<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended February 25, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
Commission File Number 0-16998
DRUG EMPORIUM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 31-1064888
(STATE OF CORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
----------------
155 HIDDEN RAVINES DRIVE
POWELL, OHIO 43065
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.10 PAR VALUE
(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
or any amendment to this Form 10-K. [ ]
At May 19, 1995, there were 13,182,585 shares of Drug Emporium
common stock outstanding. The aggregate market value of shares of common stock
held by non-affiliates of the Registrant as of May 19, 1995 was approximately
$43,164,000, based on a closing price of $4.375 per share on Nasdaq National
Market on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Part II, Items 6., 7. and 8., and Part IV, Item 14. incorporate by
reference portions of the Drug Emporium, Inc. Annual Report to Stockholders for
the year ended February 25, 1995. Part III, Items 10., 11., 12., and 13.
incorporate by reference portions of the Drug Emporium, Inc. Proxy Statement
for the 1995 Annual Meeting of Stockholders. With the exception of the
information specifically incorporated by reference, the Drug Emporium, Inc.
Annual Report to Stockholders for the year ended February 25, 1995 is not
deemed filed as part of this report.
<PAGE> 2
ITEM 1. BUSINESS
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INTRODUCTION
In 1977, the first Drug Emporium store was opened in Columbus,
Ohio. Today, the Company operates 113 company-owned stores and franchises 99
stores with combined revenues in excess of $1.3 billion. The accompanying
financial statements include only amounts related to company-owned stores.
Drug Emporium is a category-dominant, value-added retailer selling
health and beauty care, over-the-counter medication, prescription drugs,
greeting cards, cosmetics and highly-consumable products at everyday low
prices. Product lines include a vast array of health items, cosmetics,
designer fragrances and seasonal lines. Pharmacy sales contributed to 25%, 24%
and 21% of total revenue for fiscal 1995, 1994 and 1993.
The Company's common stock trades on the Nasdaq National Market
under the symbol DEMP. As of February 25, 1995, there were 13,170,585 shares
outstanding. Drug Emporium's 7-3/4% convertible subordinated debentures, due
October 1, 2014, are traded on the Nasdaq National Market under the symbol
DEMPG.
In January 1993, the Company developed and began executing a plan
to improve the operating results of the stores. As a result of these efforts
the Company reported seven consecutive profitable quarters. The profitable
results were achieved despite continued and consistent losses from the stores
in the Washington, D.C. market. Because the stores in the Washington, D.C.
market did not sufficiently respond to turnaround efforts and in order to free
up capital for investment in better performing markets, the Company sold seven
stores in the Washington, D.C. market and announced the closing of fourteen
additional stores. The cost associated with these 21 stores resulted in a
pretax charge of $11,850,000 recorded in November 1994. Of the $11,850,000
charge, $6,500,000 is expected to require cash outlays for rent, broker fees
and other costs associated with the leased properties. The remaining
$5,350,000 primarily results from write-downs of assets including leasehold
improvements, goodwill and discounts on liquidated inventories. The cash
outlays required by the charge are expected to be funded by the proceeds of the
sale of assets in the 21 stores.
STORE OPERATIONS
Company stores range in size from 18,000 to 33,000 square feet,
with a typical store having approximately 25,000 square feet, including retail
selling space and storage space in the rear of each store.
Each store has a manager, one or two assistant managers, a head
pharmacist, and approximately 8 to 12 additional full-time employees. The
stores are grouped into five operational regions, each overseen by a regional
vice president. The regional vice presidents' responsibilities include
visiting all Company stores and assuring that Company standards for buying,
merchandising, customer service and store appearance are maintained.
The Company's stores are located primarily in shopping centers on
major commercial thoroughfares. The capital expenditures required to fixture
and equip a store averages $200,000. Pre-opening expenses, including salaries
and promotional expenses, average $50,000 per store, and each store requires
approximately $1,000,000 in initial inventory.
The typical trade area for a Drug Emporium store encompasses
200,000 people in 75,000 households within a defined area, usually five miles.
The customer profile: 80 percent middle-to-upper income women between the ages
of 25 and 54 who shop on a two-and-a-half week cycle.
Drug Emporium stores accommodate 8,000 to 12,000 shoppers per week
and provide an environment for shoppers seeking a pleasant and social shopping
experience. Drug Emporium fills a unique tenant category in a shopping
center's merchandising mix. Preferably placed adjacent to a supermarket chain
store, Drug Emporium stores are well received by both hard and soft goods
national retailers.
Most stores are open seven days and 80 hours a week. Each store
has a similar layout, with the pharmacy located in the rear of the store.
Company stores accept payment in cash or by check or credit card and from
third-party providers.
<PAGE> 3
<TABLE>
The table set forth below lists the 212 Drug Emporium stores by
market as of February 25, 1995:
<S> <C>
WHOLLY-OWNED:
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Columbus, Cincinnati, Dayton, OH 19
Philadelphia, PA 25
Atlanta, Augusta, GA, and Charleston, SC 24
Washington, DC 5
Los Angeles, San Francisco, CA 22
Milwaukee, WI 5
St. Louis, MO 4
Indianapolis, IN 2
Orlando, FL 2
Minneapolis, MN 5
---
113
===
INDEPENDENT FRANCHISES:
- -----------------------
Charlotte, Raleigh, Durham, Concord, NC 6
Phoenix, Tucson, AZ 8
Kansas City, MO 3
Dallas, TX 16
Seattle, Tacoma, WA 17
San Antonio, Austin, Houston, TX 8
Virginia Beach, VA 7
Greensboro, Winston-Salem, NC 3
Barboursville, Charleston, WV 3
Baton Rouge, LA 1
Oklahoma City, OK 1
Lafayette, Shreveport, LA, and Amarillo, Abilene,
Longview, Lubbock, Denton, TX, Little Rock, AZ,
and Wichita KS 11
Louisville, KY 4
Richmond, Charlottesville, VA 3
Omaha, NE 2
Victoria, Brownsville, TX 2
Union City, NJ 2
Morris Plains, NJ 1
Las Vegas, NV 1
--
99
==
</TABLE>
Subsequent to February 25, 1995, the Company acquired stores in the
Baton Rouge, LA and Louisville, KY markets.
The Company considers various geographic and demographic factors,
including population around the site, income level within that area, proximity
to major shopping malls, traffic count, accessibility of site, proximity of
competitors and available parking spaces. Extensive market research is
utilized through an outside market research firm which identifies, among other
things, trade area, trade area potential, demographic factors, competitors and
competitors' sales/strengths/weaknesses, and projects three-year anticipated
sales volumes.
Company and, to a limited extent, franchisee pharmacy matters are
supervised by the Director of Pharmacy who directs compliance with state and
federal pharmacy regulations and training. The Company has implemented a
computerized pharmacy system across its network of Company stores. Most
franchisees have installed similar systems. The system simplifies the
preparation of labels and maintenance of patient profiles.
Drug Emporium continues to have a strong franchise network
consisting of 99 stores. In 1993, Drug Emporium, Inc. established a Franchise
Advisory Board designed to provide a forum to investigate and discuss issues
and concerns of the Company and its franchisees. One of the major
accomplishments of the Franchise Advisory Board was the formation of a program
called DESIRE, which stands for Drug Emporium Shares in Research and Education.
Under its franchise system, the Company permits franchisees to
operate Drug Emporium stores in a specific geographic area based on ADIs (areas
of dominant influence of television signals). Prospective franchisees must
make a minimum equity investment of $1,000,000 per store and establish an
acceptable line of credit in the amount of $500,000 per store. The Company
assists franchisees in site selection, store layout, and establishing
purchasing and advertising policies.
<PAGE> 4
The Company selects its franchisees carefully and works closely
with them to increase the likelihood of success for each franchisee.
Prospective franchisees sign confidentiality agreements in addition to a
non-compete clause contained within the executed franchise agreement. Upon
execution of a franchise agreement, the franchisee must pay a nonrefundable
$25,000 fee for the first store and a $10,000 commitment fee for each
additional store designated for that market. The balance of the $25,000 store
fee ($15,000) is payable upon the opening of each subsequent designated store
in the market.
The current franchise agreement provides for franchise royalties at
a minimum rate of $6,000 per store for the second year and $25,000 per year per
store for stores open three years or more against the following percentage
royalties: 1% on gross sales from $3.5 million to $6 million, 2% from $6
million to $8 million, 3% from $8 million to $10 million, and 1.25% on gross
sales over $10 million.
In addition, each franchisee must pay .1% of gross sales to the
Company to offset the cost of developing advertising. Each franchisee must
also spend at least 1% of gross sales for advertising. The current franchise
agreement permits the Company to require that .6% of the 1% advertising
expenditure be contributed to a national advertising program if such program is
established by the Company.
The Company may either open its own stores or allow other
franchisees to open stores in a franchisee's territory outside a defined area
for each existing store if the franchisee fails to comply with the development
schedule agreed upon by the Company and the franchisee.
ACQUISITION OF FRANCHISEES
The Company, from time to time, has acquired or sought to acquire
certain of its franchise operations. The Company's decision to pursue the
acquisition of a franchisee is based on the Company's evaluation of the growth
opportunities in a particular market, the impact the acquisition would have on
earnings per share and the quality of the franchisee's existing management.
Since 1983, the Company has acquired franchisees located in Los Angeles,
Washington, D.C., Atlanta, Cincinnati, Milwaukee, Minneapolis, St. Louis,
Charleston, S.C., Indianapolis and Orlando. The Company plans to evaluate
future opportunities to acquire appropriate franchisees from time to time and
may use cash or securities to pay for such acquisitions.
MERCHANDISING AND MARKETING
The Company's merchandising goal is to provide customers with the
widest available selection of health and beauty aids, cosmetics, prescription
drugs and general merchandise at everyday low prices. The Company estimates
that approximately 67% of a typical store's sales mix is health and beauty aids
and general merchandise, 25% pharmacy items and 8% cosmetics.
The Company is continuing to aggressively oversee strategies
designed to lower the total cost of acquiring merchandise in order to continue
to be competitive with other national and regional chain discounters. The
Company began implementing point of sale (POS) scanning during fiscal 1994.
POS will provide information to better manage gross margins and inventory
levels by electronically capturing transactions at the store level.
During fiscal 1995, no single vendor accounted for more than 10% of
the Company's purchases. The Company purchases from over 500 vendors, although
the great majority of the business is conducted with approximately 100 vendors.
The Company believes it is a significant customer for each of these 100
vendors.
During fiscal 1994 and 1995, the Company expanded its private label
program with various manufacturers of health and beauty aids and general
merchandise. Drug Emporium brand products include analgesics, laxatives, cough
and cold remedies, wet 'n drys and hosiery. Currently, out of a total of
25,000 average stockkeeping units ("SKUs") per store, there are over 500
private label SKUs and the program is expected to expand to over 650 SKUs over
the next few years.
The Company advertises through the use of television, radio,
newspaper and direct mail. Point of sale advertising is also used. The
Company's strategy of clustering stores within ADI markets is an important
factor in maximizing the effect of its advertising expenditures. The Company
works with an advertising agency that coordinates advertising for the entire
chain. Benefits of centralization include efficiencies of buys with media,
coordination of chain-wide promotional activities, and ability to negotiate
better prices with vendors.
<PAGE> 5
CUSTOMER SERVICE
The Company believes that its commitment to customer service is an
important ingredient of its success. The Company encourages its managers and
other employees to be responsible to customers. The stores are designed to
make products easily accessible. Store employees are trained to be friendly
and helpful to customers. Each store has numerous cashiers to speed up and
facilitate customer check-out.
COMPETITION
The sale of deep discount health and beauty aids, cosmetics and
prescription drugs is highly competitive. The Company believes that the
principal bases of competition in this market are price, product variety,
service, site location and customer recognition. The Company also believes
there exist only a few similar companies, the major ones being Phar-Mor Inc.
and F&M Distributors Inc. The Company's stores compete not only with those
similar companies but with numerous other drug stores with national or regional
images, but also with supermarkets, combination stores and discount stores.
Many of the Company's supermarket, combination store and discount and retail
drug store competitors have more outlets and substantially greater financial
resources than the Company or have more convenient locations than Company
stores. The Company believes that its prices are competitive and that it
offers greater product variety and better service than its competitors. The
Company also believes that the smaller size of its stores compared to the major
discount competitors provides a better shopping experience and allows a better
selection of sites in tight real estate markets that exist in some major
cities. The Company 's ability to expand successfully into new markets is
especially sensitive to the competitive factors in those markets.
EMPLOYEES AND TRAINING
At February 25, 1995, the Company had a total of approximately
5,800 employees, both full-time and part-time, of which 128 were corporate
staff personnel. None of the employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
Drug Emporium believes that the training of store employees and
franchisees is one of the most important elements of its business. The Company
conducts training classes at its headquarters, and senior management works
closely with regional and district managers in this regard.
REGULATION
The sale of franchises by the Company is subject to regulation by
the Federal Trade Commission and various states in which it does, or may in the
future do, business. Such regulations generally require the prior registration
or an exemption from registration for the sale of franchises and delivery to
prospective franchisees of a franchise disclosure document. No assurances can
be given that any future changes in the existing laws or the promulgation of
new laws will not adversely affect the Company.
The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime and other working conditions.
A portion of the Company's personnel are paid at rates related to the federal
minimum wage, and accordingly, further increases in the minimum wage increase
the Company's labor costs.
The prescription drug business is subject to the federal Food, Drug
and Cosmetic Act, Drug Abuse Prevention and Control Act and Fair Packaging and
Labeling Act relating to the content and labeling of drug products, comparable
state statutes and state regulation regarding recordkeeping and licensing
matters with civil and criminal penalties for violations.
<PAGE> 6
SERVICE MARKS
The Company has obtained federal registrations of the servicemark
"Drug Emporium" and "Savings So Big You Need A Shopping Cart" for retail drug
store services "Drug Emporium" for technical aid and assistance in the
establishment and operation of retail drug stores and "Drug Emporium", plus
design, for retail drug store services. Federal registration of the
servicemarks "Food and Drug Emporium," "Drug Emporium RX," and "Drug Emporium
Express" are currently pending.
The mark "Drug Emporium" has been registered in the states of
Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Indiana,
Kansas, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Nebraska, Nevada,
New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania,
South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia and
Wisconsin, as well as Mexico and Puerto Rico. The mark "Savings So Big You
Need A Shopping Cart" has been filed and is pending in Canada and Mexico. The
mark "Drug Emporium," plus design, and the shopping cart design have been filed
in Mexico, Japan and France, and the shopping cart design is registered in
Canada. The Company believes that these marks are of material importance to
its business.
Federal registration of a mark does not create new substantive
rights to use the mark or to assert rights based on ownership, but it does
provide additional remedies for the protection of the mark.
<TABLE>
EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers are:
<CAPTION>
Served as
Name Age Position (1) Officer Since
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
David L. Kriegel 49 Chairman of the Board, Chief Executive Officer, 1992
Director
Robert E. Lyons, III 44 Senior Vice President 1990
Timothy S. McCord 35 Chief Financial Officer 1994
Jane H. Lagusch 49 Vice President, Secretary 1990
Keith E. Alessi 40 Treasurer 1993
<FN>
(1) Officers serve until their successors are chosen and are qualified
subject to earlier removal by the board of directors, and subject
to rights, if any, under employment contracts.
</TABLE>
DAVID L. KRIEGEL
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Since December 1992, Mr. Kriegel has been the Chairman and Chief
Executive Officer of the Company. Mr. Kriegel is Chairman and Chief Executive
Officer of Kriegel Holding Company, Inc., a privately-owned corporation dealing
with consumer products, real estate and distribution. Until January 1993, Mr.
Kriegel was Vice President of Cardinal Health and Marketing Group, a division
of Cardinal Distribution, Inc., a publicly owned company. From September 1988
to December 1990, Mr. Kriegel was Corporate Vice President of Roundy's Inc., a
cooperative food distributor. Mr. Kriegel is a director of Bank One, Lima,
N.A.
ROBERT E. LYONS, III
- --------------------
Mr. Lyons assumed a new position with the Company in January 1993
as Senior Vice President with key marketing and merchandising responsibilities.
From January 1990 to December 1992, Mr. Lyons was President and Chief Operating
Officer of the Company. Mr. Lyons has been with the Company and/or associated
with a franchise since 1983.
TIMOTHY S. McCORD
- -----------------
Since June 1994, Mr. McCord, a Certified Public Accountant, has
served as Chief Financial Officer. From June 1993 to June 1994, Mr. McCord
was Controller of the Company. Previous to joining the Company, Mr. McCord was
employed by Ernst & Young, LLP, the external auditors to the Company, for ten
years.
<PAGE> 7
JANE H. LAGUSCH
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Ms. Lagusch was appointed a Vice President of the Company
January 30, 1993. Ms. Lagusch has been the Secretary of the Company since
January 1990.
KEITH E. ALESSI
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Mr. Alessi is a member of the board of directors and Treasurer
of the Company. He served as Chief Financial Officer from January to June of
1993 to June of 1994. Since 1988, Mr. Alessi has been associated with Farm
Fresh, Inc., a privately-held grocery chain, in various capacities, and
currently as Vice Chairman and director. Mr. Alessi is also Chairman and Chief
Executive Officer of Virginia Supermarkets, Inc. and is a director of New Cort
Holding, Inc.
ITEM 2. PROPERTIES
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All of the Company's stores are occupied pursuant to long-term
leases that vary as to rental provisions, expiration dates, renewal options,
and rental amounts and payment provisions. The Company does not deem any
individual stores lease to be significant in relation to its overall
operations. For information as to the amount of the Company's rental
obligations for retail store leases, see Note 5 of Notes to Consolidated
Financial Statements.
The Company also owns a 20,000 square foot executive office
building for its use as its principal office. The site includes five acres of
property and is located in Powell, Ohio, just north of Columbus.
ITEM 3. LEGAL PROCEEDINGS
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Nortex Drug Distributors, Inc v. Drug Emporium, Inc., Case No.
C2-93-767, filed August 6, 1993, and Texas Drug Distributors, Inc. V. Drug
Emporium, Inc, Case No. C2-93-847, filed August 30, 1993, both of which are
pending in the United States District Court, Southern District of Ohio, Eastern
Division. The plaintiffs in the two suits are both franchisees of the Company.
The claims set forth in the complaints are substantially the same in both suits
and allege that the Company failed to perform as required under the Company's
franchise agreements with plaintiffs under Texas law. Plaintiffs also claim
that the Company imposed a mandatory pricing structure on plaintiffs which
violated state and federal antitrust laws. The plaintiffs are seeking treble
damages and a declaration that the noncompetition clause in the franchise
agreements is unenforceable. No specific amount of damages is claimed. The
Company is aggressively defending these suits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------- -------------------------------------------------------------
MATTERS
-------
The Company's common stock is traded on the Nasdaq National Market
under the symbol DEMP. The following table sets forth, for the quarterly
periods shown, the high and low sale price per share as reported on Nasdaq
National Market:
<TABLE>
<CAPTION>
Fiscal Quarter Ended High Low
- -------------------------------------------------------------
<S> <C> <C>
May 29, 1993 $6.875 $4.000
August 28, 1993 $7.625 $6.250
November 27, 1993 $6.500 $4.625
February 26, 1994 $6.625 $4.625
May 28, 1994 $6.125 $4.000
August 27, 1994 $5.500 $5.000
November 26, 1994 $5.375 $4.125
February 25, 1995 $5.625 $3.875
</TABLE>
The Company paid no dividends in fiscal 1995 or 1994.
<PAGE> 8
The Company's bank credit agreement restricts payment of dividends,
stock repurchases and acquisition of the Company's convertible subordinated
debt to 50% of the Company's cumulative net income beginning February 27, 1994.
Notwithstanding this restriction, the Company is permitted to purchase up to
$10 million of its convertible subordinated debt.
At April 17, 1995, the number of holders of record of the Company's
common stock, without determination of the number of individual participants in
security positions, was approximately 1,356.
ITEM 6. SELECTED FINANCIAL DATA
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The information required by this Item 6 is incorporated by
reference from page 11 of the Drug Emporium, Inc. Annual Report to Stockholders
for the year ended February 25, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information required by this Item 7 is incorporated by
reference from pages 12 through 14 of the Drug Emporium, Inc. Annual Report to
Stockholders for the year ended February 25, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The information required by this Item 8 is incorporated by
reference from pages 15 through 23 and page 25 of the Drug Emporium, Inc.
Annual Report to Stockholders for the year ended February 25, 1995.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Certain of the information required by this Item 10 is set forth
under Item 1. "Executive Officers of the Company."
*
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
*
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
*
* Reference is made to information under the captions "Election of
Directors," "Executive Compensation," "Security Ownership of
Certain Beneficial Owners and Management," and "Certain
Relationships and Related Transactions," in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held June
15, 1995. The Company mailed its definitive proxy statement to
stockholders on or about May 10, 1995.
<PAGE> 9
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a)(1) Financial Statements
The following Consolidated Financial Statements of Drug Emporium,
Inc. are incorporated by reference in Item 8 from the pages set
forth below of the Drug Emporium, Inc. Annual Report to
Stockholders for the year ended February 25, 1995.
Page Nos. of
Annual Report
-------------
Consolidated Balance Sheets as of February 25
(26), 1995 and 1994 15
Consolidated Statements of Operations for Each
of the Three Fiscal Years in the Period Ended
February 25, 1995 16
Consolidated Statements of Shareholders' Equity
for Each of the Three Fiscal Years in the Period
Ended February 25, 1995 16
Consolidated Statements of Cash Flows for Each
of the Three Fiscal Years in the Period Ended
February 25, 1995 17
Notes to Consolidated Financial Statements 18 - 23
Report of Independent Auditors 25
(2) Financial Statement Schedules
-----------------------------
Schedules for which provision is made in Regulation S-X are not
required under the instructions contained therein, are
inapplicable, or the information is included in the footnotes to
the Consolidated Financial Statements.
(3) Exhibits List
-------------
(3) Articles of Incorporation and By-Laws
-------------------------------------
3.3 Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.3 to the
Company's S -1 Registration Statement No. 33-21755)
(10) Material Contracts
------------------
10.1 Drug Emporium, Inc. 1983 Incentive
Stock Option Plan (incorporated by
reference to Exhibit 10.2 to the
Company's S-1 Registration Statement
Registration No. 33-21755) **
10.2 Drug Emporium, Inc. 1984 Incentive
Stock Option Plan (incorporated by
reference to Exhibit 10.3 to the
Company's S-1 Registration Statement
Registration No. 33-21755) **
10.3 Drug Emporium, Inc. 1987 Incentive
Stock Option Plan (incorporated by
reference to Exhibit 10.4 to the
Company's S-1 Registration Statement
Registration No. 33-21755) **
10.4 Drug Emporium, Inc. 1990 Incentive
Stock Option Plan (incorporated by
reference to Exhibit 10.41 to the
Company's Annual Report on Form 10-K
for the fiscal year ended February 28,
1990) **
10.5 Drug Emporium, Inc. Non-Qualified Stock
Option Plan (incorporated by reference
to Exhibit 10.5 to the Company's S-1
Registration Statement Registration No.
33-21755) **
<PAGE> 10
10.7 Form of License and Franchise Agreement
(incorporated by reference to Exhibit
10.7 to the Company's S-1
Registration Statement Registration No.
33-21755)
10.8 Form of Option Agreement (incorporated
by reference to Exhibit 10.8 to the
Company's S-1 Registration Statement
Registration No. 33-21755)
*10.10 Second Amended and Restated Revolving
Credit Agreement dated as of May 12,
1995, between Drug Emporium, Inc. and
Bank One, Columbus, N.A.
10.11 Employment contract dated March 11,
1993 between David L. Kriegel and Drug
Emporium, Inc. (incorporated by
reference to the Company's Annual
Report on Form 10-K for the fiscal year
ended February 27, 1993) **
10.12 Drug Emporium, Inc. 1993 Incentive
Stock Option Plan (incorporated by
reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K
for the fiscal year ended February 27,
1993) **
10.13 Drug Emporium, Inc. 1993 Non-Qualified
Stock Option Plan (incorporated by
reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K
for the fiscal year ended February 27,
1993) **
*(11) Statement re Computation of Per Share Earnings
----------------------------------------------
11.1 Statement not required as computation
is set forth in reasonable detail in
the Annual Report.
*(13) Annual Report to Security Holders, Form 10Q or
----------------------------------------------
Quarterly Report to Security Holders
------------------------------------
13.1 Annual Report to Stockholders for
Fiscal Year Ended February 25, 1995
(limited to those portions incorporated
herein)
*(22) Subsidiaries of Registrant
--------------------------
22.1 The Company has the following
wholly-owned subsidiaries:
<TABLE>
<CAPTION>
State of
Name Incorporation
----------------------------------------------------
<S> <C>
Centerline, Inc. Delaware
Winter Fern Drug Distributors, Inc. Ohio
RJR Drug Distributors Inc. Delaware
Houston Venture, Inc. Ohio
Emporium Venture, Inc. Ohio
</TABLE>
*(24) Consent of Experts
------------------
24.1 Consent of Ernst & Young
(27) Financial Data Schedule
-----------------------
27.1 Financial Data Schedule of the Company
*Included with this Annual Report on Form 10-K
**Compensatory plans, contracts or agreements
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the fourth quarter of
fiscal 1995.
<PAGE> 11
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.
DRUG EMPORIUM, INC.
(Registrant)
Date: May 25, 1995 By: /s/ David L. Kriegel
-------------------------------------
David L. Kriegel,
Chairman and Chief Executive Officer
Pursuant to the requirements 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:
Date: May 25, 1995
/s/ Timothy S. McCord /s/ David L. Kriegel
- ------------------------- -----------------------------
Timothy S. McCord David L. Kriegel
Chief Financial Officer Chairman and Chief Executive
Officer
/s/ John B. Gerlach
-----------------------------
John B. Gerlach
Director
/s/ Walter E. Sinterman
-----------------------------
Walter E. Sinterman
Director
/s/ William L. Sweet, Jr.
-----------------------------
William L. Sweet, Jr.
Director
/s/ V. J. Wiechart, Sr.
-----------------------------
V. J. Wiechart, Sr.
Director
<PAGE> 1
EXHIBIT 10.10
SECOND AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
Borrower: DRUG EMPORIUM, INC.
Bank: BANK ONE, COLUMBUS, NA
MAY 12, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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Section 1. AMOUNT AND TERMS OF THE REVOLVING CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. COMMITMENT OF THE BANK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. CANCELLATION OR REDUCTION OF THE COMMITMENT BY BORROWER . . . . . . . . . . . . . . . . . . . . 2
1.3. FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4. LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.5. THE NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.6. ADDITIONAL PROVISIONS AND LIMITATIONS RELATING TO LIBO RATE LOANS . . . . . . . . . . . . . . . 5
1.7. PREPAYMENTS AND RIGHT TO REBORROW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.8. BORROWING BASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2. TERM LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 3. GENERAL TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.1. PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2. PAYMENT ON NON-BANKING DAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.3. SETOFFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.4. CAPITAL ADEQUACY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.5. FAILURE TO PAY; INTEREST AFTER MATURITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 4. CONDITIONS OF EXTENSIONS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.1. CONDITIONS PRECEDENT TO INITIAL EXTENSIONS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . 10
4.2. CONDITIONS PRECEDENT TO EXTENSIONS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.1. ORGANIZATION AND GOOD STANDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.2. DUE QUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.3. POWER AND AUTHORITY; DUE AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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5.4. BINDING OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.5. NO VIOLATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.6. NO PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.7. GOVERNMENT APPROVALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.8. FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.9. LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.10. MARGIN ACTIVITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.11. ACCURATE REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.12. TAX RETURNS AND PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.13. TITLE TO PROPERTIES; LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.14. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.15. PATENTS, TRADEMARKS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.16. SUBSIDIARIES AND AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.17. INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.18. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.19. ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.20. SOLVENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.1. COMPLIANCE WITH LAWS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.2. PRESERVATION OF CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.3. AUDITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.4. REPORTING REQUIREMENTS OF BORROWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.5. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.6. MAINTENANCE OF PROPERTIES AND INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.7. PAYMENT OF TAXES AND CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
ii
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6.8. PERFORMANCE OF CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.9. ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.10. DEPOSITORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.11. SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.1. NEGATIVE PLEDGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.2. TANGIBLE NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.3. MINIMUM CURRENT RATIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.4. UNSUBORDINATED LIABILITIES TO TANGIBLE NET WORTH RATIO . . . . . . . . . . . . . . . . . . . . . 21
7.5. LIABILITIES TO TANGIBLE NET WORTH RATIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.6. INCOME AVAILABLE FOR FIXED CHARGES TO FIXED CHARGES RATIO . . . . . . . . . . . . . . . . . . . 21
7.7. MERGERS, ACQUISITIONS, SALES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.8. LOANS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.9. CONTINGENT OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.10. DIVIDENDS, PURCHASES AND PREPAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.11. TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.12. SUBORDINATED DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.13. SOLVENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.14. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.15. SALE/LEASEBACKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.16. ACCOUNTS RECEIVABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.17. CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 8. EVENTS OF DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 9. PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 10. DEFINITIONS . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
iii
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10.1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.2. ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.1. TERM OF AGREEMENT; SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.2. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.3. NO IMPLIED WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.4. AMENDMENTS, MODIFICATIONS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.5. APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.6. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.7. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.8. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.9. ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
11.10. HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.11. EFFECTIVE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.12. CONFESSION OF JUDGMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.13. TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.14. CONSENT TO JURISDICTION; SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
EXHIBIT 1.1.3 STANDARD FORM OF BANK'S LETTER OF CREDIT APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . 38
EXHIBIT 1.5 SECOND AMENDED AND RESTATED REVOLVING CREDIT NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . 39
EXHIBIT 4.1(B) SECOND AMENDED AND RESTATED SECURITY AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 42
EXHIBIT 4.1(C) SECOND AMENDED AND RESTATED PLEDGE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
EXHIBIT 4.1(D) SECOND AMENDED AND RESTATED UNCONDITIONAL GUARANTY . . . . . . . . . . . . . . . . . . . . . . . . 69
EXHIBIT 4.1(E) SECOND AMENDED AND RESTATED SECURITY AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 76
EXHIBIT 4.1(K) FORM OF BORROWER'S COUNSEL'S OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
</TABLE>
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EXHIBIT 5.9 PENDING LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
EXHIBIT 5.16 LIST OF SUBSIDIARIES AND AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
EXHIBIT 6.4(I) FORM OF BORROWING BASE CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
EXHIBIT 6.4(K) LANDLORD'S WAIVER AND CONSENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
</TABLE>
v
<PAGE> 7
SECOND AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
THIS SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT dated as of
the 12th day of May, 1995 (the "Agreement"), is between DRUG EMPORIUM, INC., a
Delaware corporation (the "Borrower"), and BANK ONE, COLUMBUS, NA (the "Bank"),
and amends and restates in its entirety that certain Revolving Credit Agreement
dated as of February 14, 1992 between Borrower and the Bank as amended and
restated by that certain First Amended and Restated Revolving Credit and Term
Loan Agreement dated as of January 4, 1994 between Borrower and the Bank and as
further amended by that certain Amendment No. 1 to First Amended and Restated
Revolving Credit and Term Loan Agreement dated as of November 11, 1994 between
Borrower and the Bank and that certain Amendment No. 2 to First Amended and
Restated Revolving Credit and Term Loan Agreement dated as of February 25, 1995
between Borrower and the Bank.
THE PARTIES HERETO, INTENDING TO BE LEGALLY BOUND, hereby agree as
follows:
SECTION 1
AMOUNT AND TERMS OF THE REVOLVING CREDIT
1.1. COMMITMENT OF THE BANK.
1.1.1. Commitment. The Bank agrees, subject to the terms and
conditions of this Agreement, and provided that no Event of Default or Default
(the definitions of these and other capitalized terms used herein having the
meanings provided in Section 10) then exists, to provide Credits to Borrower in
the form of Loans from time to time on and after the date hereof but prior to
April 30, 1998 (the "Maturity Date") in respective amounts selected by Borrower
from time to time, provided that the aggregate amount thereof at any one time
outstanding shall not exceed the Commitment.
1.1.2. Maximum Commitment. The amount of the Commitment shall
equal the lesser of the Borrowing Base or $45,000,000. The maximum amount of all
Credits of the Bank to Borrower under this Section 1 at any one time outstanding
shall not exceed the total of the Commitment. For the purpose of computing the
unused portion of the Commitment, the Bank shall treat as outstanding Credits
under this Agreement the undrawn face amount of outstanding Letters of Credit
issued from time to time hereunder at the request of Borrower. Upon repayment of
any outstanding Credit, the amount of such Credit will again be available for
reborrowing hereunder.
<PAGE> 8
1.1.3. Letters of Credit.
(a) Borrower may request a Letter of Credit by
completing the Bank's then standard application for a Letter of Credit (copy of
current standard application is attached as Exhibit 1.1.3) and delivering the
application to the Bank at least two Banking Days before the date on which the
Letter of Credit is to be issued. On the date the Letter of Credit is to be
issued, the Bank shall deliver the Letter of Credit to Borrower, or to the
Person designated by Borrower. No Letter of Credit shall be issued with an
expiration date (i) more than 180 days after the date of issuance, or (ii) after
the Maturity Date or which is payable in a currency other than United States
dollars. Except as otherwise provided herein, all the terms of the Letter of
Credit and such standard application shall govern the Letter of Credit.
Notwithstanding any other provision hereof to the contrary, the face amount of
all Letters of Credit outstanding at any one time shall not exceed $5,000,000.
(b) Borrower shall immediately reimburse the Bank for
the amount paid on all drafts drawn under Letters of Credit issued hereunder.
If, notwithstanding the foregoing sentence, Borrower should fail to so
immediately reimburse the Bank, then, in addition to any other remedy which the
Bank may have with respect to such failure, any amount paid by the Bank on any
draft under a Letter of Credit shall be treated as a Variable Rate Loan (bearing
interest at the rate set forth in Section 3.5 hereof with respect to Loans which
have become due and payable) unless Borrower makes alternative advance provision
for the funding of such reimbursement satisfactory to the Bank.
1.2. CANCELLATION OR REDUCTION OF THE COMMITMENT BY BORROWER.
1.2.1. Cancellation/Reduction. Before the Maturity Date, the
then unused aggregate Commitment may be canceled or may be reduced permanently
from time to time by Borrower in the amount of U.S. $1,000,000 or any larger
amount which is a whole multiple of U.S. $1,000,000 upon 10 Banking Days'
written notice to the Bank of Borrower's election to do so, which notice shall
specify the date when such cancellation or reduction shall be effective and on
such effective date, the Commitment shall be so canceled or reduced; provided
that:
(a) any such cancellation or reduction shall be
irrevocable;
(b) in the event of a cancellation of the Commitment,
Borrower shall (i) pay in full all Commitment Fees due to the date of
cancellation and (ii) pay all amounts outstanding under the Note;
(c) in the event of a reduction of the Commitment to
an amount less than the principal amount of the then outstanding Loans
and Letters of Credit, Borrower shall pay the Note so that the unpaid
principal amount of the then outstanding Loans and Letters of Credit
does not exceed the Commitment as so reduced; and
(d) Borrower may not cancel, prepay or reduce LIBO
Rate Loans unless Borrower first pays all fees, costs, penalties and
premiums incurred by the Bank because of such cancellation, prepayment
or reduction.
2
<PAGE> 9
1.2.2. Payment of Interest. All principal payments made
pursuant to this Section 1.2 shall be accompanied by the payment of accrued
interest on such principal to the date of such payment and such additional
consideration as may be required pursuant to Section 1.2.1(d).
1.3. FEES.
1.3.1. Commitment Fee. As consideration for the Commitment,
Borrower shall pay to the Bank a fee (the "Commitment Fee") on the daily average
unused portion of the aggregate Commitment at a rate per annum equal to (a) 3/8
of 1% with respect to the unused portion of the first $25,000,000 of the
Commitment and (b) 1/4 of 1% with respect to the unused portion of the final
$20,000,000 of the Commitment, in each case commencing with the effective date
hereof. For the purpose of computing the unused portion of the aggregate
Commitment, the Bank shall treat as outstanding Credits under this Agreement the
undrawn face amount of outstanding Letters of Credit issued from time to time
hereunder at the request of Borrower. The Commitment Fee shall be calculated on
the basis of the actual number of days elapsed over a year of 360 days. The
Commitment Fee shall be payable quarterly in arrears on the last day of each
February, May, August and November.
1.3.2. Letter of Credit Fees. Borrower shall pay to the Bank a
negotiation fee of 1/4 of 1% of the amount of each draft drawn under a Letter of
Credit. In addition, the Bank may charge Borrower its usual and customary
issuance and administration charges with respect to each Letter of Credit.
1.4. LOANS.
1.4.1. Forms of Loans. Each Loan shall, at the election of
Borrower, be made either in the form of (a) a Variable Rate Loan (individually a
"Variable Rate Loan" and collectively the "Variable Rate Loans"); or (b) with
respect to only those Loans made during a LIBO Rate Period, a LIBO Rate Loan
(individually a "LIBO Rate Loan" and collectively the "LIBO Rate Loans"). Except
as otherwise provided herein, each Variable Rate Loan shall be in the initial
principal amount of $100,000 or any larger amount which is a whole multiple of
$100,000. Each LIBO Rate Loan shall be in the initial principal amount of
$1,000,000 or any larger amount which is a whole multiple of $100,000.
1.4.2. Borrowing Procedures.
(a) Except as otherwise provided herein, each Loan
shall be made pursuant to Borrower's written or telephonic request to the Bank
and shall specify (i) the total amount of the Loan; (ii) whether the Loan is to
be a Variable Rate Loan or, if available, a LIBO Rate Loan; (iii) the borrowing
date (the "Borrowing Date"), which shall be a Banking Day in the case of a
Variable Rate Loan or a LIBO Banking Day in the case of a LIBO Rate Loan; and
(iv) in the case of a LIBO Rate Loan, that the Bank quote to Borrower on the
Trade Date the LIBO Rate for loans outstanding for one, two, three or six
months. Requests for Variable Rate Loans may be made prior to 2:00 p.m. on the
Borrowing Date. Requests for LIBO Rate Loans shall be made by 12:00 noon on the
Request Date.
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(b) In the case of a request for a LIBO Rate Loan, the
Bank shall, no later than 11:00 a.m. on the Trade Date, notify Borrower of the
LIBO Rate applicable for the periods requested by Borrower. Borrower shall, no
later than 11:30 a.m. on the Trade Date, give notice to the Bank by telephone
confirmed by fax or otherwise in writing received on the next succeeding Banking
Day, whether it wishes (i) to complete such borrowing in the form of a LIBO Rate
Loan and, if so, the maturity date of such LIBO Rate Loan (which shall be either
one, two, three or six months from the Borrowing Date, but in no event later
than the Maturity Date); (ii) to make such borrowing as a Variable Rate Loan; or
(iii) to cancel its request for a Loan. Failure by Borrower to deliver notice to
complete the borrowing by 11:30 a.m. on the Trade Date shall constitute
cancellation of such request.
(c) The proceeds of each Loan will, subject to the
satisfaction of the terms and conditions of this Agreement, promptly (but at
least by 3:00 p.m. of the Borrowing Date) be made available to Borrower by the
Bank by crediting or making a payment to the account of Borrower.
1.5. THE NOTE.
1.5.1. Form. The Loans made by the Bank shall be evidenced by a
master promissory note of Borrower in the form attached hereto as Exhibit 1.5,
with appropriate insertions (the "Note"), payable to the order of the Bank and
representing the obligation of Borrower to pay the amount of the Commitment or,
if different, the aggregate unpaid principal amount of all Loans made by the
Bank, with interest thereon as prescribed in this Section 1.5. The Note shall
(a) be dated the date of this Agreement; (b) be stated to mature on the Maturity
Date; and (c) bear interest at the applicable interest rate per annum as
provided in, and payable as specified in, this Section 1.5. Each Loan made by
the Bank and each payment made on account of principal on the Note shall be
recorded by the Bank on its books and records in the usual and ordinary course
of business, such ordinary course books and records to constitute prima facie
evidence in the absence of manifest error of the amount of all Loans and
payments; provided, however, that the failure of the Bank to make such
recordation shall not limit or otherwise affect the obligations of Borrower
under the Note.
1.5.2. Interest on Variable Rate Loans. Each Variable Rate Loan
shall bear interest on the unpaid principal balance of such Loan for each day
from the day such Loan is made until it becomes due, at a fluctuating rate per
annum equal to the Prime Rate. Interest on all Variable Rate Loans shall be
calculated on the basis of the actual number of days elapsed over a year of 360
days. Any change in the interest rate on a Variable Rate Loan due to a change in
the Prime Rate shall take effect, without notice to Borrower, at the opening of
business on the date of such change in the Prime Rate. Interest on the Variable
Rate Loans shall be payable quarterly on the last day of each February, May,
August and November commencing on the first such date following the initial
Variable Rate Loan.
1.5.3. Interest on LIBO Rate Loans. Each LIBO Rate Loan shall
bear interest on the outstanding principal amount of such Loan for each day from
the day such Loan is made until it becomes due, at a rate per annum equal to the
LIBO Rate as in effect on the applicable Trade
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Date. Borrower shall pay, with respect to each LIBO Rate Loan, such additional
amounts as shall be determined pursuant to Section 1.6. Interest on each LIBO
Rate Loan shall be payable at the maturity of such Loan. Interest on all LIBO
Rate Loans shall be calculated on the actual number of days elapsed over a year
of 360 days.
1.5.4. Additional Interest. For so long as the Bank, or any
participating bank, maintains reserves against any category of liabilities which
includes deposits by reference to which the interest rate on LIBO Rate Loans is
determined or any category of extensions of credit or other assets which
includes loans by a non-United States office of the Bank to United States
residents which the Bank, or such participating bank, determines in good faith
to be legally required, and as a result the cost to the Bank, or such
participating bank, of making or maintaining its LIBO Rate is determined by the
Bank, or such participating bank, in good faith to have increased, then the Bank
may require Borrower to pay, contemporaneously with each payment of interest on
any LIBO Rate Loan of the Bank, additional interest on such LIBO Rate Loan at a
rate per annum equal to (a)(i) the applicable LIBO Rate divided by (ii) one
minus the Euro Reserve Percentage minus (b) the applicable LIBO Rate.
1.6. ADDITIONAL PROVISIONS AND LIMITATIONS RELATING TO LIBO RATE LOAN
1.6.1. Additions. The additional provisions and limitations
set forth below shall apply with respect to LIBO Rate Loans:
(a) Deposits Unavailable. If the Bank shall, in good
faith, determine that it is unable to reasonably ascertain the LIBO Rate or
either the Bank or any participating bank is unable to acquire Eurodollar
deposits or Eurocurrency deposits on reasonable terms in an amount sufficient to
meet a request for a LIBO Rate Loan, the Bank shall forthwith give notice
thereof to Borrower, whereupon, until the Bank notifies Borrower that the
circumstances giving rise to such unavailability no longer exist (which the Bank
shall do upon receiving notice thereof), the obligations of the Bank to make
LIBO Rate Loans shall be suspended. In such event, Borrower may request a
Variable Rate Loan of like amount without regard to the notice requirement of
Section 1.4 or may cancel such request.
(b) Illegality. The obligation of the Bank to make LIBO
Rate Loans hereunder shall be suspended (to the extent necessary to remove such
illegality or impossibility) if any change in any law, treaty, rule or
regulation, or in any interpretation thereof by any governmental authority
charged with its administration (whether or not having the force of law)
including, without limitation, exchange controls, shall, in the sole opinion of
the Bank or any participating bank, make it unlawful or impossible for such bank
to comply with its obligation to make or maintain any LIBO Rate Loan hereunder
for the duration of such illegality or impossibility. The Bank shall promptly
notify Borrower of such suspension, whereupon, until the Bank receives notice
that such illegality or impossibility ceases to exist and gives notice to
Borrower thereof, the obligations of the Bank to make LIBO Rate Loans shall be
suspended. Borrower shall, upon receipt of notice from the Bank, either (i)
repay in full (or to the extent necessary to remove such illegality or
impossibility) the outstanding principal amount of all such LIBO Rate Loans,
plus accrued interest thereon or (ii) convert the applicable interest rate
payable
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with respect to such Loan to the interest rate payable on a similar Variable
Rate Loan (to the extent such rate is not illegal).
(c) Change in Law. If the Bank has LIBO Rate Loans
outstanding and there shall occur any change in applicable law, treaty, rule,
regulation or in any interpretation thereof by any governmental authority
charged with its administration (whether or not having the force of law) which
(i) change directly affects transactions in Eurodollars or Eurocurrencies, (ii)
involves new or additional taxes, reserves or deposit requirements in regard to
the LIBO Rate Loans or changes in the basis of taxation of payments on such
Loans, or (iii) if the LIBO Rate Loans made hereunder by the Bank were to have
been matched with Eurodollar or Eurocurrency deposits corresponding in amounts
to such LIBO Rate Loans and having maturity dates which are the same as such
LIBO Rate Loans regardless of whether or not such LIBO Rate Loans are in fact so
matched, increases the cost to the Bank or any participating bank of making or
maintaining the LIBO Rate Loans hereunder or reduces the amount of any payments
(whether of principal, interest, or otherwise) receivable by the Bank or any
participating bank as to any LIBO Rate Loans or requires the Bank or any
participating bank to make any payment on or calculated by reference to the
gross amount of any sum received by it as to such LIBO Rate Loans, then:
(A) the Bank shall promptly notify Borrower
of the occurrence of such event;
(B) the Bank shall promptly deliver to
Borrower a certificate stating the change which has
occurred, together with the date thereof and the
amount of and the manner of calculating the increased
cost on any outstanding LIBO Rate Loan; and
(C) upon receipt of such certificate from the
Bank, Borrower shall pay to the Bank within 10 days
the amount or amounts of such additional cost with
respect to such outstanding LIBO Rate Loan as
additional compensation hereunder.
(d) Certificate as to Payment. The certificate of the
Bank as to the additional amounts payable pursuant to Section 1.6.1(c) delivered
to Borrower shall (in the absence of manifest error in the transmission or
calculation) be conclusive evidence of the amount thereof. The protection of
this Section 1.6.1(d) shall be available to the Bank and any participating bank
regardless of any possible contention of invalidity or inapplicability of the
law, regulation or condition which has been imposed. However, if Borrower has
made a payment of any additional amounts pursuant to Section 1.6.1(c) and any
subsequent event occurs which reduces the amount of the increased cost incurred
by the Bank or any participating bank, then the Bank shall promptly refund to
Borrower an amount equal to such reduction in the amount of increased cost.
(e) Substitution. If Borrower is required to pay to the
Bank any additional amounts pursuant to Section 1.6.1(c), Borrower shall be
entitled, upon giving the Bank not less than five days' written notice, in
addition to its other rights, to prepay all or any portion of an outstanding
LIBO Rate Loan with respect to which such additional amounts of payment are
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<PAGE> 13
required (any prohibition against prepayment of such Loans herein contained to
the contrary notwithstanding) by substituting a Variable Rate Loan of equal
principal amount for all or any such portion of the Loan. All such prepayments
shall be accompanied by payment of interest accrued to the date of such
prepayments. As a condition of such prepayments, Borrower shall promptly pay to
the Bank upon the Bank's written request such amount or amounts as in the
reasonable good faith business judgment of the Bank will compensate the Bank for
any loss, premium or penalty incurred by it because of such prepayment.
(f) Increased Costs. In addition to the other amounts
payable hereunder, Borrower shall pay to the Bank such additional amounts as
shall compensate the Bank for increased costs which the Bank, reasonably and in
good faith determines to be allocable to LIBO Rate Loans. Additional amounts
payable under this Section 1.6.1(f) shall be paid by Borrower to the Bank on the
maturity of the respective LIBO Rate Loans, subject to receipt by Borrower from
the Bank of a certificate showing the amount and certifying to the correctness
thereof.
(g) Interest Period. With respect to LIBO Rate Loans,
if the interest period selected by Borrower (i) ends on a day which is not a
LIBO Banking Day, the period so selected shall be extended to the next
succeeding LIBO Banking Day unless such LIBO Banking Day falls in another
calendar month, in which case such interest period shall end on the next
preceding LIBO Banking Day; or (ii) begins on the last LIBO Banking Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such interest period), the period so
selected shall end on the last LIBO Banking Day of the calendar month; provided,
however, that notwithstanding (i) or (ii) above, no period may be selected which
ends after the Maturity Date.
1.6.2. Limitation. Charges or additional expenses or otherwise
to Borrower under Sections 1.2.1(d), 1.5.4 or 1.6.1 shall be subject to the
conditions that each is (a) the subject of notice given to Borrower by the Bank
within a reasonable time after the Bank determines that the same may exist; (b)
except as to the subjects of Section 1.2.1(d), the result of a change in law or
regulation or official interpretation thereof occurring after the date of
Closing; (c) not reflected in the determination of any other rate or charge
hereunder; and (d) (i) directly attributable and unique to the transactions
under this Agreement, or (ii) as to all the Bank's customers similarly or
analogously situated, (A) passed through to or assessed against other customers
to the extent the Bank is contractually empowered to do so and (B) is allocated
among all such customers (without reference to part (A) of this clause).
1.6.3. Statement. The Bank's written statement to Borrower that
items under or covered by this Section 1.6 are properly chargeable to Borrower
under this Agreement, the general nature of those charges, and the amount
thereof shall be conclusive, absent manifest error. Except only to the extent
specifically set forth in this Agreement to the contrary, no charges or
additions under or covered by this Section 1.6 shall be payable, and no interest
shall accrue thereon, prior to the presentation of the statement described in
this Section 1.6.3.
1.7. PREPAYMENTS AND RIGHT TO REBORROW. Outstanding Variable Rate Loans
may be prepaid in whole at any time or in part from time to time in an amount
which is a whole multiple of U.S. $100,000 (or such lesser amount as constitutes
the entire amount outstanding) without
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premium or penalty. The LIBO Rate Loans may be prepaid only as provided for in
Section 1.2 or Section 1.6.1(e). No prepayment of a Loan shall affect Borrower's
right to reborrow from the Bank under the Note before the Maturity Date.
1.8. BORROWING BASE. Borrower shall, from time to time, prepay Loans in
such amounts as shall be necessary so that, at all times, the sum of the
aggregate unpaid principal amount of all Loans is less than or equal to the
Borrowing Base as reflected on the most recent Borrowing Base Certificate
delivered hereunder. Any prepayment required as a result of a reduced Borrowing
Base shall be made within five Banking Days after the delivery of the applicable
Borrowing Base Certificate and shall be subject to the provisions of Section
1.2.1(d) hereof. Borrower may, with the consent of the Bank, which consent may
be withheld for any reason or no reason, in lieu of making such prepayment,
deliver, within said five Banking Days, to the Bank, such additional collateral
as the Bank may request accompanied by such documents as may be deemed necessary
or appropriate by the Bank to protect the interests of the Bank.
SECTION 2
TERM LOAN
Prior to the execution hereof, the Borrower paid to the Bank all
amounts due under that certain Term Note dated January 4, 1994 in the original
principal amount of $15,000,000 from Borrower to Bank and the Bank returned the
original of such Term Note to Borrower marked, "Paid in Full".
SECTION 3
GENERAL TERMS
3.1. PAYMENTS. Borrower shall make all payments of principal, interest
and additional compensation on the Note issued hereunder and Commitment Fees to
the Bank as payee at the Bank's main office, 100 East Broad Street, Columbus,
Ohio, in immediately available funds prior to 12:00 noon, on the date such
payments shall become due in accordance with the terms hereof and of each Note.
3.2. PAYMENT ON NON-BANKING DAYS. Subject to the provisions of Section
1.6.1(g), whenever any payment to be made hereunder shall be stated to be due on
a day other than a Banking Day, such payment shall be made on the next
succeeding Banking Day and such extension of time shall in such case be included
in the computation of payment of interest hereunder or the Commitment Fees
hereunder, as the case may be.
3.3. SETOFFS. Upon the occurrence of any Event of Default, the Bank
shall have the right to setoff against all obligations of Borrower to the Bank
hereunder and under the Note, whether matured or unmatured, all amounts owing to
Borrower by the Bank, whether or not then due and payable, and all other funds
or property of Borrower on deposit with or otherwise held by or in
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the custody of the Bank for the beneficial account of Borrower, except for
deposit accounts that contain only (a) payroll funds, (b) employee benefit plan
funds, (c) tax deposits or (d) other funds which are not beneficially owned by
Borrower. Borrower agrees, to the fullest extent it may effectively do so under
applicable law, that any holder of a participation in the Note may exercise
rights of setoff or counterclaim, and any other rights with respect to such
participation, as fully as if the holder of the participation were a direct
creditor of the Borrower in the amount of such participation.
3.4. CAPITAL ADEQUACY. If, after the date hereof, there occurs any
change in any applicable law, rule or regulation regarding capital adequacy, 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 the Bank, or
any participating bank, with any request or directive regarding capital adequacy
(whether or not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate of return
on the Bank's, or the participating bank's, capital as a direct consequence of
its obligations hereunder to a level below that which the Bank, or the
participating bank, could have achieved but for such adoption, change or
compliance (taking into consideration the Bank's, or participating bank's,
policies with respect to capital adequacy) by an amount deemed by the Bank, or
the participating bank, to be material, then, from time to time, within 15 days
after demand by the Bank, Borrower shall pay to the Bank such additional amount
or amounts as will compensate the Bank for such reduction. If Borrower is
required to pay to the Bank any additional amounts pursuant to this Section 3.4,
Borrower shall be entitled, upon giving the Bank not less than five days'
written notice, in addition to its other rights, to prepay all or any portion of
an outstanding Loan with respect to which such additional amounts are due, any
provision herein contained to the contrary notwithstanding (all such prepayments
shall be with interest accrued to the date of such prepayments). As a condition
of such prepayments, Borrower shall promptly pay to the Bank upon the Bank's
written request such amount or amounts as, in the reasonable judgment of the
Bank, will compensate the Bank, or any participating bank, for such prepayment
in accordance with the provisions of Section 1.6.1(e).
3.5. FAILURE TO PAY; INTEREST AFTER MATURITY. Whenever any principal
payment to be made on a LIBO Rate Loan shall become due and payable, whether or
not at the stated maturity thereof, and Borrower fails to make such principal
payment, the unpaid amount shall be deemed to be a Variable Rate Loan hereunder.
Unpaid (a) interest on the Note, or (b) principal on any Loan, shall, after
becoming due and payable, bear interest at the Prime Rate plus 1%. If any such
unpaid payment represents the required payment to be made on a LIBO Rate Loan,
Borrower shall be liable for all the costs, premiums, fees and penalties
incurred by the Bank due to such non-payment pursuant to Section 1.6.1(e), which
amounts shall be due and payable within 10 days after demand by the Bank and
which amounts shall bear interest at the Prime Rate plus 1%.
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SECTION 4
CONDITIONS OF EXTENSIONS OF CREDIT
The obligation of the Bank to make extensions of Credit to Borrower
provided for hereunder shall be subject to the following conditions:
4.1. CONDITIONS PRECEDENT TO INITIAL EXTENSIONS OF CREDIT. Prior to the
initial extension of Credit hereunder, Borrower shall furnish to the Bank all of
the following, each dated the date hereof (unless otherwise indicated) in form
and substance satisfactory to the Bank:
(a) Note. A properly executed Note, drawn to the order of the
Bank in the principal amount of $45,000,000.
(b) Security Agreement. A properly executed Second Amended and
Restated Security Agreement in the form attached hereto as Exhibit 4.1(b) (the
"Security Agreement").
(c) Pledge Agreement. A properly executed Second Amended and
Restated Pledge Agreement in the form attached hereto as Exhibit 4.1(c) (the
"Pledge Agreement"), accompanied by appropriate stock certificates and stock
powers.
(d) Subsidiary Guaranties. Properly executed Second Amended and
Restated Unconditional Guaranties of each Wholly-Owned Subsidiary in the form
attached hereto as Exhibit 4.1(d) (each, a "Subsidiary Guaranty").
(e) Subsidiary Security Agreements. Properly executed Second
Amended and Restated Security Agreements of each Wholly-Owned Subsidiary in the
form attached hereto as Exhibit 4.1(e) (each, a "Subsidiary Security
Agreement").
(f) Financing Statements. Copies of duly completed and executed
Uniform Commercial Code financing statements or statements of assignment or
statements of amendment with respect to the property covered by the Security
Agreement, the Subsidiary Security Agreements and the Pledge Agreement, in
proper form for filing in all jurisdictions in which such filing is necessary or
appropriate to establish, perfect, protect and preserve the rights, titles,
interests, remedies, powers, privileges and Liens of the Bank in such property.
(g) Liens and Other Searches. Results of record searches by a
Person satisfactory to the Bank, of the Uniform Commercial Code filings which
may have been filed with respect to the personal property of Borrower or the
Subsidiaries in the state and county filing offices and real estate records in
each of the jurisdictions requested by the Bank, and of judgment and tax Liens
with respect to Borrower and each Subsidiary.
(h) Borrowing Base Certificate. A Borrowing Base Certificate,
duly executed and completed by the chief executive officer or chief financial
officer of Borrower, setting forth the calculation of the Borrowing Base as of
February 25, 1995.
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(i) Certified Resolutions of Borrower. A certified copy of the
resolutions of the Board of Directors of Borrower authorizing the execution,
delivery and performance of this Agreement, the Note, the Security Agreement and
the Pledge Agreement.
(j) Certified Resolutions of Subsidiaries. Certified copies of
the resolutions of the Boards of Directors of each Wholly-Owned Subsidiary
authorizing the execution, delivery and performance of the applicable Subsidiary
Guaranties and Subsidiary Security Agreements.
(k) Opinion of Counsel. The favorable opinion of counsel for
Borrower ("Counsel"), which Counsel shall be acceptable to the Bank, addressed
to the Bank in the form attached hereto as Exhibit 4.1(k).
(l) Secretary's Certificates. Signed copies of certificates of
the Secretary or Assistant Secretary of Borrower and each of the Wholly-Owned
Subsidiaries which shall certify the names of the officers of each such company
authorized to sign this Agreement, the Note, the Security Agreement, the Pledge
Agreement, the Subsidiary Guaranties, the Subsidiary Security Agreements and the
other documents or certificates to be executed and delivered pursuant hereto or
thereto (the "Loan Documents"), together with the true signatures of such
officers. The Bank may conclusively rely upon such certificates until it shall
receive a further certificate of the Secretary or an Assistant Secretary of the
applicable company canceling or amending the prior certificate and submitting
the signatures of the officers named in such further certificate.
4.2. CONDITIONS PRECEDENT TO EXTENSIONS OF CREDIT. The obligation of
the Bank to provide or extend any Credit hereunder shall be subject to the
further condition precedent that, at the time of each Loan, Borrower shall be in
compliance with all of the provisions, warranties and conditions contained in
this Agreement (or, if not in compliance with the representations and warranties
hereunder, such non-compliance is disclosed to the Bank before Borrower requests
a Loan and the Bank waives the non-compliance), and there shall exist no Default
or Event of Default as set forth in Section 8. Each borrowing hereunder shall be
deemed to be a representation and warranty by Borrower on the date of such
borrowing that the representations and warranties contained in Section 5 are
then true and correct, and that Borrower is then in compliance with the
covenants contained in Sections 6 and 7.
SECTION 5
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to the Bank, which representations and
warranties will survive the execution and delivery of this Agreement and the
Note, as follows:
5.1. ORGANIZATION AND GOOD STANDING. Borrower and each Subsidiary has
been duly organized and is validly existing as a corporation in good standing
under the laws of its jurisdiction, with power and authority to own its
properties and to conduct its business as such properties are presently owned
and such business is presently conducted.
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5.2. DUE QUALIFICATION. Borrower and each Subsidiary is duly qualified
to do business as a foreign corporation in good standing, and has obtained all
necessary licenses and approvals, in all jurisdictions in which the failure to
maintain such qualification, licenses or approvals would materially adversely
affect (a) the interests of the Bank hereunder, (b) the ability of such
companies to perform their obligations hereunder or under any document or
agreement contemplated hereby or (c) the enforceability of this Agreement.
5.3. POWER AND AUTHORITY; DUE AUTHORIZATION. Borrower and each of the
Wholly-Owned Subsidiaries has all necessary power, authority and legal right to
(a) execute, deliver and perform the Loan Documents and (b) carry out the terms
of the Loan Documents. Borrower and each of the Wholly-Owned Subsidiaries has
duly authorized, by all necessary corporate action, the execution, delivery, and
performance of this Agreement and the other Loan Documents to which such entity
is a party.
5.4. BINDING OBLIGATIONS. This Agreement constitutes, and each other
Loan Document to which each such entity is a party when duly executed and
delivered will constitute, a legal, valid and binding obligation of Borrower and
each Wholly-Owned Subsidiary enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization, or
other similar laws affecting the enforcement of creditors' rights generally and
by general principles of equity, regardless of whether such enforceability is
considered in a proceeding in equity or at law.
5.5. NO VIOLATION. The consummation of the transactions contemplated by
this Agreement and the other Loan Documents and the fulfillment of the terms
hereof and thereof will not (a) conflict with, result in any breach of any of
the terms and provisions of, or constitute (with or without notice or lapse of
time) a default under, (i) the charter documents (e.g., Articles of
Incorporation and Code of Regulations) of Borrower or any Subsidiary, or (ii)
any material indenture (including, without limitation, the Indenture), loan
agreement, mortgage, deed of trust, or other agreement or instrument to which
Borrower or any Subsidiary is a party or by which it is bound, or (b) result in
the creation or imposition of any Lien (other than a Permitted Lien) upon any of
the properties of Borrower or any Subsidiary which Lien has a material impact on
the enforceability of the Loan Documents or the collectibility of amounts
outstanding under the Loan Documents pursuant to the terms of any such material
indenture, loan agreement, mortgage, deed of trust, or other agreement or
instrument, other than the Loan Documents, or (c) violate any law or any order,
rule, or regulation applicable to Borrower or any Subsidiary of any court or of
any federal or state regulatory body, administrative agency, or other
governmental instrumentality having jurisdiction over such entity or any of its
properties.
5.6. NO PROCEEDINGS. To the best of Borrower's knowledge, there are no
proceedings or investigations pending or threatened before any court, regulatory
body, administrative agency or other tribunal or governmental instrumentality
(a) asserting the invalidity of this Agreement or any other Loan Document, (b)
seeking to prevent the consummation of any of the transactions contemplated by
this Agreement or any other Loan Document, or (c) seeking any determination or
ruling that might materially and adversely affect (i) the performance by
Borrower or any Wholly-Owned Subsidiary of its obligations under this Agreement
or any of the Loan Documents, or (ii) the validity or enforceability of this
Agreement or any of the Loan Documents.
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5.7. GOVERNMENT APPROVALS. No authorization or approval or other action
by, and no notice to or filing with, any governmental authority or regulatory
body is required for the due execution, delivery and performance by Borrower or
any Wholly-Owned Subsidiary of this Agreement or any other Loan Document.
5.8. FINANCIAL CONDITION. Borrower has furnished to the Bank audited
consolidated financial statements including (a) an audited Consolidated balance
sheet as at February 25, 1995 of Borrower; (b) an audited Consolidated statement
of operations for the year ended February 25, 1995 of Borrower; (c) an audited
Consolidated statement of shareholders' equity for the year ended February 25,
1995 of Borrower; and (d) an audited Consolidated statement of cash flow for the
year ended February 25, 1995 of Borrower. Such financial statements are complete
and correct and fairly present the Consolidated financial position of Borrower
and the Subsidiaries as at such date and the Consolidated results of operations
of Borrower and the Subsidiaries for the period ended on such date, all in
accordance with generally accepted accounting principles consistently applied.
Since February 25, 1995, to the best of Borrower's knowledge, there has been no
material adverse change in any such position, business or operations.
5.9. LITIGATION. Except as set forth on Exhibit 5.9 hereto, no
injunction, decree or other decision has been issued or made by any court,
government or agency or instrumentality thereof that prevents, and, to the best
of Borrower's knowledge, no threat by any person has been made to attempt to
obtain, any such decision (a) that involves this Agreement or the other Loan
Documents or the transactions contemplated hereby or thereby or (b) that
Borrower reasonably believes will involve liabilities in excess of 10% of the
Borrower's Tangible Net Worth at the time of determination.
5.10. MARGIN ACTIVITY. Neither Borrower nor any Subsidiary is engaged
in the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulation U or X of the Board of Governors
of the Federal Reserve System as is now and may from time to time hereafter be
in effect), and no part of the proceeds of any Loan hereunder will be used to
purchase or carry any such margin stock or to extend credit to others for the
purpose of purchasing or carrying any such margin stock or to reduce or retire
any Indebtedness incurred for any such purpose.
5.11. ACCURATE REPORTS. No material information, exhibit, financial
statement, document, book, record or report furnished or to be furnished by
Borrower to the Bank in connection with this Agreement was or will be inaccurate
in any material respect as of the date it was or will be dated or (except as
otherwise disclosed to the Bank at such time) as of the date so furnished, or
contained or will contain any material misstatement of fact or omitted or will
omit to state a material fact or any fact necessary to make the statements
contained therein not materially misleading.
5.12. TAX RETURNS AND PAYMENTS. Borrower and the Subsidiaries have
filed all tax returns required by law to be filed and have paid all taxes,
assessments and other governmental charges levied upon any of their properties,
assets, income or franchises, other than those not yet delinquent and those
being contested in good faith for which adequate reserves have been
13
<PAGE> 20
established in accordance with generally accepted accounting principles. The
charges, accruals and reserves on the books of Borrower and its Subsidiaries in
respect to income taxes for all fiscal periods are adequate, and Borrower knows
of no unpaid material assessment for additional income taxes for any fiscal
period or of any basis therefor.
5.13. TITLE TO PROPERTIES; LIENS. Borrower and the Subsidiaries have
title to, ownership or other interests or rights sufficient to permit the use of
all of their respective material properties and assets (including all material
patents, trademarks, service marks, trade names, copyrights and licenses)
necessary to the performance of the Agreement and the conduct of their Core
Business, including the properties and assets reflected in the balance sheet of
Borrower delivered pursuant to Section 5.8, except properties held under leases
which are capitalized in accordance with generally accepted accounting
principles consistently applied and except properties and assets disposed of
since the date of such balance sheet in the ordinary course of business, and
none of such properties or assets is subject to any Lien except Permitted Liens.
5.14. ERISA. Without in any way limiting the scope of Section 5.5,
neither Borrower nor any Subsidiary (a) has incurred any material accumulated
funding deficiency within the meaning of the Employee Retirement Income Security
Act of 1974, as amended from time to time ("ERISA"); (b) has incurred any
material liability to the Pension Benefit Guaranty Corporation established under
ERISA (or any successor thereto under ERISA) in connection with any employee
benefit plan established or maintained by such company; nor (c) has had any tax
assessed against it by the Internal Revenue Service for any alleged violation
under Section 4975 of the Internal Revenue Code.
5.15. PATENTS, TRADEMARKS, ETC. Borrower and each Subsidiary own or
have interests or rights in all the material patents, trademarks, service marks,
trade names, copyrights and licenses, necessary for the conduct of the Core
Business, without any known conflict with the rights of others except conflicts
which would not materially and adversely affect the businesses of such
companies.
5.16. SUBSIDIARIES AND AFFILIATES. Borrower has no Subsidiaries or
Affiliates except those set forth on Exhibit 5.16 attached hereto.
5.17. INVESTMENTS. Except for Permitted Investments, neither Borrower
nor any Subsidiary (a) is a general partner in any partnership or a member in
any joint venture, (b) owns or holds the assets, stocks, bonds, notes or other
securities other than as disclosed on Exhibit 5.16 or in the financial
statements delivered to the Bank pursuant to Section 5.8, nor (c) is a party to
any agreement relating to commodity futures, financial futures or similar
investments.
5.18. INSURANCE. All of the properties and operations of Borrower and
the Subsidiaries of a character usually insured by Persons of established
reputation engaged in the same or a similar business similarly situated are
adequately insured, by reputable insurers duly licensed by appropriate state
authorities against loss or damage of the kinds and in the amounts customarily
insured against by such Persons; and Borrower and each Subsidiary carry, with
such insurers in customary amounts, such other insurance, including public
liability insurance, as is usually carried by Persons of established reputation
engaged in the same or a similar business similarly situated.
14
<PAGE> 21
Without limiting the foregoing, the Borrower shall at all times: (a) furnish to
the Bank, upon request, a statement of its insurance coverage, in form and
detail satisfactory to the Bank; (b) require each policy of insurance to contain
a provision whereby it cannot be canceled, amended or modified except after 30
days' prior written notice to the Bank; (c) require each policy of insurance
covering any of the Collateral (as defined in the Security Agreement or any
Subsidiary Security Agreement) to be written or endorsed so as to make losses,
if any, payable to the Bank, in addition to the Borrower; and (d) require each
policy of insurance covering any of the Collateral to contain an agreement by
the insurer that any loss shall be payable to the Bank notwithstanding any act
or negligence of the Borrower or any Subsidiary which might otherwise result in
forfeiture of said insurance. If the Borrower fails to pay or cause to be paid
the premium on any such insurance, the Bank may, in its sole discretion, do so
for the account of the Borrower, and Borrower shall reimburse the Bank for the
cost thereof on demand.
5.19. ENVIRONMENTAL MATTERS. There are, to the best of Borrower's
knowledge, no materials, presently located on any real property owned by, leased
to or operated by Borrower or any Subsidiary, which are radioactive or which are
toxic and which under federal, state or local law, statute, ordinance or
regulations, or court or administrative order or decree, or private agreement
for which Borrower or a Subsidiary is legally responsible for compliance (the
"Environmental Requirements") or require special handling in collection,
storage, treatment or disposal ("Hazardous Materials") which are not being
handled in accordance with the Environmental Requirements and to the best
knowledge of Borrower, no part of such real property has been contaminated by
any Hazardous Materials.
5.20. SOLVENCY. Borrower and the Subsidiaries are able to meet their
debts as they become due. The present fair saleable value of the property and
assets of Borrower and the Subsidiaries is greater than the amount required to
pay all Indebtedness of Borrower and the Subsidiaries, including the
Indebtedness incurred under this Agreement.
SECTION 6
AFFIRMATIVE COVENANTS
Until all Loans, amounts due or which could in the future become due
under Letters of Credit and other sums due and owing under this Agreement to the
Bank have been paid in full and Borrower no longer has any right to borrow or
request Letters of Credit hereunder, Borrower covenants and agrees as follows:
6.1. COMPLIANCE WITH LAWS, ETC. Borrower shall and shall cause each of
the Subsidiaries to comply in all material respects with all applicable laws,
rules, regulations and orders regarding its operations.
6.2. PRESERVATION OF CORPORATE EXISTENCE. Except as provided in Section
7.7.1, Borrower shall and shall cause each of the Subsidiaries to preserve and
maintain its corporate existence, rights, franchises and privileges in the
jurisdiction of its incorporation, and qualify and remain qualified in good
standing as a foreign corporation in each jurisdiction where the failure to
15
<PAGE> 22
preserve and maintain such existence, rights, franchises, privileges and
qualification would materially adversely affect (a) the interests of the Bank
hereunder or (b) the enforceability of this Agreement or any of the Loan
Documents. Borrower will engage and cause the Subsidiaries to engage primarily
in the Core Business.
6.3. AUDITS. Borrower shall and shall cause each of the Subsidiaries
to, at any time and from time to time during regular business hours, upon at
least two Banking Days notice, permit the Bank, or its agents or
representatives, (a) to examine and make copies of and abstracts from all books,
records and documents (including, without limitation, computer tapes and disks)
in the possession or under the control of such company and (b) to visit the
offices and properties of such company for the purpose of examining such
materials described in clause (a) next above, and to discuss matters relating to
such company's performance hereunder or such company's business, operations and
financial condition with any of the officers or employees of such company having
knowledge of such matters and who are then available. Borrower agrees to use
reasonable efforts to make such officers and employees available at such time or
at another mutually agreeable time. In addition to the foregoing, Borrower
agrees to allow the Bank to perform inventory audits by an independent
accounting firm chosen by the Bank with respect to Borrower's and its
Subsidiaries' retail stores; provided, however, that only one such audit shall
be conducted in any 12 month period and that any such audit shall be with
respect to up to one-half of such retail stores. The costs of such inventory
audits shall be borne by Borrower up to $25,000 in any fiscal year.
6.4. REPORTING REQUIREMENTS OF BORROWER. Borrower shall furnish to, or
at the direction of, the Bank:
(a) Monthly Financial Statements. Within 45 days after the last
day of each of the first 11 months of each fiscal year of Borrower, (i) a
Consolidated and Consolidating balance sheet of Borrower and the Subsidiaries as
at the close of such period; (ii) a Consolidated and Consolidating statement of
operations for Borrower and the Subsidiaries for such period and for the year to
date; and (iii) a reconciliation of retained earnings on a Consolidated basis as
at the close of such period; all in reasonable detail, prepared in accordance
with generally accepted accounting principles applied on a consistent basis and
certified as complete and correct, subject to changes resulting from year-end
adjustments, by the chief financial officer, chief executive officer or
controller of Borrower.
(b) Annual Financial Statements. Within 90 days after the end
of each fiscal year of Borrower, a complete annual audit report, including (i) a
Consolidated balance sheet of Borrower and the Subsidiaries as at the close of
such period, (ii) Consolidated statements of operations, shareholders' equity
and cash flow for such period and (iii) any management letters prepared in
connection with such audit report, all in reasonable detail, prepared in
accordance with generally accepted accounting principles applied on a consistent
basis and accompanied by an unqualified opinion thereon of Ernst & Young or
other independent auditors of recognized national standing selected by Borrower
and acceptable to the Bank. In addition, Borrower shall furnish to, or at the
direction of, the Bank, within 90 days after the close of each fiscal year (A) a
Consolidating balance sheet of Borrower and the Subsidiaries as at the end of
such period and (B) Consolidating statements of operations for such period; all
in reasonable detail and based upon the audited Consolidated statements referred
to above, prepared in accordance with
16
<PAGE> 23
generally accepted accounting principles applied on a consistent basis and
certified as complete and correct by the chief financial officer, chief
executive officer or controller of Borrower.
(c) Weekly Sales Reports. Within 10 days after the end of each
week, a sales report reflecting, for the prior week and the year to date and for
the comparable periods for the prior year, (i) sales activity of each retail
store operated by Borrower and each Subsidiary and (ii) sales activity of each
operating region of Borrower and each Subsidiary, all in form and substance
satisfactory to the Bank. Notwithstanding the foregoing, if, during the period
ending on the date that is one year after the date hereof, the Borrower does not
produce sales reports within such time periods, then the Borrower shall not be
deemed to be in default under this Section 6.4(c) if it delivers to the Bank
copies of any sales reports delivered to its own management promptly upon their
preparation.
(d) Monthly Compliance Certificates. Concurrently with the
delivery of the monthly and annual financial statements to be furnished pursuant
to Sections 6.4(a) and (b) hereof, a certificate of the chief financial officer,
chief executive officer or controller of Borrower which (i) states that, except
as disclosed therein, such officer, after reasonable investigation, has no
knowledge of any Event of Default or Default and (ii) sets forth, in summary
form, calculations showing the financial status of Borrower (at the end of, or,
in the case of incurrence tests, during, such accounting period) in respect of
the restrictions contained in Sections 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7.1(b),
7.9(b) and 7.10 hereof.
(e) Auditor's Certificate. Concurrently with the annual audit
report called for by Section 6.4(b), a certificate prepared by the auditors
stating that, except as disclosed therein, they have no knowledge of any Event
of Default or Default with respect to the restrictions contained in Sections
7.1(b), 7.2, 7.3, 7.4, 7.5, 7.6, 7.9(b), 7.10 and 7.17 hereof.
(f) Notice of Default. Promptly upon the Chief Executive
Officer, Chief Financial Officer or Chief Accounting Officer of Borrower
obtaining knowledge thereof, a certificate identifying any Default or Event of
Default, specifying the nature and period of the existence thereof and what
action Borrower has taken, is taking, or proposes to take in respect thereof.
(g) Reports. Promptly upon filing or distribution, copies of
all material which Borrower or any Subsidiary sends to any class of its security
holders or files with the Securities and Exchange Commission or any national
securities exchange including, but not limited to, all registration statements,
annual reports on Form 10-K, quarterly reports on Form 10-Q, reports on Form
8-K, proxy material and reports to shareholders and any and all amendments
thereof or supplements thereto.
(h) Notice of Litigation. Promptly upon any executive officer
of Borrower obtaining knowledge thereof, a certificate identifying any
litigation, arbitration proceeding or administrative investigation, inquiry or
other proceeding to which Borrower or any Subsidiary is or hereafter may become
a party which may involve any risk of any material judgment or liability not
fully covered by insurance or which may otherwise result in any materially
adverse change in the business or assets or in the condition (financial or
otherwise) of Borrower or any Subsidiary or
17
<PAGE> 24
which may impair the ability of Borrower or any Subsidiary to perform under this
Agreement or any Loan Document.
(i) Borrowing Base Certificate. Within 30 days after the end of
each fiscal month, a Borrowing Base Certificate as at the end of such fiscal
month.
(j) Financial Plan. Within 60 days after the end of each fiscal
year (i) a financial plan of Borrower and the Subsidiaries consisting of a
budget containing detailed financial projections for the then current fiscal
year on a quarterly basis (including profit and loss statements, cash flow
statements and balance sheets), in form and substance satisfactory to the Bank,
such budget and projections to be accompanied by a certificate of the chief
financial officer or controller of Borrower specifying the assumptions on which
such budget and projections were prepared and stating that such officer has no
reason to question the reasonableness of any such material assumptions; and (ii)
a reasonably detailed discussion of the issues and strategies of management with
respect to such financial plan.
(k) Landlord Waivers. Immediately upon execution hereof,
Borrower shall use its best efforts to obtain from those of its and its
Subsidiaries' landlords who have not already provided one, in those
jurisdictions where such landlords are given a statutory Lien superior to or
pari passu with the Lien granted to the Bank under the Loan Documents, a
Landlord's Waiver and Consent in the form attached hereto as Exhibit 6.4(k).
From and after the execution hereof, Borrower shall, prior to entering into or
assuming any obligations under a lease or permitting any Subsidiary to enter
into or assume any obligations under a lease in those jurisdictions where
landlords are given such a statutory Lien, use its best efforts to obtain such a
Landlord's Waiver and Consent.
(l) Quarterly Reconciliation Statements. Within 45 days after
the last day of each of Borrower's fiscal quarters, a reconciliation of
Borrower's store closing and restructuring reserve, on a Consolidated basis as
at the close of such period; in form and substance acceptable to the Bank and in
reasonable detail.
6.5. USE OF PROCEEDS. Borrower shall use the loan proceeds disbursed
pursuant to this Agreement to repay all Indebtedness owed to the Bank, including
Indebtedness under that certain First Amended and Restated Revolving Credit and
Term Loan Agreement dated January 4, 1994 and the Term Note and First Amended
and Restated Revolving Credit Note, each dated January 4, 1994 executed
thereunder, and for other legal and proper purposes.
6.6. MAINTENANCE OF PROPERTIES AND INSURANCE. Borrower shall and shall
cause each Subsidiary to (a) at all times have an ownership or other interest in
all of its respective material properties and assets (including all material
patents, trademarks, service marks, trade names, copyrights, licenses and rights
in respect of the foregoing) sufficient to permit the use thereof necessary to
the performance of this Agreement and the Loan Documents and the conduct of
their Core Business including the property and assets reflected in the most
recent balance sheet delivered to the Bank pursuant to Section 6.4 except
property held under leases which are capitalized in accordance with generally
accepted accounting principles consistently applied and except properties and
assets disposed of since the date of such balance sheet in the ordinary
18
<PAGE> 25
course of business or otherwise in compliance herewith, (b) maintain in good
repair, working order and condition all material properties used or useful in
the business of Borrower and each Subsidiary and, from time to time, make all
appropriate repairs, renewals and replacements thereof; and (c) maintain
insurance upon their properties of such character and amounts as are usually
maintained by companies engaged in like business; furnish to the Bank, upon
request, a statement of its insurance coverage; and obtain additional insurance
promptly upon the reasonable and prudent request of the Bank.
6.7. PAYMENT OF TAXES AND CLAIMS. Borrower shall, and shall cause each
Subsidiary to, promptly pay and discharge all taxes and assessments levied and
assessed or imposed upon their properties or upon their income as well as all
material claims which, if unpaid, might by law become a Lien upon their
properties; provided, however, that nothing herein contained shall require
Borrower or any Subsidiary to pay any such taxes, assessments or claims so long
as such company shall in good faith contest the validity and stay the execution
and enforcement thereof.
6.8. PERFORMANCE OF CONTRACTS. Borrower shall, and shall cause each
Subsidiary to, perform according to and comply with all of their agreements if
non-performance thereof could materially adversely affect the business or credit
of such company or could impair the ability of such company to perform this
Agreement or any Loan Document; provided, however, that nothing herein contained
shall require Borrower or any Subsidiary to so perform or comply with respect to
any action as to which there exists a bona fide dispute, during the pendency and
diligent prosecution of such dispute.
6.9. ENVIRONMENTAL MATTERS. If at any time Borrower obtains notice that
any real property owned by, leased to or operated by Borrower or any Subsidiary
has located therein Hazardous Materials, Borrower shall, within 30 days after
receipt of such notice, take or cause to be taken, at its sole expense, such
actions as may be necessary to comply with all Environmental Requirements;
provided, however, that nothing herein contained shall require Borrower or any
Subsidiary to take any such actions so long as such company shall in good faith
contest such notice and stay the execution and enforcement thereof.
6.10. DEPOSITORY. Borrower shall and shall cause each Subsidiary to use
the Bank as its primary corporate depository institution.
6.11. SUBSIDIARIES. Promptly upon, but in no case later than 10 days
after, the creation of any Subsidiary or the acquisition by Borrower of
additional stock of any existing Subsidiary, and in addition to any other
requirements relating to such creation or acquisition, Borrower shall (a) notify
the Bank of such act and supply the Bank with such financial and other
information regarding such Subsidiary as the Bank may request, (b) cause the
shares of stock of such Subsidiary not then subject to the Pledge Agreement to
become subject to such Pledge Agreement and (c) if the creation or acquisition
results in the creation of a Wholly-Owned Subsidiary, cause the Wholly-Owned
Subsidiary to deliver a Subsidiary Guaranty and Subsidiary Security Agreement to
the Bank.
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<PAGE> 26
SECTION 7
NEGATIVE COVENANTS
Until all Loans, amounts due or which could in the future become due
under Letters of Credit and other sums due and owing under this Agreement to the
Bank have been paid and Borrower no longer has the right to borrow or request
Letters of Credit hereunder, Borrower covenants and agrees as follows:
7.1. NEGATIVE PLEDGE. Borrower shall not, and shall not allow any
Subsidiary to, without the prior written consent of the Bank:
(a) Create, incur, assume or permit to continue any Lien on any
of its property or assets, whether now owned or hereafter acquired, except
Permitted Liens; nor
(b) Create, incur, assume or suffer to exist any Indebtedness
except (i) Indebtedness represented by the Note; (ii) Subordinated Debt; (iii)
Secured Indebtedness which is secured by Permitted Liens; (iv) unsecured
Indebtedness owed by Borrower to any Subsidiary or owed by any Wholly-Owned
Subsidiary to Borrower or another Subsidiary; and (v) up to $2,000,000 of
unsecured Indebtedness owed by Borrower representing a portion of the purchase
price payable by Borrower for all of the stock of Borrower's Wholly-Owned
Subsidiary RJR Drug Distributors Inc.
7.2. TANGIBLE NET WORTH. Borrower shall not permit Tangible Net Worth
at any time to be less than the amount set forth for the applicable period;
provided, however, that each of the amounts of Tangible Net Worth set forth in
the following schedule shall be automatically increased on and after the date of
any issuance by Borrower of any equity security by an amount equal to 75% of any
increase in Tangible Net Worth resulting solely from such issuance:
<TABLE>
<CAPTION>
===============================================================================
PERIOD TANGIBLE NET WORTH
- -------------------------------------------------------------------------------
<S> <C>
Date hereof until and including March 2, 1996 $38,000,000
- -------------------------------------------------------------------------------
March 3, 1996 until and including March 1, 1997 $42,000,000
- -------------------------------------------------------------------------------
March 2, 1997 and thereafter $45,000,000
===============================================================================
</TABLE>
Notwithstanding any other provision hereof to the contrary, for purposes of this
Section 7.2, Tangible Net Worth shall be deemed to include up to $2,800,000 of
goodwill arising from the purchase occurring on December 3, 1993 of certain of
the capital stock of Cincinnati Drug Distributors, Inc.
7.3. MINIMUM CURRENT RATIO. Borrower shall not permit, at any time, the
Consolidated Current Ratio of Borrower to be less than 1.50:1.00. "Consolidated
Current Ratio" means the ratio of (a) Current Assets of Borrower (Consolidated)
to (b) Current Liabilities of Borrower (Consolidated).
20
<PAGE> 27
7.4. UNSUBORDINATED LIABILITIES TO TANGIBLE NET WORTH RATIO. Borrower
shall not permit the ratio of Consolidated Unsubordinated Liabilities to
Tangible Net Worth plus Subordinated Debt to be more than 1.35:1.00 at any time
from the date hereof to and including March 2, 1996 or more than 1.25:1.00 at
any time thereafter.
7.5. LIABILITIES TO TANGIBLE NET WORTH RATIO. Borrower shall not permit
the ratio of Borrower's Consolidated Liabilities to Tangible Net Worth to be
more than 5.00:1.00 at any time from the date hereof to and including May 27,
1995 or more than 4.5:1.00 at any time thereafter.
7.6. INCOME AVAILABLE FOR FIXED CHARGES TO FIXED CHARGES RATIO.
Borrower shall not permit the ratio of Borrower's Consolidated Income Available
for Fixed Charges to Borrower's Consolidated Fixed Charges at the end of any
fiscal quarter for the four fiscal quarters then ended to be less than the
relevant ratio set forth in the following schedule:
<TABLE>
<CAPTION>
==========================================================================
PERIOD RATIO
- --------------------------------------------------------------------------
<S> <C>
Date hereof until and including March 2, 1996 1.05:1.00
- --------------------------------------------------------------------------
March 3, 1996 and thereafter 1.10:1.00
==========================================================================
</TABLE>
7.7. MERGERS, ACQUISITIONS, SALES, ETC.
7.7.1. Borrower shall not, and shall not allow any Subsidiary
to, (a) be a party to any merger or consolidation, or (b) purchase or otherwise
acquire (i) all or substantially all of the assets or any stock of any class of,
or (ii) any partnership or joint venture interest in, any other Person, except
for Permitted Investments and except for any merger of any Subsidiary into
Borrower provided that Borrower shall be the continuing or surviving corporation
and, after giving effect to such merger, no Event of Default or Default shall
exist hereunder.
7.7.2. Borrower shall not, and shall not allow any Subsidiary
to, sell, transfer, convey or lease all or any substantial part of its assets,
including the stock of any Subsidiary, except in the ordinary course of
business.
7.8. LOANS, ETC. Borrower shall not, and shall not allow any Subsidiary
to, make any loan, advance or capital contribution to or investment in or with
any Person, except (a) Permitted Investments, (b) loans or advances of Borrower
to Wholly-Owned Subsidiaries or (c) loans or advances (up to an aggregate at any
one time outstanding not exceeding $500,000 on a Consolidated basis) to Persons
other than Wholly-Owned Subsidiaries and except that the Borrower may accept
deferred payment of up to $1,500,000 of the purchase price payable to Borrower
by one of Borrower's franchisees for certain assets of a Nashville, Tennessee
store purchased by Borrower and resold to such franchisee within one year of the
date hereof, which deferral will be evidenced by one or more promissory notes of
the franchisee to Borrower; provided that the conversion of delinquent open
account royalty receivables to notes receivable shall not be deemed to
constitute a loan or advance for purposes of this Section 7.8.
7.9. CONTINGENT OBLIGATIONS. Borrower shall not, and shall cause the
Subsidiaries to not, assume, guarantee, endorse, contingently agree to purchase
or otherwise become liable upon
21
<PAGE> 28
the obligation of any one or more Persons other than (a) guaranties by Borrower
of obligations of Wholly-Owned Subsidiaries; (b) guaranties by Borrower of
obligations of Affiliates and Subsidiaries, other than Wholly-Owned
Subsidiaries, which are engaged in the Core Business up to an aggregate amount
of $1,000,000 for the amount of all such guaranties at any one time outstanding
on a Consolidated basis; (c) guaranties by Subsidiaries of obligations of
Borrower; (d) guaranties by Borrower of real estate lease obligations for stores
closed by Borrower and leased by the landlord thereof to unrelated Persons so
long as the aggregate rentals payable under any such guaranty do not exceed the
amount payable under the original lease of Borrower which was terminated
simultaneously with the execution of the guaranty; and (e) guaranties by
Borrower of obligations of unrelated Persons up to an aggregate amount of
$100,000 for the amount of all such guaranties at any one time outstanding on a
Consolidated basis.
7.10. DIVIDENDS, PURCHASES AND PREPAYMENTS. Borrower shall not, and
shall not permit any Subsidiary to, (a) declare or pay any dividends on, or make
any distribution with respect to, any shares of its capital stock of any class
(except in shares of such capital stock), (b) purchase, redeem or otherwise
acquire for a consideration any shares of its capital stock of any class, nor
(c) prepay, purchase, redeem or otherwise acquire any of its Subordinated Debt;
provided, however, that Borrower may take any such action so long as (i) no
Event of Default shall then have occurred and be continuing or would result from
such action, and (ii) at the time of such action, and after giving effect
thereto, the aggregate amount expended in connection with all such actions shall
not exceed 50% of cumulative Consolidated Net Income (net of any losses and
exclusive of extraordinary credits and non-recurring gains) earned from and
after February 28, 1994 and; provided further, that Wholly-Owned Subsidiaries
shall not be restricted by the provisions of this Section 7.10 from paying cash
dividends to Borrower. Notwithstanding the foregoing, the Redemption shall not
constitute a breach of this Section 7.10 so long as (A) the aggregate Redemption
price paid by Borrower does not exceed $10,000,000; (B) the Redemption price
paid by Borrower for the redemption of any Debenture does not exceed 80% of the
face value thereof; and (C) the Redemption does not result in any other Default
or Event of Default.
7.11. TRANSACTIONS WITH AFFILIATES. Borrower shall not, and shall not
allow any Subsidiary to, enter into any transaction, including, without
limitation, the purchase, sale or exchange of any property or the rendering of
any service, with any Affiliate except in the ordinary course of and pursuant to
the reasonable requirements of the business of Borrower and upon fair and
reasonable terms no less favorable to Borrower than would obtain in an arm's
length transaction with a Person not an Affiliate of Borrower.
7.12. SUBORDINATED DEBT. Borrower shall not permit the modification,
waiver or amendment of any of the terms of its Subordinated Debt.
7.13. SOLVENCY. Borrower shall not, and shall not allow any Subsidiary
to, make any transfer of an interest in property or incur any obligation if such
company:
(a) made such transfer or incurred such obligation with actual
intent to hinder, delay, or defraud any Person to which such company
was, or became, indebted on or after the date such transfer was made or
such obligation was incurred; or
22
<PAGE> 29
(b) (i) received less than a reasonably equivalent value
in exchange for such transfer or obligation; and
(ii) (A) was insolvent on the date that such transfer
was made or such obligation was incurred, or became insolvent as a
result of such transfer or obligation;
(B) was engaged in business or a transaction, or
was about to engage in business or a transaction, for which any
property remaining with such company was an unreasonably small capital;
or
(C) intended to incur, or believed that such
company would incur, Indebtedness that would be beyond such company's
ability to pay as it matured;
provided, however, that the provisions of this Section 7.13 shall not be deemed
to have been violated by reason of the transactions contemplated hereby.
7.14. ERISA. Borrower shall not, and shall not allow any Subsidiary to,
(a) incur any material accumulated funding deficiency within the meaning of
ERISA; (b) incur any material liability to the Pension Benefit Guaranty
Corporation established under ERISA (or any successor thereto under ERISA) in
connection with any employee benefit plan established or maintained by such
company; nor (c) have any tax assessed against it by the Internal Revenue
Service for any alleged violation under Section 4975 of the Internal Revenue
Code.
7.15. SALE/LEASEBACKS. Borrower shall not, and shall not allow any
Subsidiary to, enter into any agreement with any Person providing for the
leasing by such company of real or personal property which has been or is to be
sold or transferred by such company to such Person or of real or personal
property intended to be used for substantially the same purpose as the property
sold or transferred by such company; provided, however, that all real or
personal property which is purchased after the date hereof for the express
purpose of a later sale and leaseback transaction shall be exempt from the
foregoing prohibition.
7.16. ACCOUNTS RECEIVABLE. Borrower shall not, and shall not allow any
Subsidiary to, discount or sell any of its notes or accounts receivable.
7.17. CAPITAL EXPENDITURES. Borrower will not permit the aggregate
amount of Capital Expenditures made by Borrower and the Subsidiaries during any
fiscal year or other period to exceed the amounts set forth in the following
schedule. To the extent that Capital Expenditures in any fiscal year or stated
period are less than the permitted amount as set forth in the following schedule
(without giving effect to any adjustment allowed pursuant to this sentence), the
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<PAGE> 30
permitted amount of Capital Expenditures for the next succeeding fiscal year
only shall be increased by the amount of such difference.
<TABLE>
<CAPTION>
============================================================================
PERIOD CAPITAL EXPENDITURES
<S> <C>
Date hereof until and including February 29, 1996 $10,000,000
- ----------------------------------------------------------------------------
March 1, 1996 until and including February 28, 1997 $11,000,000
- ----------------------------------------------------------------------------
March 1, 1997 until and including April 30, 1998 $14,000,000
============================================================================
</TABLE>
SECTION 8
EVENTS OF DEFAULT AND REMEDIES
If any of the following events ("Events of Default") shall occur and be
continuing:
(a) Principal and Letter of Credit Payments. Borrower shall
default (i) in the payment of the principal of the Note when and as the
same shall become due and payable, whether at the due date thereof or
by acceleration or otherwise (including any payment due pursuant to
Section 1.8 as a result of any Borrowing Base deficiency) or (ii) in
the payment of any reimbursement to the Bank for amounts paid on any
draft drawn under a Letter of Credit issued hereunder;
(b) Interest Payments and Fees. Borrower shall default in the
payment of interest on the Note or any additional amount due hereunder
or thereunder, when and as the same shall become due and payable,
whether at the due date thereof or by acceleration or otherwise,
provided such default shall continue for a period of five days;
(c) Representations and Warranties. Any representation or
warranty made by Borrower in this Agreement, any Borrowing Base
Certificate, report, certificate, financial statement or other
instrument furnished in connection with this Agreement or the Loans
shall prove to be false or misleading in any material respect;
(d) Special Covenants. Borrower or any Subsidiary shall fail to
observe or perform any covenant, condition or agreement in Section
6.4(a), (b) or (i) or Section 7 of this Agreement or the Bank shall
fail (other than by reason of the act or omission of Bank) to have a
valid, enforceable and perfected Lien upon all the collateral as
provided in the Security Agreement and each Subsidiary Security
Agreement, first and prior to all other Liens other than Permited
Liens;
(e) Other Covenants. Borrower or any Subsidiary shall fail to
observe or perform any covenant, condition or agreement (other than
those mentioned in Section 6.4(a), (b) or (i) or Section 7) to be
observed or performed pursuant to the terms hereof, provided such
default shall continue unremedied for 30 days after written notice
thereof to Borrower by the Bank;
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<PAGE> 31
(f) Cross Default. (i) Borrower or any Subsidiary shall default
with respect to any Indebtedness other than Indebtedness represented by
the Note; (ii) any event or condition shall occur which enables the
holder of any Indebtedness (other than Indebtedness represented by the
Note) or any Person acting on such holder's behalf to accelerate the
maturity thereof, or (iii) the holder of any Indebtedness other than
Indebtedness represented by the Note shall accelerate the maturity of
such Indebtedness; provided, however, that no Default under this
Section 8(f) shall be deemed to occur where the amount, individually or
in the aggregate, of such Indebtedness does not exceed $500,000;
(g) Judgments. One or more judgments from which no appeal may
be taken or with respect to which the time to appeal has expired for
the payment of money in excess of $500,000 shall be rendered against
Borrower and the Subsidiaries in the aggregate and the same shall
remain undischarged for a period of 30 consecutive days during which
the execution shall not be effectively stayed;
(h) Bankruptcy, Etc. Borrower or any Subsidiary shall (i) make
an assignment for the benefit of, or enter into any composition or
arrangement with, creditors; (ii)(A) apply for or consent to the
appointment of a receiver, custodian, trustee or liquidator for it or
any of its property, or (B) authorize such application or consent, or
(C) proceedings seeking such appointment shall be commenced against
such company without authorization, consent or application, and shall
have not been discharged within 60 days of such commencement; (iii)(A)
authorize or file a voluntary petition in bankruptcy, suffer an order
for relief under any federal bankruptcy law or apply for or consent (by
admission of material allegations of a petition or otherwise) to the
application of any bankruptcy, reorganization, arrangement,
readjustment of debt, insolvency, dissolution, liquidation or other
similar law of any jurisdiction, or (B) authorize such application or
consent, or proceedings to such end shall be instituted against such
company without its authorization, application or consent and shall not
be discharged within 60 days of the institution thereof; (iv) permit or
suffer all or any part of its properties to be sequestered, attached,
or subjected to a Lien through any legal proceeding or distraint which
is not discharged within 60 days of the commencement thereof; or (v)
generally not pay its debts as such debts become due;
(i) Reorganization, Receiver, Etc. An order, judgment or decree
shall be entered without the application, approval or consent of
Borrower or any Subsidiary by any court of competent jurisdiction,
approving a petition seeking reorganization of such company or
appointing a receiver, trustee or liquidator of such company or of all
or a substantial part of its assets, and such order, judgment or decree
shall continue unstayed and in effect for any period of 60 days;
(j) ERISA. A Reportable Event (as defined in ERISA) shall have
occurred with respect to any Plan (as defined therein) of Borrower or
any Subsidiary and, within 30 days after the reporting of such
Reportable Event to the Bank, the Bank shall have notified Borrower in
writing that (i) it has made a determination that, on the basis of such
Reportable Event, there are reasonable grounds for the termination of
such Plan by the
25
<PAGE> 32
Pension Benefit Guaranty Corporation or for the appointment by the
appropriate United States District Court of a trustee to administer
such Plan; and (ii) as a result thereof an Event of Default exists
hereunder; or a trustee shall be appointed by a United States District
Court to administer any Plan; or the Pension Benefit Guaranty
Corporation shall institute proceedings to terminate any Plan;
(k) Change in Control. Any Person or group of Persons acting in
concert, other than David Kriegel or John B. Gerlach, acquires
beneficial interest in 25% or more of any class of the outstanding
voting securities of Borrower; or
(l) Collateral Default. Any default (other than those otherwise
mentioned in this Section 8) shall occur pursuant to the terms of any
of the Loan Documents other than this Agreement and such default
continues after the longer of 30 days or any cure period provided in
such Loan Document;
then (A) the Bank, at any time thereafter during the continuance of any such
Event of Default specified above (other than in Section (h) or (i)), may, by
written notice to Borrower, terminate the Commitment (if still in existence),
and declare the entire principal amount of the Note to be due and payable
forthwith, whereupon the Note, including all principal and interest and all
other amounts payable hereunder or thereunder, shall forthwith become due and
payable; and (B) automatically upon the occurrence of any of the events
specified in Section (h) or (i), the Commitment shall terminate (if still in
existence) and the Note shall become immediately due and payable, in either case
without presentment, demand, protest, or notice of any kind, all of which are
hereby expressly waived, anything contained herein or in the Note or the Loan
Documents to the contrary notwithstanding.
SECTION 9
PARTICIPATION
The Bank may sell or agree to sell to one or more other Persons a
participation in all or any part of any Loans held by it or any Loan made or to
be made by it hereunder. For all purposes hereunder, including the enforcement
of any rights arising hereunder, any such participating Person shall be deemed
to be a party hereto and a "Bank", as defined herein, as fully as though such
participating Person were a signator hereto and whether or not specifically
contemplated by the terms hereof.
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<PAGE> 33
SECTION 10
DEFINITIONS
10.1. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the meanings specified:
"Affiliate" with respect to any Person means each Person that,
directly or indirectly (through one or more intermediaries or otherwise),
controls, is controlled by, or is under common control with such Person, but,
when used with respect to Borrower, such term shall exclude Subsidiaries.
"Agreement" is defined in the preamble.
"Bank" is defined in the preamble.
"Banking Days" means days other than Saturdays, Sundays and
other legal holidays or days on which the principal office of the Bank is
closed.
"Borrower" is defined in the preamble.
"Borrowing Base" means, as at the date of determination
thereof, 35% of the aggregate amount of Eligible Inventory.
"Borrowing Base Certificate" means a certificate of the chief
executive officer, chief financial officer or controller of Borrower in the form
of Exhibit 6.4(i) attached hereto setting forth the calculation of the Borrowing
Base.
"Borrowing Date" is defined at Section 1.4.2(a).
"Capital Expenditures" means, as to any Person, for any period,
expenditures (including the aggregate amount due under capital leases incurred
during such period but excluding such amount under capital leases of assets the
inclusion of which would cause such amount to be double counted for such period)
made by such Person to acquire or construct fixed assets, plant and equipment
(including renewals, improvements and replacements) during such period, computed
in accordance with generally accepted accounting principles applied on a basis
consistent with those used in making the calculations for purposes of
determining compliance with the provisions of this Agreement and shall include
that portion of the purchase price of any asset acquisition permitted by Section
7.7 which is allocated to fixed assets.
"Closing" means the closing of the transactions described
herein at the offices of Drug Emporium, Inc., 155 Hidden Ravines Drive, Powell,
Ohio.
"Commitment" is defined at Section l.1.2.
"Commitment Fee" is defined at Section 1.3.1.
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<PAGE> 34
"Consolidated" means reports or accounts of Borrower and its
Subsidiaries consolidated in accordance with generally accepted accounting
principles applied on a consistent basis.
"Consolidated Current Ratio" is defined at Section 7.3.
"Consolidating" means financial statements which present
individual financial statements for (a) each of the separate entities which is
included in the Consolidated statements of Borrower, (b) each of Borrower's
Mid-Atlantic, Midwest, Northeast, Southeast, Western and Cincinnati districts
and (c) each additional district which may be added by Borrower or any
Subsidiary after the date hereof, together with all entries required by
generally accepted accounting principles for the elimination of intercompany
accounts.
"Core Business" means the ownership and operation of deep
discount drugstores.
"Counsel" is defined at Section 4.1(k).
"Credit Amount," "Credit" or "Credits" means credit extended by
the Bank to Borrower pursuant to the provisions of this Agreement, whether in
the form of Loans, Letters of Credit or otherwise.
"Current Assets" means all assets which may properly be
classified as current assets in accordance with generally accepted accounting
principles applied on a consistent basis, except that amounts due from
unconsolidated Subsidiaries and Affiliates shall be excluded.
"Current Liabilities" means all Liabilities as may properly be
classified as current Liabilities in accordance with generally accepted
accounting principles applied on a consistent basis, and shall include the
amount of all Loans which are outstanding hereunder but shall not include up to
$11,850,000 in reserves reasonably established by the Borrower in November 1994
in connection with the Disposition.
"Debenture" means any of the $52,000,000 in aggregate principal
amount of Borrower's outstanding 7-3/4% Convertible Subordinated Debentures due
October 1, 2014 issued pursuant to the Indenture.
"Default" means any condition or event which constitutes an
Event of Default or which would become an Event of Default with the giving of
notice or lapse of time or both (unless cured or waived).
"Disposition" means, collectively, (a) the transfer of
Borrower's stores numbered 702, 703, 706, 709, 710, 713 and 730 located in
Virginia and Maryland to Melville Corp.'s CVS drugstore unit on or before
November 19, 1994; (b) the closing of Borrower's stores numbered 701, 711, 715,
719, 721, 722, 723, 724, 725, 726, 727 and 728 located in Virginia and Maryland
on or before March 31, 1995; (c) the closing of Borrower's stores numbered 704,
705, 714, 718
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<PAGE> 35
and 729 in the Washington, D.C. market on or before March 2, 1997; and (d) the
closing of Borrower's stores numbered 52 and 53 in the Indianapolis market on or
before May 31, 1995.
"EBITR" means, for any period, Income Available for Fixed
Charges with respect to such period adjusted (with respect to any period ending
on or before November 30, 1995 only) so as not to include any loss derived from
the stores disposed of or closed pursuant to the Disposition.
"Eligible Inventory" means, at any time, without duplication,
the aggregate cost (net of all reserves other than LIFO reserves) to Borrower of
Inventory owned exclusively by Borrower or any of its Wholly-Owned Subsidiaries
who have entered into Subsidiary Guaranties and Subsidiary Security Agreements
(so long as such Subsidiary Guaranties and Subsidiary Security Agreements remain
in full force and effect) as determined on a FIFO basis in accordance with
generally accepted accounting principles consistently applied less the face
amount of all guaranties then outstanding as authorized by Section 7.9(b);
provided, however, that there shall be excluded from Eligible Inventory (a) all
Inventory which is customarily dispensed to the consumer through a pharmacy only
with a doctor's prescription; (b) all Inventory in transit; and (c) any
Inventory which is not the subject of a first perfected security interest of the
Bank.
"Environmental Requirements" is defined at Section 5.19.
"ERISA" is defined at Section 5.14.
"Euro Reserve Percentage" means, for any day, that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the actual reserve requirement for a member bank of the Federal
Reserve System in respect of "Eurocurrency liabilities" (or in respect of any
other category of liabilities which includes deposits by reference to which the
interest rates on LIBO Rate Loans is determined or any category of extensions of
credit or other assets which includes loans by a non-United States office of
either Bank to United States residents).
"Eurocurrency" means any currency (a) for which a Rate of
Exchange Available to the Bank exists and (b) an established, stable trading
market in the currency exists.
"Eurodollar" means the United States dollars loaned under a
LIBO Rate Loan.
"Events of Default" is defined at Section 8.
"Fixed Charges" means, for any period, the sum of (a) gross
interest expense incurred during such period and (b) gross rental expense
incurred during such period with respect to non-capitalized leases, all as
determined in accordance with generally accepted accounting principles, applied
on a consistent basis.
"Hazardous Materials" is defined at Section 5.19.
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<PAGE> 36
"Income Available for Fixed Charges" means, for any period, the
sum of Consolidated Net Income before income taxes and the amount of any LIFO
provision incurred during such period, determined in accordance with generally
accepted accounting principles consistently applied, plus Fixed Charges, but
shall not include a charge of up to $11,850,000 reasonably taken by the Borrower
in November 1994 in connection with the Disposition.
"Indebtedness" means any Liabilities representing obligations
for borrowed money or the deferred purchase price of property or services
(except accruals and trade accounts payable arising in the ordinary course of
business) including, without limitation, capitalized lease obligations, and
Liabilities similar to the foregoing of other Persons which are secured by a
Lien on any asset of Borrower or any Subsidiary, or guaranteed directly or
indirectly by any of them.
"Indenture" means that certain indenture dated as of October 5,
1989 between the Borrower and The Huntington National Bank as trustee.
"Inventory" means finished goods owned by Borrower held for
sale in the ordinary course of business of Borrower.
"Letter of Credit" means a commercial letter of credit issued
hereunder by the Bank as a Loan pursuant to this Agreement on behalf of
Borrower. "Letter of Credit" shall specifically not include stand-by letters of
credit and the Bank is under no obligation to issue stand-by letters of credit
to Borrower hereunder.
"Liabilities" as applied to any Person, shall mean (a) all
items (except items of capital stock, of capital surplus, of general contingency
reserves or of retained earnings and amounts attributable to minority interest,
if any) which, in accordance with generally accepted accounting principles,
would be included in determining total liabilities as shown on the liability
side of a balance sheet of such Person as at the date as of which Liabilities
are to be determined, including specifically capitalized lease obligations and
(b) all obligations secured by any Lien or conditional sale or other title
retention agreement to which any property or asset owned or held by such Person
is subject, whether or not the obligations secured thereby shall have been
assumed (excluding non-capitalized leases which may amount to title retention
agreements).
"LIBO Banking Days" means days which are both Banking Days and
London Banking Days.
"LIBO Fixed Charge Coverage Ratio" means the ratio described in
clause (a) of the definition of "LIBO Rate Period", below.
"LIBO Rate" means, as of the date of each LIBO Rate Loan, the
rate of interest (rounded upward, if necessary, to the next highest 1/16th of
1%) at which the Bank was offered deposits in United States dollars in the
London Interbank LIBO Market on the second London Banking Day preceding the date
of such LIBO Rate Loan for delivery on the date of such LIBO Rate Loan, for
deposits for a like period as such LIBO Rate Loan and in an amount equal to the
amount of such LIBO Rate Loan plus (a) either (i) 2.5% or, (ii) 2.25% in the
case of a LIBO Rate Loan made during a LIBO Rate Period when the most recent
quarterly financial statements of
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<PAGE> 37
Borrower indicate both (A) a LIBO Fixed Charge Coverage Ratio of 1.20:1.00 or
greater and (B) a LIBO Senior Leverage Ratio of 1.5:1.0 or less and (b) any
additional costs provided for in Section 1.5.4.
"LIBO Rate Loan" is defined at Section 1.4.1.
"LIBO Rate Period" means any period during which the most
recent quarterly financial statements of Borrower indicate both (a) a ratio of
EBITR to Fixed Charges for the four fiscal quarters then ended of greater than
1.10:1.00 and (b) a ratio of (i) the sum of total Consolidated Unsubordinated
Liabilities plus 40% of any LIFO reserve to (ii) the sum of Consolidated
Tangible Net Worth plus Subordinated Debt plus 60% of any LIFO reserve of less
than 2.0:1.0. Notwithstanding the foregoing, a date shall not be deemed to be
included in a LIBO Rate Period if more than 45 days have then elapsed from the
end of Borrower's then most recent fiscal quarter and Borrower has not yet
delivered to the Bank its quarterly financial statements for such fiscal
quarter.
"LIBO Senior Leverage Ratio" means the ratio described in
clause (b) of the definition of "LIBO Rate Period", above.
"Lien" means a security interest, charge, or encumbrance, or
other right or claim of any Person other than (a) a potential claim or right
(that has not yet been asserted) of a trustee appointed for any customer of
Borrower in connection with any bankruptcy proceeding or (b) an unfiled lien for
taxes accrued but not yet payable.
"Loan Documents" are defined at Section 4.1(l).
"Loan" means a loan made by the Bank pursuant hereto evidenced
by the Note.
"London Banking Days" means days on which dealings are carried
out in the London Interbank Market.
"Maturity Date" is defined at Section 1.1.1.
"Net Income" means for any period the Consolidated net income
(deficit) of Borrower incurred during such period as determined in accordance
with generally accepted accounting principles consistently applied.
"Note" is defined at Section 1.5.1.
"Permitted Investments" means any of the following to the
extent such investment does not violate the covenants set forth in Section 7 of
this Agreement on or after the date such investment is made:
(a) commercial paper issued by the Bank or
certificates of deposit issued, or other time deposit accounts
offered, by the Bank or any Affiliate of the Bank;
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<PAGE> 38
(b) marketable direct obligations issued by the United
States of America maturing within one year from the date of
acquisition thereof;
(c) commercial paper maturing no more than one year
from the date of creation thereof and having as at any date of
determination a rating of at least A-1 (or its equivalent) from
Standard & Poor's Corporation or P-1 (or its equivalent) from
Moody's Investor's Service, Inc.;
(d) existing investments in the Subsidiaries;
(e) the purchase of all or a portion of the assets of
a Person so long as (i) the assets acquired are used solely in
the Core Business, (ii) the cumulative aggregate consideration
paid for all such assets purchased hereunder in any fiscal year
does not exceed $3,000,000 and (iii) the Bank is notified in
writing of each such purchase 30 days in advance;
(f) investments by Borrower in newly formed, partially
owned Subsidiaries and Affiliates involved in the Core Business
so long as the cumulative aggregate investment made hereunder
does not exceed $500,000;
(g) investments toward an acquisition permitted by
Section 7.7 which acquisition is not completed; and
(h) acquisitions and other transactions permitted by
Section 7.7.
"Permitted Liens" means any of the following:
(a) Liens securing (i) taxes, assessments, fees or
other governmental charges or levies, or securing the claims of
materialmen, mechanics, carriers, warehousemen, landlords and
other similar Persons or (ii) Permitted Investments, to the
extent the Lien thereon arises by operation of law;
(b) Liens incurred or deposits made in the ordinary
course of business (i) in connection with workers'
compensation, unemployment insurance, social security and other
similar laws or (ii) to secure the performance of bids,
tenders, sales, contracts, public or statutory obligations not
incurred in connection with the borrowing of money, the
obtaining of advances or the payment of the purchase price of
property or services;
(c) Reservations, exceptions, easements, leases and
other similar title exceptions or encumbrances affecting real
property, provided they do not in the aggregate materially
interfere with their use in the ordinary course of Borrower's
or any Subsidiary's business;
(d) Liens in favor of the Bank;
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<PAGE> 39
(e) Liens securing purchase money obligations
respecting personal property of Borrower and the Subsidiaries
and capitalized leases for an aggregate amount not in excess of
$10,000,000 at any one time outstanding on a Consolidated basis
so long as such Liens apply only to the personal property being
purchased or leased and do not attach to Inventory; and
(f) Liens securing the existing mortgage of MetLife
Capital on real property used as Borrower's headquarters
located at 155 Hidden Ravines Drive, Powell, Ohio and fixtures
thereon (but not personal property of any type appurtenant
thereto or used in connection therewith) incurred by Borrower
provided that the aggregate amount of Indebtedness of Borrower
secured thereby does not exceed $1,900,000 at any one time
outstanding.
"Person" means any individual, partnership, corporation, trust,
unincorporated organization, government or any department or agency thereof or
any other entity.
"Pledge Agreement" is defined at Section 4.1(c).
"Prime Rate" means the rate published or announced by the Bank
as its "Prime Rate" which rate may not be the Bank's lowest rate.
"Rate of Exchange Available to the Bank" means (a) whenever an
exchange rate applies to voluntary borrowings by Borrower, the rate of exchange
of United States dollars to a Eurocurrency, as quoted to the Bank from brokers,
traders or other Persons who make such quotations, or (b) whenever an exchange
rate applies to a situation other than a voluntary borrowing by Borrower, the
rate of exchange as between Eurocurrency and United States dollars, in the
following order of preference: (i) from correspondents, principals, brokers,
traders or other Persons with whom the Bank regularly conducts business, (A) as
offered to and accepted by the Bank for transactions hereunder and for other
customers or for its own account; (B) as offered to the Bank; (ii) from brokers,
traders, or other Persons who make such quotations in the ordinary course of
their business (A) as offered to and accepted by the Bank for transactions
hereunder and for other customers or for its own account; (B) as offered to the
Bank.
"Redemption" means the Borrower's redemption of certain of the
Debentures.
"Request Date" means the day three LIBO Banking Days before the
Borrowing Date of a LIBO Rate Loan.
"Security Agreement" is defined at Section 4.1(b).
"Subordinated Debt" means unsecured Indebtedness of Borrower
maturing more than 12 months from the date of determination thereof that is
subordinated to all Loans and other amounts owed under this Agreement on terms
acceptable to the Bank and shall include the Debentures so long as the same
shall not have been amended and their maturity date is more than 12 months from
the date of determination.
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<PAGE> 40
"Subsidiary" means any corporation at least 51% of the
outstanding voting stock of which shall, at the time as of which any
determination is being made, be owned, directly or indirectly, by Borrower.
"Subsidiary Guaranties" is defined at Section 4.1(d).
"Subsidiary Security Agreement" is defined at Section 4.1(e).
"Tangible Net Worth" means the total of the capital stock (net
of treasury stock), paid in surplus and retained earnings (deficit), as
determined in accordance with generally accepted accounting principles
consistently applied, minus the following items (without duplication of
deductions), if any, appearing on the Consolidated balance sheet of Borrower:
(a) all deferred charges (net of amortization);
(b) the book amount of all assets which would be
treated as intangibles under generally accepted accounting
principles, including, without limitation, such items as
goodwill, unamortized debt discount and expense and corporate
organization expenses, treasury stock, trademarks, trademark
applications, trade names, service marks, brand names,
copyrights, patents, patent applications and licenses and
rights with respect to the foregoing; and
(c) write-up in the book amount of any asset resulting
from a revaluation thereof from the book amount entered upon
acquisition.
"Trade Date" means, regarding LIBO Rate Loans, the day two LIBO
Banking Days before the Borrowing Date or the Effective Date.
"Unsubordinated Liabilities" means all Liabilities of Borrower
less Subordinated Debt.
"Variable Rate Loan" is defined at Section 1.4.1.
"Wholly-Owned Subsidiary" means a Subsidiary, all of the voting
stock (other than directors' qualifying shares) of which and all other stock and
equity securities of which are owned, directly or indirectly, by Borrower.
10.2. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles consistent with those applied in the preparation of the
financial statements of Borrower as of the date hereof.
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SECTION 11
MISCELLANEOUS
11.1. TERM OF AGREEMENT; SUCCESSORS AND ASSIGNS. This Agreement and all
covenants, agreements, representations and warranties made herein and in the
certificates delivered pursuant hereto shall survive the making by the Bank of
the Loans and the execution and delivery to the Bank of the Note and shall
continue in full force and effect until the Maturity Date, the termination of
the Commitment or the payment in full of all amounts due hereunder, whichever is
latest. Whenever in this Agreement either of the parties are referred to, such
reference shall include the successors and assigns of such party; and all terms
and provisions of this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
11.2. NOTICES. Notices, demands and communications shall be deemed to
have been properly given to Borrower when faxed to (614) 548-6541 or deposited
in the United States mail, registered or certified, postage prepaid, and
addressed to Borrower at 155 Hidden Ravines Drive, Powell, Ohio 43065,
Attention: Chief Executive Officer, or hand delivered to the same address. Any
communication to the Bank shall be deemed properly given if faxed, hand
delivered or similarly mailed as follows:
Bank One, Columbus, NA
Commercial Loan Department
100 East Broad Street
Columbus, Ohio 43271-0170
Fax: (614) 248-5518
11.3. NO IMPLIED WAIVERS. No delay on the part of the Bank in
exercising any right, power or privilege granted hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or privilege preclude any other or further exercise thereof. The rights
and remedies herein expressly specified are cumulative and not exclusive of any
other rights and remedies which the Bank would otherwise have.
11.4. AMENDMENTS, MODIFICATIONS, ETC. No amendment, modification,
termination, or waiver of any provision of this Agreement or of the Note nor
consent to any departure by Borrower therefrom, shall in any event be effective
unless the same shall be in writing and signed by the Bank, and then such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given. No notice or demand on Borrower in any case shall
entitle Borrower to any other or further notice or demand in similar or other
circumstances.
11.5. APPLICABLE LAW. This Agreement and the Note shall be deemed to be
contracts made under the laws of the State of Ohio, and for all purposes shall
be construed in accordance with the laws of such state.
11.6. SEVERABILITY. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such
35
<PAGE> 42
prohibition or unenforceability without invalidating the remaining provisions
hereof or affecting the validity or enforceability of such provisions in any
other jurisdiction.
11.7. EXPENSES. All fees, costs or expenses, including reasonable fees
and expenses of outside legal counsel incurred by the Bank, in connection with
the preparation, administration, amendment, modification or enforcement of the
Agreement shall be paid by Borrower on demand.
11.8. COUNTERPARTS. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures thereto were upon the
same instrument. Complete sets of counterparts shall be lodged with Borrower and
the Bank.
11.9. ENTIRE AGREEMENT. The Loan Documents set forth the entire
understanding between the parties concerning the subject matter thereof and
incorporate all prior negotiations and understandings. There are no covenants,
promises, agreements, conditions or understandings, either oral or written,
between them relating to the subject matter of this Agreement other than those
set forth in the Loan Documents. No representation or warranty has been made by
or on behalf of any party to the Loan Documents (or any officer, director,
employee or agent thereof) to induce the other parties to enter into the Loan
Documents or to abide by or consummate any transactions contemplated by any term
of the Agreement, except representations and warranties, if any, expressly set
forth or referred to in the Loan Documents. Nothing expressed or implied in any
of the Loan Documents is intended or shall be construed to confer upon or give
any Person other than the parties hereto and their successors or assigns, any
rights or remedies under or by reason of the Loan Documents.
11.10. HEADINGS. Headings of the sections of this Agreement are for
convenience only and shall not affect the construction of this Agreement.
11.11. EFFECTIVE DATE. This Agreement shall become effective upon the
execution of a counterpart hereof by each of the parties.
11.12. CONFESSION OF JUDGMENT. Borrower hereby authorizes any attorney
at law to appear for Borrower, in an action on the Agreement, at any time after
the same becomes due, as herein provided, in any court of record in or of the
State of Ohio, or elsewhere, to waive the issuing and service of process against
Borrower and to confess judgment in favor of the holder of the Agreement or the
party entitled to the benefits of the Agreement against Borrower for the amount
that may be due, with interest at the rate herein mentioned and costs of suit,
and to waive and release all errors in said proceedings and judgment, and all
petitions in error, and right of appeal from the judgment rendered.
11.13. TIME. Unless otherwise stated, all time references set forth
herein are stated in Columbus, Ohio time.
11.14. CONSENT TO JURISDICTION; SERVICE. As a specifically bargained
inducement for the transactions set forth herein, the parties hereto
specifically agree that any action, suit or proceeding in respect of or arising
from or out of this Agreement, its validity or performance, shall be initiated
and prosecuted as to all parties and their successors and assigns at Columbus,
36
<PAGE> 43
Ohio except to the extent that such exclusive jurisdiction would be
inconsistent with the Bank's exercise of its rights under Section 11.12 hereof.
The parties hereto consent to and submit to the exercise of jurisdiction over
their person by any court situated at Columbus, Ohio, including without
limitation the United States District Court for the Southern District of Ohio
and having jurisdiction over the subject matter hereof and each not otherwise
subject to jurisdiction and service in Columbus, Ohio, hereby irrevocably
appoints and designates Thomas D. Igoe (or any other person in Columbus, Ohio
whom the Bank or its successor or assign, after giving the parties hereto five
days written notice thereof, may appoint), as its true and lawful attorney in
fact and duly authorized agent for service of legal process and agree that
service of such process upon such attorney in fact shall constitute personal
service of such process upon such party. Such attorney in fact, within five
days after receipt of any such process, shall forward the same, by personal or
messenger delivery or by registered or certified mail, together with all papers
affixed thereto, to such party at such party's address as set forth herein.
The parties hereto have caused this Agreement to be duly executed by
their respective duly authorized officers as of the date first above written.
BANK ONE, COLUMBUS, NA
By: Thomas D. Igoe
-----------------------------------------
Thomas D. Igoe
Senior Vice President
DRUG EMPORIUM, INC.
By: David L. Kriegel
-----------------------------------------
David L. Kriegel, Chief Executive Officer
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND
COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN
AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT
CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE
AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS,
FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR
ANY OTHER CAUSE.
37
<PAGE> 44
EXHIBIT 1.1.3
[BANKONE LOGO]
APPLICATION AND AGREEMENT
FOR COMMERCIAL LETTER OF CREDIT
_______________________________________________________________________________
TO:
Gentlemen: Date __________________
Please issue an Irrevocable Letter of Credit in accordance with this
application and forward same to your correspondent for delivery to the
beneficiary as indicated below (by check "X"). In issuing the Credit you are
expressly authorized to make such changes from the terms herein below set forth
as you in your sole discretion may deem advisable provided that no such changes
shall vary the principal terms hereof.
Transmit by / / Airmail / / Airmail, with Short Preliminary Cable Advice
/ / Cable, with Airmail Confirmation
_______________________________________________________________________________
This part for bank use only unless Applicant
you designate advising bank
_______________________________________________________________________________
Beneficiary Maximum Amounts
In words
In figures
_______________________________________________________________________________
Expiration date
In the country of the beneficiary
unless otherwise indicated
_______________________________________________________________________________
Available by drafts at ________________________________________________________
(Indicate Tenor -- Sight, 30, 60, 90 Days, Etc.)
drawn on you or at your option, any of your correspondents.
Discount charges, if any, for the account of the / /applicant / /beneficiary.
DRAFTS MUST BE ACCOMPANIED BY THE FOLLOWING DOCUMENTS (AS CHECKED):
/ / Signed commercial invoice in ___________ copies
/ / Special U.S. Customs invoice in __________ copies
/ / Negotiable Marine/Air Insurance Policy or Certificate in duplicate for 110%
of invoice value (unless otherwise specified) covering all risks, and war
risks and
/ / Other risks (please Specify) __________________________________________ or
/ / Insurance effected by ourselves. We agree to keep insurance coverage in
force until this transaction is completed.
/ / Full set of clean on board ocean bills of lading issued
to order of ______________________________________________________________
/ / Clean air waybill, consigned to: _________________________________________
(Name)
______________________________________________________________________________
(Address)
marked freight collect/prepaid and marked notify _____________________________
(Name)
______________________________________________________________________________
(Address)
Bills of lading to be dated no later than ________________________
/ / Packing list in ____________ copies.
/ / Other documents, if any: _________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Covering shipment of: ________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
(Please mention commodity only, omitting details
as to grade, quality, etc. if possible)
/ / C.I.F. / / C & F / / C & I
/ / F.O.B. ___________________________________________________________________
(Name of city, port, or airport)
______________________________________________________________________________
Shipments from: Partial shipments / /Are / /Are not
To: permitted
Transhipments / /Are / /Are not
permitted
/ / All banking charges outside the United States for beneficiary's account.
Unless otherwise instructed, documents will be forwarded to you in one airmail
by the negotiating bank.
_______________________________________________________________________________
SPECIAL INSTRUCTIONS
_______________________________________________________________________________
Catalog No. 00860 Rev. (7/94)
38-A
<PAGE> 45
TERMS AND CONDITIONS OF ACCEPTANCE AND AGREEMENT
FOR COMMERCIAL LETTER OF CREDIT
In consideration of your issuing, at our request, your Commercial Letter
of Credit (herein called "the Credit") substantially in accordance with the
Application appearing on the first page hereof, the undersigned agree as
follows:
1. We certify that each draft or acceptance under or purporting to be
under the Credit will grow out of transactions pursuant to defininte bona fide
contracts for the shipment of goods within a specified reasonable time.
2. As to drafts or acceptances under or purporting to be under the
Credit, which are payable in United States Currency, we agree (a) in the case of
each sight draft, to reimburse you at your issuing office, on demand, in United
States legal tender, the amount paid on such draft, or, if so demanded by you,
to pay to you at said office, in advance in such legal tender the amount
required to pay such draft; and (b) in the case of each acceptance, to pay to
you, at said office, in United States legal tender, the amount thereof, on
demand but in any event not later than one business day prior to maturity, or,
in case the acceptance is not payable at your said office, then on demand, but
in any event in time to reach the place of payment in the usual course of the
mails not later than one business day prior to maturity.
3. As to drafts or acceptances under or purporting to be under the Credit,
which are payable in currency other than United States currency, we agree (a)
in the case of each sight draft, to reimburse you, at your issuing office, on
demand, the equivalent of the amount paid, in United States legal tender at the
rate of exchange then current for cable transfers to the place of payment in
the currency in which such draft is drawn, and (b) in the case of each
acceptance, to furnish you, at said office, on demand, but in any event in
time to reach the place of payment in the usual course of the mails not later
than one business day prior to maturity, with first class banker's demand bills
of exchange to be approved by you for the amount of the acceptance, payable in
the currency of the acceptance and bearing our endorsement, or, if you so
request, to pay to you at said office, on demand, the equivalent of the
acceptance in United States legal tender at the rate of exchange then current
for cable transfers to the place of payment in the currency in which the
acceptance is payable. A demand made on one of us shall fix the exchange rate
as to all of us. If for any reason whatsoever there shall be at the time of
your demand for reimbursement or payment no rate of exchange current for
effective cable transfers to the place of payment in the currency in which any
such draft is drawn or any such acceptance is payable, we agree to pay you, on
demand, in United States legal tender an amount which in your sole judgement
shall be sufficient to meet our obligations hereunder, which amount may be
applied by you at any time as a payment on account of such obligations, or, at
your option, held as security therefor; it being understood however, that we
shall remain liable for any deficiency which may result if such amount in
United States legal tender shall prove insufficient to effect full payment or
reimbursement to you at the time when a rate of exchange for such cable
transfers shall be again current.
4. We also agree to pay to you, on demand, your commission and all
charges and expenses (including all charges for legal services) paid or
incurred by you in connection with the Credit, plus correspondents' charges,
if any, and interest where chargeable.
5. That, if the foregoing application requests the inclusion in the
Credit of any provision for Clean Advances to the beneficiary, you may place in
the Credit such a provision in that respect as you may deem appropriate, under
which any bank entitled to negotiate drafts under the Credit, acting in its
discretion in each instance and upon the request and receipt in writing from
the beneficiary, may make any one or more Clean Advances at any time on or
prior to the date by which the drafts are to be negotiated under the Credit.
The aggregate of such advances shall in no event to more than the amount
specified in the Application for Clean Advances, and in no event shall any such
advance exceed the amount remaining available under the Credit at the time of
the advance. While it is expected by us that each such advance will be repaid
to the bank that made the advance by the beneficiary from the proceeds of any
drafts drawn under the Credit, should any such advances not be thus repaid, we
will on demand pay you the amounts thereof as if such advances were evidenced
by drafts drawn under the Credit, together with interest on each such amount
for the period that the same shall have been outstanding at such rate as you
may find at the time of demand to be payable. It is understood that neither you
nor any bank which may make such advances shall be obligated to inquire into
the use that may be made thereof by the beneficiary and that you and each such
bank shall be without liability for any wrongful use that may be made by the
beneficiary of any such funds so advanced.
6. We hereby recognize and admit your unqualified right to the possession
and disposal of all property shipped or warehoused under or pursuant to or in
connection with the Credit or in any way relative thereto or to the drafts drawn
thereunder, whether or not released to any of us on trust or bailee receipt or
otherwise, and also in and to all shipping documents, warehouse receipts,
policies or certificates of insurance and other documents accompanying or
relative to drafts drawn under the Credit, and in and to the proceeds of each
and all of the foregoing, until such time as all the obligations and
liabilities of us or any of us to you at any time existing under or with
reference to the Credit or this agreement, or any other credit or any other
obligation or liability to you, whether now existing or hereafter created or
arising, have been fully paid and discharged, all as security for such
obligations and liabilities; and that all or any of such property and
documents, and the proceeds of any thereof, coming into the possession of you
or any of your correspondents, may be held and disposed of by you as herein
provided; and the receipt by you, or any of your correspondents, at any time of
other security, of whatever nature, including cash, shall not be deemed a
waiver of any of your rights or powers herein recognized.
7. Unless otherwise instructed by you, we agree from time to time to give
you trust receipts in any form acceptable to you for any property or documents
released by you to any of us and to sign and deliver to you such Statements of
Trust Receipt Financing, such Security Agreements and/or such Financing
Statements as you may from time to time request in any form acceptable to you.
We will pay any relative filing fees. In the event you receive some, but not
all, of the documents against which availments may be made and, at our request,
you deliver such documents to us, against trust receipt or otherwise, prior to
the presentation of the relative draft, we agree to pay you on demand the
amount of any claim made against you by reason thereof and authorize you to pay
or accept (as the case may be) such draft when it is presented, regardless of
whether or not such draft or any document which may accompany it complies with
the terms of the Credit.
8. Except so far as otherwise expressly stated in the Credit, we agree
(a) that you and any of your correspondents may receive and accpet, as a "Bill
of Lading" relative to the Credit, any document issued or purporting to be
issued by or on behalf of any carrier which acknowledges receipt of property
for transportation, whatever the specific provisions of such document, and any
such bill of lading issued by or on behalf of an ocean carrier may be accepted
by you as an "Ocean Bill of Lading" whether or not the entire transportation
is by water, and the date of every bill of lading shall be deemed the date of
shipment of the poperty mentioned therein; and (b) that you and any of your
correspondents may receive and accept as sufficient and controlling the
description of the property contained in the invoice and also receive and accept
bills of lading, insurance and other documents, however variant in description
from that contained in the invoice; and (c) that you and any of your
correspondents may receive and accept bills of lading containing stamped,
written, or typewritten provisions thereon, whether or not signed or initialed,
and you or any of your correspondents may assume conslusively that the same
were placed with proper authority on the bill of lading at the time of its
signing and issuance by the carrier or any agent thereof; and (d) that, if the
Credit states that except so far as otherwise expressly stated it is subject to
the Uniform Customs and Practice for Documentary Credits (1983 Revision), and
any subsequent revision thereof, fixed by the International Chamber of Commerce
(Publication No. 400) (herein called the "Uniform Customs"), the Credit shall
be so subject in all respects; and (e) that, if the Credit does not state that
except so far as otherwise expressly stated it is subject to the Uniform
Customs, you and any of your correspondents may, without limiting the type of
document acceptable according to any other provisions of this agreement, accept
documents of any character which comply with the Uniform Customs or which
comply with the laws or regulations in force and customs and usages of the
place of negotiation; and (f) that you and any of your correspondents may
receive and accept as documents of insurance under the Credit either insurance
policies or insurance certificates which need to be for an amount of insurance
greater than the amount paid by you under or relative to the Credit; and (g)
that you and any of your correspondents may receive, accept and pay as
complying with the terms of the Credit, any drafts or other documents,
otherwise in order, which may be signed by, or issued to, the administrator or
executor of, or the trustee in bankruptcy of, or the receiver for any of the
property of, the party in whose name the Credit provides that any drafts or
other documents should be drawn or issued.
38-B
<PAGE> 46
9. Except as otherwise expressly stated in the Credit, we agree (a) that
part shipments may be made under the Credit and that you may honor the relative
drafts without inquiry regardless of any apparent disproportion between the
quantity shipped and the amount of the relative draft and the total amount of
the Credit and the total quantity to be shipped under the Credit; and (b) that
if the Credit specifies shipments in installments within stated periods and the
shipper fails to ship in any designated period, shipments of subsequent
installments may nevertheless be made in their respective designated periods
and you may honor the relative drafts.
10. We agree that in the event of any extension of the maturity or time for
presentation of drafts, acceptances or documents, or any other modification of
the terms of the Credit, at the request of any of us, with or without
notification to the others, or in the event of any increase in the amount of
the Credit at our request, this agreement shall be binding upon us with regard
to the Credit so increased or otherwise modified, to drafts, documents and
property covered thereby, and to any action taken by you or any of your
correspondents in accordance with such extension, increase or other
modification.
11. We hereby expressly authorize you and any of your correspondents to
accept and pay at your option any drafts drawn under or purporting to be drawn
under the Credit notwithstanding any discrepancies or irregularities between
the drafts and documents presented and those required by the terms of the
Credit; provided that as to discrepancies and irregularities not otherwise
covered by the provisions of this agreement, you or your correspondent so
accepting or paying must be furnished with an indemnity satisfactory to you
which, running in our favor as well as yours covers the discrepancies or
irregularities but is limited to the actual damage directly attributable to
such discrepancies or irregularities.
12. We assume all risks of the acts or omissions of the users of the
Credit. We agree that should the beneficiary under the Credit, upon receipt of
advice by cable, or otherwise, of the issuance of the Credit, but prior to its
actual receipt, negotiate drafts by virtue of such advice, such negotiation
shall be considered a proper one and shall be included under the terms and
subject to all conditions hereof, and we assume all the risks of the misuse of
the Credit whatsoever. Neither you nor your correspondents shall be
responsible: for the existence, character, description, quality, quantity,
weight, condition, packing, value, or delivery of the property purporting to be
represented by documents; for any difference in character, description,
quality, quantity, weight, condition, packing or value of the property from
that expressed in documents; for the form, validity, sufficiency, genuineness
or legal effect of documents, even if such documents should in fact prove to be
in any or all respects invalid, insufficient, fraudulent or forged; for the
time, place, manner or order in which shipment is made; for partial or
incomplete shipment, or failure or omission to ship any or all of the property
referred to in the Credit; for the character, adequacy, validity, or
genuineness of any insurance; for the solvency or responsibility of any
insurer, or for any other risk connected with insurance; for any deviation from
instructions, delay, default or fraud by the shipper or anyone else in
connection with the property or the shipping thereof; for the solvency,
responsibility or relationship to the property of any party issuing any
documents in connection with the property; for delay in arrival or failure to
arrive of either the property or any of the documents relating thereto; for
delay in giving or failure to give notice of arrival or any other notice; for
any breach of contract between the shippers or vendors and ourselves or any of
us; for the validity or sufficiency of any instrument assigning or purporting
to assign the Credit or the rights or benefits thereunder or proceeds thereof
in whole or in part, which may prove to be invalid or ineffective for any
reason; for failure of any draft to bear any reference or adequate reference to
the Credit, or failure of documents to accompany any draft at negotiation, or
failure of documents to accompany any draft at payment if sent by duplicate
mail, or failure of any person to note the amount of any draft on the reverse
of the Credit or to surrender to take up the Credit or to send forward
documents apart from drafts as required by the terms of the Credit, each of
which provisions, if contained in the Credit itself, it is agreed may be waived
by you, or for errors, omissions, interruptions or delays in transmission or
delivery of any messages, by mail, cable, telegraph, wireless or otherwise,
whether or not they be in cipher; nor shall you be responsible for any error,
neglect, or default of any of your correspondents for errors in translation or
for errors in interpretation of technical terms or for any consequences arising
from causes beyond your control; and none of the above shall affect, impair, or
prevent the vesting of any of your rights or powers hereunder. You shall have
the right to transmit the terms of the Credit without translating them. We
shall protect you and any other drawee in paying any draft dated on or before
the expiration of any time limit expressed in the Credit regardless of when
drawn and when or whether negotiated. If the Credit provides that payment is to
be made by your correspondent, neither you nor such correspondent shall be
responsible for the failure of any of the documents specified in the Credit to
come into your hands or for any delay in connection therewith, and our
obligation to reimburse you for payments made or obligations incurred shall not
be affected by such failure or delay in the receipt by you of any of such
documents. In furtherance and extension and not in limitation of the specific
provisions hereinbefore set forth, we agree that any action taken by you or any
correspondent of yours, under or in connection with the Credit or the relative
drafts, documents or property, if taken in good faith, shall be binding on us,
and shall not put you or your correspondent under any resulting liability to
us; and we make like agreement as to any inaction or omission, unless in
breach of good faith.
You shall not in any way be liable for any failure by you or anyone else
to pay or accept any draft or acceptance under the Credit resulting from any
censorship, law, control or restriction rightfully or wrongfully exercised by
any de facto or de jure domestic or foreign government or agency or from any
other cause beyond your control or the control of your correspondents, agents
or sub-agents or for any loss or damage to us or anyone else resulting from any
such failure to pay or accept, all such risks being expressly assumed by us,
and we agree to indemnify and hold you harmless from any claim, loss, liability
or expense arising by reason of any such failure to pay or accept. We are
responsible to you for all obligations imposed upon you with respect to the
Credit or the relative drafts, documents or property.
13. We agree to procure promptly any necessary import and export or other
licenses for the import or export or shipping of the property and to comply
with all foreign and domestic governmental regulations in regard to the
shipment of the property or the financing thereof, and to furnish such
certificates in that respect as you may at any time require, and to keep the
property adequately covered by insurance satisfactory to you, in companies
satisfactory to you, and to assign the policies or certificates of insurance to
you, or to make the loss or adjustment, if any, payable to you, at your option;
and to furnish you if demanded with evidence of acceptance by the insurers of
such assignment.
14. Each of us agrees, at any time and from time to time, on demand, to
deliver to you, as a security for any and all of the liabilities of us and any
of us hereunder and all other liabilities of us and any of us to you, direct or
contingent, joint, several or independent, now or hereafter existing, due or to
become due, whether created directly or acquired by assignment or otherwise,
additional property satisfactory to you or to make such payment as you may
require. Each of us agrees that the balance of every account of us or any of us
with you and each claim of us or any of us against you existing from time to
time, shall be subject to a lein and subject to be set off against any and all
such liabilities of us or any of us; and you may at any time or from time to
time at your option and without notice appropriate and apply toward the payment
of any of such liabilities of us or any of us the balance of each such account
of us or any of us with you and each such claim of us or any of us against you,
and we and each of us will continue liabile for any deficiency. Each of us
agrees that all property of every description, now or hereafter in your
possession or custody or in transit to you for any purpose including
safekeeping, collection or pledge, for the account of us or any of us, or as to
which we or any of us may have any interest, right or power, whether or not
such property is in whole or in part released to us or any of us on trust or
bailee receipt, are hereby made security and subject to a lein and security
interest in your favor for any and all such liabilities of us or any of us. You
may at any time and from time to time, without notice, transfer into your own
name or that of your nominee any property so held as collateral. Each of us
agrees that upon the failure of us or any of us at all times to keep a margin
of security with you satisfactory to you, or upon the nonpayment or
nonfullfillment of any such liabilities of us or any of us when they shall
become due or be made due, or upon the death or insolvency of us or any of us,
or upon the suspension of business of us or any of us, or upon the issuance of
any warrant of attachment against the credits or any of the property of us or
any of us, or upon the making by us or any of us of an assignment for the
benefit of creditors, or upon the application for the appointment or the
appointment of a trustee or receiver for us or any of us or for any of the
property of us or any of us, or upon the taking possession by any public
official having regulatory powers over any of us of the property of any of us
for the purpose of conserving the assets of any of us, or upon any proceedings
being commenced by or against us or any of us under or purporting to be under
any bankruptcy, reorganization, arrangement, readjustment of debt,
receivership, liquidation, dissolution, winding up, adjustment, compensation or
liquidation law or statute of any jurisdiction, then and in any such event, (a)
any and all such liabilities of us or any of us shall, at your option, become
and be
38-C
<PAGE> 47
immediately due and payable, without notice, presentation, demand of payment
or protest, all such being hereby expressly waived, and notwithstanding any
credit or time allowed to any of us, or any instrument evidencing such
liabilities or otherwise, and (b) you shall have the right from time to time to
sell, resell, assign, and deliver all or any part of the property securing any
liabilities of us or any of us, arrived or to arrive, at any Broker's Board of
Exchange, or at public or private sale, at your option, without having the
property at the place of sale, in such parcel or parcels and at such time or
times and at such place or places, and upon such terms and conditions as you
may deem proper, and in connection therewith may grant options, all without
demand, advertisement or notice to us or any of us, all of which are hereby
expressly waived, and to apply the net proceeds of such sale or sales to the
payment of any and all such liabilities and we and each of us will continue
liable to you for any deficiency, with interest. Upon each such sale, you may
purchase the whole or any part of the property of us or any of us being sold,
free from any right of redemption, which we and each of us hereby expressly
waive and release. Demands or calls for collateral on or any notices to us or
any of us respectively (a) may be made or given by you by leaving same at the
last known address of us or any of us respectively or by mailing, telegraphing,
cabling, radioing, telephoning or otherwise sending same to such address, with
the same effect as if delivered to all of us in person, (b) shall be considered
made as of the time of such leaving or mailing, telegraphing, cabling,
radioing, telephoning or other sending by public agencies of communication.
Each of us agrees that with or without notification to any of us, you may
exchange, release, surrender, realize upon, release on trust receipt to any of
us, or otherwise deal with any property by whomsoever pledged, mortgaged, or
subjected to a security interest to secure directly or indirectly any of the
obligations hereunder or for which any of the undersigned may be liable.
We will bear and pay all expenses of every kind (including all charges for
legal services) of the enforcement of any of your rights herein mentioned, of
any claim or demand by you against us or any of us, and of any actual or
attempted sale, exchange, enforcement, collection, maintenance, retention,
insurance, compromise, settlement, release, delivery on trust receipt, or
delivery of any such security, and of the receipt of proceeds thereof, and will
repay to you any such expenses incurred by you.
15. None of your options, powers or rights (including those hereunder)
shall be waived unless you or your authorized agent shall have signed such
waiver in writing. No such waiver, unless expressly as stated therein, shall be
effective as to any transaction which occurs subsequent to the date of such
waiver, nor as to any continuance of a breach after such waiver. No segregation
or specific allocation by you of specified collateral against any liability
shall waive or affect any lein of any sort against other securities or property
or any of your options, powers or rights (including those hereunder).
16. The word "property" as used in this agreement includes goods,
merchandise, securities, funds, choses in action, and any and all other forms
of property, whether real, personal or mixed and any right or interest therein.
Property in your possession shall include property in possession of anyone for
you in any manner whatsoever. Your options, powers and rights specified in this
agreement are in addition to those otherwise created. You are hereby expressly
given the right and power in furtherance of any right, power or privilege which
you may have hereunder or in connection with the Credit to execute
endorsements, assignments or other instruments of conveyance or transfer in our
name, place and stead covering any property standing in our name or belonging
to us of every kind and description which you may hold or which may come into
your possession under the Credit or by reason of this agreement.
17. If the undersigned is a banking institution, the undersigned hereby
appoints you as its agent to the extent of issuing the Credit in accordance
with, and subject to the terms and provisions of, the foregoing Application and
Agreement for Commercial Letter of Credit.
18. If the undersigned is a partnership, the obligations hereof shall
continue in force, and apply, notwithstanding any change in the membership of
such partnership, whether arising from the death or retirement of one or more
partners or the addition of one or more new partners.
19. This agreement shall be binding upon us, our heirs, executors,
administrators, successors and assigns, and shall inure to the benefit of, and
to be enforceable by, you, your heirs, executors, administrators, successors,
transferees and assigns. If this agreement should be terminated or revoked by
operation of law as to us, or any of us, we will indemnify and save you
harmless from any loss which may be suffered or incurred by you in acting
hereunder prior to the receipt by you, or your transferees or assigns, of
notice in writing of such termination or revocation. If this agreement is
signed by two or more parties, it shall be the joint and several agreement of
such parties and whenever used herein, the singular number shall include the
plural, and the plural the singular. The agreement shall be governed by and
construed in accordance with the law of the state in which the Bank One
affiliate specified in this application and agreement has its principal office.
20. In the event that we fail to pay you on demand any amounts due you
arising under the terms of this Application we will pay you in the following
manner:
________(a) In addition to the aforesaid amounts, interest on the
amounts due you at the rate equivalent to your "Prime Lending Rate" in
effect from time to time, plus ________% per annum calculated on a
________ day year basis, calculated on the actual number of days
elapsed during the lending period. "Prime Lending Rate" means the rate
announced from time to time by Bank One as its Prime Lending Rate
which rate may not be the lowest rate of interest offered by Bank One.
The rate of interest will be adjusted on the same day as Bank One's
Prime Lending Rate changes. All amounts due hereunder including
interest and principal shall be payable upon demand by you.
________(b) We request that you activate the Promissory Note in your
possession payable to you which we have heretofore executed.
Any deferred payments to be made under (a) or (b) above shall be:
________ unsecured (subject however, to the rights granted you in this
Application). ________ secured by the following described property and
the proceeds thereof (which property is in addition to that otherwise
described in this Application): _____________________________________
_____________________________________________________________________
_____________________________________________________________________
which property has been deposited with you, or to which a security
interest is hereby given to you. You shall have all the rights and
remedies in connection with said property as set forth in this
Application in addition to those arising under the Uniform Commercial
Code.
21. WE HEREBY CERTIFY THAT TRANSACTIONS IN THE MERCHANDISE COVERED BY THIS
APPLICATION ARE NOT PROHIBITED UNDER THE FOREIGN ASSETS CONTROL REGULATIONS OF
THE UNITED STATES TREASURY DEPARTMENT AND THAT ANY IMPORTATION COVERED BY THIS
APPLICATION CONFORMS IN EVERY RESPECT WITH ALL EXISTING UNITED STATES
GOVERNMENT REGULATIONS AND EXECUTIVE ORDERS.
Very Truly Yours,
______________________________________ ________________________________ (SEAL)
(Corporation or Firm) (Individual)
38-D
<PAGE> 48
EXHIBIT 1.5
SECOND AMENDED AND RESTATED
REVOLVING CREDIT NOTE
$45,000,000 Powell, Ohio
_____________, 1995
On or before April 30, 1998, for value received, the undersigned, DRUG
EMPORIUM, INC., a Delaware corporation (the "Company"), hereby promises to pay
to the order of BANK ONE, COLUMBUS, NA (the "Lender") or its assigns, as further
provided herein, the principal amount of Forty Five Million Dollars
($45,000,000) or, if such principal is less, the aggregate unpaid principal
amount of all Loans made by the Lender to the Company pursuant to the Agreement
referred to in Section 1 hereof, together with interest on the unpaid principal
balance from time to time outstanding hereunder until paid in full at the rates
determined and payable at the times in accordance with the provisions of Section
1.5 of the Agreement. Both principal and interest are payable in federal funds
or other immediately available money of the United States of America at the Main
Office of the Lender, Bank One, Columbus, NA, 100 East Broad Street, Columbus,
Ohio.
Section 1. Agreement. This Note is the Note referred to in the Second
Amended and Restated Revolving Credit Agreement dated as of the date hereof,
between the Company and the Lender, as the same may be amended, modified or
supplemented from time to time (the "Agreement"), which Agreement, as amended,
is incorporated by reference herein. All capitalized terms used herein shall
have the same meanings as are assigned to such terms in the Agreement. This Note
is entitled to the benefits of and is subject to the terms, conditions and
provisions of the Agreement. The Agreement, among other things, contains
provisions for acceleration of the maturity hereof upon the happening of certain
stated events, and also for repayments and reborrowings on account of the
principal hereof prior to maturity upon the terms, conditions and provisions
specified therein. The obligations of the Company hereunder are secured as set
forth in the Agreement.
Section 2. Endorsements. All Loans made by the Lender to the Company
pursuant to the Agreement and all payments made on account of principal hereof
shall be recorded by the Lender and, prior to any transfer hereof, endorsed on
the schedule attached hereto which is a part of this Note; provided, however,
that the failure of the Lender or any holder to make such notation shall not
limit or otherwise affect the obligations of the Company hereunder or under the
Agreement.
Section 3. Setoffs. Upon the occurrence of any Event of Default, the
holder hereof shall have the right to setoff against all obligations of the
Company hereunder or under any of the Loan Documents, whether matured or
unmatured, all amounts owing to the Company or any Wholly Owned Subsidiary by
the holder hereof or any Affiliate of the holder hereof, whether or not then due
and payable, and all other funds or property of the Company or any Wholly Owned
Subsidiary on deposit with or otherwise held by or in the custody of the holder
hereof or any
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<PAGE> 49
Affiliate of the holder hereof for the beneficial account of the Company or any
Wholly Owned Subsidiary.
Section 4. Confession of Judgment. The Company hereby authorizes any
attorney at law to appear for the Company in an action on this Note, at any time
after the same becomes due, as herein provided, in any court of record in or of
the State of Ohio, or elsewhere, to waive the issuing and service of process
against the Company and to confess judgment in favor of the legal holder of this
Note against the Company for the amount that may be due, with interest at the
rate herein mentioned and cost of suit, and to waive and release all errors in
said proceedings and judgment, and all petitions in error, and right of appeal
from the judgment rendered.
DRUG EMPORIUM, INC.
By:
-----------------------------------------
David L. Kriegel, Chief Executive Officer
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO
NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A
COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED
TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY
HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS,
FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE
AGREEMENT, OR ANY OTHER CAUSE.
40
<PAGE> 50
SCHEDULE TO REVOLVING CREDIT NOTE
<TABLE>
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DATE AMOUNT OF AMOUNT OF UNPAID NOTATION MADE
LOAN PRINCIPAL PRINCIPAL BY
PAYMENTS BALANCE
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<S> <C> <C> <C> <C>
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</TABLE>
41
<PAGE> 51
EXHIBIT 4.1(b)
SECOND AMENDED AND RESTATED
SECURITY AGREEMENT
THIS SECOND AMENDED AND RESTATED SECURITY AGREEMENT dated as of the ___
day of ______________, 1995 (collectively with the exhibits attached hereto, the
"Agreement") is between DRUG EMPORIUM, INC., a Delaware corporation (the
"Company"), and BANK ONE, COLUMBUS, NA (the "Bank") under that certain Second
Amended and Restated Revolving Credit Agreement dated of even date herewith
between the Company and the Bank (the "Loan Agreement") and amends and restates
in its entirety that certain First Amended and Restated Security Agreement dated
as of January 4, 1994 between the Company and the Bank. The parties agree as
follows:
Section 1. Definitions.
1.1. Additional Definitions. In addition to the terms defined
elsewhere in this Agreement or the Loan Agreement, the following terms have the
following meanings:
"Account" means and includes all accounts (whether or not earned by
performance), contract rights, chattel paper, instruments, documents, general
intangibles (including, without limitation, general customer and prescription
customer lists, tax refunds, tax refund claims, patents, trademarks, trade
names, good will, blue prints and drawings relating thereto) and all other forms
of obligations owing to the Company, whether secured or unsecured, whether now
existing or hereafter created, and whether or not specifically assigned to the
Bank under this Agreement, all guarantees and other security therefor, all
merchandise returned to or repossessed by the Company, and all rights of
stoppage in transit and all other rights and remedies of an unpaid vendor,
lienor or secured party.
"Collateral" means and includes all Accounts, Inventory, all property now
or at any time hereafter in the Bank's possession (including claims and credit
balances), and all other property in which the Company at any time grants a Lien
to the Bank pursuant to the Loan Documents or otherwise, whether now existing or
hereafter acquired or arising, together with (a) all books, records, ledger
cards and other property pertaining to any of the foregoing, and any equipment
on which any such items are stored or maintained and (b) all products and
proceeds of any of the foregoing, and all insurance proceeds related to any of
the foregoing, including, without limitation, any claims against third parties
for loss or damage to or destruction of any or all of the foregoing and any
cash, negotiable instruments and other instruments of money, chattel paper,
security agreements or other documents. The term "Collateral" shall not include
furniture, fixtures or equipment but shall include computers, modems, printers,
software, and related equipment, media and data necessary to run software owned
or used by the Company to keep track of its Inventory or Accounts.
42
<PAGE> 52
"Collateral Location" means each of the locations listed on the
Collateral Locations Exhibit, attached hereto and made a part hereof, and such
other locations as may be established as such pursuant to this Agreement.
"Customer" means any Person who is obligated as an account debtor or
other obligor on, under, or in connection with, any Account.
"Default" means any Event of Default and any event, condition or
circumstance which, with the giving of notice or lapse of time, or both, may
become an Event of Default.
"Event of Default" means any of the events specified in Section 8 of the
Loan Agreement as an Event of Default, provided that any requirement for the
giving of notice or lapse of time has been satisfied in connection with such
event.
"GAAP" means generally accepted accounting principles applied on a basis
consistent with the accounting principles reflected in the financial statements
furnished to the Bank under, and which comply with the requirements of, the Loan
Agreement.
"Inventory" means all raw materials, work in process, finished goods and
materials and supplies of any kind, nature or description which are or might be
used or consumed in the business of the Company or used in connection with the
manufacturing, packing, shipping, advertising, selling or finishing of such
goods, merchandise and other personal property, and all goods, merchandise and
other personal property wherever located, to be furnished by the Company under
any contract or contract for service or held for sale or lease, whether now
owned or hereafter acquired, and all documents of title or other documents
representing the foregoing.
"Loan Documents" means this Agreement, the Loan Agreement and all other
instruments or agreements required or contemplated hereby or thereby.
"Obligations" means (a) the obligations of the Company or any Subsidiary
to the Bank under this Agreement or any of the Loan Documents, (b) the
obligations of the Company to the Bank under any other instrument or agreement
required or contemplated hereby or thereby, (c) all costs and expenses incurred
by the Bank in the collection or the enforcement of any such obligations of the
Company, or realization upon the Collateral, including without limitation
reasonable attorneys' fees and legal expenses, (d) all future advances made by
the Bank for the maintenance, protection or preservation of, the Collateral or
any portion thereof, including without limitation advances for storage,
insurance premiums, transportation charges, and the like and (e) all other
obligations of the Company to the Bank, howsoever created, arising, or
evidenced, whether direct or indirect, absolute or contingent, or now or
hereafter existing or due or to become due.
"Requirement of Law" means, for any Person, any term, condition, or
provision of any law, rule, judgment, regulation, order, writ, injunction or
decree of any court or government, domestic or foreign and any ruling of any
arbitrator to which such Person is a party or by which such Person or any of its
assets or property is bound or affected or from which such Person derives
benefits, and, if such Person is a corporation, its charter documents and
bylaws.
43
<PAGE> 53
"UCC" means Chapters 1301 through 1309 of the Ohio Revised Code as in
effect on the date of this Agreement and as the same may be supplemented or
amended from time to time hereafter.
1.2. Rules of Construction. All accounting terms used in this
Agreement not otherwise specifically defined in this Agreement shall be
construed in accordance with GAAP. Any capitalized term not defined herein but
defined in the Loan Agreement shall be construed in accordance with the
definition of such term as set forth in the Loan Agreement. Any other term not
specifically defined in this Agreement or the Loan Agreement shall be construed
in accordance with the meaning for such terms under the UCC. The meaning of any
defined term used in this Agreement shall apply equally to the singular, plural
and other forms of the term defined.
Section 2. Grant of Security Interest.
2.1. Lien. As security for the full and timely payment or
performance of the Obligations in accordance with the terms thereof, the Company
agrees that the Bank shall have, and there is hereby granted to and created in
favor of the Bank, a Lien under the UCC, and otherwise in accordance with
applicable law, in and to the Collateral. The Lien created hereunder shall be
prior in interest to any other Lien affecting the Collateral. The Lien created
hereunder shall be and remain in full force and effect until all of the
Obligations shall have been paid and discharged in full and otherwise satisfied
and the Company shall no longer have any right to request any Loans under the
Loan Agreement.
2.2. Collateral. As an inducement to enter into this Agreement
and the Loan Agreement, the Company is hereby granting to the Bank a security
interest in, among other assets, its Accounts and Inventory. The Company
understands that the Bank would not have entered into this Agreement or the Loan
Agreement if the Company was not granting a security interest to the Bank in
Accounts and Inventory and that the indubitable equivalent of any Lien in favor
of the Bank against Accounts and Inventory is not provided to the Bank by the
substitution therefor of a Lien against real estate or any other asset which is
not as quickly convertible into cash as Accounts or Inventory.
Section 3. Representations and Warranties. The Company hereby represents
and warrants to the Bank that:
3.1. Title to Collateral. The Company has good, indefeasible and
marketable title to all the Collateral free of all Liens other than those
granted hereby, except for Liens of landlords under state statutes or Liens
permitted under the Loan Agreement. No financing or continuation statement which
names the Company as debtor has been filed in any state or other jurisdiction
except as provided for herein or as set forth on Schedule 3.1 hereto, and the
Company has not agreed or consented to cause or to permit in the future (upon
the happening of a contingency or otherwise) any of the Collateral, whether now
owned or hereafter acquired, to be subject to a Lien.
44
<PAGE> 54
3.2. Perfection of Lien. The Company has taken or caused to be
taken all actions necessary to establish the Bank's Lien in the Collateral as a
valid, enforceable and perfected Lien, first and prior to all other Liens except
Liens permitted under the Loan Agreement.
3.3. Books and Records; Chief Executive Office. All books and
records of the Company concerning the Collateral are accurate, complete and
maintained in accordance with GAAP. The Collateral Locations Exhibit correctly
sets forth the address of (a) the chief executive office, registered office and
principal place of business of the Company, (b) any plant or division of the
Company maintaining a separate principal place of business, registered office or
chief executive office, (c) all other places of business of the Company and the
location of all Collateral and (d) the name and business address of each
landlord and mortgagee with any interest in any Collateral Location. The only
original books of account and records of the Company relating to any Accounts of
the Company are, and will continue to be, kept at the offices of the Company set
forth on the Collateral Locations Exhibit opposite the name of the division or
the plant of the Company where such Accounts originated. The only locations at
which Inventory is located are set forth on the Collateral Locations Exhibit
opposite the name of the division or the plant of the Company or other location
where such Inventory is located.
3.4. Accounts. The Accounts arose out of bona fide sales or
services, are collectible in the ordinary course of business and are not
disputed or subject to offset.
Section 4. Affirmative Covenants. On and after the date of this Agreement
and until all of the Obligations shall have been paid and discharged in full or
otherwise satisfied and the Company shall no longer have any right to request
any Loans under the Loan Agreement:
4.1. Insurance. The Company shall at all times: (a) maintain or
cause to be maintained insurance upon the Collateral with responsible and
reputable insurers of such character and in such amounts as are usually
maintained by Persons engaged in a like business; (b) furnish to the Bank, upon
request, a statement of its insurance coverage, in form and detail satisfactory
to the Bank; (c) require each policy of insurance to contain a provision whereby
it cannot be canceled, amended or modified except after 30 days' prior written
notice to the Bank; (d) require each policy of insurance covering any of the
Collateral to be written or endorsed so as to make losses, if any, payable to
the Bank, in addition to the Company; and (e) require each policy of insurance
covering any of the Collateral to contain an agreement by the insurer that any
loss shall be payable to the Bank notwithstanding any act or negligence of the
Company which might otherwise result in forfeiture of said insurance. If the
Company fails to pay or cause to be paid the premium on any such insurance, the
Bank may, in its sole discretion, do so for the account of the Company, add the
cost thereof to the Obligations and be reimbursed by the Company therefor on
demand.
4.2. Notice of Default. If any Default or Event of Default
occurs, the Company shall give prompt notice of such happening to the Bank.
4.3. Inspection. The Company shall permit any Person designated
by the Bank to enter, examine, audit and inspect the Collateral and all
properties, corporate books and financial records pertaining to the Collateral,
or the operation, business, affairs and financial condition of
45
<PAGE> 55
the Company at any reasonable time and from time to time, and shall permit such
Persons to copy and make excerpts of such books and records.
4.4. Sale of Inventory. Notwithstanding the security interest in
the Collateral granted hereunder, the Company shall have the right to sell,
lease or otherwise dispose of its Inventory in the ordinary course of its
business, free and clear of such security interest; but, in such event, such
security interest shall continue in the proceeds of such sale, lease or other
disposition.
4.5. Company's Rights to Collect Accounts. Notwithstanding the
security interest in the Accounts granted under this Agreement, the Company
shall endeavor to collect the Accounts at its own cost and expense, until such
time as the Bank shall have notified the Company, pursuant to Section 4.6, that
the Bank has revoked the Company's right to collect the Accounts.
4.6. Collection of Accounts by the Bank. If an Event of Default
shall have occurred, the Bank shall have the right at any time and without
affecting the liability of the Company to the Bank (a) to revoke any right of
the Company to collect its Accounts pursuant to Section 4.5 by written notice to
the Company to such effect, (b) to take over and direct collection of the
Accounts of the Company, (c) to give notice of the security interest of the Bank
in the Accounts to any or all of the Customers, (d) to give notice to the
Customers to make payment of the Accounts directly to the Bank (and, at the
request of the Bank, the Company shall indicate on all billings to Customers
that payments thereon are to be made to the Bank), and (e) to take control of
the Accounts of the Company and the Proceeds thereof, and to take possession of
all of the Company's books and records relating thereto, with full power and
authority in the name of the Bank or of the Company to enforce, collect, sue
for, receive, compromise, settle and give receipts for any and all of the
Accounts. If any Account becomes evidenced by a promissory note, trade
acceptance, chattel paper or other writing or instrument for the payment of
money, and there is at the time a Default, the Company shall, at the request of
the Bank, promptly deliver any such instrument to the Bank duly endorsed to the
order of the Bank as additional Collateral under this Agreement. It is
understood and agreed by the Company that the Bank shall have no liability
whatsoever to the Company under this Section 4.6.
4.7. Account Verification. The Bank may at any time, without
notice to the Company, verify with any Customer the status of any Account
payable by such Customer; provided, however, that, prior to the occurrence of an
Event of Default, no request for verification shall be made in the name of the
Bank, nor shall the Bank disclose the purpose of such request. The Company from
time to time will execute and deliver such instruments and take all such action
as the Bank may reasonably request in order to effectuate the purpose of this
Section 4.7.
4.8. Preservation and Protection of Security Interests. The
Company shall faithfully preserve and protect the Bank's security interest in
the Collateral and shall, at its own cost and expense, cause such security
interest to be perfected and continue perfected so long as the Obligations or
any portion thereof are outstanding and unpaid, and for such purpose the Company
shall from time to time at the request of the Bank file or record, or cause to
be filed or recorded,
46
<PAGE> 56
such instruments, documents and notices, including without limitation financing
and continuation statements, as the Bank may deem necessary or advisable from
time to time in order to preserve, perfect and continue perfected said security
interest. The Company shall do all such other acts and things and shall execute
and deliver all such other instruments and documents, including without
limitation further security agreements, pledges, endorsements, assignments and
notices, as the Bank may deem necessary or advisable from time to time in order
to perfect and preserve the priority of said security interest as a perfected
first Lien in the Collateral prior to the rights of any other secured party or
lien creditor. The Bank, and its officers, employees and authorized agents, or
any of them, are hereby irrevocably appointed the attorneys-in-fact of the
Company to do all acts and things which the Bank may deem necessary or advisable
to preserve, perfect and continue perfected the Bank's security interest in the
Collateral, including without limitation the signing of financing, continuation
or other similar statements and notices on behalf of the Company.
4.9. Maintenance of Collateral. The Company shall (a) from time
to time replace and repair all parts of the Collateral which are or become worn,
broken, damaged, or deteriorated, maintain the Collateral now or hereafter owned
or acquired by it, and every part thereof, in good working order and repair and
pay the costs of such repairs, replacements, and maintenance as well as any
costs of storing the same; and (b) pay and discharge all taxes, assessments,
fees, and other governmental charges or levies imposed upon it or any of the
Collateral as well as all lawful claims of materialmen, mechanics, carriers,
warehousemen, landlords and other similar Persons for labor, materials, supplies
and rentals which, if unpaid, might by law become a Lien on the Collateral or
any part thereof. If the Company fails to make any payments it is required to
make under this Section 4.9, the Bank may do so for the account of the Company
and may add the amount of such payments to the Obligations.
4.10. Inventory. The Company shall maintain the Inventory in good
condition, salable at the Company's normal prices in the ordinary course of its
business.
4.11. New Stores. Prior to the opening of any retail store not
presently operated by the Company or any Subsidiary, the Company shall give
written notice to the Bank and shall perform, and cause each of the Subsidiaries
to perform, such acts as may be necessary or advisable to grant to the Bank a
perfected Lien, subject to no other Liens other than Liens permitted under the
Loan Agreement, in the Collateral located or to be located in such new retail
store.
4.12. Annual Certificate. The Company shall furnish to the Bank
within 45 days after the close of each fiscal year, a certificate of the chief
financial officer or controller of the Company certifying that he has reviewed
the locations where the Inventory is located and that appropriate filings have
been made for the Company and each Subsidiary so that the Bank continues to have
a perfected Lien hereunder, subject to no other Lien other than Liens permitted
under the Loan Agreement.
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<PAGE> 57
Section 5. Negative Covenants. On and after the date of this Agreement
and until all of the Obligations shall have been paid and discharged in full or
otherwise satisfied and the Company shall no longer have the right to request
Loans under the Loan Agreement:
5.1. Liens. The Company shall not create, assume, incur or suffer
to exist or agree or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) to be created, assumed, incurred or to
exist any Lien upon any of the Collateral (other than Permitted Liens) except
with the prior written consent of the Bank to each such Lien.
5.2. Negative Pledge. Except as permitted by the Loan Agreement,
the Company shall not, without the prior written consent of the Bank, (a) sell,
assign, or transfer any of its right, title and interest in the Collateral,
except the Company may sell Inventory in the ordinary course of business
pursuant to Section 4.4, (b) permit any levy or attachment to be made against
any of the Collateral, or (c) file any financing statement with respect to any
of the Collateral, except financing statements in favor of the Bank.
5.3. Corporate Name. The Company shall not change its corporate
name unless, before the effective date of such change, the Company delivers to
the Bank such financing statements executed by the Company that the Bank may
request to reflect such name change, together with such other documents and
instruments that the Bank may request in connection with such name change. The
Company shall not hold its right, title or interest in, nor maintain its records
relating to, any Collateral in any name other than its corporate name.
5.4. Change of Locations. The Company shall not change any of the
Collateral Locations unless, before the effective date of such change, (a) the
Company shall have given to the Bank 10 days prior written notice of its
intention to so change any such Collateral Location, clearly describing each
such new Collateral Location and providing any other information in connection
therewith that the Bank may reasonably request and (b) with respect to each such
new Collateral Location, it shall have taken such action, satisfactory to the
Bank (including, without limitation, the execution and delivery to the Bank of
such financing statements executed by the Company that the Bank may request to
reflect such change in Collateral Location together with such other documents
and instruments that the Bank may request in connection with such change), as
may be necessary to maintain the security interest of the Bank in the Collateral
at all times fully perfected and in full force and effect.
Section 6. Application of Moneys.
6.1. Payments. Except as otherwise provided herein, all monies
which the Bank shall receive either upon realization of the Lien granted
hereunder or otherwise may be applied by or at the direction of the Bank as
follows:
6.1.1. First, to the payment or reimbursement of all
reasonable advances, expenses and disbursements of the Bank (including, without
limitation, the fees and disbursements of its counsel and agents) incurred in
connection with the administration and enforcement of, or the preservation of
any rights under, this Agreement or the Loan Documents or in the collection of
the Obligations.
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<PAGE> 58
6.1.2. Second, to the payment of the then existing
Obligations, matured and unmatured, in such order and in such manner as the Bank
may elect.
6.1.3. Third, after discharge and repayment of all of
the Obligations, any remaining funds shall be paid by the Bank to the Company.
6.2. Reserved Rights. The Bank shall have the continuing and
exclusive right to apply or reverse and re-apply any and all payments to any
portion of the Obligations. To the extent that the Company makes a payment or
payments to the Bank or the Bank receives any payment or proceeds of the
Collateral for the Company's benefit, which payment(s) or proceeds or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside or required to be repaid to a trustee, receiver or any other party
under any bankruptcy act, state or federal law, common law or equitable cause,
then, to the extent of such payment or proceeds received, the Obligations or the
part thereof intended to be satisfied shall be revived and continue in full
force and effect as if such payment or proceeds had not been received by the
Bank.
Section 7. Events of Default and Remedies.
7.1. Rights on Event of Default.
7.1.1. Upon the occurrence of any Event of Default,
the Bank shall have the right, upon notice to the Company, (except that upon
the occurrence of an Event of Default under Section 8(h) or 8(i) of the Loan
Agreement, no notice shall be required) to declare the Obligations immediately
due and payable and may, without demand of performance or other demand,
advertisement or notice of any kind to or upon the Company or any other Person
(all and each of which demands, advertisements and/or notices are hereby
expressly waived), forthwith exercise such rights and remedies as are provided
by the UCC and such other rights and remedies in respect thereof as it may have
at law or in equity or under any of the Loan Documents, including without
limitation the right to enter any premises where any of the Collateral is
located and take possession of the same without demand or notice and without
prior judicial hearing or legal proceedings, which the Company hereby expressly
waives, and to sell all or any portion of the Collateral at public or private
sale, without prior notice to the Company except as otherwise required by law
(and, if notice is required by law, after 10 days prior written notice), at
such place or places and at such time or times and in such manner and upon such
terms, whether for cash or on credit, as the Bank in its sole discretion may
determine. Upon any such sale of any of the Collateral, the Bank may purchase
all or any of the Collateral being sold, free from any equity or right of
redemption. The Bank shall apply the proceeds of any such sale as provided in
Section 6. If such proceeds are insufficient to pay the amounts required by
law, the Company shall be liable for any deficiency in the amount so realized
from the Collateral.
7.1.2. The Company shall promptly pay or reimburse all
costs and expenses of the Bank, including, but not limited to, attorneys' fees,
incurred with respect to the enforcement or preservation of any of the Bank's
rights hereunder.
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7.1.3. Except as otherwise provided in this Agreement,
the Company hereby waives presentment, demand, protest or any notice (to the
extent permitted by applicable law) of any kind in connection with this
Agreement or any Collateral.
7.1.4. The Bank shall not incur any liability as a
result of the sale of any Collateral, or any part thereof, at any private sale
conducted in a commercially reasonable manner, in compliance with any applicable
law. The Company hereby waives any claims against the Bank arising by reason of
the fact that the price at which any of the Collateral may have been sold at
such a private sale was less than the price which might have been obtained at a
public sale or was less than the aggregate amount of the Obligations, even if
the Bank accepts the first offer received and does not offer any Collateral to
more than one offeree, provided that the Bank has acted in a commercially
reasonable manner in conducting such private sale.
7.1.5. Upon any sale of all or any part of any
Collateral made either under the power of sale given hereunder or under judgment
or decree in any judicial proceedings for foreclosure or otherwise for the
enforcement of this Agreement, the Bank is hereby irrevocably appointed the true
and lawful attorney of the Company, in its name and stead, to make all necessary
deeds, bills of sale and instruments of assignment, and transfer or conveyance
of the property thus sold. For that purpose, the Bank may execute all such
documents and instruments. This power of attorney shall be deemed coupled with
an interest, and the Company hereby ratifies and confirms all that its said
attorney, or its substitute or substitutes, shall lawfully do by virtue of this
Agreement. If so requested by the Bank or by any purchaser of the Collateral or
a portion thereof, the Company shall further ratify and confirm any such sale or
transfer by executing and delivering to the Bank or to such purchaser or
purchasers at the Company's expense all reasonable and proper deeds, bills of
sale, instruments of assignment, conveyance or transfer and releases as may be
designated in any such request.
7.1.6. When authorized in accordance with this Section
7.1, the Bank may proceed to realize upon the security interest in the
Collateral against any one or more of the types of Collateral, at any one time
or from time to time, as the Bank shall determine in its sole discretion,
subject to the provisions of this Section 7.1. The Bank shall not be required to
realize upon any one type of Collateral before proceeding to realize upon the
security interest granted in any other type of Collateral. The proceeds of any
sale of, or other realization upon, or other receipt from, all or any Collateral
shall be applied by the Bank in the manner set forth in Section 6 hereof.
7.2. Remedies Cumulative; Delay or Omission Not a Waiver. To the
extent permitted by law and not otherwise provided to the contrary under this
Agreement, no remedy given hereunder to the Bank shall be exclusive of any other
remedy, and every such remedy shall be cumulative and in addition to every other
remedy given hereunder or now or hereafter given by statute, law, equity or
otherwise to the extent not contrary to or inconsistent with the terms of this
Agreement. The Bank may, in its absolute discretion, exercise all or any of the
powers, rights or remedies given to it hereunder or which may be now or
hereafter given by statute, law or equity or otherwise. No course of dealing
between the Company and the Bank or any delay or omission of the Bank to
exercise any right, remedy or power accruing upon any Default or Event of
Default shall impair any right, remedy or power or shall be construed to be a
waiver of any such Default
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or Event of Default or of any right of the Bank or acquiescence therein, and
every right, remedy and power given by this Agreement to the Bank may, to the
extent permitted by law, be exercised from time to time and as often as may be
deemed expedient by the Bank.
7.3. Assembling of Collateral. Upon the occurrence of any
Default, the Company, upon demand by the Bank, shall promptly assemble the
Collateral, or any part thereof designated by the Bank, and make it available to
the Bank at a place to be designated by the Bank which shall be reasonably
convenient to the Bank and the Company. The right of the Bank under this Section
7.3 to have the Collateral assembled and made available to it is of the essence
of this Agreement and the Bank may, at its election, enforce such right by an
action for specific performance.
7.4. No Requirement to Marshal Collateral. The Company, to the
extent that it has any right, title or interest in any of the Collateral, waives
and releases any right to require the Bank to collect any of the Obligations
from any portion of the Collateral under any theory of marshaling of assets, or
otherwise, and specifically authorizes the Bank to apply any of its Collateral
against any of the Obligations in any manner that the Bank may determine.
Section 8. Termination of Agreement. Upon the last to occur of (a)
satisfaction of all obligations of the Company under this Agreement, (b) payment
of all of the Obligations, (c) termination of the Commitment, (d) termination of
all outstanding Letters of Credit or (e) payment in full of the Note, this
Agreement and the estate and rights hereby granted by the Company in the
Collateral shall automatically cease, terminate and be void simultaneously
therewith. Any of the Collateral remaining at the time of such termination shall
be fully released and discharged from the Lien hereof and delivered to the
Company by the Bank, and this Agreement shall thereupon be released by the Bank,
all at the expense of the Company.
Section 9. Miscellaneous.
9.1. Expenses. All fees, costs or expenses, including reasonable
fees and expenses of outside legal counsel, incurred by the Bank in connection
with either the preparation, administration, amendment, modification or
enforcement of this Agreement or any other instruments, documents, or agreements
to be delivered pursuant thereto (including, without limitation, (a) all
expenses incurred in obtaining all necessary judicial and other approvals of the
transactions contemplated hereby, (b) all expenses incurred in conducting any
examinations or appraisals which the Bank, in its sole discretion, deems
necessary or appropriate, (c) all expenses incurred in assigning or otherwise
transferring control of post office boxes to the Bank or (d) out-of-pocket
collateral administration expenses) shall be paid by the Company on demand.
9.2. Term of Agreement; Successors and Assigns. This Agreement
and all covenants, agreements, representations and warranties made herein and in
the certificates delivered pursuant hereto shall survive the execution and
delivery hereof and shall continue in full force and effect until the
termination of this Agreement as set forth in Section 8. Whenever in this
Agreement either of the parties hereto is referred to, such reference shall be
deemed to include the permitted successors and assigns of such party; and all
terms and provisions of this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective permitted successors and
assigns. The Company may not assign its rights or obligations
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hereunder without the prior consent of the Bank. The Bank may assign all or any
of its rights or obligations hereunder without the prior consent of the Company.
9.3. Notices. Notices, demands and communications shall be deemed
to have been properly given to the Company only when faxed to (614) 548-6541 or
when made in writing and deposited in the United States mail, registered or
certified, postage prepaid, and addressed to the Company at 155 Hidden Ravines
Drive, Powell, Ohio 43065, Attention: Chief Executive Officer, whether or not
the same are actually received by the Company. Any communication to the Bank
shall be deemed properly given if faxed to (614) 248-5518 or similarly mailed
and addressed to the Bank at Commercial Loan Department, 100 East Broad Street,
Columbus, Ohio 43271-0121.
9.4. No Implied Waivers. No delay on the part of the Bank in
exercising any right, power or privilege granted hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or privilege preclude any other or further exercise thereof. The rights
and remedies herein expressly specified are cumulative and not exclusive of any
other rights and remedies which the Bank would otherwise have.
9.5. Amendments, Modifications, Etc. No amendment, modification,
termination, or waiver of any provision of this Agreement nor consent to any
departure by the Company therefrom, shall in any event be effective unless the
same shall be in writing and signed by the Bank, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given. No notice or demand on the Company in any case shall entitle
the Company to any other or further notice or demand in similar or other
circumstances.
9.6. Applicable Law. This Agreement shall be deemed to be a
contract made under the laws of the State of Ohio, and for all purposes shall be
construed in accordance with the laws of such state.
9.7. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.
9.8. Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures thereto were upon the
same instrument. Complete sets of counterparts shall be lodged with the Company
and the Bank.
9.9. Merger. This Agreement, the Note, the Loan Agreement and the
other Loan Documents reflect the entire understanding of the parties with
respect to their subject matter and supersede all prior agreements or
understandings with respect thereto in their entirety.
9.10. Headings. Headings of the sections of this Agreement are
for convenience only and shall not affect the construction of this Agreement.
9.11. Effective Date. This Agreement shall become effective upon
the execution of a counterpart hereof by each of the parties.
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9.12. Confession of Judgment. The Company hereby authorizes any
attorney at law to appear for the Company, in an action on this Agreement, at
any time after any obligation hereunder becomes due, as herein provided, in any
court of record in or of the State of Ohio, or elsewhere, to waive the issuing
and service of process against the Company and to confess judgment in favor of
the Bank or the party entitled to the benefits of this Agreement against the
Company for the amount that may be due, with interest at the default rate
provided for in the Loan Documents and costs of suit, and to waive and release
all errors in said proceedings and judgment, and all petitions in error, and
right of appeal from the judgment rendered.
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The parties hereto have caused this Agreement to be duly executed by their
respective duly authorized officers as of the day and year first above written.
BANK ONE, COLUMBUS, NA
By
-----------------------------------
Thomas D. Igoe
Senior Vice President
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO
NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A
COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED
TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY
HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS,
FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THIS
AGREEMENT, OR ANY OTHER CAUSE.
DRUG EMPORIUM, INC.
By
-----------------------------------
David L. Kriegel, Chief Executive
Officer
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COLLATERAL LOCATIONS
EXHIBIT
[**To be prepared by the Company as
anticipated by Section 3.3**]
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EXHIBIT 4.1(c)
SECOND AMENDED AND RESTATED
PLEDGE AGREEMENT
THIS SECOND AMENDED AND RESTATED PLEDGE AGREEMENT dated as of the ___ day
of _____________, 1995 (the "Agreement") is between DRUG EMPORIUM, INC., a
Delaware corporation (the "Company"), and BANK ONE, COLUMBUS, NA, (the "Bank")
under that certain Second Amended and Restated Revolving Credit Agreement dated
of even date herewith between the Company and the Bank (the "Loan Agreement"),
and amends and restates in its entirety that certain First Amended and Restated
Pledge Agreement dated as of January 4, 1994 between the Company and the Bank.
The parties agree as follows:
Section 1. Definitions.
1.1. Additional Definitions. In addition to the terms defined
elsewhere in this Agreement or the Loan Agreement, the following terms have the
following meanings:
"Collateral" is defined in Section 2.2.
"Collateral Proceeds" means all proceeds derived from or with
respect to the Collateral including, but not limited to, all securities
hereafter delivered or deliverable to the Bank in substitution for or in
addition to any of such Collateral and all certificates and instruments
evidencing such securities and all cash, securities and other property at any
time and from time to time received, receivable or otherwise distributed in
respect to or in exchange for any such Collateral.
"Default" means the occurrence of a condition or event which with
notice or lapse of time or both would constitute an Event of Default.
"Eligible Collateral" means marketable certificated securities
reviewed and approved by the Bank in advance in its reasonable discretion,
including, but not limited to, the Initial Collateral, and includes the
securities and the certificates or instruments representing the securities.
"Event of Default" means any of the events identified in Section
8 of the Loan Agreement as an Event of Default, provided that any requirement
for the giving of notice or lapse of time has been satisfied in connection with
such event.
"Initial Collateral" means the Collateral delivered by the
Company to the Bank prior to or contemporaneously with the execution and
delivery hereof and initially made subject to the Lien of this Agreement as more
fully described on Exhibit A.
"Lien of this Agreement" or "Lien hereof" means the lien created
by this Agreement or by any prior, concurrent or subsequent conveyance to the
Bank (whether made by the Company or any other Person) or otherwise created upon
any property held by the Bank to secure
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payment of the Obligations and/or performance of the Company's other obligations
under the Loan Documents.
"Loan Documents" means this Agreement, the Loan Agreement and all
other instruments or agreements required or contemplated hereby or thereby.
"Obligations" means (a) the obligations of the Company or any
Subsidiary to the Bank under this Agreement or any of the Loan Documents, (b)
the obligations of the Company to the Bank under any other instrument or
agreement required or contemplated hereby or thereby, (c) all costs and expenses
incurred by the Bank in the collection or the enforcement of any such
obligations of the Company, or realization upon the Collateral, including,
without limitation, reasonable attorneys' fees and legal expenses, (d) all
future advances made by the Bank for the maintenance, protection or preservation
of, the Collateral or any portion thereof, including, without limitation,
advances for storage, insurance premiums, transportation charges, and the like
and (e) all other obligations of the Company to the Bank, howsoever created,
arising, or evidenced, whether direct or indirect, absolute or contingent, or
now or hereafter existing or due or to become due.
"UCC" means Chapters 1301 through 1309 of the Ohio Revised Code
as in effect on the date of this Agreement and as the same may be supplemented
or amended from time to time hereafter.
1.2. Rules of Construction. All accounting terms used in this
Agreement not otherwise specifically defined in this Agreement shall be
construed in accordance with generally accepted accounting principles applied on
a basis consistent with the accounting principles reflected in the financial
statements furnished to the Bank under, and which comply with the requirements
of, the Loan Agreement. Any capitalized term not defined herein but defined in
the Loan Agreement shall be construed in accordance with the definition of such
term as set forth in the Loan Agreement. Any other term not specifically defined
in this Agreement or the Loan Agreement shall be construed in accordance with
the meaning for such terms under the UCC. The meaning of any defined term used
in this Agreement shall apply equally to the singular, plural and other forms of
the term defined.
Section 2. Delivery and Pledge of Collateral.
2.1. Delivery of Collateral.
2.1.1. Prior to or contemporaneously with the execution
and delivery hereof, the Company has delivered or is delivering the Initial
Collateral to the Bank, receipt of which is hereby acknowledged. Any and all
Collateral delivered to the Bank shall meet the applicable requirements set
forth in Section 2.1.2 and, until the termination of this Agreement as provided
in Section 8 hereof, shall be pledged to and held by the Bank for the purposes
set forth in Section 2.2 hereof.
2.1.2. The Company shall effect delivery, with respect
to each item of Eligible Collateral which is to be delivered to the Bank
pursuant hereto, by delivery of stock
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certificates in suitable form duly endorsed in blank or having attached thereto
a legal assignment, stock power or bond power in a form satisfactory to the
Bank, with signature guarantees satisfactory to the Bank.
2.1.3. Concurrently with each delivery of Collateral to
the Bank pursuant to this Agreement (including, but not limited to, Initial
Collateral) the Company shall deliver to the Bank a certificate of the Company
dated the date of such delivery (a) identifying the items of Collateral being
delivered and (b) certifying that the representations and warranties of the
Company set forth herein are true and correct with respect to such items of
Collateral on such date.
2.2. Pledge of Collateral. As security for the full and timely
payment or performance of the Obligations in accordance with the terms thereof,
the Company, by these presents, does hereby grant and pledge unto the Bank, and
its successors and assigns, all of the Company's right, title and interest in
and to the following property (the "Collateral"):
2.2.1. The Initial Collateral and such other Eligible
Collateral as shall hereafter be actually delivered by the Company to the Bank
in substitution for or in addition to the Initial Collateral pursuant to the
terms of this Agreement;
2.2.2. The Collateral Proceeds;
2.2.3. Any other property and, to the extent provided in
this Agreement, the proceeds thereof that may, from time to time hereafter, be
subject to the Lien of this Agreement; and
2.2.4. All powers and appurtenant rights of the Company
in the property listed in Sections 2.2.1 through 2.2.3 above.
Section 3. Collateral Maintenance.
3.1. Holding of Collateral. Prior to the occurrence of any Event
of Default, all Collateral shall be held by the Bank in the name of the Company
endorsed or signed in blank or in favor of the Bank. After the occurrence of any
Event of Default, any or all of the Collateral may be registered in the name of
the Bank or any nominee of the Bank. The Bank may deliver any of the Collateral
to the issuers thereof for the purpose of making denominational exchanges or
registrations or transfers or for such other purpose in furtherance and pursuant
to the provisions of this Agreement as the Bank may deem advisable. The Company
will deliver promptly (but not later than three Banking Days after receipt of a
written request from the Bank) to the Bank such other documents and certificates
as the Bank may reasonably request in connection with subjecting any Collateral
and Collateral Proceeds to the Lien of this Agreement.
3.2. Voting Rights. Prior to the occurrence of any Event of
Default, the Company shall have the right to vote and give consents with respect
to the Collateral, to consent to, ratify action taken at, or waive notice of,
any meeting with respect to the Collateral and to exercise all other
stockholders' rights and privileges with respect to the Collateral with the same
force and
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effect as if the Collateral was not subject to this Agreement; provided,
however, that no vote shall be cast nor shall any consent, waiver or
ratification be given or action taken which would be inconsistent with any of
the provisions of this Agreement or would cause, or approve any action that
would cause, the occurrence of a Default or Event of Default. After the
occurrence of any Event of Default, the Bank shall have all voting rights and
all other stockholders' rights and privileges with respect to the Collateral
with the same force and effect as if it was the absolute owner and record holder
thereof. The Company shall execute and deliver to the Bank all such proxies,
powers of attorney and other instruments as the Bank may request for the purpose
of enabling it to exercise its rights under this Section 3.2.
3.3. Payments on Collateral. Prior to the occurrence of any Event
of Default, and subject to Section 3.4 hereof, all payments on or with respect
to any Collateral shall be made to the Company. After the occurrence of an Event
of Default, the Bank shall have the right to take or direct all actions which it
deems necessary, desirable or appropriate to cause all payments on or with
respect to any Collateral to be made directly to the Bank, and the Bank shall
hold such payments as Collateral Proceeds or shall apply such payments as
provided in Section 6 hereof. If the Company receives any payment on or with
respect to any Collateral after the occurrence of an Event of Default, the
Company shall hold such payment in trust for the benefit of the Bank and shall
promptly remit such payment to the Bank. Upon waiver of an Event of Default, the
Bank shall, within three Banking Days after any such cure or waiver, pay over to
the Company any and all payments on the Collateral collected and held by the
Bank (other than any such payment theretofore applied by the Bank as provided in
Section 6 hereof) and so long as no other Event of Default has occurred, the
Company shall thereafter be entitled to receive directly payments on or with
respect to the Collateral.
3.4. Stock Dividends; Distributions. Notwithstanding the
provisions of Section 3.3 hereof, the following items shall forthwith be
delivered to the Bank, accompanied by proper stock powers, bond powers and/or
instruments of assignment duly executed by the Company, to be held as Collateral
subject to the terms of this Agreement:
3.4.1. Any and all dividends and interest on or with
respect to the Collateral paid or payable by delivery of stock or otherwise paid
or payable other than in cash;
3.4.2. Any and all other distributions made or payable
on or with respect to the Collateral, whether resulting from a subdivision,
combination or reclassification of the securities of the issuer thereof or
received in exchange for Collateral, or any part thereof, or as a result of any
merger, consolidation, acquisition or other exchange of assets to which such
issuer may be a party or otherwise; and
3.4.3. Any and all property (other than dividends and
interest) received in payment of or in redemption of or in exchange for any
Collateral.
All such items received by the Company shall be held by it in trust for the
benefit of the Bank until delivered to the Bank.
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Section 4. Representations and Warranties. The Company hereby
represents and warrants to the Bank that:
4.1. Title to Collateral. The Company is, or on the date of
delivery of the Collateral will be, the sole owner, of record and beneficially,
of the Initial Collateral and all other Eligible Collateral delivered pursuant
hereto. The Company has, or will have at the date of such delivery, good and
marketable title to each item constituting Collateral, free of any mortgage,
pledge, security interest, lien, charge or encumbrance (other than the Lien of
this Agreement). No Person has, or will have at the date of such delivery, any
rights to purchase or acquire any of the Collateral. Exhibit A correctly sets
forth the percentage of the issued and outstanding capital stock of the
applicable issuer eligible to vote for election of directors which each item of
Initial Collateral represents.
4.2. Perfection of Lien. The Company has taken with respect to
the Initial Collateral, or will have taken at the date of delivery of all of the
Eligible Collateral delivered pursuant hereto, all actions necessary so that the
Bank shall have a valid first and prior perfected security interest in and to,
and a general first lien upon, such Collateral subject to no other lien or
encumbrance.
4.3. Consents or Governmental Approvals. No consents or approvals
of any Person are required for the assignment and transfer by the Company of
possession of any of the Collateral to the Bank hereunder or, except as set
forth herein, the subsequent sale or transfer of such Collateral by the Bank.
4.4. Status of Collateral. Each share of the Initial Collateral
is, and each share of Eligible Collateral delivered pursuant hereto will be,
validly issued, fully paid and non-assessable and, to the best of the Company's
knowledge and belief, transferable on the books and records of the issuer in its
present form without restriction, except as transferability may now or in the
future be restricted by operation of state "blue sky" laws or federal securities
laws.
Section 5. Covenants.
5.1. Warranty of Title and Authority to Pledge. The Company
warrants and agrees that all the Collateral now or hereafter subject to the Lien
of this Agreement is or will be, as the case may be, owned by the Company, of
record and beneficially, and pledged by it hereunder free and clear of any
mortgage, pledge, security interest, lien, charge or encumbrance, except the
Lien of this Agreement, and that it has and will have full power and lawful
authority to pledge, assign, transfer and deliver such Collateral in the manner
and form described or to cause such Collateral to be so pledged, assigned,
transferred and delivered. The Company shall not create, incur or suffer to
exist any mortgage, pledge, security interest, lien, charge or encumbrance upon
the Collateral other than the Lien of this Agreement. The Company hereby does,
and until the Collateral is reassigned to the Company will, warrant and defend
the title of the Bank to the Collateral, whether now or hereafter pledged or
delivered by the Company, against the claims and demands of all Persons.
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5.2. Protection of Title; Payment of Taxes, Liens and Other
Items. The Company shall:
5.2.1. Duly and promptly pay and discharge, or cause to
be paid and discharged, before they become delinquent, all taxes, assessments,
governmental and other charges lawfully levied, assessed or imposed upon or
against any of the Collateral, including the income or profits therefrom and the
interest of the Bank in such Collateral;
5.2.2. Duly observe and conform in all material respects
to all valid requirements of any governmental authority imposed upon the Company
relative to any of the Collateral, and all covenants, terms and conditions under
or upon which any part thereof is held; and
5.2.3. Cause to be paid and discharged all lawful claims
(including, without limitation, income taxes) which, if unpaid, might become a
lien or encumbrance upon the Collateral.
5.3. Preservation and Protection of Security Interests. The
Company shall faithfully preserve and protect the Bank's security interest in
the Collateral and shall, at its own cost and expense, cause such security
interest to be perfected and continue perfected so long as the Obligations or
any portion thereof are outstanding and unpaid, and for such purpose the Company
shall from time to time at the request of the Bank file or record, or cause to
be filed or recorded, such instruments, documents and notices, including without
limitation financing and continuation statements, as the Bank may deem necessary
or advisable from time to time in order to preserve, perfect and continue
perfected said security interest. The Company shall do all such other acts and
things and shall execute and deliver all such other instruments and documents,
including without limitation further security agreements, pledges, endorsements,
assignments and notices, as the Bank may deem necessary or advisable from time
to time in order to perfect and preserve the priority of said security interest
as a perfected first lien in the Collateral prior to the rights of any other
secured party or lien creditor. The Bank, and its officers, employees and
authorized agents, or any of them, are hereby irrevocably appointed the
attorneys-in-fact of the Company to do all acts and things which the Bank may
deem necessary or advisable to preserve, perfect and continue perfected the
Bank's security interest in the Collateral, including without limitation the
signing of financing, continuation or other similar statements and notices on
behalf of the Company.
5.4. Advances by Bank. If the Company shall fail to perform any
of its covenants contained in this Agreement, the Bank may, but shall not be
obligated to, make advances to perform the same on behalf of the Company, and
the Company will repay upon demand all sums so advanced, with interest from the
date of such advance until payment in full at the default rate of interest
payable under the Loan Documents. All sums so advanced, with interest as
aforesaid, shall be secured by this Agreement. No such advance shall be deemed
to relieve the Company from any Default or Event of Default hereunder.
5.5. Notice of Default. If any Default occurs, the Company shall
give immediate notice of such happening to the Bank.
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Section 6. Application of Monies.
6.1. Payments. Except as otherwise provided herein, all monies
which the Bank shall receive upon realization of the Lien of this Agreement
hereunder or otherwise may be applied by or at the direction of the Bank as
follows:
6.1.1. First, to the payment or reimbursement of all
reasonable advances, expenses and disbursements of the Bank (including, without
limitation, the fees and disbursements of its counsel and agents) incurred in
connection with the administration and enforcement of, or the preservation of
any rights under, this Agreement or the Loan Documents or in the collection of
the Obligations.
6.1.2. Second, to the payment of the then existing
Obligations, matured and unmatured, in such order and in such manner as the Bank
may elect.
6.1.3. Third, after discharge and repayment of all of
the Obligations, any remaining funds shall be paid by the Bank to the Company.
6.2. Reserved Rights. The Bank shall have the continuing and
exclusive right to apply or reverse and re-apply any and all payments to any
portion of the Obligations. To the extent that the Company makes a payment or
payments to the Bank or the Bank receives any payment or proceeds of the
Collateral for the Company's benefit, which payment(s) or proceeds or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside or required to be repaid to a trustee, receiver or any other party
under any bankruptcy act, state or federal law, common law or equitable cause,
then, to the extent of such payment or proceeds received, the Obligations or the
part thereof intended to be satisfied shall be revived and continue in full
force and effect as if such payment or proceeds had not been received by the
Bank.
Section 7. Remedies upon Event of Default.
7.1. Remedies.
7.1.1. Upon the occurrence of any Event of Default, the
Bank shall have the right, upon notice to the Company (except that upon the
occurrence of an Event of Default under Section 8(h) or 7(i) of the Loan
Agreement, no notice shall be required), to declare the Obligations immediately
due and payable and may, without demand of performance or other demand,
advertisement or notice of any kind to or upon the Company or any other Person
(all and each of which demands, advertisements and/or notices are hereby
expressly waived), forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or forthwith sell, assign, give an option
or options to purchase, contract to sell or otherwise dispose of and deliver
said Collateral, or any part thereof, in one or more parcels at public or
private sale or sales, at any exchange, broker's board or any of the Bank's
offices or elsewhere upon such terms and conditions as it may deem advisable and
at such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk, with the right to the Bank upon any such
sale or sales, public or private, to purchase the whole or any part of said
Collateral so
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sold, free of any right or equity of redemption in the Company, which right or
equity is (to the extent permitted by applicable law) hereby expressly waived
and released. To the extent permitted by applicable law, the Company waives all
claims, damages and demands against the Bank arising out of the retention or
sale of the Collateral. In addition to the rights and remedies granted to it in
this Agreement and in any other instrument or agreement securing, evidencing or
relating to any of the Obligations, the Bank shall have all the rights and
remedies of a secured party under the UCC.
7.1.2. The Company recognizes that, by reason of certain
prohibitions contained in the Securities Act of 1933, as amended, and applicable
state securities laws, the Bank may be compelled, with respect to any sale of
all or any part of the Collateral, to limit purchasers to those who will agree,
among other things, to acquire the Collateral for their own account, for
investment and not with a view to the distribution or resale thereof. The
Company acknowledges that any such private sale may be at prices and on terms
less favorable to the Bank than those obtainable through a public sale without
such restrictions, and, notwithstanding such circumstances, agrees that any such
private sale shall be deemed to have been made in a commercially reasonable
manner and that the Bank shall have no obligation to engage in public sales and
no obligation to delay the sale of any Collateral for the period of time
necessary to permit the respective issuer thereof to register it for public
sale.
7.1.3. The Company shall promptly pay or reimburse all
costs and expenses of the Bank, including, but not limited to, attorneys' fees,
incurred with respect to the enforcement or preservation of any of the Bank's
rights hereunder.
7.1.4. Except as otherwise provided in this Agreement,
the Company hereby waives presentment, demand, protest or any notice (to the
extent permitted by applicable law) of any kind in connection with this
Agreement or any Collateral.
7.1.5. The Bank shall not incur any liability as a
result of the sale of any Collateral, or any part thereof, at any private sale
conducted in a commercially reasonable manner, in compliance with any applicable
law. The Company hereby waives any claims against the Bank arising by reason of
the fact that the price at which any of the Collateral may have been sold at
such a private sale was less than the price which might have been obtained at a
public sale or was less than the aggregate amount of the Obligations, even if
the Bank accepts the first offer received and does not offer any Collateral to
more than one offeree, provided that the Bank has acted in a commercially
reasonable manner in conducting such private sale.
7.1.6. Upon any sale of all or any part of any
Collateral made either under the power of sale given hereunder or under judgment
or decree in any judicial proceedings for foreclosure or otherwise for the
enforcement of this Agreement, the Bank is hereby irrevocably appointed the true
and lawful attorney of the Company, in its name and stead, to make all necessary
deeds, bills of sale and instruments of assignment, and transfer or conveyance
of the property thus sold. For that purpose, the Bank may execute all such
documents and instruments. This power of attorney shall be deemed coupled with
an interest, and the Company hereby ratifies and confirms all that its said
attorney, or its substitute or substitutes, shall lawfully do by virtue of this
Agreement. If so requested by the Bank or by any purchaser of the Collateral or
a portion
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thereof, the Company shall further ratify and confirm any such sale or transfer
by executing and delivering to the Bank or to such purchaser or purchasers at
the Company's expense all reasonable and proper deeds, bills of sale,
instruments of assignment, conveyance or transfer and releases as may be
designated in any such request.
7.1.7. When authorized in accordance with this Section
7.1, the Bank may proceed to realize upon the security interest in the
Collateral against any one or more of the types of Collateral, at any one time
or from time to time, as the Bank shall determine in its sole discretion,
subject to the provisions of this Section 7.1. The Bank shall not be required to
realize upon any one type of Collateral before proceeding to realize upon the
security interest granted in any other type of Collateral. The proceeds of any
sale of, or other realization upon, or other receipt from, all or any Collateral
shall be applied by the Bank in the manner set forth in Section 6 hereof.
7.2. Remedies Cumulative; Delay or Omission Not a Waiver. To the
extent permitted by law and not otherwise provided to the contrary under this
Agreement, no remedy given hereunder to the Bank shall be exclusive of any other
remedy, and every such remedy shall be cumulative and in addition to every other
remedy given hereunder or now or hereafter given by statute, law, equity or
otherwise to the extent not contrary to or inconsistent with the terms of this
Agreement. The Bank may, in its absolute discretion, exercise all or any of the
powers, rights or remedies given to it hereunder or which may be now or
hereafter given by statute, law or equity or otherwise. No course of dealing
between the Company and the Bank or any delay or omission of the Bank to
exercise any right, remedy or power accruing upon any Default or Event of
Default shall impair any right, remedy or power or shall be construed to be a
waiver of any such Default or Event of Default or of any right of the Bank or
acquiescence therein, and every right, remedy and power given by this Agreement
to the Bank may, to the extent permitted by law, be exercised from time to time
and as often as may be deemed expedient by the Bank.
Section 8. Termination of Agreement. Upon the last to occur of (a)
satisfaction of all obligations of the Company under this Agreement, and (b)
payment of all of the Obligations, (c) termination of the Commitment, (d)
termination of all outstanding Letters of Credit or (e) payment in full of the
Note, this Agreement and the estate and rights hereby granted by the Company in
the Collateral shall automatically cease, terminate and be void simultaneously
therewith. Any of the Collateral remaining at the time of such termination shall
be fully released and discharged from the Lien hereof and delivered to the
Company by the Bank, and this Agreement shall thereupon be released by the Bank,
all at the expense of the Company.
Section 9. Miscellaneous.
9.1. Expenses. All fees, costs or expenses, including reasonable
fees and expenses of outside legal counsel, incurred by the Bank in connection
with either the preparation, administration, amendment, modification or
enforcement of this Agreement or any other instruments, documents, or agreements
to be delivered pursuant thereto (including, without limitation, (a) all
expenses incurred in obtaining all necessary judicial and other approvals of the
transactions contemplated hereby, (b) all expenses incurred in conducting any
examinations or appraisals which the Bank, in its sole discretion, deems
necessary or appropriate, subject,
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however, to the provisions of Section 6.3 of the Loan Agreement restricting the
Company's obligations with respect to inventory audits, or (c) out-of-pocket
collateral administration expenses) shall be paid by the Company on demand.
9.2. Term of Agreement; Successors and Assigns. This Agreement
and all covenants, agreements, representations and warranties made herein and in
the certificates delivered pursuant hereto shall survive the execution and
delivery hereof and shall continue in full force and effect until the
termination of this Agreement as set forth in Section 8. Whenever in this
Agreement any of the parties hereto are referred to, such reference shall be
deemed to include the permitted successors and assigns of such party; and all
terms and provisions of this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective permitted successors and
assigns. The Company may not assign its rights or obligations hereunder without
the prior consent of the Bank. The Bank may assign all or any of its rights or
obligations hereunder without the prior consent of the Company.
9.3. Notices. Notices, demands and communications shall be deemed
to have been properly given to the Company only when faxed to the Company at
(614) 548-6541 or when made in writing and deposited in the United States mail,
registered or certified, postage prepaid, and addressed to the Company at 155
Hidden Ravines Drive, Powell, Ohio 43065, Attention: Chief Executive Officer,
whether or not the same are actually received by the Company. Any communication
to the Bank shall be deemed properly given if faxed to the Bank at (614)
248-5518 or similarly mailed to the Bank and addressed to the Bank at Commercial
Loan Department, 100 East Broad Street, Columbus, Ohio 43271-0121.
9.4. No Implied Waivers. No delay on the part of the Bank in
exercising any right, power or privilege granted hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or privilege preclude any other or further exercise thereof. The rights
and remedies herein expressly specified are cumulative and not exclusive of any
other rights and remedies which the Bank would otherwise have.
9.5. Amendments, Modifications, Etc. No amendment, modification,
termination, or waiver of any provision of this Agreement nor consent to any
departure by the Company therefrom, shall in any event be effective unless the
same shall be in writing and signed by the Bank, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given. No notice or demand on the Company in any case shall entitle
the Company to any other or further notice or demand in similar or other
circumstances.
9.6. Applicable Law. This Agreement shall be deemed to be a
contract made under the laws of the State of Ohio, and for all purposes shall be
construed in accordance with the laws of such state.
9.7. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.
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9.8. Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures thereto were upon the
same instrument. Complete sets of counterparts shall be lodged with the Company
and the Bank.
9.9. Merger. This Agreement, the Loan Agreement and the other
agreements executed in connection with the Loan Agreement reflect the entire
understanding of the parties with respect to its subject matter and supersede
all prior agreements or understandings with respect thereto in their entirety.
9.10. Headings. Headings of the sections of this Agreement are
for convenience only and shall not affect the construction of this Agreement.
9.11. Effective Date. This Agreement shall become effective upon
the execution of a counterpart hereof by each of the parties.
9.12. Confession of Judgment. The Company hereby authorizes any
attorney at law to appear for the Company, in an action on this Agreement, at
any time after any obligation hereunder becomes due, as herein provided, in any
court of record in or of the State of Ohio, or elsewhere, to waive the issuing
and service of process against the Company and to confess judgment in favor of
the Bank or the party entitled to the benefits of this Agreement against the
Company for the amount that may be due, with interest at the default rate
provided for in the Loan Agreement and costs of suit, and to waive and release
all errors in said proceedings and judgment, and all petitions in error, and
right of appeal from the judgment rendered.
IN WITNESS WHEREOF, the Company and the Bank have caused this Agreement
to be executed and delivered effective the day and year first above written.
BANK ONE, COLUMBUS, NA
By
---------------------------------------
Thomas D. Igoe
Senior Vice President
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WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO
NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A
COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED
TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY
HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS,
FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THIS
AGREEMENT, OR ANY OTHER CAUSE.
DRUG EMPORIUM, INC.
By
-----------------------------------------
David L. Kriegel, Chief Executive Officer
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EXHIBIT A
INITIAL COLLATERAL
1. Stock Certificate No. 1 dated February 26, 1991, evidencing the ownership by
the Company of 10 shares of the Common Stock of Centerline, Inc., being 100% of
the issued and outstanding shares of the capital stock of such issuer eligible
to vote for election of directors of such issuer.
2. Stock Certificate No. 1 dated August 23, 1991, evidencing the ownership by
the Company of 100 shares of the Common Stock of Winter Fern Drug Distributors,
Inc., being 100% of the issued and outstanding shares of the capital stock of
such issuer eligible to vote for election of directors of such issuer.
3. Stock Powers, each dated February 11, 1992, relating to the stock
certificates listed at items 1 and 2 above, executed by the Company in blank.
4. Stock Certificate No. 8 dated _May 9, 1995, evidencing the ownership by the
Company of 1,190 shares of the Common Stock of RJR Drug Distributors Inc., being
100% of the issued and outstanding shares of the capital stock of such issuer
eligible to vote for election of directors of such issuer.
5. Stock Certificate No. 1 dated September 7, 1994, evidencing the ownership by
the Company of 100 shares of the Common Stock of Houston Venture, Inc., being
100% of the issued and outstanding shares of the capital stock of such issuer
eligible to vote for election of directors of such issuer.
6. Stock Certificate No. 1 dated September 7, 1994, evidencing the ownership by
the Company of 100 shares of the Common Stock of Emporium Venture, Inc., being
100% of the issued and outstanding shares of the capital stock of such issuer
eligible to vote for election of directors of such issuer.
7. Stock Powers, each dated of even date herewith, relating to the stock
certificates listed at items 4, 5 and 6 above, executed by the Company in blank.
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EXHIBIT 4.1(d)
SECOND AMENDED AND RESTATED
UNCONDITIONAL GUARANTY
_________________, a ____________ corporation (the "Guarantor"), in order
to induce BANK ONE, COLUMBUS, NA ("the Bank"), to make loans to DRUG EMPORIUM,
INC., a Delaware corporation (the "Company"), pursuant to that certain Second
Amended and Restated Revolving Credit Agreement of even date herewith (the
"Agreement"), does hereby:
(a) CONSIDERATION. Represent and warrant to the Bank that it is a
subsidiary of the Company and, as such, it is entering into this Guaranty in
order to ensure to itself the availability of certain of the funds which the
Company plans to borrow from the Bank pursuant to the Agreement and that the
Guarantor, therefore, expects to derive economic benefits from the execution,
delivery and performance of the Agreement;
(b) SOLVENCY. Represent and warrant to the Bank that, both before and
after its execution, delivery and performance of the Guaranty, it is or will be
solvent, it has or will have assets having a fair value in excess of the amount
required to pay its probable liabilities or its existing debts as they become
absolute and matured and it has or will have access to adequate capital for the
conduct of its business and is or will be able to pay its debts from time to
time incurred in connection therewith as such debts mature;
(c) GUARANTY OF PAYMENT. Unconditionally and absolutely guarantee the
full and timely payment by the Company to the Bank of (i) any and all of the
liabilities or obligations which may become due and payable to the Bank from the
Company in accordance with the terms and conditions of the Agreement or any
other agreement, instrument or document executed by the Company in connection
therewith, (ii) all costs and expenses incurred by the Bank in the collection or
the enforcement of any such obligations of the Company, or realization upon the
Collateral, including, without limitation, reasonable attorneys' fees and legal
expenses, (iii) all future advances made by the Bank for the maintenance,
protection or preservation of, the Collateral or any portion thereof, including,
without limitation, advances for storage, insurance premiums, transportation
charges, and the like and (iv) all other obligations of payment of the Company
to the Bank, howsoever created, arising, or evidenced, whether direct or
indirect, absolute or contingent, or now or hereafter existing or due or to
become due (the "Payment Obligations"); and
(d) GUARANTY OF PERFORMANCE. Unconditionally and absolutely guarantee the
due and punctual performance and observance by the Company of (i) any and all
other obligations which are to be performed or observed by the Company in
accordance with the terms and conditions of the Agreement or any other
agreement, instrument or document executed by the Company in connection
therewith, whether according to the original or present terms thereof, at an
earlier or accelerated date or dates as provided therein, or pursuant to any
extension of time or to any change or changes in the terms and conditions
thereof, now or at any time hereafter made or granted and (ii) all other
obligations of the Company to the Bank, howsoever created, arising, or
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evidenced, whether direct or indirect, absolute or contingent, or now or
hereafter existing or due or to become due (the "Performance Obligations" and,
collectively with the Payment Obligations, the "Obligations").
SECTION 1. ABSOLUTE AND UNCONDITIONAL OBLIGATION OF GUARANTOR. All
obligations of Guarantor under this Guaranty shall be absolute, unconditional
and continuing and shall remain in full force and effect until all of the
Obligations now existing or hereafter incurred shall have been paid and
discharged in full and otherwise satisfied. The obligations of Guarantor under
this Guaranty shall not be released, discharged, affected, modified or impaired
by reason of the happening from time to time of any event, including, without
limitation, any one or more of the following:
1.1. COMPROMISE, ETC. The compromise, settlement, release,
discharge or termination of any or all of the Obligations, by operation of law
or otherwise, except by payment and performance in full of the Obligations
pursuant to the terms of the Agreement or any other agreement, document or
instrument pursuant to which the Company is obligated to the Bank with respect
thereto;
1.2. FAILURE TO GIVE NOTICE. The failure of the Bank to give
notice to Guarantor of the occurrence of any Default or Event of Default under
the Agreement (capitalized terms not defined herein are defined in the
Agreement);
1.3. WAIVER. The waiver of the payment, performance or observance
by the Company of any of the Obligations;
1.4. EXTENSION. The extension of the time for payment of any
Indebtedness constituting Obligations or of the time for performance of any
other Obligation, or the extension or the renewal of any thereof;
1.5. MODIFICATION. The modification or amendment (whether
material or otherwise) of any of the Obligations, whether set forth in the
Agreement or any other agreement, document or instrument pursuant to which the
Company or any other Person is obligated to the Bank, in accordance with the
provisions of the Agreement, or any other agreement, instrument or document
relating thereto or otherwise;
1.6. ACTION OR INACTION. The taking of or omission to take any
action under the Agreement or any other agreement, document or instrument
pursuant to which the Company or any other Person is obligated to the Bank;
1.7. INVALIDITY, ETC. The invalidity or unenforceability of any
term or provision of the Agreement or any other agreement, document or
instrument pursuant to which the Company or any other Person is obligated to the
Bank, or any loss or release or substitution of, or other dealing with, any of
the Indebtedness constituting Obligations or otherwise;
1.8. DELAY. Any failure, omission or delay on the part of the
Bank to enforce, assert or exercise any right, power or remedy conferred in the
Agreement or any other agreement,
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document or instrument pursuant to which the Company or any other Person is
obligated to the Bank, or any other act or acts on the part of the Bank;
1.9. BANKRUPTCY. The voluntary or involuntary liquidation,
dissolution, sale or other disposition of all or substantially all of the
assets, marshaling of assets and liabilities, receivership, insolvency,
bankruptcy, assignment for the benefit of creditors, arrangement, composition
with creditors or readjustment of, or other similar proceedings affecting the
Company, or its assets, or any allegation of invalidity or contest of the
validity of this Guaranty in any such proceedings;
1.10. DEFAULT BY GUARANTOR. The default or failure of Guarantor
to fully perform any of its obligations set forth in this Guaranty, the
occurrence of any Event of Default under the Agreement, or the default or
failure of any other Person to fully perform any of its obligations set forth in
any other agreement, document or instrument pursuant to which the Company or any
such Person is obligated to the Bank;
1.11. MISSING AGREEMENTS. The failure of any agreement,
instrument, certificate, or other document to be executed or delivered in
connection with the Agreement; or
1.12. MISCELLANEOUS. Any other event, circumstance, right, claim
or defense of any character whatsoever, whether or not similar to the foregoing.
SECTION 2. NO CONSENT OR NOTICE. The Bank may, at any time and from time
to time, without consent of, or notice to, Guarantor, do any, some, or all of
the following without thereby impairing or releasing the obligations of
Guarantor under this Guaranty:
2.1. AMENDMENTS. Change the manner, place or terms of payment, or
change or extend the time of payment of, or renew or alter, the terms of any
obligations of payment of the Company to the Bank, and the guarantee herein made
shall apply to the obligations of payment of the Company to the Bank as so
changed, extended, renewed or altered;
2.2. ACTION OR INACTION. Exercise or refrain from exercising any
rights against the Company, any other guarantor of the Agreement, or any other
Person, or otherwise act or refrain from acting; or
2.3. SETTLE OR COMPROMISE. Settle or compromise any obligations
of payment of the Company, or any other guarantor of the obligations of the
Company to the Bank or subordinate the payment of all or any part thereof to the
payment of any liability (whether due or not) to creditors of the Company other
than the Bank.
SECTION 3. RIGHTS OF THE BANK AND RELATED MATTERS.
3.1. ENFORCEMENT. Guarantor agrees that this Guaranty may be
enforced by the Bank without first resorting to or exhausting any other remedy
available under the Agreement, any other guaranty of the Agreement, any other
related agreement, document or instrument pursuant to which the Company or any
other Person is obligated to the Bank, or otherwise;
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provided, however, that nothing herein contained shall prevent the Bank from
resorting to any right or remedy available to it.
3.2. BENEFIT. Guarantor agrees that this Guaranty will inure to
the benefit of and may be enforced by the Bank, its successors and assigns, any
duly authorized agent of the Bank, and any subsequent holder of any instrument
evidencing any of the Obligations, and shall be binding on and enforceable
against Guarantor, its successors and assigns.
3.3. WAIVER OF NOTICE, EVENT OF DEFAULT UNDER THE AGREEMENT, ETC.
Guarantor waives notice of any Default or Event of Default under the Agreement
and presentment, protest, notice of dishonor and demand for payment of or with
respect to any obligation of payment of the Company to the Bank or any
instrument or other writing evidencing or securing any obligation of payment of
the Company to the Bank.
3.4. SUBORDINATION AS TO GUARANTOR. Guarantor hereby subordinates
any and all claims which it now has, or in the future may acquire, as creditor,
employee, or contributor to the capital of the Company, to the prior payment and
performance in full of any and all of the Obligations to the extent hereinafter
set forth in this Section 3.4. If, prior to the payment and performance of all
of the Obligations, upon the occurrence and during the continuation of a Default
or an Event of Default under the Agreement, Guarantor would, without reference
to the provisions of this Section 3.4, be entitled to receive any payment on
account of any claim of Guarantor against the Company, in insolvency proceedings
or otherwise, all such payments shall be made instead to the Bank until all of
the Obligations have been paid and performed in full, and Guarantor hereby so
directs. If, following the occurrence and during the continuation of a Default
or any Event of Default, Guarantor receives any payment on account of any claim
of Guarantor against the Company, Guarantor shall immediately pay the same over
to the Bank to be applied to the payment and performance of all of the
Obligations.
3.5. NO DEFENSE LIMITS GUARANTOR'S OBLIGATIONS. No setoff,
counterclaim, reduction, or diminution of any obligation, or any other defense
of any kind or nature (excepting payment or performance in fact) which Guarantor
has or may have against the Bank shall limit or in any way affect Guarantor's
obligations under this Guaranty.
3.6. WAIVER OF RIGHTS TO SUBROGATION AND REIMBURSEMENT. Guarantor
hereby waives any right of subrogation to the rights of the Bank against the
Company, any right of reimbursement by the Company or any other right of
recovery that Guarantor may have against the Company if Guarantor makes any
payment under this Guaranty. Guarantor hereby represents and warrants that it
has not received any promissory note from the Company or entered into any other
written or oral agreement with the Company to the effect that Guarantor will be
reimbursed by the Company if Guarantor makes any payments under this Guaranty
and has not received any property of the Company as security for any such
reimbursement. Guarantor hereby covenants and agrees that Guarantor will not, at
any time, accept any promissory note or enter into any written or oral agreement
with the Company which has the effect of reimbursing Guarantor for any payments
that it may make under this Guaranty, accept any property of the Company as
security for any such reimbursement, or make any claim for reimbursement or that
Guarantor should be subrogated to the rights of the Bank against the Company.
The waivers,
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representations, warranties, covenants and agreements contained in this
paragraph are for the benefit of and may be enforced by the Bank and the Company
and their respective successors and assigns, including (without limitation) any
trustee in bankruptcy of the Company.
3.7. WAIVER OF NOTICE OF ACCEPTANCE. Guarantor hereby expressly
waives notice from the Bank of its acceptance of and reliance upon this
Guaranty, and of any future creation, renewal or accrual of any of the
Obligations, and any and every obligation of payment and performance of the
Company to the Bank shall conclusively be presumed to have been created,
contracted or incurred in reliance upon this Guaranty.
3.8. SECURITY. The obligations of the Guarantor hereunder are
secured by a First Amended and Restated Security Agreement of even date herewith
between the Guarantor and the Bank.
SECTION 4. MISCELLANEOUS.
4.1. NOTICES. All notices, requests or other communications under
this Guaranty shall be in writing and shall be deemed to have been properly
given only when faxed or deposited in the United States mail, registered or
certified, postage prepaid, return receipt requested, addressed as follows:
To Guarantor:
-------------------------------
155 Hidden Ravines Drive
Powell, Ohio 43065
Attn.: Chief Executive Officer
(614) 548-6541
To the Bank:
Bank One, Columbus, NA
Commercial Loan Department
100 East Broad Street
Columbus, Ohio 43271-0121
(614) 248-5518
Any party may, by notice given under this Section 4.1, designate a different
address for it than the one specified above.
4.2. AGREEMENT TO PAY ATTORNEYS' FEES AND EXPENSES. If the
Company should fail in the payment or performance of any of the Obligations and
the Bank employs attorneys or incurs other expenses for the enforcement of
performance or observance by Guarantor of any of the Obligations or any
obligation or agreement on the part of Guarantor contained in this Guaranty,
Guarantor shall, on demand therefor, reimburse the reasonable fees of such
attorneys and such other expenses so incurred by the Bank.
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4.3. WAIVER. No delay on the part of the Bank in exercising any
of its options, powers or rights under this Guaranty, or any partial or single
exercise thereof, shall constitute a waiver thereof. No waiver of any of the
respective rights or obligations of the Bank under this Guaranty, and no
modification or amendment of this Guaranty, will be deemed to be effective
unless the same shall be in writing, duly signed on behalf of the Bank and
Guarantor. Each waiver, if any, will apply only with respect to the specific
instance and for the specific purpose given, and will in no way impair the
rights of the Bank or the obligations of Guarantor to the Bank in any respect at
any other time. No notice to or demand on Guarantor in any case will entitle
Guarantor to any other or further notice or demand in similar or other
circumstances.
4.4. AMENDMENT. This Guaranty shall not be or be deemed to be
amended, modified or limited orally or by any course of conduct or dealing or
any manner other than by a writing signed by the party against which such
amendment, modification or limitation is sought to be charged. This Guaranty is
made in the State of Ohio and is to be construed in accordance with and the
rights of the parties hereunder are to be governed by Ohio law.
4.5. NO RELEASE. The provisions of this Guaranty notwithstanding,
no rights or privileges of the Bank under the Agreement or any other agreement,
document or instrument pursuant to which the Company is obligated to the Bank
shall in any way be diminished or released by this Guaranty.
4.6. SEVERABILITY. In case any clause, provision or section of
this Guaranty, or any covenant, stipulation, obligation, agreement, act, or
action, or part thereof, made, assumed, entered into, or taken under this
Guaranty, or any application thereof, is for any reason held to be illegal,
invalid or inoperable, such illegality, invalidity, or inoperability shall not
affect the remainder thereof or any other clause, provision or section or any
other covenant, stipulation, obligation, agreement, act or action or part
thereof, made, assumed, entered into, or taken thereunder, which shall at the
time be construed and enforced as if such illegal or invalid or inoperable
portion were not contained therein, nor shall such illegality or invalidity or
inoperability or any application thereof affect any legal and valid and operable
application thereof, from time to time, and each such clause, provision or
section, covenant, stipulation, obligation, agreement, act, or action, or part
thereof shall be deemed to be effective, operative, made, entered into or taken
in the manner and to the full extent from time to time permitted by law.
4.7. CAPTIONS. The captions or headings in this Guaranty are for
convenience only and in no way define, limit or describe the scope or intent of
any provision or section of this Guaranty.
4.8. ENTIRE AGREEMENT. This Guaranty sets forth the entire
understanding of the parties and supersedes any and all prior agreements,
arrangements, and understandings relating to the subject matter of this
Guaranty.
4.9. SEPARATE INSTRUMENT. This Guaranty constitutes a separate
instrument, enforceable in accordance with its terms, and neither this Guaranty
nor the obligations of
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Guarantor under this Guaranty shall, under any circumstance or in any legal
proceedings, be deemed to have merged into or with any other agreement or
obligation of Guarantor.
4.10. JOINT PREPARATION. This Guaranty is to be deemed to have
been prepared jointly by the Guarantor and the Bank, and any uncertainty or
ambiguity existing herein shall not be interpreted against either party, but
shall be interpreted according to the rules for the interpretation of arm's
length agreements.
4.11. THIRD PARTIES. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any Person other than the
parties hereto and their successors or assigns, any rights or remedies under or
by reason of this Guaranty.
4.12. GOVERNING LAW. This Guaranty shall be governed and
construed by the provisions hereof and in accordance with the laws of the State
of Ohio applicable to instruments to be performed in the State of Ohio.
4.13. CONFESSION OF JUDGMENT. Guarantor hereby authorizes any
attorney at law to appear for it, in an action on this Guaranty, as herein
provided, in any court of record in or of the State of Ohio, or elsewhere, to
waive the issuing and service of process against Guarantor and to confess
judgment in favor of the holder of the Guaranty against Guarantor for the amount
that may be due, with interest at the default rate provided for in the Agreement
and costs of suit, and to waive and release all errors in said proceedings and
judgment, and all petitions in error, and right of appeal from the judgment
rendered.
IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the ___
day of _____________, 1995.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO
NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A
COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED
TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY
HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS,
FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE
AGREEMENT, OR ANY OTHER CAUSE.
[**SUBSIDIARY**]
By:
------------------------------------
Its:
------------------------------------
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EXHIBIT 4.1(E)
SECOND AMENDED AND RESTATED
SECURITY AGREEMENT
THIS SECOND AMENDED AND RESTATED SECURITY AGREEMENT dated as of the ___
day of ___________, 199__ (collectively with the exhibits attached hereto, the
"Agreement") is between _______________________________, a __________________
corporation (the "Company"), and BANK ONE, COLUMBUS, NA (the "Bank") under that
certain Second Amended and Restated Revolving Credit Agreement dated of even
date herewith between Drug Emporium, Inc. (the "Parent") and the Bank (the
"Loan Agreement") and amends and restates in its entirety that certain First
Amended and Restated Security Agreement dated as of January 4, 1994 between the
Company and the Bank. The parties agree as follows:
Section 1. Definitions.
1.1. Additional Definitions. In addition to the terms defined
elsewhere in this Agreement or the Loan Agreement, the following terms have the
following meanings:
"Account" means and includes all accounts (whether or not earned by
performance), contract rights, chattel paper, instruments, documents, general
intangibles (including, without limitation, general customer and prescription
customer lists, tax refunds, tax refund claims, patents, trademarks, trade
names, good will, blueprints and drawings relating thereto) and all other forms
of obligations owing to the Company, whether secured or unsecured, whether now
existing or hereafter created, and whether or not specifically assigned to the
Bank under this Agreement, all guarantees and other security therefor, all
merchandise returned to or repossessed by the Company, and all rights of
stoppage in transit and all other rights and remedies of an unpaid vendor,
lienor or secured party.
"Collateral" means and includes all Accounts, Inventory, all property now
or at any time hereafter in the Bank's possession (including claims and credit
balances), and all other property in which the Company at any time grants a Lien
to the Bank pursuant to the Loan Documents or otherwise, whether now existing or
hereafter acquired or arising, together with (a) all books, records, ledger
cards and other property pertaining to any of the foregoing, and any equipment
on which any such items are stored or maintained and (b) all products and
proceeds of any of the foregoing, and all insurance proceeds related to any of
the foregoing, including, without limitation, any claims against third parties
for loss or damage to or destruction of any or all of the foregoing and any
cash, negotiable instruments and other instruments of money, chattel paper,
security agreements or other documents. The term "Collateral" shall not include
furniture, fixtures or equipment but shall include computers, modems, printers,
software, and related equipment, media and data necessary to run software owned
or used by the Company to keep track of its Inventory or Accounts.
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"Collateral Location" means each of the locations listed on the
Collateral Locations Exhibit, attached hereto and made a part hereof, and such
other locations as may be established as such pursuant to this Agreement.
"Customer" means any Person who is obligated as an account debtor or
other obligor on, under, or in connection with, any Account.
"Default" means any Event of Default and any event, condition or
circumstance which, with the giving of notice or lapse of time, or both, may
become an Event of Default.
"Event of Default" means any of the events specified in Section 7.1 of
this Agreement as an Event of Default, provided that any requirement for the
giving of notice or lapse of time has been satisfied in connection with such
event.
"GAAP" means generally accepted accounting principles applied on a basis
consistent with the accounting principles reflected in the financial statements
of the Parent furnished to the Bank under, and which comply with the
requirements of, the Loan Agreement.
"Inventory" means all raw materials, work in process, finished goods and
materials and supplies of any kind, nature or description which are or might be
used or consumed in the business of the Company or used in connection with the
manufacturing, packing, shipping, advertising, selling or finishing of such
goods, merchandise and other personal property, and all goods, merchandise and
other personal property wherever located, to be furnished by the Company under
any contract or contract for service or held for sale or lease, whether now
owned or hereafter acquired, and all documents of title or other documents
representing the foregoing.
"Loan Documents" means this Agreement, the Loan Agreement, the Note, the
Pledge Agreement, the Subsidiary Guaranties, the Subsidiary Security Agreements
and all other instruments or agreements required or contemplated hereby or
thereby.
"Obligations" means (a) the obligations of the Parent or any Subsidiary
to the Bank under any of the Loan Documents, (b) the obligations under any other
instrument or agreement required or contemplated hereby or thereby, (c) all
costs and expenses incurred by the Bank in the collection or the enforcement of
any such obligations, or realization upon the Collateral, including without
limitation reasonable attorneys' fees and legal expenses, (d) all future
advances made by the Bank for the maintenance, protection or preservation of,
the Collateral or any portion thereof, including without limitation advances for
storage, insurance premiums, transportation charges, and the like and (e) all
other obligations of the Parent or any Subsidiary to the Bank, howsoever
created, arising, or evidenced, whether direct or indirect, absolute or
contingent, or now or hereafter existing or due or to become due.
"Requirement of Law" means, for any Person, any term, condition, or
provision of any law, rule, judgment, regulation, order, writ, injunction or
decree of any court or government, domestic or foreign and any ruling of any
arbitrator to which such Person is a party or by which such Person or any of its
assets or property is bound or affected or from which such Person derives
benefits, and, if such Person is a corporation, its charter documents and
bylaws.
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"UCC" means Chapters 1301 through 1309 of the Ohio Revised Code as in
effect on the date of this Agreement and as the same may be supplemented or
amended from time to time hereafter.
1.2. Rules of Construction. All accounting terms used in this
Agreement not otherwise specifically defined in this Agreement shall be
construed in accordance with GAAP. Any capitalized term not defined herein but
defined in the Loan Agreement shall be construed in accordance with the
definition of such term as set forth in the Loan Agreement. Any other term not
specifically defined in this Agreement or the Loan Agreement shall be construed
in accordance with the meaning for such terms under the UCC. The meaning of any
defined term used in this Agreement shall apply equally to the singular, plural
and other forms of the term defined.
Section 2. Grant of Security Interest.
2.1. Lien. As security for the full and timely payment or
performance of the Obligations in accordance with the terms thereof, the Company
agrees that the Bank shall have, and there is hereby granted to and created in
favor of the Bank, a Lien under the UCC, and otherwise in accordance with
applicable law, in and to the Collateral. The Lien created hereunder shall be
prior in interest to any other Lien affecting the Collateral. The Lien created
hereunder shall be and remain in full force and effect until all of the
Obligations shall have been paid and discharged in full and otherwise satisfied
and the Parent shall no longer have any right to request any Loans under the
Loan Agreement.
2.2. Collateral. As an inducement to enter into this Agreement
and the Loan Agreement, the Company is hereby granting to the Bank a security
interest in, among other assets, its Accounts and Inventory. The Company
understands that the Bank would not have entered into this Agreement or the Loan
Agreement if the Company was not granting a security interest to the Bank in
Accounts and Inventory and that the indubitable equivalent of any Lien in favor
of the Bank against Accounts and Inventory is not provided to the Bank by the
substitution therefor of a Lien against real estate or any other asset which is
not as quickly convertible into cash as Accounts or Inventory.
Section 3. Representations and Warranties. The Company hereby
represents and warrants to the Bank that:
3.1. Title to Collateral. The Company has good, indefeasible and
marketable title to all the Collateral free of all Liens other than those
granted hereby, except for and Liens of landlords under state statutes or Liens
permitted under the Loan Agreement. No financing or continuation statement which
names the Company as debtor has been filed in any state or other jurisdiction
except as provided for herein or as set forth in the Loan Agreement, and the
Company has not agreed or consented to cause or to permit in the future (upon
the happening of a contingency or otherwise) any of the Collateral, whether now
owned or hereafter acquired, to be subject to a Lien.
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3.2. Perfection of Lien. The Company has taken or caused to be
taken all actions necessary to establish the Bank's Lien in the Collateral as a
valid, enforceable and perfected Lien, first and prior to all other Liens except
Liens permitted under the Loan Agreement.
3.3. Books and Records; Chief Executive Office. All books and
records of the Company concerning the Collateral are accurate, complete and
maintained in accordance with GAAP. The Collateral Locations Exhibit correctly
sets forth the address of (a) the chief executive office, registered office and
principal place of business of the Company, (b) any plant or division of the
Company maintaining a separate principal place of business, registered office or
chief executive office, (c) all other places of business of the Company and the
location of all Collateral and (d) the name and business address of each
landlord and mortgagee with any interest in any Collateral Location. The only
original books of account and records of the Company relating to any Accounts of
the Company are, and will continue to be, kept at the offices of the Company set
forth on the Collateral Locations Exhibit opposite the name of the division or
the plant of the Company where such Accounts originated. The only locations at
which Inventory is located are set forth on the Collateral Locations Exhibit
opposite the name of the division or the plant of the Company or other location
where such Inventory is located.
3.4. Accounts. The Accounts arose out of bona fide sales or
services, are collectible in the ordinary course of business and are not
disputed or subject to offset.
Section 4. Affirmative Covenants. On and after the date of this Agreement
and until all of the Obligations shall have been paid and discharged in full or
otherwise satisfied and the Parent shall no longer have any right to request any
Loans under the Loan Agreement:
4.1. Insurance. The Company shall at all times: (a) maintain or
cause to be maintained insurance upon the Collateral with responsible and
reputable insurers of such character and in such amounts as are usually
maintained by Persons engaged in a like business; (b) furnish to the Bank, upon
request, a statement of its insurance coverage, in form and detail satisfactory
to the Bank; (c) require each policy of insurance to contain a provision whereby
it cannot be canceled, amended or modified except after 30 days' prior written
notice to the Bank; (d) require each policy of insurance covering any of the
Collateral to be written or endorsed so as to make losses, if any, payable to
the Bank, in addition to the Company; and (e) require each policy of insurance
covering any of the Collateral to contain an agreement by the insurer that any
loss shall be payable to the Bank notwithstanding any act or negligence of the
Company which might otherwise result in forfeiture of said insurance. If the
Company fails to pay or cause to be paid the premium on any such insurance, the
Bank may, in its sole discretion, do so for the account of the Company, add the
cost thereof to the Obligations and be reimbursed by the Company therefor on
demand.
4.2. Notice of Default. If any Default or Event of Default
occurs, the Company shall give prompt notice of such happening to the Bank.
4.3. Inspection. The Company shall permit any Person designated
by the Bank to enter, examine, audit and inspect the Collateral and all
properties, corporate books and financial records pertaining to the Collateral,
or the operation, business, affairs and financial condition of
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the Company at any reasonable time and from time to time, and shall permit such
Persons to copy and make excerpts of such books and records.
4.4. Sale of Inventory. Notwithstanding the security interest in
the Collateral granted hereunder, the Company shall have the right to sell,
lease or otherwise dispose of its Inventory in the ordinary course of its
business, free and clear of such security interest; but, in such event, such
security interest shall continue in the proceeds of such sale, lease or other
disposition.
4.5. Company's Rights to Collect Accounts. Notwithstanding the
security interest in the Accounts granted under this Agreement, the Company
shall endeavor to collect the Accounts at its own cost and expense, until such
time as the Bank shall have notified the Company, pursuant to Section 4.6, that
the Bank has revoked the Company's right to collect the Accounts.
4.6. Collection of Accounts by the Bank. If an Event of Default
shall have occurred, the Bank shall have the right at any time and without
affecting the liability of the Company to the Bank (a) to revoke any right of
the Company to collect its Accounts pursuant to Section 4.5 by written notice to
the Company to such effect, (b) to take over and direct collection of the
Accounts of the Company, (c) to give notice of the security interest of the Bank
in the Accounts to any or all of the Customers, (d) to give notice to the
Customers to make payment of the Accounts directly to the Bank (and, at the
request of the Bank, the Company shall indicate on all billings to Customers
that payments thereon are to be made to the Bank), and (e) to take control of
the Accounts of the Company and the Proceeds thereof, and to take possession of
all of the Company's books and records relating thereto, with full power and
authority in the name of the Bank or of the Company to enforce, collect, sue
for, receive, compromise, settle and give receipts for any and all of the
Accounts. If any Account becomes evidenced by a promissory note, trade
acceptance, chattel paper or other writing or instrument for the payment of
money, and there is at the time a Default, the Company shall, at the request of
the Bank, promptly deliver any such instrument to the Bank duly endorsed to the
order of the Bank as additional Collateral under this Agreement. It is
understood and agreed by the Company that the Bank shall have no liability
whatsoever to the Company under this Section 4.6.
4.7. Account Verification. The Bank may at any time, without
notice to the Company, verify with any Customer the status of any Account
payable by such Customer; provided, however, that, prior to the occurrence of an
Event of Default, no request for verification shall be made in the name of the
Bank, nor shall the Bank disclose the purpose of such request. The Company from
time to time will execute and deliver such instruments and take all such action
as the Bank may reasonably request in order to effectuate the purpose of this
Section 4.7.
4.8. Preservation and Protection of Security Interests. The
Company shall faithfully preserve and protect the Bank's security interest in
the Collateral and shall, at its own cost and expense, cause such security
interest to be perfected and continue perfected so long as the Obligations or
any portion thereof are outstanding and unpaid, and for such purpose the Company
shall from time to time at the request of the Bank file or record, or cause to
be filed or recorded,
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such instruments, documents and notices, including without limitation financing
and continuation statements, as the Bank may deem necessary or advisable from
time to time in order to preserve, perfect and continue perfected said security
interest. The Company shall do all such other acts and things and shall execute
and deliver all such other instruments and documents, including without
limitation further security agreements, pledges, endorsements, assignments and
notices, as the Bank may deem necessary or advisable from time to time in order
to perfect and preserve the priority of said security interest as a perfected
first Lien in the Collateral prior to the rights of any other secured party or
lien creditor. The Bank, and its officers, employees and authorized agents, or
any of them, are hereby irrevocably appointed the attorneys-in-fact of the
Company to do all acts and things which the Bank may deem necessary or advisable
to preserve, perfect and continue perfected the Bank's security interest in the
Collateral, including without limitation the signing of financing, continuation
or other similar statements and notices on behalf of the Company.
4.9. Maintenance of Collateral. The Company shall (a) from time
to time replace and repair all parts of the Collateral which are or become worn,
broken, damaged, or deteriorated, maintain the Collateral now or hereafter owned
or acquired by it, and every part thereof, in good working order and repair and
pay the costs of such repairs, replacements, and maintenance as well as any
costs of storing the same; and (b) pay and discharge all taxes, assessments,
fees, and other governmental charges or levies imposed upon it or any of the
Collateral as well as all lawful claims of materialmen, mechanics, carriers,
warehousemen, landlords and other similar Persons for labor, materials, supplies
and rentals which, if unpaid, might by law become a Lien on the Collateral or
any part thereof. If the Company fails to make any payments it is required to
make under this Section 4.9, the Bank may do so for the account of the Company
and may add the amount of such payments to the Obligations.
4.10. Inventory. The Company shall maintain the Inventory in good
condition, salable at the Company's normal prices in the ordinary course of its
business.
4.11. New Stores. Prior to the opening of any retail store not
presently operated by the Company, the Company shall give written notice to the
Bank and shall perform such acts as may be necessary or advisable to grant to
the Bank a perfected Lien, subject to no other Liens other than Liens permitted
under the Loan Agreement, in the Collateral located or to be located in such new
retail store.
4.12. Annual Certificate. The Company shall furnish to the Bank
within 45 days after the close of each fiscal year, a certificate of the chief
financial officer or controller of the Company certifying that he has reviewed
the locations where the Inventory is located and that appropriate filings have
been made for the Company so that the Bank continues to have a perfected Lien
hereunder, subject to no other Lien other than Liens permitted under the Loan
Agreement.
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Section 5. Negative Covenants. On and after the date of this Agreement
and until all of the Obligations shall have been paid and discharged in full or
otherwise satisfied and the Company shall no longer have the right to request
Loans under the Loan Agreement:
5.1. Liens. The Company shall not create, assume, incur or suffer
to exist or agree or consent to cause or permit in the future (upon the
happening of a contingency or otherwise) to be created, assumed, incurred or to
exist any Lien upon any of the Collateral (other than Permitted Liens) except
with the prior written consent of the Bank to each such Lien.
5.2. Negative Pledge. Except as permitted by the Loan Agreement,
it shall not, without the prior written consent of the Bank, (a) sell, assign,
or transfer any of its right, title and interest in the Collateral, except the
Company may sell Inventory in the ordinary course of business pursuant to
Section 4.4, (b) permit any levy or attachment to be made against any of the
Collateral, or (c) file any financing statement with respect to any of the
Collateral, except financing statements in favor of the Bank.
5.3. Corporate Name. The Company shall not change its corporate
name unless, before the effective date of such change, the Company delivers to
the Bank such financing statements executed by the Company that the Bank may
request to reflect such name change, together with such other documents and
instruments that the Bank may request in connection with such name change. The
Company shall not hold its right, title or interest in, nor maintain its records
relating to, any Collateral in any name other than its corporate name.
5.4. Change of Locations. The Company shall not change any of the
Collateral Locations unless, before the effective date of such change, (a) the
Company shall have given to the Bank 10 days prior written notice of its
intention to so change any such Collateral Location, clearly describing each
such new Collateral Location and providing any other information in connection
therewith that the Bank may reasonably request and (b) with respect to each such
new Collateral Location, it shall have taken such action, satisfactory to the
Bank (including, without limitation, the execution and delivery to the Bank of
such financing statements executed by the Company that the Bank may request to
reflect such change in Collateral Location together with such other documents
and instruments that the Bank may request in connection with such change), as
may be necessary to maintain the security interest of the Bank in the Collateral
at all times fully perfected and in full force and effect.
Section 6. Application of Moneys.
6.1. Payments. Except as otherwise provided herein, all monies
which the Bank shall receive either upon realization of the Lien granted
hereunder or otherwise may be applied by or at the direction of the Bank as
follows:
6.1.1. First, to the payment or reimbursement of all
reasonable advances, expenses and disbursements of the Bank (including, without
limitation, the fees and disbursements of its counsel and agents) incurred in
connection with the administration and enforcement of, or the preservation of
any rights under, this Agreement or the Loan Documents or in the collection of
the Obligations.
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6.1.2. Second, to the payment of the then existing
Obligations, matured and unmatured, in such order and in such manner as the Bank
may elect.
6.1.3. Third, after discharge and repayment of all of
the Obligations, any remaining funds shall be paid by the Bank to the Company.
6.2. Reserved Rights. The Bank shall have the continuing and
exclusive right to apply or reverse and re-apply any and all payments to any
portion of the Obligations. To the extent that the Company makes a payment or
payments to the Bank or the Bank receives any payment or proceeds of the
Collateral for the Company's benefit, which payment(s) or proceeds or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside or required to be repaid to a trustee, receiver or any other party
under any bankruptcy act, state or federal law, common law or equitable cause,
then, to the extent of such payment or proceeds received, the Obligations or the
part thereof intended to be satisfied shall be revived and continue in full
force and effect as if such payment or proceeds had not been received by the
Bank.
Section 7. Events of Default and Remedies.
7.1. Events of Default. There shall exist an Event of Default
if any of the following occurs:
7.1.1. A default or event of default occurs under any of
the Loan Documents.
7.1.2. Any representation or warranty of the Company
made in this Agreement shall prove to have been false or misleading in any
material respect on the date as of which made.
7.1.3. Any agreement, report, certificate, financial
statement or other instrument or document referred to in and furnished to the
Bank pursuant to this Agreement shall prove to have been false or misleading in
any material respect on the date as of which delivered.
7.1.4. A default in the performance or observance of any
of the covenants set forth in this Agreement to be performed or observed by the
Company provided such default shall continue unremedied for 30 days after
written notice thereof to the Company by the Bank.
7.1.5. A failure of the Bank to have a valid,
enforceable and perfected Lien upon all of the Collateral, first and prior to
all other Liens except for those permitted by the Loan Agreement.
7.1.6. Any default in payment of principal or interest
on the Note when and as due or when demand is made all as provided in a Note or
the Loan Agreement.
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7.2. Rights on Event of Default.
7.2.1. Upon the occurrence of any Default or Event of
Default, the Bank shall have the right, upon notice to the Company, (except that
upon the occurrence of an Event of Default under Section 8(h) or 8(i) of the
Loan Agreement, no notice shall be required) to declare the Obligations
immediately due and payable and may, without demand of performance or other
demand, advertisement or notice of any kind to or upon the Company or any other
Person (all and each of which demands, advertisements and/or notices are hereby
expressly waived), forthwith exercise such rights and remedies as are provided
by the UCC and such other rights and remedies in respect thereof as it may have
at law or in equity or under any of the Loan Documents, including without
limitation the right to enter any premises where any of the Collateral is
located and take possession of the same without demand or notice and without
prior judicial hearing or legal proceedings, which the Company hereby expressly
waives, and to sell all or any portion of the Collateral at public or private
sale, without prior notice to the Company except as otherwise required by law
(and, if notice is required by law, after 10 days prior written notice), at such
place or places and at such time or times and in such manner and upon such
terms, whether for cash or on credit, as the Bank in its sole discretion may
determine. Upon any such sale of any of the Collateral, the Bank may purchase
all or any of the Collateral being sold, free from any equity or right of
redemption. The Bank shall apply the proceeds of any such sale as provided in
Section 6. If such proceeds are insufficient to pay the amounts required by law,
the Company shall be liable for any deficiency in the amount so realized from
the Collateral.
7.2.2. The Company shall promptly pay or reimburse all
costs and expenses of the Bank, including, but not limited to, attorneys' fees,
incurred with respect to the enforcement or preservation of any of the Bank's
rights hereunder.
7.2.3. Except as otherwise provided in this Agreement,
the Company hereby waives presentment, demand, protest or any notice (to the
extent permitted by applicable law) of any kind in connection with this
Agreement or any Collateral.
7.2.4. The Bank shall not incur any liability as a
result of the sale of any Collateral, or any part thereof, at any private sale
conducted in a commercially reasonable manner, in compliance with any applicable
law. The Company hereby waives any claims against the Bank arising by reason of
the fact that the price at which any of the Collateral may have been sold at
such a private sale was less than the price which might have been obtained at a
public sale or was less than the aggregate amount of the Obligations, even if
the Bank accepts the first offer received and does not offer any Collateral to
more than one offeree, provided that the Bank has acted in a commercially
reasonable manner in conducting such private sale.
7.2.5. Upon any sale of all or any part of any
Collateral made either under the power of sale given hereunder or under judgment
or decree in any judicial proceedings for foreclosure or otherwise for the
enforcement of this Agreement, the Bank is hereby irrevocably appointed the true
and lawful attorney of the Company, in its name and stead, to make all necessary
deeds, bills of sale and instruments of assignment, and transfer or conveyance
of the property thus sold. For that purpose, the Bank may execute all such
documents and instruments. This power of attorney shall be deemed coupled with
an interest, and the Company hereby ratifies
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and confirms all that its said attorney, or its substitute or substitutes, shall
lawfully do by virtue of this Agreement. If so requested by the Bank or by any
purchaser of the Collateral or a portion thereof, the Company shall further
ratify and confirm any such sale or transfer by executing and delivering to the
Bank or to such purchaser or purchasers at the Company's expense all reasonable
and proper deeds, bills of sale, instruments of assignment, conveyance or
transfer and releases as may be designated in any such request.
7.2.6. When authorized in accordance with this Section
7.2, the Bank may proceed to realize upon the security interest in the
Collateral against any one or more of the types of Collateral, at any one time
or from time to time, as the Bank shall determine in its sole discretion,
subject to the provisions of this Section 7.2. The Bank shall not be required to
realize upon any one type of Collateral before proceeding to realize upon the
security interest granted in any other type of Collateral. The proceeds of any
sale of, or other realization upon, or other receipt from, all or any Collateral
shall be applied by the Bank in the manner set forth in Section 6 hereof.
7.3. Remedies Cumulative; Delay or Omission Not a Waiver. To the
extent permitted by law and not otherwise provided to the contrary under this
Agreement, no remedy given hereunder to the Bank shall be exclusive of any other
remedy, and every such remedy shall be cumulative and in addition to every other
remedy given hereunder or now or hereafter given by statute, law, equity or
otherwise to the extent not contrary to or inconsistent with the terms of this
Agreement. The Bank may, in its absolute discretion, exercise all or any of the
powers, rights or remedies given to it hereunder or which may be now or
hereafter given by statute, law or equity or otherwise. No course of dealing
between the Company and the Bank or any delay or omission of the Bank to
exercise any right, remedy or power accruing upon any Default or Event of
Default shall impair any right, remedy or power or shall be construed to be a
waiver of any such Default or Event of Default or of any right of the Bank or
acquiescence therein, and every right, remedy and power given by this Agreement
to the Bank may, to the extent permitted by law, be exercised from time to time
and as often as may be deemed expedient by the Bank.
7.4. Assembling of Collateral. In addition, upon the occurrence
of any Default, the Company, upon demand by the Bank, shall promptly assemble
the Collateral, or any part thereof designated by the Bank, and make it
available to the Bank at a place to be designated by the Bank which shall be
reasonably convenient to the Bank and the Company. The right of the Bank under
this Section 7.4 to have the Collateral assembled and made available to it is of
the essence of this Agreement and the Bank may, at its election, enforce such
right by an action for specific performance.
7.5. No Requirement to Marshal Collateral. The Company, to the
extent that it has any right, title or interest in any of the Collateral, waives
and releases any right to require the Bank to collect any of the Obligations
from any portion of the Collateral under any theory of marshaling of assets, or
otherwise, and specifically authorizes the Bank to apply any of its Collateral
against any of the Obligations in any manner that the Bank may determine.
Section 8. Termination of Agreement. Upon the last to occur of (a)
satisfaction of all obligations of the Company under this Agreement, and (b)
payment of all of the Obligations,
85
<PAGE> 95
(c) termination of the Commitment, (d) termination of all outstanding Letters of
Credit or (e) payment in full of the Note, this Agreement and the estate and
rights hereby granted by the Company in the Collateral shall automatically
cease, terminate and be void simultaneously therewith. Any of the Collateral
remaining at the time of such termination shall be fully released and discharged
from the Lien hereof and delivered to the Company by the Bank, and this
Agreement shall thereupon be released by the Bank, all at the expense of the
Company.
Section 9. Miscellaneous.
9.1. Expenses. All fees, costs or expenses, including reasonable
fees and expenses of outside legal counsel, incurred by the Bank in connection
with either the preparation, administration, amendment, modification or
enforcement of this Agreement or any other instruments, documents, or agreements
to be delivered pursuant thereto (including, without limitation, (a) all
expenses incurred in obtaining all necessary judicial and other approvals of the
transactions contemplated hereby, (b) all expenses incurred in conducting any
examinations or appraisals which the Bank, in its sole discretion, deems
necessary or appropriate, (c) all expenses incurred in assigning or otherwise
transferring control of post office boxes to the Bank or (d) out-of-pocket
collateral administration expenses) shall be paid by the Company on demand.
9.2. Term of Agreement; Successors and Assigns. This Agreement
and all covenants, agreements, representations and warranties made herein and in
the certificates delivered pursuant hereto shall survive the execution and
delivery hereof and shall continue in full force and effect until the
termination of this Agreement as set forth in Section 8. Whenever in this
Agreement either of the parties hereto is referred to, such reference shall be
deemed to include the permitted successors and assigns of such party; and all
terms and provisions of this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective permitted successors and
assigns. The Company may not assign its rights or obligations hereunder without
the prior consent of the Bank. The Bank may assign all or any of its rights or
obligations hereunder without the prior consent of the Company.
9.3. Notices. Notices, demands and communications shall be deemed
to have been properly given to the Company only when faxed to (614) 548-6541 or
when made in writing and deposited in the United States mail, registered or
certified, postage prepaid, and addressed to the Company at 155 Hidden Ravines
Drive, Powell, Ohio 43065, Attention: Chief Executive Officer, whether or not
the same are actually received by the Company. Any communication to the Bank
shall be deemed properly given if faxed to (614) 248-5518 or similarly mailed
and addressed to the Bank at Commercial Loan Department, 100 East Broad Street,
Columbus, Ohio 43271-0121.
9.4. No Implied Waivers. No delay on the part of the Bank in
exercising any right, power or privilege granted hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or privilege preclude any other or further exercise thereof. The rights
and remedies herein expressly specified are cumulative and not exclusive of any
other rights and remedies which the Bank would otherwise have.
9.5. Amendments, Modifications, Etc. No amendment, modification,
termination, or waiver of any provision of this Agreement nor consent to any
departure by the Company
86
<PAGE> 96
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Bank, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given. No notice
or demand on the Company in any case shall entitle the Company to any other or
further notice or demand in similar or other circumstances.
9.6. Applicable Law. This Agreement shall be deemed to be a
contract made under the laws of the State of Ohio, and for all purposes shall be
construed in accordance with the laws of such state.
9.7. Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.
9.8. Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures thereto were upon the
same instrument. Complete sets of counterparts shall be lodged with the Company
and the Bank.
9.9. Merger. This Agreement, the Note, the Loan Agreement and the
other Loan Documents reflect the entire understanding of the parties with
respect to their subject matter and supersede all prior agreements or
understandings with respect thereto in their entirety.
9.10. Headings. Headings of the sections of this Agreement are
for convenience only and shall not affect the construction of this Agreement.
9.11. Effective Date. This Agreement shall become effective upon
the execution of a counterpart hereof by each of the parties.
9.12. Confession of Judgment. The Company hereby authorizes any
attorney at law to appear for the Company, in an action on this Agreement, at
any time after any obligation hereunder becomes due, as herein provided, in any
court of record in or of the State of Ohio, or elsewhere, to waive the issuing
and service of process against the Company and to confess judgment in favor of
the Bank or the party entitled to the benefits of this Agreement against the
Company for the amount that may be due, with interest at the default rate
provided for in the Loan Documents and costs of suit, and to waive and release
all errors in said proceedings and judgment, and all petitions in error, and
right of appeal from the judgment rendered.
87
<PAGE> 97
The parties hereto have caused this Agreement to be duly executed by
their respective duly authorized officers as of the day and year first above
written.
BANK ONE, COLUMBUS, NA
By
----------------------------------
Thomas D. Igoe
Senior Vice President
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO
NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A
COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED
TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY
HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS,
FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH
THIS AGREEMENT, OR ANY OTHER CAUSE.
[**SUBSIDIARY**]
By
-------------------------------
Its
-------------------------------
88
<PAGE> 98
COLLATERAL LOCATIONS
EXHIBIT
[**To be prepared by the Company as
anticipated by Section 3.3**]
89
<PAGE> 99
EXHIBIT 4.1(k)
FORM OF BORROWER'S COUNSEL'S OPINION
1. The Company and each of its Wholly Owned Subsidiaries are corporations
duly organized, and each other Subsidiary is a corporation duly
incorporated, and the Company and each Subsidiary is validly existing
and in good standing under the laws of the jurisdictions in which
incorporated. The Company and each of its Subsidiaries have all
requisite power and authority, corporate or otherwise, to own or lease
their property and carry on their businesses as and in the places where
such properties are now located, leased or operated or such businesses
are now conducted and the Company has such power and authority to enter
into and perform all of its obligations under the Agreement, the Note,
the Security Agreement and the Pledge Agreement. Each Wholly Owned
Subsidiary has all requisite power and authority, corporate or
otherwise, to enter into and perform all of its obligations under its
Subsidiary Guaranty and Subsidiary Security Agreement.
2. The execution, delivery and performance by the Company of the
Agreement, the Note, the Security Agreement and the Pledge Agreement
has been duly authorized by all necessary corporate action. The
Agreement, the Note, the Security Agreement and the Pledge Agreement
have been duly executed and delivered by the Company. The Agreement,
the Note, the Security Agreement and the Pledge Agreement constitute
the legal, valid and binding obligation of the Company, and are
enforceable against the Company in accordance with their terms, subject
as to enforceability to bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and subject to
general principles of equity.
3. The execution, delivery and performance by each of the Wholly Owned
Subsidiaries of its Subsidiary Guaranty and Subsidiary Security
Agreement has been duly authorized by all necessary corporate action.
Each of the Subsidiary Guaranties and Subsidiary Security Agreements
has been duly executed and delivered by the applicable Wholly Owned
Subsidiary. Each of the Subsidiary Guaranties and Subsidiary Security
Agreements constitutes the legal, valid and binding obligation of the
applicable Wholly Owned Subsidiary, and is enforceable against such
Wholly Owned Subsidiary in accordance with its terms, subject as to
enforceability to bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and subject to
general principles of equity.
4. The Note issued and delivered to the Bank pursuant to the provisions of
the Agreement (assuming its due execution and delivery) is a valid,
binding and enforceable obligation of the Company in accordance with
its terms, subject as to enforceability to bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights
generally and subject to general principles of equity.
5. To the best of our knowledge, after due inquiry, neither the Company
nor any of its Subsidiaries is in violation of or in default under any
provision of: its Certificate of Incorporation or Bylaws (each as
amended to date); any law, rule, regulation, order, writ,
90
<PAGE> 100
judgment, injunction, decree, determination or award presently in
effect and having applicability to the Company or any of its
Subsidiaries; or any loan, indenture, credit agreement, lease or other
instrument which violation or default could materially adversely affect
the business, Consolidated financial position or Consolidated results
of operations of the Company and its Subsidiaries.
6. To the best of our knowledge, after due inquiry, the execution,
delivery and performance of the Agreement, the Note, the Security
Agreement and the Pledge Agreement by the Company and of the Subsidiary
Guaranties and Subsidiary Security Agreements by each of the Wholly
Owned Subsidiaries does not result in a violation of any terms or
conditions of the Certificate of Incorporation or Bylaws of the Company
or any Wholly Owned Subsidiary, or breach any term or provision of, or
constitute a default under, any agreement, note or other agreement to
which the Company or any of its Subsidiaries is a party, which
violation, breach or default could materially adversely affect the
business, Consolidated financial position or Consolidated results of
operations of the Company and its Subsidiaries.
7. To the best of our knowledge, after due inquiry, there is no action,
proceeding or investigation pending or threatened which questions the
validity of the Agreement, the Note or any of the Loan Documents or any
action taken or to be taken pursuant thereto, or which might result,
either in any case or in the aggregate, in any material and adverse
change in the business, operations, affairs or condition of the Company
or any of its Subsidiaries, their properties and assets or in any
material liability on the part of the Company or any of its
Subsidiaries.
8. All amounts due or to become due to the Bank under the Agreement are
"Senior Indebtedness" as that term is defined in the Indenture. The
Debentures are subordinated and subject in right to the prior payment
in full of all amounts due or to become due to the Bank under the
Agreement to the extent and in the manner set forth in the subsections
of Article Fourteen of the Indenture.
9. The Note is entitled to the benefits of, and is secured by valid Liens
created by, the Pledge Agreement, the Security Agreement, the
Subsidiary Guaranties and the Subsidiary Security Agreements.
10. The provisions of the Pledge Agreement, the Security Agreement and the
Subsidiary Security Agreements are effective to create in favor of the
Bank legal, valid and enforceable security interests as between the
parties to those agreements, but specifically excluding any opinion as
to the perfection of those security interests except as provided in
paragraph 11 below, in all right, title, and interest of the Company
and the Wholly Owned Subsidiaries in the Collateral, as defined
therein, and further subject as to enforceability to bankruptcy,
insolvency or other similar laws affecting the enforcement of
creditors' rights generally and subject to general principles of
equity.
11. Assuming (i) the accuracy and completeness of the list of Store
Locations set forth on attached Exhibit B, and (ii) that, other than
[**Centerline, Inc. as to the State of Delaware
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<PAGE> 101
and Drug Emporium, Inc. as to the States of South Carolina, Indiana and
New Hampshire**], each debtor has a place of business in more than one
county of each state listed opposite its respective name on attached
Exhibit C, and based solely upon our review of Ohio law and the CCH
Secured Transaction Guide as to the other jurisdictions, the filing of
financing statements in substantially the form of Exhibit A, with
appropriate names of the debtor inserted therein and appropriate
exhibits appended thereto (the "Financing Statements") with the
Secretary of State and County Recorder (or other comparable official)
of the states and counties listed on attached Exhibit C will be
sufficient to perfect the Bank's security interest described in the
Security Agreement and the Subsidiary Security Agreements in the
Collateral as defined therein, and the delivery to the Bank of the
Collateral, as defined in the Pledge Agreement, is sufficient to
perfect the Bank's security interest described in the Pledge Agreement,
except as follows:
(a) in the case of "instruments" [as such term is defined in
Uniform Commercial Code Section 9-105 (1)(i) (Ohio Revised Code
Section 1309.01(A)(9)] not constituting part of "chattel paper"
[as such term is defined in Uniform Commercial Code Section
9-105(1)(b) (Ohio Revised Code Section 1309.01(A)(2)], the
security interest of the Bank therein cannot be perfected
through the filing of the Financing Statements but will be
perfected if possession thereof is obtained by the Bank;
(b) insofar as the Bank's security interest relates to
after-acquired Collateral, such security interest will be
perfected only when the Company or a Subsidiary acquires rights
in such Collateral;
(c) the effectiveness of the Financing Statements terminates five
years after the date of filing, unless a continuation statement
is filed prior to such termination in accordance with Uniform
Commercial Code Section 9-403(2)-(3) [Ohio Revised Code Section
1309.40(B)-(C)];
(d) in the case of nonidentifiable cash proceeds, continuation of
perfection of the Bank's security interest therein is limited
to the degree set forth in Uniform Commercial Code Section
9-306 (Ohio Revised Code Section 1309.25);
(e) if the Company or a Subsidiary so changes its name, identity,
or corporate structure that any Financing Statement becomes
seriously misleading, the filing of such Financing Statement
will, pursuant to Uniform Commercial Code Section 9-402(7)
[Ohio Revised Code Section 1309.39(G)], be ineffective to
perfect a security interest in collateral acquired by the
Company or any such Subsidiary more than four months after the
change, unless a new appropriate financing statement is filed
before the expiration of that period;
(f) in the case of either (1) the movement of certain tangible
collateral to a state in which a Financing Statement has not
been filed or (2) a change in the location of the Company or a
Subsidiary to a state in which a Financing Statement has not
been filed, the Bank's security interest will become
unperfected unless a new appropriate financing statement is
filed in the new state within four months in
92
<PAGE> 102
accordance with Uniform Commercial Code Section 9-103 (Ohio
Revised Code Section 1309.03); and
(g) under certain circumstances described in Uniform Commercial
Code Section Section 9-307 and 9-308 (Ohio Revised Code Section
Section 1309.26 and 1309.27), purchasers of collateral may take
the same free of a perfected security interest.
12. To the best of our knowledge, after due inquiry (such inquiry
consisting solely of (a) a certificate delivered to us by the Company,
and (b) our review of the results of searches conducted by, and made
available to us by, the Bank, as set forth on attached Exhibit D), the
Bank's perfected security interest in the Collateral described in the
Security Agreement and the Subsidiary Security Agreements is prior to
any other security interest in such Collateral evidenced by the filing
of a financing statement, but only to the extent a security interest in
such Collateral created by the Security Agreement and the Subsidiary
Security Agreements may be perfected by the filing of financing
statement(s), and, assuming that the Bank has no notice of any adverse
claim in favor of any third person in the Collateral described in the
Pledge Agreement, the Bank's perfected security interest in the
Collateral described in the Pledge Agreement is prior to any Liens,
except for the following:
(a) the Bank's security interest is subordinate to the Liens
described on Exhibit D attached hereto and made a part hereof;
(b) the Bank's security interest is subordinate to Liens expressly
permitted under the Agreement or the Pledge Agreement, the
Security Agreement or the Subsidiary Security Agreements; and
(c) insofar as the Bank's security interest relates to
after-acquired Collateral, such security interest may be
subordinated in priority to the conflicting security interest
of a purchase-money creditor pursuant to Uniform Commercial
Code Section 9-312(3)-(4) [Ohio Revised Code Section
1309.31(C)-(D)] or to a federal tax lien properly filed more
than 45 days before such security interest arises (or a lesser
period, if the Bank acquires knowledge of such federal tax
lien), pursuant to 26 U.S.C. Section 6323(c).
93
<PAGE> 103
EXHIBIT 5.9
PENDING LITIGATION
Nortex Drug Distributors, Inc. v. Drug Emporium, Inc., Case No.
C2-93-767, filed August 6, 1993, and Texas Drug Distributors, Inc. v. Drug
Emporium, Inc., Case No. C2-93-847, filed August 30, 1993, both of which are
pending in the United States District Court, Southern District of Ohio, Eastern
Division. The plaintiffs in the two suits are both franchisees of the Company.
The claims set forth in the complaints are substantially the same in both suits
and allege that the Company failed to perform as required under the Company's
franchise agreements with plaintiffs and under Texas law. Plaintiffs also claim
that the Company imposed a mandatory pricing structure on plaintiffs which
violated state and federal antitrust laws. The plaintiffs are seeking treble
damages and a declaration that the noncompetition clause in the franchise
agreements is unenforceable. No specific amount of damages is claimed. The
Company is aggressively defending these suits.
94
<PAGE> 104
EXHIBIT 5.16
LIST OF SUBSIDIARIES AND AFFILIATES
<TABLE>
<CAPTION>
================================================================================
Name Shares Owned Percentage Owned
- --------------------------------------------------------------------------------
<S> <C> <C>
Centerline, Inc. 10 100.00%
- --------------------------------------------------------------------------------
Winter Fern Drug Distributors, Inc. 100 100.00%
- --------------------------------------------------------------------------------
RJR Drug Distributors Inc. 1,190 100.00%
- --------------------------------------------------------------------------------
Houston Venture, Inc. 100 100.00%
- --------------------------------------------------------------------------------
Emporium Venture, Inc. 100 100.00%
================================================================================
</TABLE>
95
<PAGE> 105
EXHIBIT 6.4(i)
DRUG EMPORIUM, INC.
BORROWING BASE CERTIFICATE
Date:
--------------------------
COLLATERAL ACTIVITY
<TABLE>
<S> <C> <C>
1. Gross FIFO Inventory owned by Drug Emporium and its Wholly-Owned
Subsidiaries as of , 199 --------------------------
------------- --
2. LESS: Any Inventory as to which the Bank does not have a first
perfected security interest as detailed on the attached schedule --------------------------
3. LESS: Reserve for shrink --------------------------
4. LESS: All other Inventory reserves, if any, other than LIFO
reserves --------------------------
5. Net FIFO Inventory (Line 1 minus Lines 2, 3 and 4) --------------------------
6. LESS: Pharmacy Inventory --------------------------
7. LESS: Inventory in Transit --------------------------
8. LESS: Face amount of Borrower guaranties of obligations of
Affiliates and Subsidiaries, other than Wholly-Owned Subsidiaries,
engaged in the Core Business (not to exceed $1,000,000) --------------------------
9. Eligible Inventory as of --------------------------
------------------------
10. Funds Available: 35% of Line 9 --------------------------
</TABLE>
96
<PAGE> 106
LOAN ACTIVITY
<TABLE>
<S> <C> <C>
11. Beginning Loan Balance (from Line 14 of previous certificate) --------------------------
12. LESS: Payments made since last report --------------------------
13. PLUS: Loans received since last report --------------------------
14. New Loan Balance as of --------------------------
--------------
15. Remaining Availability (Line 10 - Line 14) --------------------------
</TABLE>
The undersigned represents and warrants that the foregoing information
is true, complete and correct, and the collateral reflected herein complies with
the conditions, terms, warranties, representations and covenants set forth in
the Second Amended and Restated Revolving Credit Agreement between the
undersigned and BANK ONE, COLUMBUS, NA and supplements and amendments, if any,
thereto. The undersigned promises to pay to the order of BANK ONE, COLUMBUS, NA
the new loan balance reflected above, plus interest, as set forth in the Second
Amended and Restated Revolving Credit Agreement and supplements and amendments,
if any, thereto.
DRUG EMPORIUM, INC. Date
------------------------------
Authorized Signature
-------------------------------
Title
----------------------------------------------
97
<PAGE> 107
EXHIBIT 6.4(k)
LANDLORD'S WAIVER AND CONSENT
This Landlord's Waiver and Consent is executed as of this ___________ day
of ______________, 199__, by ________, located at ________ ("Landlord"), for the
benefit of Bank One, Columbus, NA, a national banking association located at 100
East Broad Street, Columbus, Ohio 43215 (the "Bank").
W I T N E S S E T H:
WHEREAS, the Bank has made or is about to make one or more loans,
advances, and/or other financial accommodations to Drug Emporium, Inc. (the
"Borrower"), to be secured in whole or in part by a guaranty of _________ (the
"Subsidiary"), which guaranty is to be secured in whole or in part by a security
agreement covering among other things, the inventory of the Subsidiary (the
"Collateral"); and
WHEREAS, the Collateral is or may be kept at the premises located at
________ (the "Premises") which are owned by the Landlord and leased to the
Subsidiary, pursuant to a lease agreement (the "Lease").
1. The Landlord consents to the location of the Collateral in the
Premises, and agrees that any right, title or interest in or to the Collateral
it may have or acquire under statute or through any other means by reason of the
location in the Premises of the Collateral, or possession thereof, or otherwise,
is subordinate to the right, title and interest of the Bank in and to the
Collateral to the full extent the Collateral secures or may hereafter secure any
and all obligations and indebtedness of every kind, now existing or hereafter
arising, and the Landlord hereby agrees that, so long as the Borrower is
obligated or indebted to the Bank, the Landlord shall not exercise any rights,
assert any claim or interest, take any action or institute any proceedings with
respect to the Collateral.
2. The Bank and its agents and representatives may enter the Premises and
remove and take possession of the Collateral at any time in accordance with said
security agreement and the Bank shall have the right to occupy the Premises for
such purposes. The Landlord will not hinder the Bank's actions in assembling the
Collateral located on the Premises, will permit the Bank to remove the
Collateral from the Premises without charge and will not hinder the Bank's
actions in enforcing its liens in the Collateral.
3. The Landlord shall and does hereby waive and relinquish in favor of
the Bank any right, claim, interest and lien which the Landlord now has or may
hereafter have in and to the Collateral, including, without limitation, any
right to levy upon the Collateral and any right to distraint with respect
thereto under any law now or hereafter in force.
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<PAGE> 108
4. In connection with exercising any of its rights pursuant to this
Waiver and Consent, the Bank agrees that it will repair any and all damage
caused to any of the real property improvements located on the Premises so as to
cause such real property improvements to be returned to the same condition they
were in immediately prior to the taking of any such actions by the Bank.
5. The provisions hereof shall remain in full force and effect until the
Borrower has fully paid and performed all of its obligations to the Bank under
all security agreements, present and future, and any extensions, modifications
and renewals thereof at any time made.
This Landlord's Waiver and Consent shall be binding upon and inure to the
benefit of the parties herein named and their respective assigns and successors
in interest.
IN WITNESS WHEREOF, the Landlord has duly executed this Landlord's Waiver
and Consent as of the day and year first above written.
Witnesses
______________________________ ____________________________________
Print Name:___________________
______________________________
Print Name:___________________
[Individual Landlord]
STATE OF______________________
COUNTY OF_____________________, SS:
BE IT REMEMBERED, that on this ________ day of _________, 199__, before
me the subscriber, a Notary Public in and for said County and State, personally
came the above-named ______________________ who acknowledged the signing of the
foregoing Waiver and Consent to be his voluntary act and deed.
IN TESTIMONY WHEREOF, I have hereunto subscribed my name and affixed my
official seal on the day and year first aforesaid.
_____________________________
Notary Public
99
<PAGE> 109
[Corporate Landlord]
STATE OF________________________
COUNTY OF_______________________, ss:
BEFORE ME, the undersigned authority, on this date personally appeared
_________ of ________ , a corporation, known to me to be the person and officer
whose name is subscribed to the foregoing instrument and being by me first duly
sworn acknowledged to me that he executed the same as the act and deed of such
corporation for the purposes and consideration therein expressed, and in the
capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this __________ day of _________,
199__.
_______________________________
Notary Public.
[Partnership Landlord]
STATE OF________________________ :
: SS
COUNTY OF_______________________ :
BE IT REMEMBERED, that on this ______ day of ___________ , 199__, before
me, the subscriber, a Notary Public in and for said county, personally came
____________, ____________ , and ___________ , being all the general partners of
_____________________________ , the Landlord in the foregoing instrument, and
acknowledged the signing thereof on behalf of the __________________ .
IN TESTIMONY WHEREOF, I have hereunto subscribed my name and affixed by
seal on this day and year aforesaid.
_______________________________
Notary Public
This instrument prepared by:
Record and Return to:
Kathleen A. Kress, Esq.
Schwartz, Kelm, Warren & Ramirez
41 South High Street
Columbus, Ohio 43215
(614) 222-3000
100
<PAGE> 1
Exhibit 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and other operating
information of the Company. The selected financial data is derived from the
consolidated financial statements of the Company. The financial data should
be read in conjunction with the consolidated financial statements and related
notes contained elsewhere in this report and Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<TABLE>
STATEMENT OF OPERATIONS DATA:
<CAPTION>
YEAR ENDED FEBRUARY 1995 1994 1993 1992 1991
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 729,503 $749,040 $ 756,710 $ 742,343 $ 620,212
Gross margin 154,724 155,473 154,002 142,404 123,869
Selling,
administrative and
occupancy expenses 144,365 146,920 146,726 136,798 108,340
Store closure and
restructuring
expense 11,850 - 4,357 7,270 -
Interest and other,
net 6,697 6,183 6,148 5,589 4,249
- -----------------------------------------------------------------------------------------------------
Income (loss) before
income taxes (8,188) 2,370 (3,229) (7,253) 11,280
Provision (benefit)
for income taxes (2,797) 1,089 (562) (2,583) 4,689
- -----------------------------------------------------------------------------------------------------
Net income (loss) $ (5,391) $ 1,281 $ (2,667) $ (4,670) $ 6,591
PER SHARE DATA:
Net income (loss) $ (0.41) $ 0.10 $ (0.20) $ (0.36) $ 0.50
Cash dividends $ - $ - $ 0.04 $ 0.12 $ 0.11
Shareholders'
equity $ 3.50 $ 3.91 $ 3.82 $ 4.06 $ 4.49
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 79,902 $ 82,176 $ 72,525 $ 74,239 $ 82,465
Total assets $ 176,444 $198,085 $ 194,935 $ 188,948 $ 183,837
Non-current
liabilities $ 63,976 $ 68,761 $ 59,861 $ 61,634 $ 62,771
Total shareholders'
equity $ 46,149 $ 51,484 $ 50,095 $ 53,254 $ 58,633
</TABLE>
11
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: The following table sets forth selected items from the
Company's Consolidated Statement of Operations expressed as a percentage of net
sales for the years indicated.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 1995 1994 1993
<S> <C> <C> <C>
Net sales (in thousands) $729,503 $ 749,040 $ 756,710
Gross margin 21.2% 20.8% 20.4%
Selling, administrative
and occupancy expenses 19.8 19.6 19.4
- ----------------------------------------------------------------------------------------------------
1.4% 1.2% 1.0%
</TABLE>
Sales for Fiscal 1995 increased one percent over Fiscal 1994 for stores open
during both periods. Overall sales decreased due to the closing of
unprofitable stores in the third and fourth quarters, offset by increased sales
from newer stores. Sales declined one percent in Fiscal 1994 resulting from a
reduction in comparable store sales of two percent, offset by the impact of
store openings and closings. Stores open during Fiscal 1995 and opened as
Fiscal 1996 begins have a sales base of approximately $650 million annually.
Pharmacy sales as a percentage of total sales have increased from 21% in Fiscal
1993 to 24% in Fiscal 1994, and 25% in Fiscal 1995. Management expects that
pharmacy sales will continue to account for approximately one-fourth of sales
in the coming year. The following table lists stores opened or acquired and
stores closed for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 1995 1994 1993
<S> <C> <C> <C>
Number of stores at
beginning of year 133 132 128
Stores opened
or acquired 5 6 12
Stores closed (25) (5) (8)
- ---------------------------------------------------------------------------------------
Total stores at end of year 113 133 132
</TABLE>
Gross margin as a percentage of sales has increased .4% in Fiscal 1995 over
Fiscal 1994 and .4% in Fiscal 1994 over Fiscal 1993 amounts. The gross margin
increases have resulted from an emphasis on improving margins through lower
product costs, selectively strengthened product pricing, and better category
management, partially offset by reductions in the retail price of the most
competitive items. Private label brands, which were introduced at the
beginning of Fiscal 1994, have contributed to overall increases in selective
category margins. For Fiscal 1996, management expects that there will be
downward pressure on the pharmacy margins as sales through managed care
networks increase as a percentage of pharmacy sales. Management's goal is to
offset this downward pressure on margins by utilizing scanning data to
improve overall category gross margins where opportunities allow, while at the
same time protecting the low price concept of the stores.
Selling, administrative and occupancy expenses decreased in Fiscal 1995
compared to Fiscal 1994 and Fiscal 1993 in total dollars but increased
slightly as a percentage of sales each year. These expenses were influenced
by the disruptions caused by closing stores during Fiscal 1995 and the overall
poor performance of those stores prior to their being closed.
Management expects increased pressure on these costs during the first half of
Fiscal 1996 resulting from the investments being made in scanning including
equipment lease costs, the impact of the rollout on labor productivity, and
new training costs. Management's goal is to more than offset these additional
costs for the year by efficiencies realized from removing the impact of the
underperforming stores that were closed, and improved store productivity in
the last half of the year once the systems are fully implemented.
12
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest and other, net increased during Fiscal 1995 and slightly during Fiscal
1994. The increase in Fiscal 1995 is primarily due to increases in interest
rates during the year. The increase in Fiscal 1994 resulted from an increase
in debt, partially offset by declining interest rates.
In January 1993, the Company developed and began executing a plan to improve
the operating results of the stores. As a result of these efforts the Company
reported seven consecutive profitable quarters. The profitable results were
achieved despite continued and consistent losses from the stores in the
Washington, D.C. market. Because the stores in the Washington, D.C. market
did not sufficiently respond to turnaround efforts and in order to free up
capital for investment in better performing markets, the Company sold seven
stores in the Washington, D.C. market and announced the closing of fourteen
additional stores. The cost associated with the 21 stores resulted in a
pretax charge of $11,850,000 recorded in November 1994. Of the $11,850,000
charge, $6,500,000 is expected to require cash outlays for rent, broker fees
and other costs associated with the leased properties. The remaining
$5,350,000 primarily results from write-downs of assets including leasehold
improvements, goodwill and discounts on liquidated inventories. The cash
outlays required by the charge are expected to be funded by the proceeds of
the sale of assets in the 21 stores. In Fiscal 1993, a charge for $4,357,000
was recorded for restructuring, severance and store closing costs.
INVENTORY VALUATION: The Company uses the LIFO method of accounting for its
inventories. Under this method, the cost of merchandise sold reported in the
financial statements approximates current costs. The Company, in computing its
LIFO charges throughout the Fiscal year, uses an estimated percentage rate of
inflation determined at the beginning of the Fiscal year. This LIFO charge is
adjusted at each year end based upon the actual weighted average percentage
rate of inflation during the Fiscal year.
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 1995 1994 1993
<S> <C> <C> <C>
LIFO charge (in thousands) $200 $654 $1,857
Inflation rate .1% .5% 1.2%
</TABLE>
Inventory turnover approximated four turns for each of the years presented.
Management's goal is to increase turns in the future by adjusting buying based
on movement information provided through scanning and by seeking alternative
distribution methods that will allow for reduced inventory of slower moving
items.
LIQUIDITY AND CAPITAL RESOURCES: The Company is operating under a bank credit
agreement as amended (Agreement) dated January 4, 1994. The Agreement allows
for a revolving credit line (Revolver) of up to $30,000,000, depending on
available collateral, and originally issued term debt of $15,000,000. The
Revolver expires on February 28, 1997, while the term debt is due in quarterly
installments through Fiscal 1999. The interest rate on the Revolver and the
term debt floated at the bank's prime rate (Prime) and Prime plus 1/4%,
respectively, during Fiscal 1995. The Agreement requires a commitment fee on
the Revolver (.375% on the first $20,000,000 and .25% on the last
$10,000,000) and has no compensating balance requirements.
13
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
During Fiscal 1995, the Company reduced borrowings by $17.2 million, as set
forth in the consolidated statements of cash flows. The cash to reduce the
borrowings came from the sale of stores in the Washington, D.C. market, a
reduced investment in inventory resulting from a net reduction in open stores,
and operational cash flows, partially offset by purchases of property and
equipment.
In April 1995, the Company completed negotiations to improve the Agreement to
allow for more flexibility in managing cash flow. The major changes include
paying off the term debt under the Agreement and increasing the allowable
borrowings under the revolving credit line to $45,000,000, depending on
available collateral. The Company expects the amendment to the Agreement to
be completed during the first quarter of Fiscal 1996.
In Fiscal 1996, the Company may purchase a portion of its convertible
subordinated debt in the open market depending upon the availability of cash
and the market price of the bonds. In addition, the Company will evaluate
acquisitions of franchisees and others giving adequate consideration to
overall capital needs and estimated return on investment.
Borrowings made pursuant to the Agreement are secured by inventory and
accounts receivable. The Agreement contains certain covenants pertaining to,
among other things, the Company's investments, net worth, working capital,
indebtedness and fixed charge coverage. The Agreement restricts payment of
dividends, stock repurchases and acquisition of the Company's convertible
subordinated debt to 50% of the cumulative net income beginning February 27,
1994. Notwithstanding this restriction, the Company is permitted to purchase
up to $10 million of its convertible subordinated debt. The Company believes
that internally generated funds and borrowings available under its Agreement
are sufficient to finance the Company's current operations.
DEFERRED TAX ASSET: The Company's deferred tax asset at February 25, 1995 is
primarily comprised of a net operating loss carryforward of $8,000,000.
Management expects to generate taxable income through operations of at least
this amount during the next few years. However, the Company has the
ability to generate taxable income through tax planning strategies, if
necessary, to utilize the net operating loss carryforward.
14
<PAGE> 5
<TABLE>
DRUG EMPORIUM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(In thousands) FEBRUARY 25, 1995 FEBRUARY 26, 1994
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,722 $ 585
Accounts receivable 10,368 9,455
Inventories 128,125 146,569
Income taxes and other current assets 6,006 3,407
-------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 146,221 160,016
Property and equipment, net 22,824 29,512
Goodwill 5,908 6,736
Other assets 1,491 1,821
-------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 176,444 $ 198,085
-------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit line $ - $ 13,480
Accounts payable 38,438 37,375
Accrued store closure and restructuring 5,862 3,935
Deferred rent 3,762 2,949
Other accrued liabilities 13,171 15,991
Current maturities of long-term debt 5,086 4,110
-------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 66,319 77,840
Convertible subordinated debt 52,000 52,000
Long-term debt, other 11,976 16,761
SHAREHOLDERS' EQUITY
Preferred stock, authorized 2,000,000 shares, none issued - -
Common stock, stated value $.10 per share, authorized
28,000,000; issued and outstanding 13,171,000 in 1995,
13,154,000 in 1994 1,317 1,315
Additional paid-in capital 32,068 32,014
Retained earnings 12,764 18,155
-------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 46,149 51,484
-------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 176,444 $ 198,085
<FN>
See accompanying notes.
</TABLE>
15
<PAGE> 6
<TABLE>
DRUG EMPORIUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(In thousands, except per share amounts)
FEBRUARY 25, 1995 FEBRUARY 26, 1994 FEBRUARY 27, 1993
<S> <C> <C> <C>
Net sales $729,503 $ 749,040 $ 756,710
Cost of sales 574,779 593,567 602,708
Gross margin 154,724 155,473 154,002
Selling, administrative and
occupancy expenses 144,365 146,920 146,726
Store closure and restructuring expense 11,850 - 4,357
Interest expense, net 6,697 5,983 5,596
Minority interest and other - 200 552
------------------------------------------------------------------------------------------------
Income (loss) before provision
(benefit) for income taxes (8,188) 2,370 (3,229)
Provision (benefit) for income )axes (2,797) 1,089 (562)
------------------------------------------------------------------------------------------------
Net income (loss) $ (5,391) $ 1,281 $ (2,667)
------------------------------------------------------------------------------------------------
Net income (loss) per share $ (.41) $ .10 $ (.20)
------------------------------------------------------------------------------------------------
Weighted average number of common
and common equivalent shares (if
dilutive) used in computing net
income (loss) per share 13,166 13,133 13,115
<FN>
See accompanying notes.
</TABLE>
<TABLE>
DRUG EMPORIUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION> ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED SHAREHOLDERS'
(In thousands) SHARES AMOUNT CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
Balance at March 1, 1992 13,110 $1,311 $31,877 $20,066 $53,254
Exercise of stock options 7 1 32 - 33
Net loss - - - (2,667) (2,667)
Dividends paid ($.04 per share) - - - (525) (525)
------------------------------------------------------------------------------------------------------------
Balance at February 27, 1993 13,117 1,312 31,909 16,874 50,095
Exercise of stock options 37 3 105 - 108
Net income - - - 1,281 1,281
------------------------------------------------------------------------------------------------------------
Balance at February 26, 1994 13,154 1,315 32,014 18,155 51,484
Exercise of stock options 17 2 54 - 56
Net loss - - - (5,391) (5,391)
------------------------------------------------------------------------------------------------------------
Balance at February 25, 1995 13,171 $1,317 $32,068 $12,764 $46,149
<FN>
See accompanying notes.
</TABLE>
16
<PAGE> 7
<TABLE>
DRUG EMPORIUM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED
(In thousands) FEBRUARY 25, 1995 FEBRUARY 26, 1994 FEBRUARY 27, 1993
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ (5,391) $ 1,281 $ (2,667)
ADJUSTMENTS TO RECONCILE TO CASH
PROVIDED BY (USED FOR) OPERATIONS:
Depreciation and amortization 7,411 6,542 6,537
Store closure and restructuring 10,606 - 4,357
Minority interest - 200 623
Deferred income taxes (1,000) 1,893 (1,244)
LIFO provision 200 654 1,857
CASH PROVIDED BY (USED FOR)
CURRENT ASSETS AND LIABILITIES:
Accounts payable and accrued expenses (3,415) 4,648 (16,094)
Accounts receivable (913) (3,067) 5,168
Inventories at current cost 14,444 (376) (15,326)
Other (1,261) (1,429) 1,707
----------------------------------------------------------------------------------------------------
Net cash provided by (used for)
operating activities 20,681 10,346 (15,082)
INVESTING ACTIVITIES
Purchase of property and equipment (3,513) (3,220) (4,163)
Proceeds from sale of property
and equipment 1,202 - -
Acquisition of minority interest - (6,256) -
----------------------------------------------------------------------------------------------------
Net cash used for investing activities (2,311) (9,476) (4,163)
FINANCING ACTIVITIES
Net borrowings (repayments)
under revolving credit line (13,480) (13,520) 22,200
Cash dividends - - (525)
Proceeds from term debt - 15,000 -
Net repayments, other (3,809) (2,338) (2,464)
Other 56 108 33
----------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities (17,233) (750) 19,244
----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
cash equivalents 1,137 120 (1)
Cash and cash equivalents,
beginning of year 585 465 466
----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,722 $ 585 $ 465
<FN>
See accompanying notes.
</TABLE>
17
<PAGE> 8
DRUG EMPORIUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION The consolidated financial statements include the
accounts of Drug Emporium, Inc. and subsidiaries (the Company) whose primary
business activity is the operation of retail stores specializing in the sale
of health and beauty aids, cosmetics, pharmaceuticals and general merchandise
at competitive prices. All significant intercompany accounts and transactions
have been eliminated in consolidation.
FISCAL YEAR The Fiscal year of the Company is the 52-53 week period ending
on the Saturday closest to February 28 (29). The quarter and Fiscal year ends
for 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1995 FISCAL YEAR 1994
<S> <C> <C>
First quarter May 28, 1994 May 29, 1993
Second quarter August 27, 1994 August 28, 1993
Third quarter November 26, 1994 November 27, 1993
Year end February 25, 1995 February 26, 1994
</TABLE>
CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash
equivalents include cash on hand and deposits at financial institutions with
maturities of less than three months.
ACCOUNTS RECEIVABLE The Company uses the allowance method of accounting for
uncollectible accounts. Accounts receivable are stated net of allowance for
uncollectible accounts of $845,000 and $613,000 as of February 25, 1995 and
February 26, 1994, respectively.
INVENTORIES Inventories are stated at the lower of cost or market. Cost is
determined by use of the last-in, first-out (LIFO) method. If current cost
had been used, inventories would have been approximately $19,581,000 and
$19,381,000 higher than reported at February 25, 1995 and February 26, 1994,
respectively. Cost of sales is primarily computed on an estimated basis and
adjusted based on physical inventories which are generally taken at all
locations twice annually.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation
is provided on a straight-line basis over the estimated useful lives of owned
assets. Leasehold improvements are amortized over the estimated useful life
of the asset or the term of the lease, whichever is shorter.
PRE-OPENING EXPENSES Expenditures related to the opening of new stores, other
than expenditures for capital assets, are charged against earnings.
GOODWILL Goodwill is amortized over 15 years using the straight-line method.
The Company amortized $611,000, $512,000 and $391,000 of goodwill during Fiscal
1995, 1994 and 1993, respectively. Accumulated amortization was $2,628,000 at
February 25, 1995 and $2,114,000 at February 26, 1994. The Company uses the
cash flow method to assess the recoverability of goodwill.
DEBT ISSUANCE COSTS Debt issuance costs incurred in connection with the
convertible subordinated debt are amortized using a straight-line method over
the term of the debt. Unamortized debt issuance costs are included as a
component of Other Assets. Amortization expense related to the issuance costs
is reported as interest expense and approximated $58,000 for each of the
Fiscal years 1995, 1994 and 1993. The amount of accumulated amortization at
February 25, 1995 and February 26, 1994 was $312,000 and $254,000,
respectively.
ADVERTISING COSTS Effective February 27, 1994, the Company adopted the
American Institute of Certified Public Accountants' Statement of Position
93-7, Reporting on Advertising Costs. Under its provisions, the Company
expenses production costs of radio and television advertising as incurred.
Since the Company had previously followed the provisions of Statement of
Position 93-7, the adoption of the new accounting statement had no effect on
income. Advertising costs, net of vendor reimbursements, were: 1995
$2,981,000; 1994 $5,571,000; and 1993 $4,712,000.
18
<PAGE> 9
DRUG EMPORIUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NET INCOME (LOSS) PER SHARE Net income (loss) per common share is determined
by dividing the weighted average number of common shares outstanding during
the year into net income (loss). Common share equivalents in the form of
stock options are excluded from the calculation since they have no dilutive
effect on per-share figures. The assumed conversion of subordinated
convertible debt into common stock had no dilutive effect on net earnings per
common share.
FRANCHISE ARRANGEMENTS Franchise arrangements with franchisees who operate
throughout the United States generally provide for initial fees, new store
opening fees and continuing payments to the Company based upon a percentage of
sales. The fees, when earned, and related costs are recorded net and included
in the Company's selling, administrative and occupancy expenses.
RECLASSIFICATIONS Certain amounts in prior years' financial statements have
been reclassified to conform with the Fiscal 1995 presentation.
2. STORE CLOSURES AND RESTRUCTURING
The Company sold seven stores in the Washington, D.C. market and closed
fourteen additional stores. The cost associated with the 21 stores resulted
in a pretax charge of $11,850,000 recorded in November 1994. Of the
$11,850,000 charge, $6,500,000 was expected to require cash outlays for rent,
broker fees and other costs associated with the leased properties. The
remaining $5,350,000 primarily results from write-downs of assets including
leasehold improvements, goodwill and discounts on liquidated inventories. The
cash outlays required by the charge are expected to be funded by the proceeds
of the sale of assets in the 21 stores. During Fiscal 1995, total exit costs
charged approximated $6,600,000 and consisted primarily of the write-down of
assets, goodwill, discounts on liquidated inventories and lease-related
expenses. Sales generated from these closed stores during fiscal years 1995,
1994 and 1993 were as follows: $71,797,000, $90,894,000, and $91,317,000,
respectively. In Fiscal 1993, a charge for $4,357,000 was recorded for
restructuring, severance and store closing costs.
3. REVOLVING CREDIT LINE
The Company is operating under a bank credit agreement as amended (Agreement)
dated January 4, 1994. The Agreement allows for a revolving credit line
(Revolver) of up to $30,000,000, depending on available collateral, and
originally issued term debt of $15,000,000. The Revolver expires on February
28, 1997, while the term debt is due in quarterly installments through Fiscal
1999. The interest rate on the Revolver and the term debt floated at the
bank's prime rate (Prime 9% at February 25, 1995) and Prime plus 1/4%,
respectively, during Fiscal 1995. The Agreement requires a commitment fee on
the Revolver (.375% on the first $20,000,000 and .25% on the last $10,000,000)
and has no compensating balance requirements.
Borrowings made pursuant to the Agreement are secured by inventory and accounts
receivable. The Agreement restricts payment of dividends, stock repurchases
and acquisition of the Company's convertible subordinated debt to 50% of the
cumulative net income beginning February 27, 1994. Notwithstanding this
restriction, the Company is permitted to purchase up to $10 million of its
convertible subordinated debt. Cash paid for interest on the revolving credit
line and long-term debt approximated interest expense in Fiscal 1995, 1994 and
1993.
19
<PAGE> 10
DRUG EMPORIUM, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(In thousands) February 25, 1995 February 26, 1994
<S> <C> <C>
Convertible subordinated debentures $ 52,000 $ 52,000
Term debt 13,500 15,000
Equipment finance agreements 2,100 4,257
Mortgage note 1,462 1,614
- ------------------------------------------------------------------------------------
69,062 72,871
Less current maturities (5,086) (4,110)
- ------------------------------------------------------------------------------------
$ 63,976 $ 68,721
</TABLE>
4. LONG-TERM DEBT
In September 1989, the Company issued $52,000,000 of 7.75% convertible
subordinated debentures. These debentures are unsecured obligations of the
Company and may be converted into common stock of the Company at any time prior
to maturity, unless previously redeemed. The conversion rate is 65.1466 shares
per $1,000 principal amount of debentures (or approximately $15.35 per share),
subject to certain adjustments under the terms of these debentures. These
debentures are redeemable at the option of the Company at 104.2% of par plus
accrued interest. This redemption rate declines annually to par on the maturity
date, October 1, 1999. The Company has reserved 3,387,624 shares of common
stock for issuance upon conversion of the debentures and 33,900 shares of Series
A Preferred Stock in connection with the rights to be distributed under the
Shareholder Rights Plan (Note 8) with respect to the reserved shares of common
stock.
The term debt is part of the Agreement discussed in Note 3 and is payable in
quarterly installments, with annual amounts due as follows: Fiscal 1996 -
$3,500,000, Fiscal 1997 - $3,000,000, and Fiscal 1998 and 1999 - $3,500,000.
The interest rate on the term debt floats at the bank's prime rate (9% at
February 25, 1995) plus 1/4%. This rate was reduced to the bank prime rate in
March 1995.
As of February 25, 1995, substantially all of the Company's furniture, fixtures
and equipment have been pledged as security for the repayment of the equipment
finance agreements. These financing agreements contain interest rates ranging
from 4.5% to 12.0%. Principal amounts related to these agreements due for
Fiscal years 1996 through 1999 are $1,418,000, $665,000, $10,000, and $7,000,
respectively.
The Company has a mortgage note secured by their corporate office building that
bears interest at a variable interest rate based on the 30-day commercial paper
rate (8.5% at February 25, 1995). Principal amounts related to the note
due for Fiscal years 1996 through 2000 are $168,000, $183,000, $199,000,
$216,000 and $235,000, respectively.
5. OPERATING LEASES
The Company leases certain equipment and retail stores under non-cancelable
operating leases which expire at various dates. Certain of the store leases
require contingent rentals based upon sales in excess of specified amounts and
generally require the Company to pay utilities, insurance and taxes, and
certain are renewable with escalation clauses. Rent expense (excluding rent
expense for closed stores from the date closed) was $27,704,000, $27,960,000 and
$27,799,000 during Fiscal 1995, 1994 and 1993, respectively.
20
<PAGE> 11
DRUG EMPORIUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At February 25, 1995 future minimum operating lease payments during the next
five years and thereafter are: 1996 - $29,165,000; 1997 - $28,312,000; 1998 -
$26,638,000; 1999 - $25,425,000; 2000 - $20,535,000; and $71,938,000
thereafter. At February 25, 1995, the future minimum lease payments for
closed stores total approximately $27,231,000 for which the Company estimates
it will receive approximately $24,565,000 of sublease income (for which there
are subleases in force aggregating $5,663,000 at February 25, 1995).
6. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment is summarized as follows:
<CAPTION>
(In thousands) February 25, February 26,
1995 1994
<S> <C> <C>
Land and building $ 2,525 $ 2,525
Furniture and fixtures 31,936 35,828
Leasehold improvements 17,053 18,575
- -----------------------------------------------------------------------------------------------
51,514 56,928
Less allowances for
depreciation and amortization (28,690) (27,416)
- -----------------------------------------------------------------------------------------------
$ 22,824 $ 29,512
</TABLE>
7. INCOME TAXES
Effective February 28, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method as required by
FASB Statement No. 109, "Accounting for Income Taxes.'' As permitted under the
new rules, prior years' financial statements were not restated. The cumulative
effect of adopting Statement No. 109 as of February 28, 1993 did not have a
material impact on the financial statements. Deferred income taxes reflect the
net tax effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The tax amounts recorded in the consolidated balance sheets
consisted of the following:
<TABLE>
<CAPTION>
TAX AFFECTED AMOUNTS
(In thousands) February 25, February 26,
1995 1994
<S> <C> <C>
DEFERRED TAX ASSETS (LIABILITIES):
Loss and AMT credit carryforwards $ 5,000 $ 1,000
Store closing reserve 2,000 1,000
Inventory valuation (3,000) (2,000)
Other, net (1,000) 2,000
- ----------------------------------------------------------------------------------------------
3,000 2,000
Current tax balance 2,000 1,000
- ----------------------------------------------------------------------------------------------
$ 5,000 $ 3,000
There were no significant deferred tax valuation allowances as of
February 25, 1995 and February 26, 1994.
Significant components of the provision for income taxes are as follows:
(In thousands) LIABILITY DEFERRED
METHOD METHOD
1995 1994 1993
------------------------------
CURRENT:
<S> <C> <C> <C>
Federal $(2,060) $ (997) $ 430
State and local 263 193 252
- ----------------------------------------------------------------------------------------------
Total current (1,797) (804) 682
Deferred (1,000) 1,893 (1,244)
- ----------------------------------------------------------------------------------------------
$(2,797) $1,089 $(562)
</TABLE>
21
<PAGE> 12
<TABLE>
DRUG EMPORIUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company received refunds, net of income taxes paid, of $49,000 during
Fiscal 1995, and made income tax payments of $1,203,000 and $1,743,000 in
Fiscal 1994 and 1993, respectively.
At February 25, 1995, the Company has net operating loss carryforwards of
$8,000,000 for income tax purposes that expire in years 2009 and 2010 and
approximately $2,425,000 of alternative minimum tax credit carryforward which
has no expiration date.
<CAPTION>
The reconciliation of income tax computed at the U.S.
federal statutory tax rates to income tax expense (benefit) is:
(In thousands) LIABILITY DEFERRED
METHOD METHOD
1995 1994 1993
<S> <C> <C> <C>
------------------------
Tax at statutory rate $(2,784) $ 806 $(1,098)
State income tax, net 174 95 166
Goodwill and minority interest 208 205 320
Other, net (395) (17) 50
- ----------------------------------------------------------------------------------------------
$(2,797) $1,089 $ (562)
</TABLE>
8. SHAREHOLDERS' EQUITY
The Company has authorized 2,000,000 shares of $1.00 par value preferred stock.
The terms of the preferred stock are subject to determination by the Company's
Board of Directors. The Company has a shareholder rights plan which provides
for the distribution of a right to purchase one-hundredth of a share of
preferred stock to each holder of common stock. The rights become exercisable
upon the occurrence of certain triggering events, as defined in the plan.
9. STOCK OPTION PLANS
<TABLE>
The Company has adopted stock option plans for key employees. Under such plans,
the Board of Directors may grant options for shares of common stock at a price
not less than 100% of the fair market value of the shares on the date of grant.
If an employee owns stock possessing more than 10% of the total combined voting
power of the Company, the option price must be 110% of the fair market value on
the date of grant. The options vest based on the term of the optionee's
continuous employment at 10% to 40% per year. Service prior to date of grant is
considered. The following is a summary of transactions under the option plans:
<CAPTION>
SHARES UNDER OPTION
(In thousands) 1995 1994 1993
<S> <C> <C> <C>
Outstanding, beginning of year 664 395 455
Granted during the year (at prices from $4.13 to $6.50 per share) 323 384 -
Cancelled during the year (39) (78) (53)
Exercised during the year (at prices from $2.14 to $5.33 per share) (17) (37) (7)
- ----------------------------------------------------------------------------------------------------------------------
Outstanding, end of year (at prices ranging from $2.14 to $8.81 per share) 931 664 395
- ----------------------------------------------------------------------------------------------------------------------
Eligible, end of year for excerise currently (at prices ranging from $2.14 to
$8.81 per share) 283 516 338
- ----------------------------------------------------------------------------------------------------------------------
At the end of Fiscal years 1995, 1994 and 1993, there were 221,000, 775,000 and 97,000 shares, respectively, reserved
for future grants.
</TABLE>
22
<PAGE> 13
DRUG EMPORIUM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. ACQUISITION OF MINORITY INTEREST AND OTHER
On December 3, 1993, the Company acquired substantially all of the remaining
minority shares of the Drug Emporium franchise which operates eleven stores in
Cincinnati and Dayton, Ohio. The cash transaction was financed utilizing the
Company's existing revolving credit line.
11. DEFINED CONTRIBUTION PLAN
The Company provides a defined contribution 401(k) plan to substantially all
employees. Participants may make voluntary contributions to the plan
generally up to 15% of their compensation. Approximately $50,000 related to
administrative and investment costs was charged to expense for this plan in
1995, 1994 and 1993.
12. CONTINGENCY
The Company is a defendant in suits filed by two current franchisees of the
Company alleging failure to perform as required by the franchise agreements and
violation of state and federal antitrust laws. The plaintiffs claim a loss of
investment capital, out-of-pocket expenses and lost profits and goodwill and
seek an unspecified amount of damages. The Company intends to vigorously
defend these suits and believes the ultimate outcome of these suits will not
materially affect the financial position or results of operation of the
Company.
<TABLE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
<CAPTION>
NET GROSS NET INCOME NET INCOME (LOSS) STOCK PRICES DIVIDENDS PAID
SALES PROFIT (LOSS) PER COMMON HIGH LOW PER COMMON
(In thousands) SHARE SHARE
<S> <C> <C> <C> <C> <C> <C> <C>
First quarter $188,678 $ 39,554 $ 269 $ .02 6.125 4.000 $ -
Second quarter 184,169 38,509 228 .02 5.500 5.000 -
Third quarter 176,343 37,256 (7,892) (.60) 5.375 4.125 -
Fourth quarter 180,313 39,405 2,004 .15 5.625 3.875 -
---------------------------------------------------------------------------------------------------------
$729,503 $154,724 $(5,391) $(.41) $ -
First quarter $182,538 $ 37,919 $ 151 $ .01 $6.875 $4.000 $ -
Second quarter 184,050 38,280 186 .01 7.625 6.250 -
Third quarter 180,209 38,212 89 .01 6.500 4.625 -
Fourth quarter 202,243 41,062 855 .07 6.625 4.625 -
- ---------------------------------------------------------------------------------------------------------------
$749,040 $155,473 $ 1,281 $ .10 $ -
</TABLE>
In the third quarter of Fiscal 1995 the Company recorded $11,850,000
($7,821,000 after tax) in expenses related to store closings.
23
<PAGE> 14
BOARD OF DIRECTORS
DRUG EMPORIUM, INC.
We have audited the accompanying consolidated balance sheets of Drug Emporium,
Inc. and subsidiaries as of February 25, 1995 and February 26, 1994, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended February 25, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Drug
Emporium, Inc. and subsidiaries at February 25, 1995 and February 26, 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended February 25, 1995, in conformity with
generally accepted accounting principles.
/S/ ERNST & YOUNG
Columbus, Ohio
April 6, 1995
<PAGE> 1
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8, Numbers 33-25768 and 33-69638) of Drug Emporium, Inc. and
subsidiaries of our report dated April 6, 1995, with respect to the
consolidated financial statements of Drug Emporium, Inc. and subsidiaries
included in this Annual Report (Form 10-K) for the year ended February 25,
1995.
ERNST & YOUNG LLP
Columbus, Ohio
May 26, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-25-1995
<PERIOD-START> FEB-27-1994
<PERIOD-END> FEB-25-1995
<EXCHANGE-RATE> 1
<CASH> 1,722
<SECURITIES> 0
<RECEIVABLES> 10,368
<ALLOWANCES> 0
<INVENTORY> 128,125
<CURRENT-ASSETS> 13,405
<PP&E> 51,514
<DEPRECIATION> (28,690)
<TOTAL-ASSETS> 176,444
<CURRENT-LIABILITIES> 66,319
<BONDS> 63,976
<COMMON> 1,317
0
0
<OTHER-SE> 44,832
<TOTAL-LIABILITY-AND-EQUITY> 176,444
<SALES> 729,503
<TOTAL-REVENUES> 729,503
<CGS> 574,779
<TOTAL-COSTS> 144,365
<OTHER-EXPENSES> 11,850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,697
<INCOME-PRETAX> (8,188)
<INCOME-TAX> (2,797)
<INCOME-CONTINUING> (5,391)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,391)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
