years remaining until the Termination Date.
3.7 Termination Upon Event of Default. If
Foothill terminates this Agreement upon the occurrence of an
Event of Default that intentionally is caused by Borrower for
the purpose, in Foothill's reasonable and good faith judgment,
of avoiding payment of the Early Termination Premium provided
in Section 3.6, in view of the impracticability and extreme
difficulty of ascertaining actual damages and by mutual
agreement of the parties as to a reasonable calculation of
Foothill's lost profits as a result thereof, Borrower shall
<Page 27>
pay to Foothill upon the effective date of such termination, a
premium in an amount equal to the Early Termination Premium.
The Early Termination Premium shall be presumed to be the
amount of damages sustained by Foothill as the result of the
early termination and Borrower agrees that it is reasonable
under the circumstances currently existing. The Early
Termination Premium provided for in this Section 3.7 shall be
deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower
hereby grants to Foothill a continuing security interest in
all currently existing and hereafter acquired or arising
Personal Property Collateral in order to secure prompt
repayment of any and all Obligations and in order to secure
prompt performance by Borrower of each of its covenants and
duties under the Loan Documents. Foothill's security
interests in the Personal Property Collateral shall attach to
all Personal Property Collateral without further act on the
part of Foothill or Borrower. Anything contained in this
Agreement or any other Loan Document to the contrary
notwithstanding, except for the sale of Inventory to buyers in
the ordinary course of business, Borrower has no authority,
express or implied, to dispose of any item or portion of the
Personal Property Collateral or the Real Property Collateral.
4.2 Negotiable Collateral. In the event that
any Collateral, including proceeds, is evidenced by or
consists of Negotiable Collateral, Borrower, immediately upon
the request of Foothill, shall endorse and deliver physical
possession of such Negotiable Collateral to Foothill.
4.3 Collection of Accounts, General
Intangibles, and Negotiable Collateral. At any time after the
occurrence and continuance of an Event of Default, Foothill or
Foothill's designee may (a) notify customers or Account
Debtors of Borrower that the Accounts, General Intangibles, or
Negotiable Collateral have been assigned to Foothill or that
Foothill has a security interest therein, and (b) collect the
Accounts, General Intangibles, and Negotiable Collateral
directly and charge the collection costs and expenses to the
Loan Account. Borrower agrees that it will hold in trust for
Foothill, as Foothill's trustee, any Collections that it
receives and immediately will deliver said Collections to
Foothill in their original form as received by Borrower.
4.4 Delivery of Additional Documentation
Required. At any time upon the request of Foothill, Borrower
shall execute and deliver to Foothill all financing
statements, continuation financing statements, fixture
filings, security agreements, pledges, assignments,
endorsements of certificates of title, applications for title,
affidavits, reports, notices, schedules of accounts, letters
of authority, and all other documents that Foothill reasonably
may request, in form satisfactory to Foothill, to perfect and
continue perfected Foothill's security interests in the
Collateral, and in order to fully consummate all of the
transactions contemplated hereby and under the other the Loan
Documents.
4.5 Power of Attorney. Borrower hereby
irrevocably makes, constitutes, and appoints Foothill (and any
of Foothill's officers, employees, or agents designated by
Foothill) as Borrower's true and lawful attorney, with power
to (a) if Borrower refuses to, or fails timely to execute and
deliver any of the documents described in Section 4.4, sign
the name of Borrower on any of the documents described in
Section 4.4, (b) at any time that an Event of Default has
occurred and is continuing, sign Borrower's name on any
invoice or bill of lading relating to any Account, drafts
against Account Debtors, schedules and assignments of
Accounts, verifications of Accounts, and notices to Account
Debtors, (c) send requests for verification of Accounts, (d)
endorse Borrower's name on any Collection item that may come
into Foothill's possession, (e) at any time that an Event of
Default has occurred and is continuing, notify the post office
authorities to change the address for delivery of Borrower's
<Page 28>
mail to an address designated by Foothill, to receive and open
all mail addressed to Borrower, and to retain all mail
relating to the Collateral and forward all other mail to
Borrower, (f) at any time that an Event of Default has
occurred and is continuing, make, settle, and adjust all
claims under Borrower's policies of insurance and make all
determinations and decisions with respect to such policies of
insurance, and (g) at any time that an Event of Default has
occurred and is continuing, settle and adjust disputes and
claims respecting the Accounts directly with Account Debtors,
for amounts and upon terms that Foothill determines to be
reasonable, and Foothill may cause to be executed and
delivered any documents and releases that Foothill determines
to be necessary. The appointment of Foothill as Borrower's
attorney, and each and every one of Foothill's rights and
powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully and finally repaid and
performed and Foothill's obligation to extend credit hereunder
is terminated.
4.6 Right to Inspect. Foothill (through any
of its officers, employees, or agents) shall have the right,
from time to time hereafter to inspect Borrower's Books and to
check, test, and appraise the Collateral in order to verify
Borrower's financial condition or the amount, quality, value,
condition of, or any other matter relating to, the Collateral.
Quarterly "cycle counts" shall be performed by a third party
acceptable to Foothill. Absent an Event of Default under this
Agreement, Foothill shall have the right to conduct semi-
annual appraisals of the Collateral and quarterly appraisals
of the Script Files. At any time that an Event of Default has
occurred and is continuing, Foothill shall have the right to
conduct appraisals of the Collateral, as often as deemed
necessary by Foothill.
4.7 Release of Health Care Receivables. The
Borrower and Foothill acknowledge that the Borrower has sold,
and will in the future sell, to McKesson certain of its Health
Care Receivables subject to the McKesson Receivables Agreement
and the McKesson Intercreditor Agreement. Upon Borrower's
request and at Borrower's expense, Foothill will terminate and
release the security interest of Foothill in other Health Care
Receivables, provided that each of the following conditions is
satisfied as determined in good faith by Foothill: (a)
Foothill shall have received such request from Borrower not
less than thirty (30) days prior to the date of such
termination and release by Foothill; (b) on or before the date
of such release and termination by Foothill, Foothill shall
have received evidence, in form and substance reasonably
satisfactory to Foothill, that Borrower has entered into
financing or factoring arrangements and subordination or
intercreditor agreements with a bank, financial institution or
other Person, in each case with a bank, financial institution
or other Person and on terms and conditions acceptable to
Foothill (it being understood that terms and conditions which
are not more adverse to the Borrower or Foothill than the
terms and conditions of the McKesson Receivables Agreement and
the McKesson Intercreditor Agreement shall be deemed
acceptable to Foothill), in a bona fide arm's length
transaction to the extent permitted under Section 7.4 hereof
as to factoring arrangements or Section 7.1 hereof as to
financing arrangements pursuant to which such bank, other
financial institution or other Person shall make loans based
on the amount of such Health Care Receivables or shall
purchase such Health Care Receivables and shall have a
perfected security interest in such Health Care Receivables;
(c) Borrower shall have received cash or, within two (2)
Business Days, available funds constituting proceeds from the
sale of such Health Care Receivables or proceeds from the
loans based on the amount of such Health Care Receivables; (d)
on the date of such release, and after giving effect thereto,
no Event of Default or act, condition or event which with
notice or passage of time or both would constitute an Event of
Default shall exist or have occurred; and (e) all proceeds
from the sale of such Health Care Receivables or from loans
based on the amount of such Health Care Receivables shall be
<Page 29>
received by Foothill for application to the Obligations in
such order and manner and Foothill may determine.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this
Agreement, Borrower makes the following representations and
warranties which shall be true, correct, and complete in all
respects as of the date hereof, and shall be true, correct,
and complete in all respects as of the Closing Date, and at
and as of the date of the making of each Advance, Letter of
Credit or Term Loan made thereafter, as though made on and as
of the date of such Advance, Letter of Credit or Term Loan
(except to the extent that such representations and warranties
relate solely to an earlier date) and such representations and
warranties shall survive the execution and delivery of this
Agreement:
5.1 No Encumbrances. Each of Borrower and its
Subsidiaries has good and indefeasible title to the
Collateral, free and clear of Liens except for Permitted
Liens.
5.2 Intentionally Omitted.
5.3 Eligible Inventory. All Eligible
Inventory is of good and merchantable quality, free from
defects.
5.4 Equipment. All of the Equipment is used
or held for use in Borrower's business and is fit for such
purposes.
5.5 Location of Inventory and Equipment. The
Inventory and Equipment are not stored with a bailee,
warehouseman, or similar party (without Foothill's prior
written consent) and are located only at the locations
identified on Schedule 6.12 or otherwise permitted by Section
6.12.
5.6 Inventory Records. Each of Borrower and
its Subsidiaries keeps correct and accurate records itemizing
and describing the kind, type, quality, and quantity of the
Inventory, and Borrower's or the Subsidiaries cost therefor.
5.7 Location of Chief Executive Office; FEIN.
The chief executive office of Borrower is located at the
address indicated in the preamble to this Agreement and
Borrower's FEIN is 13-2634868.
5.8 Due Organization and Qualification;
Subsidiaries.
(a) Each of Borrower and its Subsidiaries
is duly organized and existing and in good standing under the
laws of the jurisdiction of its incorporation and qualified
and licensed to do business in, and in good standing in, any
state where the failure to be so licensed or qualified
reasonably could be expected to have a Material Adverse
Change.
(b) Set forth on Schedule 5.8, is a
complete and accurate list of Borrower's direct and indirect
Subsidiaries, showing: (i) the jurisdiction of their
incorporation; (ii) the number of shares of each class of
common and preferred stock authorized for each of such
Subsidiaries; and (iii) the number and the percentage of the
outstanding shares of each such class owned directly or
indirectly by Borrower. All of the outstanding capital stock
<Page 30>
of each such Subsidiary has been validly issued and is fully
paid and non-assessable.
(c) Except as set forth on Schedule 5.8,
no capital stock (or any securities, instruments, warrants,
options, purchase rights, conversion or exchange rights,
calls, commitments or claims of any character convertible into
or exercisable for capital stock) of any direct or indirect
Subsidiary of Borrower is subject to the issuance of any
security, instrument, warrant, option, purchase right,
conversion or exchange right, call, commitment or claim of any
right, title, or interest therein or thereto.
(d) None of Borrower's Subsidiaries has
any material operations or assets, other than any leases owned
by Rx and certain real property owned by Nichols. All
Collateral is the property of Borrower and not the property of
any Subsidiary of Borrower, other than any leases owned by Rx
and certain real property owned by Nichols.
5.9 Due Authorization; No Conflict.
(a) The execution, delivery, and
performance by Borrower and, as applicable, the Borrower's
Subsidiaries of this Agreement and the Loan Documents to which
any of them is a party have been duly authorized by all
necessary corporate action.
(b) The execution, delivery, and
performance by each of the Borrower and its Subsidiaries of
this Agreement and the Loan Documents to which it is a party
do not and will not (i) violate any provision of federal,
state, or local law or regulation (including Regulations G, T,
U, and X of the Federal Reserve Board) applicable to Borrower
or its Subsidiaries, the Governing Documents of Borrower or
its Subsidiaries, or any order, judgment, or decree of any
court or other Governmental Authority binding on Borrower or
its Subsidiaries, (ii) except for the consent of McKesson,
which consent is evidenced by the McKesson Intercreditor
Agreement, conflict with, result in a breach of, or constitute
(with due notice or lapse of time or both) a default under any
material contractual obligation or material lease of Borrower
or its Subsidiaries, (iii) result in or require the creation
or imposition of any Lien of any nature whatsoever upon any
properties or assets of Borrower or its Subsidiaries, other
than Permitted Liens, or (iv) require any approval of
stockholders or any approval or consent of any Person under
any material contractual obligation of Borrower or its
Subsidiaries.
(c) Other than the filing of appropriate
financing statements, fixture filings, and mortgages, the
execution, delivery, and performance by Borrower or its
Subsidiaries of this Agreement and the Loan Documents to which
Borrower or its Subsidiaries is a party do not and will not
require any registration with, consent, or approval of, or
notice to, or other action with or by, any federal, state,
foreign, or other Governmental Authority or other Person.
(d) This Agreement and the Loan Documents
to which Borrower or its Subsidiaries is a party, and all
other documents contemplated hereby and thereby, when executed
and delivered by Borrower or its Subsidiaries will be the
legally valid and binding obligations of Borrower or its
Subsidiaries, as the case may be, enforceable against Borrower
or its Subsidiaries, as the case may be, in accordance with
their respective terms, except as enforcement may be limited
by equitable principles or by bankruptcy, insolvency,
reorganization, moratorium, or similar laws relating to or
limiting creditors' rights generally.
<Page 31>
(e) The Liens granted by Borrower and its
Subsidiaries to Foothill in and to its properties and assets
pursuant to this Agreement and the other Loan Documents are
validly created, perfected, and first priority Liens, subject
only to Permitted Liens.
5.10 Litigation. There are no actions or
proceedings pending by or against either Borrower or its
Subsidiaries before any court or administrative agency and
none of Borrower or its Subsidiaries has knowledge or belief
of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions,
or prosecutions involving Borrower, its Subsidiaries or any
guarantor of the Obligations, except for: (a) ongoing
collection matters in which Borrower or its Subsidiaries is
the plaintiff; (b) matters disclosed on Schedule 5.10; and (c)
matters arising after the date hereof that, if decided
adversely to Borrower or its Subsidiaries, would not result in
a Material Adverse Change.
5.11 No Material Adverse Change. All financial
statements relating to Borrower, its Subsidiaries or any
guarantor of the Obligations that have been delivered by
Borrower to Foothill have been prepared in accordance with
GAAP (except, in the case of unaudited financial statements,
for the lack of footnotes and being subject to year-end audit
adjustments) and fairly present Borrower's (or such
Subsidiaries' or guarantor's, as applicable) financial
condition as of the date thereof and Borrower's results of
operations for the period then ended. There has not been a
Material Adverse Change with respect to Borrower, its
Subsidiaries or such guarantor, as applicable, since the date
of the latest financial statements submitted to Foothill on or
before the Closing Date.
5.12 Solvency. The Borrower is solvent. After
giving effect to the Nichols Guaranty or the Rx Guaranty, as
appropriate, and subject to the limitations set forth in
Section 7 thereof, each of the Subsidiaries is Solvent. No
transfer of property is being made by any of Borrower or its
Subsidiaries and no obligation is being incurred by any of
Borrower or its Subsidiaries in connection with the
transactions contemplated by this Agreement or the other Loan
Documents with the intent to hinder, delay, or defraud either
present or future creditors of Borrower or its Subsidiaries.
5.13 Employee Benefits. None of Borrower, any
of its Subsidiaries, or any of their ERISA Affiliates
maintains or contributes to any Benefit Plan, other than those
listed on Schedule 5.13. Borrower, each of its Subsidiaries
and each ERISA Affiliate have satisfied the minimum funding
standards of ERISA and the IRC with respect to each Benefit
Plan to which it is obligated to contribute. No ERISA Event
has occurred nor has any other event occurred that may result
in an ERISA Event that reasonably could be expected to result
in a Material Adverse Change. None of Borrower or its
Subsidiaries, any ERISA Affiliate, or any fiduciary of any
Plan is subject to any direct or indirect liability with
respect to any Plan under any applicable law, treaty, rule,
regulation, or agreement. None of Borrower or its
Subsidiaries or any ERISA Affiliate is required to provide
security to any Plan under Section 401(a)(29) of the IRC.
5.14 Environmental Condition. To its
knowledge, none of Borrower's or its Subsidiaries' properties
or assets has ever been used by Borrower or its Subsidiaries
or, to the best of Borrower's knowledge, by previous owners or
operators in the disposal of, or to produce, store, handle,
treat, release, or transport, any Hazardous Materials. To its
knowledge, none of Borrower's or its Subsidiaries' properties
or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a
Hazardous Materials disposal site, or a candidate for closure
pursuant to any environmental protection statute. No Lien
arising under any environmental protection statute has
<Page 32>
attached to any revenues or to any real or personal property
owned or operated by Borrower or its Subsidiaries. Neither
Borrower nor any of its Subsidiaries has received a summons,
citation, notice, or directive from the Environmental
Protection Agency or any other federal or state governmental
agency concerning any action or omission by either Borrower or
any of its Subsidiaries resulting in the releasing or
disposing of Hazardous Materials into the environment.
5.15 License Arrangements. Neither Borrower
nor any of its Subsidiaries has a license arrangement with any
drug or pharmaceutical manufacturer.
5.16 Credit Card Agreements. Set forth on
Schedule 5.16 hereto is a correct and complete list of all of
the Credit Card Agreements and all other agreements, documents
and instruments existing as of the date hereof between or
among Borrower, any of its affiliates, the Credit Card
Issuers, the Credit Card Processors and any of their
affiliates, and a true and correct copy of each such agreement
is attached thereto. The Credit Card Agreements constitute
all of such agreements necessary for Borrower to operate its
business as presently conducted with respect to credit cards
and debit cards and no Accounts of Borrower arise from
purchases by customers of Inventory with credit cards or debit
cards, other than those which are issued by Credit Card
Issuers with whom Borrower has entered into one of the Credit
Card Agreements set forth on Schedule 5.16 hereto, as such
schedule may be updated from time to time to reflect any new
Credit Card Issuer with whom Borrower, in its sole discretion,
has entered into a Credit Card Agreement in accordance with
Section 6.17 hereof; except, that, to the extent any of such
agreements have not been executed and delivered by the parties
thereto as of the date hereof, Borrower shall, and shall cause
the other parties thereto, to execute and deliver such
agreements within thirty (30) days after the date hereof.
Each of the Credit Card Agreements constitutes the legal,
valid and binding obligations of Borrower and to the best of
Borrower's knowledge, the other parties thereto, enforceable
in accordance with their respective terms and are in full
force and effect; except, that, to the extent any of such
agreements have not been executed and delivered by the parties
thereto as of the date hereof, Borrower shall, and shall cause
the other parties thereto, to execute and deliver such
agreements within thirty (30) days after the date hereof. No
default of event of default, or act, condition or event which
after notice or passage of time or both, would constitute a
default or event of default under any of the Credit Card
Agreements exists or has occurred. Borrower and the other
parties thereto have complied with all of the terms and
conditions of the Credit Card Agreements to the extent
necessary for Borrower to be entitled to receive all payments
to which Borrower is entitled thereunder. Borrower has
delivered, or caused to be delivered to Foothill, true,
correct and complete copies of all of the Credit Card
Agreements.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any
credit hereunder shall be available and until full and final
payment of the Obligations, and unless Foothill shall
otherwise consent in writing, Borrower shall do, and shall
cause each of its Subsidiaries to do, all of the following:
6.1 Accounting System. Maintain a standard
and modern system of accounting that enables Borrower and its
Subsidiaries to produce financial statements in accordance
with GAAP, and maintain records pertaining to the Collateral
that contain information as from time to time may be requested
<Page 33>
by Foothill. Borrower and each of its Subsidiaries shall keep
a modern inventory reporting system that shows all additions,
sales, claims, returns, and allowances with respect to the
Inventory.
6.2 Collateral Reporting. Provide Foothill
with the following documents at the following times in form
satisfactory to Foothill: (a) on a monthly basis and, in any
event, by no later than the 10th day of each month during the
term of this Agreement, a detailed calculation of the
Borrowing Base, (b) on a monthly basis and, in any event, by
no later than the 10th day of each month during the term of
this Agreement, a summary aging, by vendor, of Borrower's
accounts payable and any book overdraft, (c) on a weekly
basis, Inventory reports specifying Borrower's cost and the
wholesale market value of its Inventory by category, with
additional detail showing additions to and deletions from the
Inventory, (d) on a monthly basis and in any event by no later
than the 10th day of each month during the term of this
Agreement, a status report for all rents owed to each landlord
for each of the leased properties of Borrower or its
Subsidiaries, and (e) such other reports as to the Collateral
or the financial condition of Borrower as Foothill may request
from time to time.
6.3 Financial Statements, Reports,
Certificates. Deliver to Foothill: (a) as soon as
available, but in any event within 45 days after the end of
each month during each of Borrower's fiscal years, a company
prepared balance sheet and income statement, (b) as soon as
available, but in any event within 45 days after the end of
each quarter during each of the Borrower's fiscal years, a
statement of cash flow covering Borrower's operations during
such period; and (c) as soon as available, but in any event
within 90 days after the end of each of Borrower's fiscal
years, financial statements of Borrower for each such fiscal
year, audited by independent certified public accountants
reasonably acceptable to Foothill and certified, without any
qualifications, by such accountants to have been prepared in
accordance with GAAP, together with a certificate of such
accountants addressed to Foothill stating that such
accountants do not have knowledge of the existence of any
Default or Event of Default. Such audited financial
statements shall include a balance sheet, profit and loss
statement, and statement of cash flow and, if prepared, such
accountants' letter to management. If Borrower is a parent
company of one or more Subsidiaries, or Affiliates, or is a
Subsidiary or Affiliate of another company, then, in addition
to the financial statements referred to above, Borrower agrees
to deliver financial statements prepared on a consolidating
basis so as to present Borrower and each such related entity
separately, and on a consolidated basis.
Together with the above, Borrower also shall
deliver to Foothill Borrower's Form 10-Q Quarterly Reports,
Form 10-K Annual Reports, and Form 8-K Current Reports, and
any other filings made by Borrower with the Securities and
Exchange Commission, if any, as soon as the same are filed, or
any other information that is provided by Borrower to its
shareholders.
Each month, together with the financial
statements provided pursuant to Section 6.3(a), Borrower shall
deliver to Foothill a certificate signed by its chief
financial officer to the effect that: (i) all financial
statements delivered or caused to be delivered to Foothill
hereunder have been prepared in accordance with GAAP (except,
in the case of unaudited financial statements, for the lack of
footnotes and being subject to year-end audit adjustments) and
fairly present the financial condition of Borrower, (ii) the
representations and warranties of Borrower contained in this
Agreement and the other Loan Documents are true and correct in
all material respects on and as of the date of such
certificate, as though made on and as of such date (except to
the extent that such representations and warranties relate
solely to an earlier date), (iii) for each month that also is
<Page 34>
the date on which a financial covenant in Section 7.20 is to
be tested, a Compliance Certificate demonstrating in
reasonable detail compliance at the end of such period with
the applicable financial covenants contained in Section 7.20,
and (iv) on the date of delivery of such certificate to
Foothill there does not exist any condition or event that
constitutes a Default or Event of Default (or, in the case of
clauses (i), (ii), or (iii), to the extent of any non-
compliance, describing such non-compliance as to which he or
she may have knowledge and what action Borrower has taken, is
taking, or proposes to take with respect thereto).
In addition to the financial statements
required to be delivered as set forth above, not later than 30
days prior to the end of each fiscal year of the Borrower, the
Borrower shall deliver to Foothill financial projections
(including projected income statements, balance sheets and
statements of cash flow, all projected on a monthly basis for
the succeeding fiscal year and on an annual basis for each
fiscal year thereafter until the termination of this Agreement
and in each case prepared on a consolidated and stand alone
basis), in form and substance reasonably satisfactory to
Foothill; all such financial projections shall be reasonable,
shall be prepared on a reasonable basis and in good faith, and
shall be based on assumptions believed by the Borrower to be
reasonable at the time made and from the best information then
available to the Borrower.
6.4 Tax Returns. Deliver to Foothill copies
of each of Borrower's and its Subsidiaries future federal
income tax returns, and any amendments thereto, within 30 days
of the filing thereof with the Internal Revenue Service.
6.5 Guarantor Reports. Cause any guarantor of
any of the Obligations to deliver its annual financial
statements at the time when Borrower provides its audited
financial statements to Foothill and copies of all federal
income tax returns as soon as the same are available and in
any event no later than 30 days after the same are filed with
the Internal Revenue Service.
6.6 Intentionally Omitted.
6.7 Title to Equipment. Upon Foothill's
request, Borrower or its Subsidiaries immediately shall
deliver to Foothill, properly endorsed, any and all evidences
of ownership of, certificates of title, or applications for
title to any items of Equipment.
6.8 Maintenance of Equipment. Maintain the
Equipment in good operating condition and repair (ordinary
wear and tear excepted), and make all necessary replacements
thereto so that the value and operating efficiency thereof
shall at all times be maintained and preserved. Other than
those items of Equipment that constitute fixtures on the
Closing Date, Borrower and its Subsidiaries shall not permit
any item of Equipment to become a fixture to real estate or an
accession to other property, and such Equipment shall at all
times remain personal property, other than leasehold
improvements pursuant to any lease agreement for the subject
premises.
6.9 Taxes. Cause all assessments and taxes,
whether real, personal, or otherwise, due or payable by, or
imposed, levied, or assessed against Borrower or any of its
property to be paid in full, before delinquency or before the
expiration of any extension period, except to the extent that
the validity of such assessment or tax shall be the subject
of a Permitted Protest. Borrower and each of its Subsidiaries
shall make due and timely payment or deposit of all such
federal, state, and local taxes, assessments, or contributions
required of it by law, and will execute and deliver to
<Page 35>
Foothill, on demand, appropriate certificates attesting to the
payment thereof or deposit with respect thereto. Borrower and
each of its Subsidiaries will make timely payment or deposit
of all tax payments and withholding taxes required of it by
applicable laws, including those laws concerning F.I.C.A.,
F.U.T.A., state disability, and local, state, and federal
income taxes, and will, upon request, furnish Foothill with
proof satisfactory to Foothill indicating that Borrower and
each of its Subsidiaries has made such payments or deposits.
6.10 Insurance.
(a) At its expense, keep the Personal
Property Collateral insured against loss or damage by fire,
theft, explosion, sprinklers, and all other hazards and risks,
and in such amounts, as are ordinarily insured against by
other owners in similar businesses. Borrower also shall
maintain business interruption, public liability, product
liability, and property damage insurance relating to
Borrower's ownership and use of the Personal Property
Collateral, as well as insurance against larceny,
embezzlement, and criminal misappropriation.
(b) At its expense, obtain and maintain
(i) insurance of the type necessary to insure the Mortgaged
Property (as such terms are defined in the Mortgages), for the
full replacement cost thereof, against any loss by fire,
lightning, windstorm, hail, explosion, aircraft, smoke damage,
vehicle damage, earthquakes, elevator collision, and other
risks from time to time included under "extended coverage"
policies, in such amounts as Foothill may require, but in any
event in amounts sufficient to prevent Borrower from becoming
a co-insurer under such policies, (ii) combined single limit
bodily injury and property damages insurance against any loss,
liability, or damages on, about, or relating to each parcel of
Real Property Collateral, in an amount of not less than
$9,000,000; and (iii) business rental insurance covering
annual receipts for a 12 month period for each parcel of Real
Property Collateral.
(c) Intentionally Omitted.
(d) All such policies of insurance shall
be in such form, with such companies, and in such amounts as
may be reasonably satisfactory to Foothill. All hazard
insurance and such other insurance as Foothill shall specify,
shall contain an equivalent endorsement satisfactory to
Foothill, showing Foothill as sole loss payee thereof, or
Foothill's interest as it may appear, and shall contain a
waiver of subrogation. Every policy of insurance referred to
in this Section 6.10 shall contain an agreement by the insurer
that it will not cancel such policy except after 30 days prior
written notice to Foothill and that any loss payable
thereunder shall be payable notwithstanding any act or
negligence of Borrower or Foothill which might, absent such
agreement, result in a forfeiture of all or a part of such
insurance payment and notwithstanding (i) occupancy or use of
the Real Property Collateral for purposes more hazardous than
permitted by the terms of such policy, (ii) any foreclosure or
other action or proceeding taken by Foothill pursuant to the
Mortgages upon the happening of an Event of Default, or
(iii) any change in title or ownership of the Real Property
Collateral. Borrower shall deliver to Foothill copies of such
policies of insurance and evidence of the payment of all
premiums therefor.
<Page 36>
(e) Original policies or certificates
thereof satisfactory to Foothill evidencing such insurance
shall be delivered to Foothill prior to the expiration of the
existing or preceding policies. Borrower shall give Foothill
prompt notice of any loss covered by such insurance, and
Foothill shall have the right to adjust any loss. Foothill
shall have the exclusive right to adjust all losses payable
under any such insurance policies without any liability to
Borrower whatsoever in respect of such adjustments. Any
monies received as payment for any loss under any insurance
policy including the insurance policies mentioned above, shall
be paid over to Foothill to be applied at the option of
Foothill either to the prepayment of the Obligations without
premium, in such order or manner as Foothill may elect, or
shall be disbursed to Borrower under stage payment terms
satisfactory to Foothill for application to the cost of
repairs, replacements, or restorations. All repairs,
replacements, or restorations shall be effected with
reasonable promptness and shall be of a value at least equal
to the value of the items or property destroyed prior to such
damage or destruction. Upon the occurrence of an Event of
Default, Foothill shall have the right to apply all prepaid
premiums to the payment of the Obligations in such order or
form as Foothill shall determine.
(f) Borrower shall not take out separate
insurance concurrent in form or contributing in the event of
loss with that required to be maintained under this Section
6.10, unless Foothill is included thereon as named insured
with the loss payable to Foothill under a standard mortgagee
endorsement. Borrower immediately shall notify Foothill
whenever such separate insurance is taken out, specifying the
insurer thereunder and full particulars as to the policies
evidencing the same, and originals of such policies
immediately shall be provided to Foothill.
6.11 No Setoffs or Counterclaims. Make
payments hereunder and under the other Loan Documents by or on
behalf of Borrower without setoff or counterclaim and free and
clear of, and without deduction or withholding for or on
account of, any federal, state, or local taxes.
6.12 Location of Inventory and Equipment. Keep
the Inventory and Equipment only at the locations identified
on Schedule 6.12; provided, however, that Borrower may amend
Schedule 6.12 so long as such amendment occurs by written
notice to Foothill not less than 30 days prior to the date on
which the Inventory or Equipment is moved to such new
location, so long as such new location is within the
continental United States, and so long as, at the time of such
written notification, Borrower provides any financing
statements or fixture filings necessary to perfect and
continue perfected Foothill's security interests in such
assets and also provides to Foothill a Collateral Access
Agreement.
6.13 Compliance with Laws. Comply in all
material respects with the requirements of all applicable
laws, rules, regulations, and orders of any governmental
authority, including the Fair Labor Standards Act and the
Americans With Disabilities Act, other than laws, rules,
regulations, and orders the non-compliance with which,
individually or in the aggregate, would not have and could not
reasonably be expected to cause a Material Adverse Change.
6.14 Employee Benefits.
(a) Promptly, and in any event within 10
Business Days after Borrower or any of its Subsidiaries knows
or has reason to know that an ERISA Event has occurred that
<Page 37>
reasonably could be expected to result in a Material Adverse
Change, a written statement of the chief financial officer of
Borrower describing such ERISA Event and any action that is
being taking with respect thereto by Borrower, any such
Subsidiary or ERISA Affiliate, and any action taken or
threatened by the IRS, Department of Labor, or PBGC. Borrower
or such Subsidiary, as applicable, shall be deemed to know all
facts known by the administrator of any Benefit Plan of which
it is the plan sponsor, (ii) promptly, and in any event within
3 Business Days after the filing thereof with the IRS, a copy
of each funding waiver request filed with respect to any
Benefit Plan and all communications received by Borrower, any
of its Subsidiaries or, to the knowledge of Borrower, any
ERISA Affiliate with respect to such request, and
(iii) promptly, and in any event within 3 Business Days after
receipt by Borrower, any of its Subsidiaries or, to the
knowledge of Borrower, any ERISA Affiliate, of the PBGC's
intention to terminate a Benefit Plan or to have a trustee
appointed to administer a Benefit Plan, copies of each such
notice.
(b) Cause to be delivered to Foothill,
upon Foothill's request, each of the following: (i) a copy of
each Plan (or, where any such plan is not in writing, complete
description thereof) (and if applicable, related trust
agreements or other funding instruments) and all amendments
thereto, all written interpretations thereof and written
descriptions thereof that have been distributed to employees
or former employees of Borrower or its Subsidiaries; (ii) the
most recent determination letter issued by the IRS with
respect to each Benefit Plan; (iii) for the three most recent
plan years, annual reports on Form 5500 Series required to be
filed with any governmental agency for each Benefit Plan;
(iv) all actuarial reports prepared for the last three plan
years for each Benefit Plan; (v) a listing of all
Multiemployer Plans, with the aggregate amount of the most
recent annual contributions required to be made by Borrower or
any ERISA Affiliate to each such plan and copies of the
collective bargaining agreements requiring such contributions;
(vi) any information that has been provided to Borrower or any
ERISA Affiliate regarding withdrawal liability under any
Multiemployer Plan; and (vii) the aggregate amount of the most
recent annual payments made to former employees of Borrower or
its Subsidiaries under any Retiree Health Plan.
6.15 Leases. Pay when due all rents and other
amounts payable under any leases to which Borrower and each of
its Subsidiaries is a party or by which Borrower's or its
Subsidiaries' properties and assets are bound, unless such
payments are the subject of a Permitted Protest. To the
extent that Borrower or any of its Subsidiaries fails timely
to make payment of such rents and other amounts payable when
due under its leases, Foothill shall be entitled, in its
discretion, to reserve an amount equal to such unpaid amounts
against the Borrowing Base. In connection with Foothill's
agreement not to require a Collateral Access Agreement from
each lessor of Borrower's stores located in Pennsylvania,
Virginia, and any other state in which Borrower locates any
Collateral where a lessor has a security interest in the
Collateral at such location, Borrower acknowledges that
Foothill has established a reserve against the Borrowing Base
in the aggregate amount equal to the sum of two (2) month's
rent for each store located in the aforementioned states;
provided, however, that in no event shall such reserve exceed
Six Hundred Thousand Dollars ($600,000); further, provided
that, if at any time after the Closing Date (a) Foothill
receives a satisfactory Collateral Access Agreement from the
lessor of any location in the aforementioned states, such
reserve will be decreased by the amount of two (2) month's
rent for such location, and (b) in the event Borrower opens an
additional location in the aforementioned states, such reserve
will be increased by the amount of two (2) month's rent for
such location unless Foothill receives a satisfactory
Collateral Access Agreement from the lessor for such location.
6.16 Year 2000 Compliance. The Borrower has
implemented a comprehensive program to address the "year 200
<Page 38>
problem" (that is, the risk that computer applications may not
be able to properly perform date-sensitive functions after
December 31, 1999) and expects to resolve on a timely basis
any material year 2000 problem. The Borrower has also made
inquiry of each supplier, vendor and customer of the Borrower
that is of material importance to the financial well-being of
the Borrower with respect to the "year 2000 problem." On the
basis of the inquiry, the Borrower believes that each such
supplier, vendor and customer of the Borrower will resolve any
material year 2000 problem on a timely basis.
6.17 Credit Card Agreements. Borrower shall
(a) observe and perform all material terms, covenants,
conditions and provisions of the Credit Card Agreements to be
observed and performed by it at the times set forth therein;
(b) not do, permit, suffer or refrain from doing anything as a
result of which there could be a material default under or
breach of any of the terms of any of the Credit Card
Agreements; (c) at all times maintain in full force and effect
the Credit Card Agreements and not terminate, cancel,
surrender, modify, amend, waive or release in any material
respect any of the Credit Card Agreements, or consent to or
permit to occur any of the foregoing; except, that, Borrower
may terminate or cancel any of the Credit Card Agreements in
the ordinary course of business of Borrower, provided, that,
Borrower shall give Foothill not less fifteen (15) days prior
written notice of its intention to so terminate or cancel any
of the Credit Card Agreements; (d) not enter into any new
Credit Card Agreements with any new Credit Card Issuer unless
(i) Foothill shall have received not less than fifteen (15)
days prior written notice of the intention of Borrower to
enter into such agreement (together with such other
information with respect thereto as Foothill may reasonably
request) and (ii) Borrower delivers, or causes to be delivered
to Foothill, a Credit Card Acknowledgment in favor of
Foothill; (e) give Foothill prompt written notice of any
Credit Card Agreement entered into by Borrower after the date
hereof, together with a true, correct and complete copy
thereof and such other information with respect thereto as
Foothill may request; and (f) furnish to Foothill, promptly
upon the request of Foothill, such information and evidence as
Foothill may reasonably require from time to time concerning
the observance, performance and compliance by Borrower or the
other party or parties thereto with the terms, covenants or
provisions of the Credit Card Agreements.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any
credit hereunder shall be available and until full and final
payment of the Obligations, Borrower will not and will not
permit any of its Subsidiaries to do any of the following
without Foothill's prior written consent:
7.1 Indebtedness. Create, incur, assume,
permit, guarantee, or otherwise become or remain, directly or
indirectly, liable with respect to any Indebtedness, except:
(a) Indebtedness evidenced by this
Agreement, together with Indebtedness to issuers of letters of
credit that are the subject of L/C Guarantees;
(b) Indebtedness set forth in the latest
financial statements of Borrower submitted to Foothill on or
prior to the Closing Date;
(c) Indebtedness secured by Permitted
Liens; and
(d) refinancings, renewals, or extensions
of Indebtedness permitted under clauses (b) and (c) of this
<Page 39>
Section 7.1 (and continuance or renewal of any Permitted Liens
associated therewith) so long as: (i) the terms and conditions
of such refinancings, renewals, or extensions do not
materially impair the prospects of repayment of the
Obligations by Borrower, (ii) the net cash proceeds of such
refinancings, renewals, or extensions do not result in an
increase in the aggregate principal amount of the Indebtedness
so refinanced, renewed, or extended, (iii) such refinancings,
renewals, refundings, or extensions do not result in a
shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended, and (iv) to
the extent that Indebtedness that is refinanced was
subordinated in right of payment to the Obligations, then the
subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to Foothill as
those applicable to the refinanced Indebtedness.
7.2 Liens. Create, incur, assume, or permit
to exist, directly or indirectly, any Lien on or with respect
to any of its property or assets, of any kind, whether now
owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that
are replacements of Permitted Liens to the extent that the
original Indebtedness is refinanced under Section 7.1(d) and
so long as the replacement Liens only encumber those assets or
property that secured the original Indebtedness).
7.3 Restrictions on Fundamental Changes.
Enter into any merger, consolidation, reorganization, or
recapitalization, or reclassify its capital stock, or
liquidate, wind up, or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, assign, lease,
transfer, or otherwise dispose of, in one transaction or a
series of transactions, all or any substantial part of its
property or assets, except that any subsidiary of Borrower may
merge with or into or consolidate with Borrower or any wholly-
owned subsidiary of Borrower may merge with or into or
consolidate with such wholly-owned subsidiary, provided that
each of the following conditions is satisfied as determined by
Foothill: (i) Foothill shall have received not less than ten
(10) days prior written notice of the intention of Borrower to
so merge and such other information with respect thereto as
Foothill may reasonably request; (ii) as of the effective date
of the merger or consolidation and after giving effect
thereto, no Event of Default shall exist or have occurred;
(iii) Foothill shall have received true, correct and complete
copies of all agreements, documents and instruments relating
to such merger, including, but not limited to, the certificate
or certificates of merger as filed with each appropriate
Secretary of State; (iv) Borrower, or such wholly-owned
subsidiary, as the case may be, shall be the surviving entity
and shall immediately upon the effectiveness of the merger
expressly confirm in writing pursuant to an agreement, in form
and substance satisfactory to Foothill, its continuing
liability in respect of the Obligations and the Loan Documents
and execute and deliver such other agreements, documents and
instruments as Foothill may reasonably request in connection
therewith; (v) the surviving entity shall, immediately after
giving effect to such transaction or series of transactions,
have a consolidated net worth as determined in accordance with
GAAP (including, without limitation, any indebtedness incurred
or anticipated to be incurred in connection with or in respect
of such transactions or series of transactions) equal to or
greater than the consolidated net worth of Borrower or such
wholly-owned subsidiary, as the case may be as determined in
accordance with GAAP immediately prior to such transaction or
series of transactions; and (vi) Borrower, or such wholly-
owned subsidiary, as the case may be, shall not become
obligated with respect to any Indebtedness, nor any of its
property become subject to any lien, unless Borrower could
incur such Indebtedness or create such lien hereunder.
7.4 Disposal of Assets. Sell, lease, assign,
transfer, or otherwise dispose of any of Borrower's properties
or assets other than sales of Inventory to buyers in the
ordinary course of Borrower's business as currently conducted,
<Page 40>
provided, however, that Borrower may dispose of worn-out or
obsolete Equipment so long as (a) any proceeds from such
disposal shall be paid directly to Foothill and (b) such sales
do not involve Equipment having a fair market value in excess
of $200,000 in the aggregate for all such Equipment disposed
of in any fiscal year of Borrower.
7.5 Change Name. Change Borrower's or any of
its Subsidiaries' name, FEIN, corporate structure (within the
meaning of Section 9402(7) of the Code), or identity, or add
any new fictitious name.
7.6 Guarantee. Guarantee or otherwise become
in any way liable with respect to the obligations of any third
Person except by endorsement of instruments or items of
payment for deposit to the account of Borrower or which are
transmitted or turned over to Foothill.
7.7 Nature of Business. Make any change in
the principal nature of Borrower's business.
7.8 Prepayments and Amendments.
(a) Except in connection with a
refinancing permitted by Section 7.1(d), prepay, redeem,
retire, defease, purchase, or otherwise acquire any
Indebtedness owing to any third Person, other than the
Obligations in accordance with this Agreement, and
(b) Other than an amendment to the loan
with McKesson to increase the debt by no more than $1,000,000,
(provided that such increase shall remain subject to the
McKesson Intercreditor Agreement) directly or indirectly,
amend, modify, alter, increase, or change any of the terms or
conditions of any agreement, instrument, document, indenture,
or other writing evidencing or concerning Indebtedness
permitted under Sections 7.1(b), (c), or (d).
7.9 Change of Control. Cause, permit, or
suffer, directly or indirectly, any Change of Control.
7.10 Consignments. Consign any Inventory or
sell any Inventory on bill and hold, sale or return, sale on
approval, or other conditional terms of sale.
7.11 Distributions. Make any distribution or
declare or pay any dividends (in cash or other property, other
than capital stock) on, or purchase, acquire, redeem, or
retire any of Borrower's capital stock, of any class, whether
now or hereafter outstanding.
7.12 Accounting Methods; Fiscal Year. Modify
or change its method of accounting, except in accordance with
GAAP. Neither Borrower nor any of its Subsidiaries shall
change its fiscal year from a year ending on the Saturday
closest to January 31.
7.13 Investments. Directly or indirectly make,
acquire, or incur any liabilities (including contingent
obligations) for or in connection with (a) the acquisition of
the securities (whether debt or equity) of, or other interests
in, a Person, (b) loans, advances, capital contributions, or
transfers of property to a Person, or (c) the acquisition of
all or substantially all of the properties or assets of a
Person.
<Page 41>
7.14 Transactions with Affiliates. Directly or
indirectly enter into or permit to exist any material
transaction with any Affiliate of Borrower except for
transactions that are in the ordinary course of Borrower's
business, upon fair and reasonable terms, that are fully
disclosed to Foothill, and that are no less favorable to
Borrower than would be obtained in an arm's length transaction
with a non-Affiliate. Foothill acknowledges and agrees any
compensation arrangements approved by the compensation
committee of the Borrower's board of directors shall be deemed
in compliance with this Section 7.14.
7.15 Suspension. Suspend or go out of a
substantial portion of its business.
7.16 Intentionally Omitted.
7.17 Use of Proceeds. Use the proceeds of the
Advances and the Term Loan made hereunder for any purpose
other than (i) on the Closing Date, (y) to repay in full the
outstanding principal, accrued interest, and accrued fees and
expenses owing to Existing Lender, and (z) to pay
transactional costs and expenses incurred in connection with
this Agreement, and (ii) thereafter, consistent with the terms
and conditions hereof, for its lawful and permitted corporate
purposes.
7.18 Change in Location of Chief Executive
Office; Inventory and Equipment with Bailees. Relocate its
chief executive office to a new location without providing 30
days prior written notification thereof to Foothill and so
long as, at the time of such written notification, Borrower
provides any financing statements or fixture filings necessary
to perfect and continue perfected Foothill's security
interests and also provides to Foothill a Collateral Access
Agreement with respect to such new location. The Inventory
and Equipment shall not at any time now or hereafter be stored
with a bailee, warehouseman, or similar party without
Foothill's prior written consent.
7.19 No Prohibited Transactions Under ERISA.
Directly or indirectly:
(a) engage, or permit any Subsidiary of
Borrower to engage, in any prohibited transaction which is
reasonably likely to result in a civil penalty or excise tax
described in Sections 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a
private exemption has not been previously obtained from the
Department of Labor;
(b) permit to exist with respect to any
Benefit Plan any accumulated funding deficiency (as defined in
Sections 302 of ERISA and 412 of the IRC), whether or not
waived;
(c) fail, or permit any Subsidiary of
Borrower to fail, to pay timely required contributions or
annual installments due with respect to any waived funding
deficiency to any Benefit Plan;
(d) terminate, or permit any Subsidiary
of Borrower to terminate, any Benefit Plan where such event
would result in any liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate under Title IV of ERISA;
(e) fail, or permit any Subsidiary of
Borrower to fail, to make any required contribution or payment
to any Multiemployer Plan;
<Page 42>
(f) fail, or permit any Subsidiary of
Borrower to fail, to pay any required installment or any other
payment required under Section 412 of the IRC on or before the
due date for such installment or other payment;
(g) amend, or permit any Subsidiary of
Borrower to amend, a Plan resulting in an increase in current
liability for the plan year such that either of Borrower, any
Subsidiary of Borrower or any ERISA Affiliate is required to
provide security to such Plan under Section 401(a)(29) of the
IRC; or
(h) withdraw, or permit any Subsidiary of
Borrower to withdraw, from any Multiemployer Plan where such
withdrawal is reasonably likely to result in any liability of
any such entity under Title IV of ERISA;
which, individually or in the aggregate, results in or
reasonably would be expected to result in a claim against or
liability of Borrower, any of its Subsidiaries or any ERISA
Affiliate in excess of Ten Thousand Dollars ($10,000).
7.20 Financial Covenants. Fail to maintain:
(a) Tangible Net Worth. Tangible Net
Worth of at least the following amounts, measured on a fiscal
quarter-end basis, as of the following dates:
First Fiscal Quarter, 1999 $3,698,000
Second Fiscal Quarter, 1999 $4,175,000
Third Fiscal Quarter, 1999 $3,758,000
Fourth Fiscal Quarter, 1999 $5,142,000
provided that, thereafter, upon receipt of the financial
projections required to be delivered to Foothill pursuant to
Section 6.3 hereof for each fiscal year, the Borrower and
Foothill shall negotiate in good faith to determine the
minimum Tangible Net Worth as of the end of each fiscal
quarter covered by such financial projections and, in the
event that the Borrower and Foothill are unable to agree upon
the amounts of such Tangible Net Worth on or before the date
that is 30 days after the date that Foothill has received such
projections, the Tangible Net Worth at the end of the each
fiscal quarter of the fiscal year covered by such financial
projections shall not be less than the amount set forth for
the corresponding fiscal quarter end set forth above plus 10%
of such amount.
(b) Minimum EBITDA. EBITDA of at least the
following amounts, measured on a fiscal quarter-end basis, as
of the following dates:
First Fiscal Quarter, 1999 $106,000
Second Fiscal Quarter, 1999 $1,346,000
Third Fiscal Quarter, 1999 $1,737,000
Fourth Fiscal Quarter, 1999 $3,905,000
provided that, thereafter, upon receipt of the financial
projections required to be delivered to Foothill pursuant to
Section 6.3 hereof for each fiscal year, the Borrower and
Foothill shall negotiate in good faith to determine the
minimum EBITDA as of the end of each fiscal quarter covered by
such financial projections and, in the event that the Borrower
and Foothill are unable to agree upon the amounts of such
EBITDA on or before the date that is 30 days after the date
that Foothill has received such projections, the EBITDA at the
<Page 43>
end of the each fiscal quarter of the fiscal year covered by
such financial projections shall not be less than the amount
set forth for the corresponding fiscal quarter end set forth
above plus 10% of such amount.
7.21 Capital Expenditures. Make capital
expenditures in any fiscal year in excess of $500,000,
provided that, thereafter, upon receipt of the financial
projections required to be delivered to Foothill pursuant to
Section 6.3 hereof for each fiscal year, the Borrower and
Foothill shall negotiate in good faith to determine the
maximum capital expenditures as of the end of the fiscal year
covered by such financial projections and, in the event that
the Borrower and Foothill are unable to agree upon the amounts
of such capital expenditures on or before the date that is 30
days after the date that Foothill has received such
projections, the capital expenditures at the end of the fiscal
year covered by such financial projection shall remain the
same as above.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall
constitute an event of default (each, an "Event of Default")
under this Agreement:
8.1 If Borrower fails to pay when due and
payable or when declared due and payable, any portion of the
Obligations (whether of principal, interest (including any
interest which, but for the provisions of the Bankruptcy Code,
would have accrued on such amounts), fees and charges due
Foothill, reimbursement of Foothill Expenses, or other amounts
constituting Obligations);
8.2 (a) If Borrower fails to perform, keep, or
observe any term, provision, condition, covenant, or agreement
contained in Sections 6.2 (Collateral Reporting), 6.4 (Tax
Returns), 6.7 (Title to Equipment), 6.12 (Location of
Inventory and Equipment), 6.13 (Compliance with Laws), 6.14
(Employee Benefits) or 6.15 (Leases) of this Agreement and
such failure continues for a period of 5 Business Days; (b) if
Borrower fails to perform, keep or observe any term,
provision, condition, covenant or agreement contained in
Sections 6.1 (Accounting System), 6.3 (Financial Statements,
Reports, Certificates), or 6.8 (Maintenance of Equipment) of
this Agreement and such failure continues for a period of 15
Business Days; or (c) if Borrower fails to perform, keep, or
observe any other term, provision, condition, covenant or
agreement contained in this Agreement, or in any of the other
Loan Documents, other than any such term, provision,
condition, covenant, or agreement that is the subject of
another provision of this Section 8, in which event such other
provision of this Section 8 shall govern; provided, that
during any period of time that any such failure or neglect of
Borrower referred to in this paragraph exists, even if such
failure is not yet an Event of Default by virtue of the
existence of a grace or cure period, Foothill shall not be
required during such period to make Advances to Borrower;
8.3 If there is a Material Adverse Change;
8.4 If any material portion of any of the
Borrower's or its Subsidiaries' properties or assets is
attached, seized, subjected to a writ or distress warrant, or
is levied upon, or comes into the possession of any third
Person;
8.5 If an Insolvency Proceeding is commenced
by the Borrower or any of its Subsidiaries;
<Page 44>
8.6 If an Insolvency Proceeding is commenced
against Borrower or any of its Subsidiaries and any of the
following events occur: (a) The Borrower or any of its
Subsidiaries, as applicable, consents to the institution of
the Insolvency Proceeding against it; (b) the petition
commencing the Insolvency Proceeding is not timely
controverted; (c) the petition commencing the Insolvency
Proceeding is not dismissed within 45 calendar days of the
date of the filing thereof; provided, however, that, during
the pendency of such period, Foothill shall be relieved of its
obligation to extend credit hereunder; (d) an interim trustee
is appointed to take possession of all or a substantial
portion of the properties or assets of, or to operate all or
any substantial portion of the business of, Borrower or its
Subsidiaries, as applicable; or (e) an order for relief shall
have been issued or entered therein;
8.7 If the Borrower or any of its Subsidiaries
is enjoined, restrained, or in any way prevented by court
order from continuing to conduct all or any material part of
its business affairs unless such injunction, restraint, or
court order is lifted or overturned within three (3) Business
Days of the issuance thereof;
8.8 If a notice of Lien, levy, or assessment
is filed of record with respect to any of Borrower's or its
Subsidiaries' properties or assets by the United States
Government, or any department, agency, or instrumentality
thereof, or by any state, county, municipal, or governmental
agency, or if any taxes or debts owing at any time hereafter
to any one or more of such entities becomes a Lien, upon any
of Borrower's or its Subsidiaries' properties or assets and
the same is not paid on the payment date thereof;
8.9 If a judgment or other claim becomes a
Lien or encumbrance upon any material portion of Borrower's or
its Subsidiaries' properties or assets, provided, however,
that Borrower, or its Subsidiary, as applicable, has the right
to release or bond such action within fifteen (15) days;
8.10 If there is a default by the Borrower or
its Subsidiaries in any material agreement to which Borrower
or its Subsidiaries is a party with one or more third Persons
and such default (a) occurs at the final maturity of the
obligations thereunder, or (b) results in a right by such
third Person(s), irrespective of whether exercised, to
accelerate the maturity of Borrower's or its Subsidiaries, as
applicable, obligations thereunder;
8.11 If Borrower or any of its Subsidiaries
makes any payment on account of Indebtedness that has been
contractually subordinated in right of payment to the payment
of the Obligations, except to the extent such payment is
permitted by the terms of the subordination provisions
applicable to such Indebtedness;
8.12 If any material misstatement or
misrepresentation exists now or hereafter in any warranty,
representation, statement, or report made to Foothill by
Borrower, its Subsidiaries, or any officer, employee, agent,
or director of Borrower or its Subsidiaries, or if any such
warranty or representation is withdrawn; or
8.13 If the obligation of any guarantor under
its guaranty is limited or terminated by operation of law or
by the guarantor thereunder, or any such guarantor becomes the
subject of an Insolvency Proceeding and any of the following
events occur: (a) such guarantor consents to the institution
of the Insolvency Proceeding against it; (b) the petition
commencing the Insolvency Proceeding is not timely
controverted; (c) the petition commencing the Insolvency
<Page 45>
Proceeding is not dismissed within 45 calendar days of the
date of the filing thereof, provided, that, during the
pendency of such period, Foothill shall be relieved of its
obligation to extend credit hereunder; (d) an interim trustee
is appointed to take possession of all or a substantial
portion of the properties or assets of, or to operate all or
any substantial portion of the business of, such guarantor; or
(e) an order for relief shall have been issued or entered
therein.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence,
and during the continuation, of an Event of Default Foothill
may, at its election, without notice of its election and
without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether
evidenced by this Agreement, by any of the other Loan
Documents, or otherwise, immediately due and payable;
(b) Cease advancing money or extending
credit to or for the benefit of Borrower under this Agreement,
under any of the Loan Documents, or under any other agreement
between Borrower and Foothill;
(c) Terminate this Agreement and any of
the other Loan Documents as to any future liability or
obligation of Foothill, but without affecting Foothill's
rights and security interests in the Personal Property
Collateral or the Real Property Collateral and without
affecting the Obligations;
(d) Settle or adjust disputes and claims
directly with Account Debtors for amounts and upon terms which
Foothill considers advisable, and in such cases, Foothill will
credit Borrower's Loan Account with only the net amounts
received by Foothill in payment of such disputed Accounts
after deducting all Foothill Expenses incurred or expended in
connection therewith;
(e) Cause Borrower to hold all returned
Inventory in trust for Foothill, segregate all returned
Inventory from all other property of Borrower or in Borrower's
possession and conspicuously label said returned Inventory as
the property of Foothill;
(f) Without notice to or demand upon
Borrower or any guarantor, make such payments and do such acts
as Foothill considers necessary or reasonable to protect its
security interests in the Collateral. Borrower agrees to
assemble the Personal Property Collateral if Foothill so
requires, and to make the Personal Property Collateral
available to Foothill as Foothill may designate. Borrower
authorizes Foothill to enter the premises where the Personal
Property Collateral is located, to take and maintain
possession of the Personal Property Collateral, or any part of
it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or Lien that in Foothill's determination
appears to conflict with its security interests and to pay all
expenses incurred in connection therewith. With respect to
any of Borrower's owned or leased premises, Borrower hereby
grants Foothill a license to enter into possession of such
premises and to occupy the same, without charge, for up to 120
days in order to exercise any of Foothill's rights or remedies
provided herein, at law, in equity, or otherwise;
<Paeg 46>
(g) Without notice to Borrower (such
notice being expressly waived), and without constituting a
retention of any collateral in satisfaction of an obligation
(within the meaning of Section 9505 of the Code), set off and
apply to the Obligations any and all (i) balances and deposits
of Borrower held by Foothill (including any amounts received
in the Blocked Accounts), or (ii) indebtedness at any time
owing to or for the credit or the account of Borrower held by
Foothill;
(h) Hold, as cash collateral, any and all
balances and deposits of Borrower held by Foothill, and any
amounts received in the Blocked Accounts, to secure the full
and final repayment of all of the Obligations;
(i) Ship, reclaim, recover, store,
finish, maintain, repair, prepare for sale, advertise for
sale, and sell (in the manner provided for herein) the
Personal Property Collateral. Foothill is hereby granted a
license or other right to use, without charge, Borrower's
labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and
advertising matter, or any property of a similar nature, as it
pertains to the Personal Property Collateral, in completing
production of, advertising for sale, and selling any Personal
Property Collateral and Borrower's rights under all licenses
and all franchise agreements shall inure to Foothill's
benefit;
(j) Sell the Personal Property Collateral
at either a public or private sale, or both, by way of one or
more contracts or transactions, for cash or on terms, in such
manner and at such places (including Borrower's premises) as
Foothill determines is commercially reasonable. It is not
necessary that the Personal Property Collateral be present at
any such sale;
(k) Foothill shall give notice of the
disposition of the Personal Property Collateral as follows:
(A) Foothill shall give Borrower,
any guarantor and each holder of a security interest in the
Personal Property Collateral who has filed with Foothill a
written request for notice, a notice in writing of the time
and place of public sale, or, if the sale is a private sale or
some other disposition other than a public sale is to be made
of the Personal Property Collateral, then the time on or after
which the private sale or other disposition is to be made;
(B) The notice shall be personally
delivered or mailed, postage prepaid, to Borrower as provided
in Section 12, at least 10 days before the date fixed for the
sale, or at least 10 days before the date on or after which
the private sale or other disposition is to be made; no notice
needs to be given prior to the disposition of any portion of
the Personal Property Collateral that is perishable or
threatens to decline speedily in value or that is of a type
customarily sold on a recognized market. Notice to Persons
other than Borrower claiming an interest in the Personal
Property Collateral shall be sent to such addresses as they
have furnished to Foothill;
(C) If the sale is to be a public
sale, Foothill also shall give notice of the time and place by
publishing a notice one time at least 10 days before the date
of the sale in a newspaper of general circulation in the
county in which the sale is to be held;
(l) Foothill may credit bid and purchase
at any public sale;
<Page 47>
(m) Any deficiency that exists after
disposition of the Personal Property Collateral as provided
above will be paid immediately by Borrower. Any excess will
be returned, without interest and subject to the rights of
third Persons, by Foothill to Borrower; and
(n) Seek the appointment of a receiver or
keeper to take possession of the Collateral and to enforce any
of the Foothill's remedies with respect to such appointment
without prior notice or hearing.
9.2 Remedies Cumulative. Foothill's rights
and remedies under this Agreement, the Loan Documents, and all
other agreements shall be cumulative. Foothill shall have all
other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by
Foothill of one right or remedy shall be deemed an election,
and no waiver by Foothill of any Event of Default shall be
deemed a continuing waiver. No delay by Foothill shall
constitute a waiver, election, or acquiescence by it.
9.3 Script Files and Pharmaceuticals.
Notwithstanding the foregoing, Foothill hereby agrees to: (i)
in connection with the sale of the Script Files, comply with
all applicable laws, rules and regulations governing the
confidentiality of any information contained in such Script
Files, except, in the instance where a court order, law, rule
or regulation requires the disclosure of such information;
(ii) in connection with the sale of any Personal Property
Collateral consisting of pharmaceuticals, sell such property
only through a licensed pharmacist or in accordance with any
applicable law, rule or regulation. In reference to the
above, Borrower hereby agrees to use its best efforts to
assist Foothill in the sale of any such Collateral, and
Borrower further agrees to use its best efforts to cause such
employees or agents of Borrower, which persons shall be
licensed to dispose of such Collateral, as are reasonably
necessary to accomplish the disposition of such Collateral to
Foothill's satisfaction. In connection with the sale of such
Collateral, Borrower agrees to use its best efforts to obtain
sales of such Collateral at commercially reasonable prices and
terms.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes,
assessments, insurance premiums, or, in the case of leased
properties or assets, rents or other amounts payable under
such leases) due to third Persons, or fails to make any
deposits or furnish any required proof of payment or deposit,
all as required under the terms of this Agreement, then, to
the extent that Foothill determines that such failure by
Borrower could result in a Material Adverse Change, in its
discretion and without prior notice to Borrower, Foothill may
do any or all of the following: (a) make payment of the same
or any part thereof; (b) set up such reserves in Borrower's
Loan Account as Foothill deems necessary to protect Foothill
from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type described in Section
6.10, and take any action with respect to such policies as
Foothill deems prudent. Any such amounts paid by Foothill
shall constitute Foothill Expenses. Any such payments made by
Foothill shall not constitute an agreement by Foothill to make
similar payments in the future or a waiver by Foothill of any
Event of Default under this Agreement. Foothill need not
inquire as to, or contest the validity of, any such expense,
tax, or Lien and the receipt of the usual official notice for
the payment thereof shall be conclusive evidence that the same
was validly due and owing.
<Page 48>
11. WAIVERS; INDEMNIFICATION.
11.1 Demand; Protest; etc. Borrower waives
demand, protest, notice of protest, notice of default or
dishonor, notice of payment and nonpayment, nonpayment at
maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper,
and guarantees at any time held by Foothill on which Borrower
may in any way be liable.
11.2 Foothill's Liability for Collateral. So
long as Foothill complies with its obligations, if any, under
article 9 of the Code, Foothill shall not in any way or manner
be liable or responsible for: (a) the safekeeping of the
Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of
any carrier, warehouseman, bailee, forwarding agency, or other
Person. All risk of loss, damage, or destruction of the
Collateral shall be borne by Borrower.
11.3 Indemnification. Borrower shall pay,
indemnify, defend, and hold Foothill, each Participant, and
each of their respective officers, directors, employees,
counsel, agents, and attorneys-in-fact (each, an "Indemnified
Person") harmless (to the fullest extent permitted by law)
from and against any and all claims, demands, suits, actions,
investigations, proceedings, and damages, and all reasonable
attorneys fees and disbursements and other costs and expenses
actually incurred in connection therewith (as and when they
are incurred and irrespective of whether suit is brought), at
any time asserted against, imposed upon, or incurred by any of
them in connection with or as a result of or related to the
execution, delivery, enforcement, performance, and
administration of this Agreement and any other Loan Documents
or the transactions contemplated herein, and with respect to
any investigation, litigation, or proceeding related to this
Agreement, any other Loan Document, or the use of the proceeds
of the credit provided hereunder (irrespective of whether any
Indemnified Person is a party thereto), or any act, omission,
event or circumstance in any manner related thereto (all the
foregoing, collectively, the "Indemnified Liabilities").
Borrower shall have no obligation to any Indemnified Person
under this Section 11.3 with respect to any Indemnified
Liability that a court of competent jurisdiction finally
determines to have resulted from the gross negligence or
willful misconduct of such Indemnified Person. This provision
shall survive the termination of this Agreement and the
repayment of the Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all
notices or demands by any party relating to this Agreement or
any other Loan Document shall be in writing and (except for
financial statements and other informational documents which
may be sent by first-class mail, postage prepaid) shall be
personally delivered or sent by registered or certified mail
(postage prepaid, return receipt requested), overnight
courier, or telefacsimile to Borrower or to Foothill, as the
case may be, at its address set forth below:
If to Borrower:PHARMHOUSE CORP.
860 Broadway
New York, New York 10003
Attn: Ms. Marcie B. Davis
Fax No.: (212) 358-9169
<Page 49>
with copies to:HERRICK, FEINSTEIN, LLP
2 Park Avenue
20th Floor
New York, New York 10016
Attn: Stephen Rathkopf, Esq.
Fax No.: (212) 889-7577
and
MALONEY, MEHLMAN & KATZ
405 Lexington Avenue
New York, New York 10174
Attn: Mel Katz, Esq.
Fax No.: (212) 972-0111
If to Foothill:FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division
Manager
Fax No. 310.478.9788
with copies to:PAUL, HASTINGS, JANOFSKY &
WALKER, LLP
600 Peachtree Street, N.E.
Suite 2400
Atlanta, Georgia 30308
Attn: Chris D. Molen, Esq.
Fax No.: (404) 815-2424
The parties hereto may change the address at which
they are to receive notices hereunder, by notice in writing in
the foregoing manner given to the other. All notices or
demands sent in accordance with this Section 12, other than
notices by Foothill in connection with Sections 9504 or 9505
of the Code, shall be deemed received on the earlier of the
date of actual receipt or 5 days after the deposit thereof in
the mail. Borrower acknowledges and agrees that notices sent
by Foothill in connection with Sections 9504 or 9505 of the
Code shall be deemed sent when deposited in the mail or
personally delivered, or, where permitted by law, transmitted
telefacsimile or other similar method set forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN
ANOTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES
HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING
HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK. THE PARTIES AGREE
THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND
<Page 50>
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE
COUNTY OF NEW YORK, STATE OF NEW YORK OR, AT THE SOLE OPTION
OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL SHALL
INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT
MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF
BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER
APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE
OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT
ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13.
BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS,
TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW
OR STATUTORY CLAIMS. EACH OF BORROWER AND FOOTHILL REPRESENTS
THAT IT HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION,
A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO
A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other
papers delivered to Foothill may be destroyed or otherwise
disposed of by Foothill 4 months after they are delivered to
or received by Foothill, unless Borrower requests, in writing,
the return of said documents, schedules, or other papers and
makes arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 Effectiveness. This Agreement shall be
binding and deemed effective when executed by Borrower and
Foothill.
15.2 Successors and Assigns. This Agreement
shall bind and inure to the benefit of the respective
successors and assigns of each of the parties; provided,
however, that Borrower may not assign this Agreement or any
rights or duties hereunder without Foothill's prior written
consent and any prohibited assignment shall be absolutely
void. No consent to an assignment by Foothill shall release
Borrower from its Obligations. Foothill may assign this
Agreement and its rights and duties hereunder with the consent
of Borrower unless an Event of Default then exists, in which
case no consent of the Borrower is required in connection with
any such assignment. Foothill reserves the right to grant
participations in all or any part of, or any interest in
Foothill's rights and benefits hereunder. In connection with
any such assignment or participation, Foothill may disclose
all documents and information which Foothill now or hereafter
may have relating to Borrower or Borrower's business. To the
extent that Foothill assigns its rights and obligations
hereunder to a third Person, Foothill thereafter shall be
released from such assigned obligations to Borrower and such
assignment shall effect a novation between Borrower and such
third Person.
<Page 51>
15.3 Section Headings. Headings and numbers
have been set forth herein for convenience only. Unless the
contrary is compelled by the context, everything contained in
each section applies equally to this entire Agreement.
15.4 Interpretation. Neither this Agreement
nor any uncertainty or ambiguity herein shall be construed or
resolved against Foothill or Borrower, whether under any rule
of construction or otherwise. On the contrary, this Agreement
has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words
used so as to fairly accomplish the purposes and intentions of
all parties hereto.
15.5 Severability of Provisions. Each
provision of this Agreement shall be severable from every
other provision of this Agreement for the purpose of
determining the legal enforceability of any specific
provision.
15.6 Amendments in Writing. This Agreement can
only be amended by a writing signed by both Foothill and
Borrower.
15.7 Counterparts; Telefacsimile Execution.
This Agreement may be executed in any number of counterparts
and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an
original, and all of which, when taken together, shall
constitute but one and the same Agreement. Delivery of an
executed counterpart of this Agreement by telefacsimile shall
be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by telefacsimile also
shall deliver an original executed counterpart of this
Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.
15.8 Revival and Reinstatement of Obligations.
If the incurrence or payment of the Obligations by Borrower or
any guarantor of the Obligations or the transfer by either or
both of such parties to Foothill of any property of either or
both of such parties should for any reason subsequently be
declared to be void or voidable under any state or federal law
relating to creditors' rights, including provisions of the
Bankruptcy Code relating to fraudulent conveyances,
preferences, and other voidable or recoverable payments of
money or transfers of property (collectively, a "Voidable
Transfer"), and if Foothill is required to repay or restore,
in whole or in part, any such Voidable Transfer, or elects to
do so upon the reasonable advice of its counsel, then, as to
any such Voidable Transfer, or the amount thereof that
Foothill is required or elects to repay or restore, and as to
all reasonable costs, expenses, and attorneys fees of Foothill
related thereto, the liability of Borrower or such guarantor
automatically shall be revived, reinstated, and restored and
shall exist as though such Voidable Transfer had never been
made.
15.9 Integration. This Agreement, together
with the other Loan Documents, reflects the entire
understanding of the parties with respect to the transactions
<Page 52>
contemplated hereby and shall not be contradicted or qualified
by any other agreement, oral or written, before the date
hereof.
1.1 Time is of the Essence. Time is of the
essence of this Agreement.
1.1 Confidentiality. Each of Borrower and
Foothill agree to treat as confidential information and not to
disclose to any other Person the terms of this Agreement and
the other Loan Documents together with any information which
Foothill obtains or receives relative to the Borrower and
which the Borrower obtains or receives relative to Foothill,
in the course of the negotiation, execution and administration
of this Agreement which reasonably could be considered
proprietary to the other, and which is not itself part of the
public domain, except that each of Foothill and the Borrower
may disclose such terms and information: (i) to its
shareholders, suppliers, employees, agents, affiliates,
attorneys, accountants, auditors, distributors, dealers, and
other representatives who have need for such terms and
information, (ii) to any potential or actual participant or
assignee so long as such participant or assignee agrees to
keep the information disclosed on the same basis of
confidentiality as set forth hereinabove, (iii) to such other
Persons as to which the other party has given its prior
written consent to disclosure, (iv) as required under
applicable federal or state securities laws, and (v) to any
Person acting under color of law or pursuant to any judicial,
administrative, regulatory or other legal proceeding. For
purposes hereof, each party hereto shall be deemed to have
treated the aforesaid terms and information "as confidential"
if, to the extent and for so long as it has maintained such
terms and information with the same degree of confidentiality
as it employs relative to its own confidential information of
the same or similar materiality.
<Page 53>
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed as of the day and year first
above written.
Sworn and subscribed PHARMHOUSE CORP.,
before me this 15th day a New York corporation
of May, 1998
By: /s/ Marcie B. Davis
NOTARY PUBLIC
Name: Marcie B. Davis
My Commission Expires
Title: Executive Vice president
Sworn and subscribed FOOTHILL CAPITAL CORPORATION,
before me this 15th day a California corporation
of May, 1998
By: /s/ Christopher O'Connor
NOTARY PUBLIC
Name: Christopher O'Connor
My Commission Expires
Title: Vice President
