<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
November 28, 1998 OR
-----------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
___________________ TO ___________________
Commission File Number 0-16998
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DRUG EMPORIUM, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1064888
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
155 Hidden Ravines Drive, Powell, Ohio 43065
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (740) 548-7080
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- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at November 28, 1998
- ---------------------------- -----------------
Common Stock, $.10 par value 13,179,785 shares
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<PAGE> 2
<TABLE>
INDEX
DRUG EMPORIUM, INC.
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets . . . . . . . . . . . . 3
Consolidated Statements of Operations . . . . . . . 4
Consolidated Statements of Cash Flows . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 8-12
PART II. OTHER INFORMATION
- --------------------------
Item 5. Other Information . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 13
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
2
<PAGE> 3
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
<CAPTION>
November 28, 1998 February 28, 1998
----------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 593 $ 783
Accounts receivable .................................. 13,093 17,410
Inventories, net of LIFO reserve of $23.7 million
and $21.8 million at November 28, 1998 and
February 28, 1998, respectively .................. 172,271 167,292
Income taxes and other ............................... 1,958 1,692
-------- --------
Total current assets ......................... 187,915 187,177
Property and equipment, net ............................ 23,936 26,777
Goodwill ............................................... 3,805 4,215
Other assets ........................................... 2,851 1,615
-------- --------
Total assets ................................ $218,507 $219,784
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit line ............................. $ 19,197 $ 22,200
Accounts payable .................................. 66,517 64,025
Accrued liabilities ............................... 20,510 14,785
Deferred income ................................... 3,472 3,679
Current maturities of long-term debt .............. 220 3,375
-------- --------
Total current liabilities .................. 109,916 108,064
Deferred rent .......................................... 3,948 4,164
Convertible subordinated debt .......................... 49,421 49,421
Long-term debt, other .................................. 585 6,745
-------- --------
Total long-term debt ...................... 50,006 56,166
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 13,179,785 at
November 28, 1998 and 13,179,785 at February 28,
1998 ............................................. 1,318 1,318
Additional paid-in capital ........................... 32,123 32,123
Retained earnings .................................... 21,196 17,949
-------- --------
Total shareholders' equity .................. 54,637 51,390
-------- --------
Total liabilities and shareholders' equity .. $218,507 $219,784
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In thousands, except per-share data)
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
November 28, November 29, November 28, November 29,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ............................ $199,132 $199,571 $613,149 $613,020
Cost of sales ........................ 156,251 157,227 484,069 482,505
-------- -------- -------- --------
Gross Margin ..................... 42,881 42,344 129,080 130,515
Selling, administrative and
occupancy expenses ............... 42,980 40,017 126,227 122,713
Special charges (credits) ............ (6,760)
Interest expense, net ................ 1,278 1,854 4,206 5,993
-------- -------- -------- --------
Income before provision
(benefit) for income taxes........ (1,378) 473 5,407 1,809
Provision (benefit) for
income taxes ..................... (611) 190 2,160 724
-------- -------- -------- --------
Net income (loss) ................... $ (767) $ 283 $ 3,247 $ 1,085
======== ======== ======== ========
Earnings per common share:
Basic .............................. $ (.06) $ .02 $ .25 $ .08
======== ======== ======== ========
Diluted ............................ $ (.06) $ .02 $ .25 $ .08
======== ======== ======== ========
Weighted average number of
Common shares outstanding:
Basic .............................. 13,180 13,180 13,180 13,180
======== ======== ======== ========
Diluted ............................ 13,180 13,186 13,186 13,201
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
<TABLE>
DRUG EMPORIUM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
<CAPTION>
Nine Months Ended
-----------------
November 28, 1998 November 29, 1997
----------------- -----------------
<S> <C> <C>
Operating activities:
Net income ................................................... $ 3,247 $ 1,085
Adjustments to reconcile to cash provided by Operations:
Depreciation and amortization ............................ 6,757 4,923
LIFO provision ........................................... 1,950 2,613
Cash provided by (used for) current assets and liabilities:
Accounts payable and accrued liabilities ................. 7,962 (1,061)
Accounts receivable ...................................... 4,317 (1,964)
Inventories at current cost .............................. (6,929) 2,767
Other .................................................... (1,788) 758
-------- -------
Net cash provided by operating activities ..................... 15,516 9,121
Investing activities:
Purchase of property and equipment, net ....................... (3,388) (1,925)
-------- -------
Net cash used in investing activities ......................... (3,388) (1,925)
Financing activities:
Net borrowings (repayments) under revolving
credit line .............................................. (3,003) (5,000)
Net repayments on term debt and other ........................ (9,315) (2,201)
-------- -------
Net cash used in financing activities ........................ (12,318) (7,201)
-------- -------
Increase (decrease) in cash and cash
equivalents .................................................. (190) (5)
Cash and cash equivalents, beginning of period .................. 783 779
-------- -------
Cash and cash equivalents, end of period ........................ $ 593 $ 774
======== =======
</TABLE>
See accompanying notes.
5
<PAGE> 6
DRUG EMPORIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited consolidated financial statements include
the accounts of Drug Emporium, Inc. and subsidiaries.
The information furnished reflects all adjustments which are, in the
opinion of management, necessary to fairly present the consolidated
financial position, results of operations and cash flows on a
consistent basis. Certain amounts in prior period financial statements
have been reclassified to conform with the current presentation.
2. The Company's cost of sales is computed using the gross profit method.
The gross profit percentage used is validated by physical inventories
conducted twice a year primarily in the second and fourth quarters and
the actual results of the LIFO calculations in the fourth quarter.
3. The following table sets forth the computation of basic and diluted
earnings.
<TABLE>
<CAPTION>
(Unaudited) (In thousands, except per share data)
Three Months Ended Nine Months Ended
------------------ -----------------
November 28, November 29, November 28, November 29,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income and numerator for
basic earnings per share -
income available to common
stockholders ........................... $ (767) $ 283 $ 3,247 $ 1,085
Effect of dilutive securities:
7.75% convertible
debentures ......................... (A) (A) (A) (A)
------- ------- ------- -------
Numerator for diluted earnings
per share - income available to
common stockholders after
assumed conversions .................... $ (767) $ 283 $ 3,247 $ 1,085
======= ======= ======= =======
Denominator:
Denominator for basic earnings
Per share - weighted-
average shares ........................ 13,180 13,180 13,180 13,180
Effect of dilutive securities:
Employee stock options (B) ......... 0 6 6 21
7.75% convertible
debentures (A) ................... -- -- -- --
------- ------- ------- -------
Denominator for diluted earnings
Per share-adjusted weighted
-average shares and assumed
conversions ........................... 13,180 13,186 13,186 13,201
======= ======= ======= =======
Basic earnings per share .................. $ (.06) $ .02 $ .25 $ .08
======= ======= ======= =======
Diluted earnings per share ................ $ (.06) $ .02 $ .25 $ .08
======= ======= ======= =======
</TABLE>
(A) The effect of the 7.75% convertible debentures is antidilutive and thus
excluded in the calculation of diluted earnings per share.
(B) Additional options to purchase shares of common stock were outstanding
during each period but were not included in the computation of diluted
earnings per share because the exercise price of the options was
greater than the average market price of the common shares and/or there
was a net loss period and, therefore, the effect would be antidilutive.
6
<PAGE> 7
DRUG EMPORIUM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
4. The Company entered into an agreement with Western Drug Distributors,
Inc., its franchise store operator in the Seattle and Portland area, to
terminate Western's Franchise agreement related to the sale of Western
Drug to Longs Drug Stores of Walnut Creek, California. The Company's
agreement with Western Drug provided for a one-time lump sum payment to
Drug Emporium, Inc. of $15.4 million. Approximately $14.4 million of
the payment was related to the buyout and is recorded as a special
credit in the Company's Statement of Operations. The remaining amounts
of the payment relate primarily to franchise fee receivables accrued in
the normal course of business, reimbursements for legal costs and
interest.
5. As a result of an ongoing review of its business operations, the
Company recorded special and nonrecurring charges in its second quarter
of $9.4 million. The charges include a noncash component of $1.3
million to write down store equipment, fixtures and leasehold
improvements at store locations to be closed, an accrual of $6.4
million to close seven underperforming store locations and record
additional costs related to the Washington, D. C. area vacant store
locations, and $1.7 million recorded as a component of gross margin in
the current period statement of operations due to store closure-related
inventory liquidations and other inventory writedowns. The
non-recurring inventory-related costs of the special charge have been
recorded as a component of gross margin in accordance with Emerging
Issues Task Force (EITF) Issue No. 96 - 9.
6. During the quarter, the Company terminated its existing banking
relationship and entered into a new agreement with Bank Boston (the
"Agreement"). The Agreement allows for revolving borrowings of up to
$100,000,000, depending upon available collateral, and expires on
October 31, 2003. The Agreement provides an approximately 60% advance
rate against inventory collateral, and allows for a more favorable
LIBO-based borrowing rate. In addition, the repurchase of bonds and
stock and the payment of dividends are no longer prohibited although
some restrictions apply. As of November 28, 1998, the Company had
excess availability under its revolving credit agreement of
$80,800,000.
7. On December 31, 1998 the Company signed a definitive agreement to
acquire the Vix drug store chain, which operates twelve deep discount
drug stores in the Buffalo and Rochester, New York area. The acquired
stores are operated under the Vix name by Tops, a division of Ahold
International. The asset purchase agreement calls for Drug Emporium to
pay an estimated $32.5 million in cash at closing and assume the store
leases. The acquisition will be financed through the use of the
Company's bank facility and is subject to regulatory approval. The
Company expects the acquisition to be accretive to earnings. Closing is
expected to occur in January 1999.
8. The accompanying unaudited consolidated financial statements are
presented in accordance with the requirements for Form 10Q and
consequently do not include all the disclosures normally required by
generally accepted accounting principles. Reference should be made to
the Company's Form 10-K for the fiscal year ended February 28, 1998
(File No. 0-16998) for additional disclosures including a summary of
the Company's accounting policies, which have not significantly
changed.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table sets forth selected items derived from the
Company's consolidated statements of operations expressed as a percentage of net
sales for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
November 28, 1998 November 29, 1997 November 28, 1998 November 29, 1997
----------------- ----------------- ----------------- -----------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales (in thousands) ........ $199,132 $199,571 $613,149 $613,020
======== ======== ======== ========
Gross margin .................... 21.5% 21.2% 21.3%(1) 21.3%
-------- -------- -------- --------
Selling, administrative and
Occupancy expenses ........ 21.6% 20.0% 20.6% 20.0%
-------- -------- -------- --------
Operating income ............... (.1%) 1.2% .7%(2) 1.3%
======== ======== ======== ========
</TABLE>
(1) Excludes nonrecurring store closure related inventory liquidations and
other inventory writedowns of $1.7 million recorded in the second
quarter of fiscal 1999.
(2) Excludes the effects of (1) above and the $6.4 million and $1.3 million
of special charges related to non-inventory store closure costs
recorded in the second quarter of fiscal 1999.
Fiscal 1999 third quarter sales decreased .3% to $199.1 million in the
current year from $199.6 million in the prior year period. The decline was a
result of having fewer stores in the quarter relative to the prior year period,
partially offset by a comparable store sales increase of 1.1%. For the nine
month period ended November 28, 1998, sales were $613.1 million compared to
$613.0 million for the comparable period of the prior fiscal year as a result of
comparable store sales increases of 1.5% and fewer stores in the current year
period.
During the quarter, the Company's gross margin improved .3% over the
prior year period as a result of higher non-pharmacy margins, partially offset
by lower pharmacy margins. On a year to date basis, gross margins were lower in
fiscal 1999 compared to the prior year due to lower pharmacy margins and the
impact of $1.7 million in special charges related to store closing inventory
liquidation costs and discontinued inventory writedowns recorded in the second
quarter. Excluding the impact of these one-time charges, year to date gross
margins were 21.3%, which is comparable to the prior year period.
The Company's quarterly results reflect a net loss of six cents per
share for the quarter compared to a net income per share of two cents in the
prior year period. Higher advertising, depreciation, and benefits costs, as well
as higher expenses related to certain reserves caused net income to decline in
the quarter relative to the prior year. Certain of these costs were recognized
in the fourth quarter of the prior year and account for much of the third
quarter's income decline compared to the prior year period. Partially offsetting
these costs was a decrease in interest expense of $576,000 compared to the prior
year quarter. For the nine month period, net income before special charges and a
one time gain was two cents per share compared to eight cents per share in the
prior year. Items impacting the year to date results relative to the prior year
were primarily the timing differences related to the recognition of certain
costs as discussed above that impacted the third quarter and lower franchise
fees, partially offset by lower interest and payroll costs.
8
<PAGE> 9
The following table lists corporately-owned stores openings and store
closing through the second quarter ended November 28, 1998 and the similar prior
year period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
November 28, 1998 November 29, 1997 November 28, 1998 November 29, 1997
----------------- ----------------- ----------------- -----------------
(Unaudited)
<S> <C> <C> <C> <C>
Number of stores at
Beginning of period ......... 133 136 135 138
Stores opened or acquired ....... 0 1 0 1
Stores closed or sold ........... (1) (0) (3) (2)
---- ---- ---- ----
Total stores at end of period ... 132 137 132 137
==== ==== ==== ====
</TABLE>
9
<PAGE> 10
RECONCILIATION OF NET INCOME TO NET INCOME (LOSS)
BEFORE SPECIAL CHARGES AND ONE-TIME GAIN
(Unaudited) (In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 28, 1998 November 28, 1998
------------------ -----------------
<S> <C> <C>
Net Income (loss) $(767) $ 3,247
Special charges, net of income tax (1) 5,613
One-time gain, net of income tax (2) (8,655)
----- -------
Net income (loss) before special charges and
one-time gain $(767) $ 205
Per Share Calculations:
Earnings (loss) per share, as reported $(.06) $ .25
Impact of special charges .43
Impact of one-time gain (.66)
----- -------
Earnings (loss) per share before special
charges and one-time gain $(.06) $ .02
</TABLE>
(1) In addition to the special charges of $6.4 million and $1.3 million
(pre-tax) related to non-inventory store closure costs, $1.7 million
(pretax) in special charges related to nonrecurring store closing
inventory liquidations and other inventory writedowns was recorded as a
component of gross margin.
(2) Gain on Seattle franchise buyout, after adjusting for franchise
receivables and interest income.
Special Charges
- ---------------
The Company recorded special and nonrecurring charges in its second
quarter of $9.4 million. The charges include a noncash component of $1.3 million
to write down store fixtures, equipment and leaseholds at store locations to be
closed, an accrual of $6.4 million to close seven underperforming store
locations and to record additional costs related to the Washington, D. C. area
vacant store locations, and $1.7 million recorded as a component of gross margin
resulting from store closure-related inventory liquidations and other inventory
writedowns. The nonrecurring inventory-related costs of the special charge have
been recorded as a component of gross margin in accordance with (EITF) Issue No.
96 - 9.
The Company anticipates that the store closures will be accretive to
earnings beginning late in the fourth quarter of the Company's current fiscal
year. The stores to be closed are not concentrated in a particular geographic
area. Although the Washington, D.C. vacant locations have taken the Company
longer than expected to sublease, the charge recorded will be the final expense
related to these locations as the charge covers 100% of the remaining lease
obligations on all of the Washington, D.C. locations which have not been
subleased. The increase in accrued liabilities at November 28, 1998 relative to
February 28, 1998 can be attributed primarily to increases in the store closing
reserves.
One-Time Gain Related to Seattle Franchise Buyout
- -------------------------------------------------
The Company finalized its agreement with Western Drug Distributors,
Inc., its franchise store operator in the Seattle and Portland area, to
terminate Western's Franchise agreement related to the sale of Western Drug to
Longs Drug Stores of Walnut Creek, California. The Company's agreement with
Western Drug provided for a one-time lump sum payment to Drug Emporium, Inc. of
$15.4 million. Approximately $14.4 million of the payment was related to the
buyout and is recorded as Other Income in the Company's Statement of Operations.
The remaining amounts of the payment relate primarily to franchise fee
receivables accrued in the normal course of business, reimbursements for legal
costs and interest. Because franchise income is recorded as a reduction to
operating costs in the Company's Statement of Operations, the elimination of
franchise fees from this market results in an increase in annual operating costs
of approximately .2 % of sales, and a decrease in annual interest expense of
approximately .2 % of sales as measured from fiscal 1998 results.
10
<PAGE> 11
Store Growth and Remodels
- -------------------------
The Company has plans to open approximately six new stores in the next
twelve months and continue its store growth after that time at a similar pace.
Leases have been signed for two of the projected six locations. In addition, the
Company has also been aggressively updating and remodeling its existing store
base. This renovation program is expected to result in a majority of its stores
having undergone some type of remodeling by the end of the next fiscal year. To
date, approximately one-fourth of the Company's stores have experienced a major
or minor remodeling since this program started.
Inventory Valuation
- -------------------
The Company uses the LIFO method of accounting for its inventories.
Under this method, the cost of merchandise sold and reported in the financial
statements approximates current cost. In computing its LIFO charge throughout
the fiscal year, the Company uses an estimated inflation rate, which was one and
one-half percent in Fiscal 1999 and two percent in Fiscal 1998. This estimated
LIFO charge is adjusted at each year end based upon the actual weighted average
inflation rate during the year.
Liquidity and Capital Resources
- -------------------------------
During the quarter, the Company terminated its existing banking
relationship and entered into a new agreement with Bank Boston (the
"Agreement"). The Agreement allows for revolving borrowings of up to
$100,000,000, depending upon available collateral, and expires on October 31,
2003. The Agreement provides an approximately 60% advance rate against inventory
collateral, a more favorable borrowing rate, and allows for greater flexibility
with respect to financial covenants. In addition, the repurchase of bonds and
stock and the payment of dividends are no longer prohibited although some
restrictions apply. As of November 28, 1998, the Company had excess availability
under its revolving credit agreement of $80,800,000. The Company believes that
internally generated funds and borrowings available under its Agreement are
sufficient to finance its current operations, store expansion and remodeling
plans.
Year 2000
- ---------
The Company has completed its assessment of the Information
Technology-related (IT-related) systems for the Year 2000 issue. For IT-related
systems, the Company's accounting software and AS400 applications are Year 2000
compliant. Processes which will not be compliant until the fourth quarter of the
Company's current fiscal year (which ends in February 1999) include the
pharmacy, payroll, and host merchandising systems, certain older personal
computers, certain PC applications, vendor EDI documents and other applications.
Processes which will not be compliant until the first quarter of the next fiscal
year include the company's store register system (a new system is currently
being implemented in all stores). The Company will complete its assessment of
non-IT-related systems for Year 2000 compliance by the end of the fourth quarter
of its current fiscal year. Major non-IT-related systems utilized by the Company
include the telephone systems and store security systems, among others. If the
Company determines that any non-IT- related systems are not Year 2000 compliant,
it will be necessary to adjust the estimates of the cost of the Year 2000
remediation.
The Company has surveyed and is working with its outside suppliers and
software vendors related to Year 2000 compliance. As it relates to the major
suppliers of the Company, some assurances related to Year 2000 readiness have
been received but not all vendors have indicated that they will be compliant
within the required time periods. Most of the external software companies that
the company utilizes for pharmacy, merchandising, store register and accounting
systems have provided the company with a certified Year 2000 compliant version
of their respective products. Certain vendor certifications received were not
valid, however, which has caused a brief delay in obtaining compliance
objectives.
The Company estimates that its Year 2000 effort is approximately 60%
complete as of the end of November 1998 and will be 80% complete as of the end
of February 1999. The Company's total estimate of Year 2000 compliance costs is
projected to be $1,150,000, with $1,000,000 estimated to be incurred related to
the purchase of hardware and software to be capitalized and $150,000 related to
costs which will be expensed as incurred.
11
<PAGE> 12
The Company expects to incur nearly all of its Year 2000 costs during its
current fiscal year, and the majority of these costs have been incurred as of
the end of the third quarter. Most of the costs are related to the hardware
required to run the Year 2000 compliant version of the in-store pharmacy system
which was required to be implemented approximately one year earlier than would
otherwise have been necessary.
The Company currently does not have a contingency plan in the event of
a particular system not being Year 2000 compliant. Such a plan will be developed
if it becomes clear that the company is not going to achieve its scheduled
compliance objectives. If the Company does not become Year 2000 compliant in a
timely manner, the Year 2000 issue could have a material impact on the
operations of the Company by impairing its ability to process customer
transactions, order and pay for merchandise for sale, and perform certain other
functions. In addition, although the Company has initiated formal communications
with all of its significant suppliers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issues and the Company has received some assurances regarding these
issues from its vendors, there is no guarantee that these third party systems
will be compliant and in the event of non-compliance would not have an adverse
effect on the Company. For example, if some of the Company's merchandise vendors
are not Year 2000 compliant it could impact the ability of the company to
procure merchandise from those vendors.
The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
Forward-Looking Statements
- --------------------------
Statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, as well as in certain other parts of this
report on Form 10-Q that look forward in time, which includes everything other
than historical information, are forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance, and underlying assumptions and
other statements which are other than statements of historical facts. From time
to time, the Company may publish or otherwise make available forward-looking
statements of this nature. All such forward-looking statements are based on the
current expectations of management and are subject to, and are qualified by,
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied by those statements. These risks and
uncertainties include, but are not limited to the high level of competition as
to price and selection from a variety of sources, the recent pressure on
pharmacy margins from managed care networks, the Company's ability to
economically eliminate under-performing stores, the Company's ability to
identify and address all Year 2000 issues and general economic conditions.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 5. Other Information
Stockholder Proposals
- ---------------------
Proposals of stockholders intended to be presented at the Company's
1999 annual meeting of stockholders must be received at the Company's principal
executive offices not later than January 20, 1999 in order to be included in the
Company's proxy statement and form of proxy relating to the 1999 annual meeting.
Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange
Act 1934, as amended, if a stockholder who intends to present a proposal at the
1999 annual meeting of stockholders does not notify the Company of such proposal
on or prior to April 5, 1999, then management proxies would be allowed to use
their discretionary voting authority to vote on the proposal when the proposal
is raised at the annual meeting, even though there is no discussion of the
proposal in the 1999 proxy statement.
Pursuant to the Company's Bylaws, proposals of stockholders intended to
be presented at the Company's 1999 annual meeting of stockholders must be
received by the Secretary of the Company at the Company's principal executive
offices not later than the 60th day prior to the date of the annual meeting in
order to be brought before the meeting. (Although, as stated above, the proposal
must be received no later than January 20, 1999 in order to be included in the
proxy statement relating to the 1999 annual meeting). The Company currently
intends to hold the 1999 annual meeting of stockholders on June 23, 1999.
Item 6. Exhibits and Reports
10. Material Contracts
10.1 Loan and Security Agreement
BankBoston Retail Finance, Inc. and
Drug Emporium, Inc.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements 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 1/6/99 By /s/ David L. Kriegel
---------- -----------------------------
David L. Kriegel
Chairman
Chief Executive Officer
Date 1/6/99 By /s/ Michael P. Leach
---------- -----------------------------
Michael P. Leach
Chief Financial Officer
14
<PAGE> 1
Exhibit 10.1
===============================================================================
========================================================
LOAN AND SECURITY AGREEMENT
========================================================
BANKBOSTON RETAIL FINANCE INC.
AGENT FOR
THE LENDERS REFERENCED HEREIN
DRUG EMPORIUM, INC.
THE BORROWER
========================================================
October 28, 1998
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
ARTICLE 1 - DEFINITIONS:
ARTICLE 2 - THE REVOLVING CREDIT:
<S> <C> <C>
2-1. Establishment of Revolving Credit.......................................................... .21 .
2-2. Advances in Excess of Borrowing Base........................................................ .22 .
2-3. Risks of Value of Collateral................................................................ .22 .
2-4. Loan Requests............................................................................... .22 .
2-5. Making of Loans Under Revolving Credit...................................................... .24 .
2-6. The Loan Account............................................................................ .24 .
2-7. The Revolving Credit Notes.................................................................. .25 .
2-8. Payment of The Loan Account................................................................. .26 .
2-9. Interest Rates.............................................................................. .26 .
2-10. Commitment Fee.............................................................................. .27 .
2-11. Agent's Fee................................................................................. .27 .
2-12. Line (Unused) Fee........................................................................... .27 .
2-13. Early Termination Fee....................................................................... .28 .
2-14. Concerning Fees............................................................................. .28 .
2-15. Agent's and Lenders' Discretion............................................................. .28 .
2-16. Procedures For Issuance of L/C's............................................................ .29 .
2-17. Fees For L/C's.............................................................................. .30 .
2-18. Concerning L/C's............................................................................ .30 .
2-19. Changed Circumstances....................................................................... .32 .
2-20. Increased Costs............................................................................. .33 .
2-21. Lenders' Commitments........................................................................ .33 .
ARTICLE 3 - CONDITIONS PRECEDENT:
3-1. Corporate Due Diligence..................................................................... .35 .
3-2. Opinion..................................................................................... .35 .
3-3. Warehousemen's Waivers...................................................................... .35 .
3-4. Additional Documents........................................................................ .35 .
3-5. Officers' Certificates...................................................................... .36 .
3-6. Representations and Warranties.............................................................. .36 .
3-7. Minimum Excess Availability................................................................. .36 .
3-8. All Fees and Expenses Paid.................................................................. .36 .
3-9. No Suspension Event......................................................................... .37 .
3-10. No Adverse Change........................................................................... .37 .
ARTICLE 4 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES:
4-1. Payment and Performance of Liabilities...................................................... .37 .
4-2. Due Organization - Corporate Authorization - No Conflicts................................... .37 .
4-3. Trade Names................................................................................. .38 .
4-4. Infrastructure.............................................................................. .38 .
4-5. Locations................................................................................... .39 .
4-6. Title to Assets............................................................................. .40 .
4-7. Indebtedness................................................................................ .40 .
4-8. Insurance Policies.......................................................................... .41 .
4-9. Licenses.................................................................................... .41 .
4-10. Leases...................................................................................... .42 .
</TABLE>
..ii ..
<PAGE> 3
<TABLE>
<S> <C> <C>
4-11. Requirements of Law......................................................................... .42 .
4-12. Maintain Properties......................................................................... .42 .
4-13. Pay Taxes................................................................................... .42 .
4-14. No Margin Stock............................................................................. .44 .
4-15. ERISA....................................................................................... .44 .
4-16. Hazardous Materials......................................................................... .44 .
4-17. Litigation.................................................................................. .45 .
4-18. Permitted Acquisitions...................................................................... .45 .
4-19. Dividends or Investments.................................................................... .46 .
4-20. Loans....................................................................................... .47 .
4-21. Protection of Assets........................................................................ .47 .
4-22. Line of Business............................................................................ .47 .
4-23. Affiliate Transactions...................................................................... .47 .
4-24. Additional Assurances....................................................................... .48 .
4-25. Adequacy of Disclosure...................................................................... .48 .
4-26. Labor Contract.............................................................................. .49 .
4-27. Other Covenants............................................................................. .49 .
ARTICLE 5 - FINANCIAL REPORTING AND PERFORMANCE COVENANTS:
5-1. Maintain Records............................................................................ .50 .
5-2. Access to Records........................................................................... .51 .
5-3. Immediate Notice to Agent .................................................................. .51 .
5-4. Borrowing Base Certificate.................................................................. .52 .
5-5. Weekly Reports.............................................................................. .53 .
5-6. Monthly Reports............................................................................. .53 .
5-7. Quarterly Reports........................................................................... .54 .
5-8. Annual Reports.............................................................................. .54 .
5-9. Officers' Certificates...................................................................... .55 .
5-10. Inventories, Appraisals, and Audits......................................................... .55 .
5-11. Additional Financial Information............................................................ .57 .
5-12. Financial Performance Covenants............................................................. .57 .
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL:
6-1. Use of Inventory Collateral................................................................. .57 .
6-2. Inventory Quality........................................................................... .58 .
6-3. Adjustments and Allowances.................................................................. .58 .
6-4. Validity of Accounts........................................................................ .58 .
6-5. Notification to Account Debtors............................................................. .59 .
ARTICLE 7 - CASH MANAGEMENT. PAYMENT OF LIABILITIES:
7-1. Depository Accounts......................................................................... .59 .
7-2. Credit Card Receipts........................................................................ .59 .
7-3. Lockbox..................................................................................... .60 .
7-4. The Concentration, Blocked, and Operating Accounts.......................................... .60 .
7-5. Proceeds and Collection of Accounts......................................................... .61 .
7-6. Payment of Liabilities...................................................................... .62 .
7-7. The Operating Account....................................................................... .62 .
ARTICLE 8 - GRANT OF SECURITY INTEREST:
8-1. Grant of Security Interest.................................................................. .63 .
8-2. Extent and Duration of Security Interest.................................................... .63 .
</TABLE>
..iii ..
<PAGE> 4
<TABLE>
<S> <C> <C>
ARTICLE 9 - AGENT AS BORROWER'S ATTORNEY-IN-FACT:
9-1. Appointment as Attorney-In-Fact............................................................. .64 .
9-2. No Obligation to Act........................................................................ .64 .
ARTICLE 10 - EVENTS OF DEFAULT:
10-1. Failure to Pay Revolving Credit............................................................. .65 .
10-2. Failure To Make Other Payments.............................................................. .65 .
10-3. Failure to Perform Covenant or Liability (No Grace Period).................................. .65 .
10-4. Financial Reporting Requirements............................................................ .66 .
10-5. Failure to Perform Covenant or Liability (Grace Period)..................................... .66 .
10-6. Misrepresentation........................................................................... .66 .
10-7. Acceleration of Other Debt; Breach of Lease................................................. .66 .
10-8. Default Under Other Agreements.............................................................. .67 .
10-9. Uninsured Casualty Loss..................................................................... .67 .
10-10. Judgment. Restraint of Business............................................................ .67 .
10-11. Business Failure............................................................................ .67 .
10-12. Bankruptcy.................................................................................. .67 .
10-13. Default by Guarantor or Related Entity...................................................... .68 .
10-14. Indictment - Forfeiture..................................................................... .68 .
10-15. Termination of Guaranty..................................................................... .68 .
10-16. Challenge to Loan Documents................................................................. .68 .
10-17. Change in Control........................................................................... .69 .
ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT:
11-1. Rights of Enforcement....................................................................... .69 .
11-2. Sale of Collateral.......................................................................... .69 .
11-3. Occupation of Business Location............................................................. .70 .
11-4. Grant of Nonexclusive License............................................................... .71 .
11-5. Assembly of Collateral...................................................................... .71 .
11-6. Rights and Remedies......................................................................... .71 .
ARTICLE 12 - NOTICES:
12-1. Notice Addresses............................................................................ .71 .
12-2. Notice Given................................................................................ .72 .
ARTICLE 13 - TERM:
13-1. Termination of Revolving Credit............................................................. .73 .
13-2. Effect of Termination....................................................................... .73 .
ARTICLE 14 - GENERAL:
14-1. Protection of Collateral.................................................................... .74 .
14-2. Successors and Assigns...................................................................... .74 .
14-3. Severability................................................................................ .74 .
14-4. Amendments. Course of Dealing.............................................................. .74 .
14-5. Power of Attorney........................................................................... .75 .
14-6. Application of Proceeds..................................................................... .75 .
14-7. Costs and Expenses of Agent and of Lenders.................................................. .75 .
14-8. Copies and Facsimiles....................................................................... .76 .
14-9. Massachusetts Law........................................................................... .76 .
14-10. Consent to Jurisdiction..................................................................... .76 .
</TABLE>
..iv ..
<PAGE> 5
<TABLE>
<S> <C> <C>
14-11. Indemnification............................................................................. .77 .
14-12. Rules of Construction....................................................................... .77 .
14-13. Intent...................................................................................... .79 .
14-14. Right of Set-Off............................................................................ .79 .
14-15. Maximum Interest Rate....................................................................... .79 .
14-16. Waivers. ................................................................................... .79 .
</TABLE>
..v ..
<PAGE> 6
EXHIBITS
1-1 : Inventory
2-7 : Revolving Credit Note
2-21 : Acceptable Voting Rights
4-2 : Related Entities
4-3 : Trade Names
4-5 : Locations, Leases, and Landlords
4-6(a) : Encumbrances
4-6(b) : Consignment
4-7 : Indebtedness
4-8 : Insurance Policies
4-10 : Capital Leases
4-13 : Taxes
4-16 : Hazardous Materials
4-17 : Litigation
4-20 : Loans and Advances
4-23 : Loans to Affiliates
5-4 : Borrowing Base Certificate
7-1 : DDA's.
7-2 : Credit Card Arrangements
..vi ..
<PAGE> 7
===============================================================================
LOAN AND SECURITY AGREEMENT BANKBOSTON RETAIL FINANCE INC.
AGENT
===============================================================================
October 28, 1998
THIS AGREEMENT is made between
BankBoston Retail Finance Inc. (in such capacity, herein the
"AGENT"), a Delaware corporation with offices at 40 Broad Street,
Boston, Massachusetts 02109, as agent for the ratable benefit of the
"LENDERS", who are, at present, those financial institutions identified
on the signature pages of the within Agreement and who in the future
are those Persons (if any) who become "Lenders" in accordance with the
provisions of Section 2-21, below,
and
Drug Emporium, Inc. (hereinafter, the "BORROWER"), a Delaware
corporation with its principal executive offices at 155 Hidden Ravines
Drive, Powell, Ohio 43065
in consideration of the mutual covenants contained herein and benefits to be
derived herefrom,
WITNESSETH:
ARTICLE 1 - DEFINITIONS:
As herein used, the following terms have the following meanings or are
defined in the section of the within Agreement so indicated:
"A/R ADVANCE RATE": 80%.
"A/R RESERVES": Such Reserves as may be established from time to
time by the Agent in the Agent's discretion with respect to
the determination of the collectability in the ordinary course
and of the creditworthiness of the Acceptable Accounts.
Without limiting the generality of the foregoing, A/R Reserves
may include (but are not limited to)
.1 .
<PAGE> 8
reserves based on the following:
(i) The aggregate of all accounts
receivables which are more than 30
days past due, as shown on the
agings of the Borrower's accounts
receivable furnished the Lender from
time to time pursuant to Article 5
of this Agreement.
(ii) The aggregate of all accounts
receivable owed by any Account
Debtor liable on any account
described in Subsection (i), above.
(iii) That portion of accounts receivable
which, when aggregated with all of
the accounts of that Account Debtor,
exceeds 15% of the then aggregate of
Acceptable Accounts.
(iv) The aggregate of all accounts
receivable which arise out of the
sale by the Borrower of goods
consigned or delivered to the
Borrower or to the Account Debtor on
sale or return terms (whether or not
compliance has been made with the
applicable provisions of Article 2
of the Uniform Commercial Code).
(v) The aggregate of all accounts
receivable which arise out of any
sale made on a basis other than upon
terms usual to the business of the
Borrower.
(vi) The aggregate of all accounts
receivable which arise out of any
sale made on a "bill and hold,"
dating, or delayed shipping basis.
(vii) The aggregate of all accounts
receivable which are owed by any
Account Debtor whose principal place
of business is not within the
continental United States or the
District of Columbia.
(viii) The aggregate of all accounts
receivable which are owed by any
Related Entity.
(ix) The aggregate of all accounts
receivable as to which the Account
Debtor holds or is entitled to any
claim, counterclaim, set off, or
chargeback as determined by the
Agent in its discretion.
(x) The aggregate of all accounts
receivable which are evidenced by a
promissory note or other
documentation evidencing modified
payment terms.
(xi) The aggregate of all accounts
receivable which are owed by any
person employed by, or a salesperson
of, the Borrower.
.2 .
<PAGE> 9
(xii) Borrower maintained reserves.
"ACCEPTABLE ACCOUNTS": Such of the Borrower's Accounts and accounts
receivable arising from franchise agreements and third party
pharmacy billings and arising in the ordinary course of the
Borrower's business for goods sold and/or services rendered by
the Borrower, which Accounts and accounts receivable have been
determined by the Agent to be satisfactory and have been
earned by performance and are owed to the Borrower by such of
the Borrower's franchisees and third party pharmacy obligors
as the Agent determines to be satisfactory, in the Lender's
discretion in each instance as to which Accounts, the Agent
has a perfected security interest which is prior and superior
to all security interests, claims, and all Encumbrances.
"ACCEPTABLE INVENTORY": Consisting of such Inventory commonly found in
a discount retail drug chain which include those items listed
on Exhibit 1-1, at such locations, and of such types,
character, qualities and quantities, as the Agent in its
reasonable discretion from time to time determines to be
acceptable for borrowing, as to which Inventory, the Agent has
a perfected security interest which is prior and superior to
all security interests, claims, and all Encumbrances other
than Permitted Encumbrances.
"ACCOUNTS" and "ACCOUNTS RECEIVABLE" include, without limitation,
"accounts" as defined in the UCC, and also all: accounts,
accounts receivable, credit card receivables, notes, drafts,
acceptances, and other forms of obligations and receivables
and rights to payment for credit extended and for goods sold
or leased, or services rendered, whether or not yet earned by
performance; all "contract rights" as formerly defined in the
UCC; all Inventory which gave rise thereto, and all rights
associated with such Inventory, including the right of
stoppage in transit; all reclaimed, returned, rejected or
repossessed Inventory (if any) the sale of which gave rise to
any Account.
"ACH": Automated clearing house.
"ACCOUNT DEBTOR": Has the meaning given that term in the UCC.
"AFFILIATE": With respect to any two Persons, a relationship in which
(a) one holds, directly or indirectly, not less than Twenty
Five Percent (25%) of the capital stock, beneficial interests,
partnership interests, or other equity interests of the other;
or (b) one has, directly or indirectly, the right, under
ordinary circumstances, to vote for the election of a
.3 .
<PAGE> 10
majority of the directors (or other body or Person who has
those powers customarily vested in a board of directors of a
corporation); or (c) not less than Twenty Five Percent (25%)
of their respective ownership is directly or indirectly held
by the same third Person.
"AGENT": Is defined in the Preamble.
"AGENT'S FEE": Is defined in Section 2-11.
"AGENT'S RIGHTS AND REMEDIES": Is defined in Section 11-6.
"AVAILABILITY": Is defined in Section 2-1(b)(i).
"AVAILABILITY RESERVES": Such reserves as the Agent from time to time
determines in the Agent's discretion as being appropriate to
reflect the impediments to the Agent's ability to realize upon
the Collateral. Without limiting the generality of the
foregoing, Availability Reserves may include (but are not
limited to) reserves based on the following:
(i) Rent (based upon past due rent
and/or for all locations for which
landlord's waivers are not furnished
in those states in which the
security interest in the Collateral
to secure the Liabilities may be
subject to the prior rights of
landlords as determined in the
Lender's reasonable discretion,
which reserve shall be in an amount
not to exceed three (3) months
rent).
(ii) In store customer credits.
(iii) Gift Certificates.
(iv) Frequent Shopper Programs.
(v) Layaways and Customer Deposits
(vi) Taxes and other governmental
charges, including, ad valorem,
personal property, and other taxes
which the Agent reasonably believes
might have priority over the
security interests of the Agent in
the Collateral.
(viii) L/C Landing Costs.
"BBRF": BankBoston Retail Finance Inc.
"BANKRUPTCY CODE": Title 11, U.S.C., as amended from time to time.
.4 .
<PAGE> 11
"BASE": The Base Rate announced from time to time by BankBoston,
N.A. (or any successor in interest to BankBoston, N.A.). In
the event that said bank (or any such successor) ceases to
announce such a rate, "Base" shall refer to that rate or index
announced or published from time to time as the Agent, in good
faith, designates as the functional equivalent to said Base
Rate. Any change in "Base" shall be effective, for purposes of
the calculation of interest due hereunder, when such change is
made effective generally by the bank on whose rate or index
"Base" is being set. In all events, interest which is
determined by reference to Base (or any successor to Base)
shall be calculated on a 360 day year and actual days elapsed.
"BASE MARGIN LOAN": Each Revolving Credit Loan while bearing interest
at the Base Margin Rate.
"BASE MARGIN RATE": Base.
"BLOCKED ACCOUNT": Defined in Section 7-4.
"BORROWER": Is defined in the Preamble.
"BORROWING BASE": Is defined in Section 2-1(b)(ii).
"BUSINESSDAY": Any day other than (a) a Saturday or Sunday; (b) any
day on which banks in Boston, Massachusetts or Columbus, Ohio,
generally are not open to the general public for the purpose
of conducting commercial banking business; or (c) a day on
which the Agent is not open to the general public to conduct
business.
"CAPITAL EXPENDITURES": The expenditure of funds or the incurrence of
liabilities which may be capitalized in accordance with GAAP.
"CAPITAL LEASE": Any lease which may be capitalized in accordance with
GAAP.
"CHANGE IN CONTROL": The occurrence of any of the following:
(a) The acquisition, by any group of persons (within
the meaning of the Securities Exchange Act of 1934, as
amended) or by any Person, of beneficial ownership (within the
meaning of Rule 13d-3 of the Securities and Exchange
Commission) of 25% or more of the issued and outstanding
capital stock of the Borrower
.5 .
<PAGE> 12
having the right, under ordinary circumstances, to vote for
the election of directors of the Borrower.
(b) More than half of the persons who were directors
of the Borrower on the first day of any period consisting of
Twelve (12) consecutive calendar months (the first of which
Twelve (12) month periods commencing with the first day of the
month during which the within Agreement was executed), cease,
for any reason other than death or disability, to be directors
of the Borrower and are not replaced by Directors whose
election by the Board of Directors of the Borrower was
approved by a vote of at least two-thirds (2/3) of the
Directors then in office who either were Directors on the date
of this Agreement was executed or whose nomination or election
was so approved.
"CHATTEL PAPER": Has the meaning given that term in the UCC.
"COLLATERAL": Is defined in Section 8-1.
"COMMITMENT FEE": Is defined in Section 2-10.
"COMMITMENT" Subject to 2-21, as follows:
<TABLE>
<CAPTION>
-------------------------- ------------------------------ --------------------------
LENDER DOLLAR COMMITMENT COMMITMENT
PERCENTAGE
-------------------------- ------------------------------ --------------------------
<S> <C> <C>
BANKBOSTON RETAIL $30,000,000.00 30%
FINANCE INC.
-------------------------- ------------------------------ --------------------------
GENERAL ELECTRIC CAPITAL $20,000,000.00 20%
CORPORATION
-------------------------- ------------------------------ --------------------------
NATIONAL CITY COMMERCIAL $20,000,000.00 20%
FINANCE, INC.
-------------------------- ------------------------------ --------------------------
LASALLE BUSINESS CREDIT, $15,000,000.00 15%
INC.
-------------------------- ------------------------------ --------------------------
AMERICAN NATIONAL BANK $15,000,000.00 15%
AND TRUST COMPANY OF
CHICAGO
-------------------------- ------------------------------ --------------------------
</TABLE>
.6 .
<PAGE> 13
"CONCENTRATION ACCOUNT": Is defined in Section 7-4.
"COST": The lower of
(a) the calculated cost of purchases, as
determined from invoices received by the Borrower,
the Borrower's purchase journal or stock ledger,
based upon the Borrower's accounting practices, known
to the Lender, which practices are in effect on the
date on which the within Agreement was executed; or
(b) the cost equivalent of the lowest
ticketed or promoted price at which the subject
inventory is offered to the public, after all
mark-downs (whether or not such price is then
reflected on the Borrower's accounting system), which
cost equivalent is determined in accordance with the
retail method of accounting, reflecting the
Borrower's historic business practices.
"Cost" does not include inventory capitalization costs or
other non-purchase price charges (other than freight if/when
included on purchase invoices) used in the Borrower's
calculation of cost of goods sold.
"COSTS OF COLLECTION": Includes, without limitation, all attorneys'
reasonable fees and reasonable out-of-pocket expenses incurred
by the Agent's attorneys, and all reasonable out-of-pocket
costs incurred by the Agent in the administration of the
Liabilities and/or the Loan Documents, including, without
limitation, reasonable costs and expenses associated with
travel on behalf of the Agent or which costs and expenses are
directly or indirectly related to or in respect of the
Agent's: administration and management of the Liabilities and
negotiation, documentation, and amendment of any Loan
Document; or efforts to preserve, protect, collect, or enforce
the Collateral, the Liabilities, and/or the Agent's Rights and
Remedies and/or any of the Agent's rights and remedies against
or in respect of any guarantor or other person liable in
respect of the Liabilities (whether or not suit is instituted
in connection with such efforts). After the occurrence of any
Event of Default all of the costs and expenses described in
this Section shall include all costs and expenses incurred by
the Agent or any Lender. The Costs of Collection are
Liabilities, and at the Agent's option, upon the actual
incurrence of any such expense, may bear interest at the
highest post-default rate which the Agent may charge the
Borrower hereunder as if such had been lent, advanced, and
credited by the Agent to, or for the benefit of, the Borrower.
.7 .
<PAGE> 14
"DDA": Any checking or other demand daily depository account maintained
by the Borrower.
"DEPOSIT ACCOUNT": Has the meaning given that term in the UCC.
"DOCUMENTS": Has the meaning given that term in the UCC.
"DOCUMENTS OF TITLE": Has the meaning given that term in the UCC.
"DOLLAR COMMITMENT": As provided in the Definition of "Commitment",
above.
"EARLY TERMINATION FEE": Is defined in Section 2-13.
"EBITDA": The Borrower's earnings before interest, taxes, depreciation,
and amortization, each as determined in accordance with GAAP,
applying a FIFO convention to the cost of goods sold provision
within earnings.
"EMPLOYEE BENEFIT PLAN": As defined in ERISA.
"ENCUMBRANCE": Each of the following:
(a) Any security interest, mortgage, pledge,
hypothecation, lien, attachment, or charge of any kind
(including any agreement to give any of the foregoing); the
interest of a lessor under a Capital Lease; conditional sale
or other title retention agreement; sale of accounts
receivable or chattel paper; or other arrangement pursuant to
which any Person is entitled to any preference or priority
with respect to the property or assets of another Person or
the income or profits of such other Person or which
constitutes an interest in property to secure an obligation;
each of the foregoing whether consensual or non-consensual and
whether arising by way of agreement, operation of law, legal
process or otherwise.
(b) The filing of any financing statement under the
UCC or comparable law of any jurisdiction.
"END DATE": The date upon which both (a) all Liabilities have been
paid in full and (b) all obligations of any Lender to make
loans and advances and to provide other financial
accommodations to the Borrower hereunder shall have been
irrevocably terminated.
"ENVIRONMENTAL LAWS": All of the following:
.8 .
<PAGE> 15
(a) Any and all federal, state,
local or municipal laws, rules, orders, regulations, statutes,
ordinances, codes, decrees or requirements which regulate or
relate to, or impose any standard of conduct or liability on
account of or in respect to environmental protection matters,
including, without limitation, Hazardous Materials, as are now
or hereafter in effect.
(b) The common law relating to
damage to Persons or property from Hazardous Materials.
"EQUIPMENT": Includes, without limitation, "equipment" as defined in
the UCC, and also all motor vehicles, rolling stock,
machinery, office equipment, plant equipment, tools, dies,
molds, store fixtures, furniture, and other goods, property,
and assets which are used and/or were purchased for use in the
operation or furtherance of the Borrower's business, and any
and all accessions or additions thereto, and substitutions
therefor.
"ERISA": The Employee Retirement Security Act of 1974, as amended.
"ERISA AFFILIATE": Any Person which is under common control with the
Borrower within the meaning of Section 4001 of ERISA or is
part of a group which includes the Borrower and which would be
treated as a single employer under Section 414 of the Internal
Revenue Code of 1986, as amended.
"EVENTS OF DEFAULT": Is defined in Article 10.
FEDERAL FUNDS EFFECTIVE RATE: For any day, a fluctuating per annum
interest rate equal to the weighted average of the rates on
overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as
published on that date (or on the then next succeeding
Business Day, if not one) by the Federal Reserve Bank of New
York, provided that if such a rate is not so published for a
day which is a Business Day, Federal Funds Effective Rate
shall be the average of quotations for such day on such
transactions received by the Agent from three federal funds
brokers of recognized standing selected by the Agent.
"FEE LETTER": That letter, styled the "Fee Letter" between the Borrower
and the Agent, as such letter may from time to time be
amended.
"FIXED CHARGE RATIO": The decimal equivalent (determined on a
trailing/rolling 12
.9 .
<PAGE> 16
month basis) of a fraction, the numerator of which is the
result of EBITDA minus cash outlays on account of capital
expenditures and the denominator of which is the aggregate of
cash payments of: interest, principal, capital leases, income
taxes, dividends, and capital stock repurchases.
"FIXTURES": Has the meaning given that term in the UCC.
"GAAP": Principles which are consistent with those promulgated or
adopted by the Financial Accounting Standards Board and its
predecessors (or successors) in effect and applicable to that
accounting period in respect of which reference to GAAP is
being made, provided, however, in the event of a Material
Accounting Change, then unless otherwise specifically agreed
to by the Agent, (a) the Borrower's compliance with the
financial performance covenants imposed pursuant to Section
5-12 shall be determined as if such Material Accounting Change
had not taken place and (b) the Borrower shall include, with
its monthly, quarterly, and annual financial statements a
schedule, certified by the Borrower's chief financial officer,
on which the effect of such Material Accounting Change to the
statement with which provided shall be described.
"GENERAL INTANGIBLES": Includes, without limitation, "general
intangibles" as defined in the UCC; and also all: rights to
payment for credit extended; deposits; amounts due to the
Borrower; credit memoranda in favor of the Borrower; warranty
claims; tax refunds and abatements; insurance refunds and
premium rebates; all means and vehicles of investment or
hedging, including, without limitation, options, warrants, and
futures contracts; records; customer lists; telephone numbers;
goodwill; causes of action; judgments; payments under any
settlement or other agreement; literary rights; rights to
performance; royalties; license and/or franchise fees; rights
of admission; licenses; franchises; license agreements,
including all rights of the Borrower to enforce same; permits,
certificates of convenience and necessity, and similar rights
granted by any governmental authority; patents, patent
applications, patents pending, and other intellectual
property; internet addresses and domain names; developmental
ideas and concepts; proprietary processes; blueprints,
drawings, designs, diagrams, plans, reports, and charts;
catalogs; manuals; technical data; computer software programs
(including the source and object codes therefor), computer
records, computer software, rights of access to computer
record service bureaus, service bureau computer contracts, and
computer data; tapes, disks, semi-conductors chips and
printouts; trade secrets rights, copyrights, mask work rights
and interests, and derivative works and interests; user,
.10 .
<PAGE> 17
technical reference, and other manuals and materials; trade
names, trademarks, service marks, and all goodwill relating
thereto; applications for registration of the foregoing; and
all other general intangible property of the Borrower in the
nature of intellectual property; proposals; cost estimates,
and reproductions on paper, or otherwise, of any and all
concepts or ideas, and any matter related to, or connected
with, the design, development, manufacture, sale, marketing,
leasing, or use of any or all property produced, sold, or
leased, by the Borrower or credit extended or services
performed, by the Borrower, whether intended for an individual
customer or the general business of the Borrower, or used or
useful in connection with research by the Borrower.
"GOODS": Has the meaning given that term in the UCC.
"GROSS MARGIN":With respect to the subject accounting period for
which being calculated, the decimal equivalent of the
following (determined in accordance with the retail method of
accounting):
Sales (Minus) Cost of Goods Sold
--------------------------------
Sales
"GUARANTORS": Drug Emporium Express, Inc., DE Michigan Management Co.,
Drug Emporium of Maryland, Inc., Drug Emporium of Michigan,
Inc., Emporium Venture Inc., Houston Venture Inc., and RJR
Drug Distributors Inc., jointly and severally.
"HAZARDOUS MATERIALS": Any (a) hazardous materials, hazardous waste,
hazardous or toxic substances or petroleum products, which (as
to any of the foregoing) are defined or regulated as a
hazardous material in or under any Environmental Law and (b)
oil in any physical state.
"INDEBTEDNESS": All indebtedness and obligations of or assumed by any
Person on account of or in respect to any of the following:
(a) In respect of money borrowed (including any
indebtedness which is non-recourse to the credit of such
Person but which is secured by an Encumbrance on any asset of
such Person) whether or not evidenced by a promissory note,
bond, debenture or other written obligation to pay money.
(b) In connection with any letter of credit or
acceptance transaction (including, without limitation, the
face amount of all letters of credit and acceptances issued
for the account of such Person or reimbursement on account of
which such Person would be obligated).
.11 .
<PAGE> 18
(c) In connection with the sale or discount of
accounts receivable or chattel paper of such Person.
(d) On account of deposits or advances.
(e) As lessee under Capital Leases. "Indebtedness"
also includes:
(x) Indebtedness of others secured by an
Encumbrance on any asset of such Person, whether or
not such Indebtedness is assumed by such Person.
(y) Any guaranty, endorsement, suretyship or
other undertaking pursuant to which that Person may
be liable on account of any obligation of any third
party.
(z) The Indebtedness of a partnership or
joint venture in which such Person is a general
partner or joint venturer.
"INDEMNIFIED PERSON": Is defined in Section 14-11.
"INSTRUMENTS": Has the meaning given that term in the UCC.
"INTEREST PAYMENT DATE": With reference to:
Each Libor Loan: The last day of the Interest Period
relating thereto; the Termination Date; and the End Date.
Each Base Margin Loan: the first day of each month;
the Termination Date; and the End Date.
"INTEREST PERIOD": (a) With respect to each Libor Loan: Subject
to Subsection (c), below, the period commencing on the date of
the making or continuation of, or conversion to, the subject
Libor Loan and ending one, two, or three months thereafter, as
the Borrower may elect by notice (pursuant to Section 2-4(a))
to the Agent.
(b) With respect to each Base Margin Loan:
Subject to Subsection (c), below, the period commencing on the
date of the making or continuation of or conversion to such
Base Margin Loan and ending on that date (i) as of which the
subject Base Margin Loan is converted to a Libor Loan, as the
Borrower may elect by notice (pursuant to Section 2-4(a)) to
the Agent, or (ii) on which the subject Base Margin Loan is
paid by the Borrower.
(c) The setting of Interest Periods is in all
instances subject to the following:
(i) Any Interest Period for a Base Margin
Loan which would
.12 .
<PAGE> 19
otherwise end on a day which is not a Business Day
shall be extended to the next succeeding Business
Day.
(ii) Any Interest Period for a Libor Loan
which would otherwise end on a day that is not a
Business Day shall be extended to the next succeeding
Business Day, unless that succeeding Business Day is
in the next calendar month, in which event such
Interest Period shall end on the last Business Day of
the month during which the Interest Period ends.
(iii) Subject to Subsection (iv), below,
any Interest Period applicable to a Libor Loan, which
Interest Period begins on a day for which there is no
numerically corresponding day in the calendar month
during which such Interest Period ends, shall end on
the last Business Day of the month during which that
Interest Period ends.
(iv) Any Interest Period which would
otherwise end after the Termination Date shall end on
the Termination Date.
(v) The number of Interest Periods in effect
at any one time is subject to Section 2-9(d) hereof.
"INVENTORY": Includes, without limitation, "inventory" as defined in
the UCC and also all: packaging, advertising, and shipping
materials related to any of the foregoing, and all names or
marks affixed or to be affixed thereto for identifying or
selling the same; Goods held for sale or lease or furnished or
to be furnished under a contract or contracts of sale or
service by the Borrower, or used or consumed or to be used or
consumed in the Borrower's business; Goods of said description
in transit: returned, repossessed and rejected Goods of said
description; and all documents (whether or not negotiable)
which represent any of the foregoing.
"INVENTORY ADVANCE RATE": 60%.
"INVENTORY RESERVES": Such Reserves as may be established from time to
time by the Agent in the Agent's discretion with respect to
the determination of the saleability, at retail, of the
Acceptable Inventory or which reflect such other factors as
affect the market value of the Acceptable Inventory. Without
limiting the generality of the foregoing, Inventory Reserves
may include (but are not limited to) reserves based on the
following:
(i) Obsolescence (determined based upon
Inventory on hand beyond a given
number of days).
(ii) Seasonality.
.13 .
<PAGE> 20
(iii) Shrinkage.
(iv) Imbalance.
(v) Change in Inventory character.
(vi) Change in Inventory composition
(vii) Change in Inventory mix.
(viii) Markdowns (both permanent and point of
sale)
(ix) Retail markons and markups
inconsistent with prior period
practice and performance; industry
standards; current business plans;
or advertising calendar and planned
advertising events.
"INVESTMENT PROPERTY": Has the meaning given that term in the UCC.
"ISSUER": The issuer of any L/C.
"L/C": Any letter of credit, the issuance of which is procured by the
Agent for the account of the Borrower and any acceptance made
on account of such letter of credit.
"L/C LANDING COSTS": To the extent not included in the Stated Amount
of an L/C, customs, duty, freight, and other out-of-pocket
costs and expenses which will be expended to "land" the
Inventory, the purchase of which is supported by such L/C.
"LEASE": Any lease or other agreement, no matter how styled or
structured, pursuant to which the Borrower is entitled to the
use or occupancy of any space.
"LEASEHOLD INTEREST": Any interest of the Borrower as lessee under any
Lease.
"LENDERS": Defined in the Preamble to the within Agreement
"LIABILITIES" (in the singular, "LIABILITY"): (a) means all and each of
the following, whether now existing or hereafter arising under
this Agreement or any other Loan Document:
(i) Any and all direct and indirect liabilities,
debts, and obligations of the Borrower to the Agent or any
Lender, each of every kind, nature, and description.
(ii) Each obligation to repay any loan, advance,
indebtedness, note, obligation, overdraft, or amount now or
hereafter owing by the Borrower to the Agent or any Lender
(including all future advances whether or not made pursuant to
a commitment by the Agent or any Lender), whether or not any
of such are liquidated,
.14 .
<PAGE> 21
unliquidated, primary, secondary, secured, unsecured, direct,
indirect, absolute, contingent, or of any other type, nature,
or description, or by reason of any cause of action which the
Agent or any Lender may hold against the Borrower.
(iii) All notes and other obligations of the Borrower
now or hereafter assigned to or held by the Agent or any
Lender, each of every kind, nature, and description.
(iv) All interest, fees, and charges and other
amounts which may be charged by the Agent or any Lender to the
Borrower and/or which may be due from the Borrower to the
Agent or any Lender from time to time.
(v) All costs and expenses incurred or paid by the
Agent or any Lender in respect of any agreement between the
Borrower and Agent or any the Lender or instrument furnished
by the Borrower to the Agent or any Lender (including, without
limitation, Costs of Collection, attorneys' reasonable fees,
and all court and litigation costs and expenses).
(vi) Any and all covenants of the Borrower to or with
the Agent or any Lender and any and all obligations of the
Borrower to act or to refrain from acting in accordance with
any agreement between the Borrower and the Agent or any Lender
or instrument furnished by the Borrower to the Agent or any
Lender.
(vii) Each of the foregoing as if each reference to
the " Agent and each Lender " therein were to each Affiliate
of the Agent or any Lender.
(b) Any and all direct and indirect liabilities, debts, and
obligations of Borrower to the Agent, each of every kind, nature, and
description.
"LIBOR BUSINESS DAY": Any day which is both a Business Day and a day
on which the principal interbank market for Libor deposits in
London in which BankBoston, N.A. participates is open for
dealings in United States Dollar deposits.
"LIBOR LOAN": Any Revolving Credit Loan which bears interest at a Libor
Rate.
"LIBOR MARGIN": (a) Until Section (b) of this Definition is in
effect: 150 basis points.
(b) Commencing with the first day of any
fiscal month after the Agent's receipt of the
Borrower's annual financial statement for the
Borrower's fiscal year 1999, which ends on or about
February 28, 1999, the Libor Margin shall be reset
monthly (commencing with the Business Day after the
Agent's receipt of the Pricing Certificate (Section
5-6(a)(i)(E)) for loans initiated on or
.15 .
<PAGE> 22
after the date when so set, that is to say Libor
contracts in effect at the time of
increases/decreases in margin will remain at the
margin originally utilized when the contract was
opened. The margin in effect at a given time will
apply to contracts opened at that time, and shall be
based upon the following pricing grid:
<TABLE>
<CAPTION>
LIBOR MARGIN PRICING GRID
------------ -------------------------------- --------------------------------- ------------------
TIER FIXED CHARGE RATIO TRAILING/ROLLING 12 MONTH MARGIN (BASIS
AVERAGE EXCESS AVAILABILITY POINTS)
------------ -------------------------------- --------------------------------- ------------------
<S> <C> <C> <C>
I Equal or Greater than 1.7 Equal or Greater than 125
$20,000,000.00
------------ -------------------------------- --------------------------------- ------------------
II Equal or Greater than 1.7 Less than $20,000,000.00 150
------------ -------------------------------- --------------------------------- ------------------
III 1.26 to 1.69 N/A 150
------------ -------------------------------- --------------------------------- ------------------
IV 1.25 or less N/A 175
------------ -------------------------------- --------------------------------- ------------------
</TABLE>
"LIBOR OFFER RATE": That rate of interest (rounded upwards, if
necessary, to the next 1/100 of 1%) determined by the Agent to
be the highest prevailing rate per annum at which deposits on
U.S. Dollars are offered to BankBoston, N.A., by first-class
banks in the London interbank market in which BankBoston, N.A.
participates at or about 10:00AM (Boston Time) Two (2) Libor
Business Days before the first day of the Interest Period for
the subject Libor Loan, for a deposit approximately in the
amount of the subject loan for a period of time approximately
equal to such Interest Period.
"LIBOR RATE": That per annum rate determined as the aggregate of the
Libor Offer Rate plus the Libor Margin except that, in the
event that it is determined by the Agent that any Lender may
be subject to the Reserve Percentage, the "Libor Rate" shall
mean, with respect to any Libor Loans then outstanding (from
the date on which that Reserve Percentage first became
applicable to such loans), and with respect to all Libor Loans
thereafter made, an interest rate per annum equal the sum of
(a) plus (b), where:
(a) is the decimal equivalent of the
following fraction:
Libor Offer Rate
----------------
1 minus Reserve Percentage
(b) the applicable Libor Margin.
.16 .
<PAGE> 23
"LINE (UNUSED) FEE": Is defined in Section 2-12.
"LOAN ACCOUNT": Is defined in Section 2-6.
"LOAN CEILING": $100,000,000.00.
"LOAN DOCUMENTS": The within Agreement, each instrument and document
executed and/or delivered as contemplated by Article 3, below,
and each other instrument or document from time to time
executed and/or delivered in connection with the arrangements
contemplated hereby, including, without limitation, the
Revolving Credit Notes, or in connection with any transaction
with the Agent or any Lender or any Affiliate of the Agent or
any Lender in connection with the arrangements contemplated
hereby, including, without limitation, any transaction which
arises out of any cash management, depository, investment,
letter of credit, interest rate protection, or equipment
leasing services provided by the Agent or any Lender or any
Affiliate of the Agent or any Lender in connection with the
arrangements contemplated hereby, as each may be amended from
time to time.
"LOCAL DDA": A depository account maintained by the Borrower, the
only contents of which may be transfers from the Funding
Account and actually used solely (i) for petty cash purposes;
or (ii) for payroll.
"LOCKBOX": An arrangement to which the Borrower is a party,
pursuant to which payments on account of the
Borrower's Receivables Collateral are made to a post
office box, access to which is limited to a bank
which processes such payments and forwards the
proceeds thereof in accordance with instructions
provided by the Borrower.
"MATERIAL ACCOUNTING CHANGE": Any change in GAAP applicable to
accounting periods subsequent to the Borrower's fiscal year
most recently completed prior to the execution of the within
Agreement, which change has a material effect on the
Borrower's financial condition or operating results, as
reflected on financial statements and reports prepared by or
for the Borrower, when compared with such condition or results
as if such change had not taken place or where preparation of
the Borrower's statements and reports in compliance with such
change results in the breach of a financial performance
covenant imposed pursuant to Section 5-12 where such a breach
would not have occurred if such
.17 .
<PAGE> 24
change had not taken place or visa versa.
"MATURITY DATE": October 31, 2003.
"OPERATING ACCOUNT": Is defined in Section 7-4.
"PARTICIPANT": Is defined in Section 14-14, hereof.
"PERMITTED ENCUMBRANCES": Those Encumbrances permitted as provided in
Section 4-6(a) hereof.
"PERSON": Any natural person, and any corporation, limited liability
company, trust, partnership, joint venture, or other
enterprise or entity.
"PROCEEDS": Includes, without limitation, "Proceeds" as defined in the
UCC (defined below), and each type of property described in
Section 8-1 hereof.
"REAL PROPERTY": (a) 155 Hidden Ravines Drive, Powell, Ohio 43065 (the
"Ohio Property") and (b) 280 West Nine Mile, Ferndale,
Michigan 48220 (the "Michigan Property").
"RECEIPTS": All cash, cash equivalents, checks, and credit card slips
and receipts as arise out of the sale of the Collateral.
"RECEIVABLES COLLATERAL": That portion of the Collateral which consists
of the Borrower's Accounts, Accounts Receivable, General
Intangibles, Chattel Paper, Instruments, Documents of Title,
Documents, Investment Property, letters of credit for the
benefit of the Borrower, and bankers' acceptances held by the
Borrower, and any rights to payment.
"RELATED ENTITY": (a) Any corporation, limited liability company,
trust, partnership, joint venture, or other enterprise which:
is a parent, brother-sister, subsidiary, or affiliate, of the
Borrower; could have such enterprise's tax returns or
financial statements consolidated with the Borrower's; could
be a member of the same controlled group of corporations
(within the meaning of Section 1563(a)(1), (2) and (3) of the
Internal Revenue Code of 1986, as amended from time to time)
of which the Borrower is a member; controls or is controlled
by the Borrower or by any Affiliate of the Borrower.
.18 .
<PAGE> 25
(b) Any Affiliate.
"REQUIREMENT OF LAW": As to any Person:
(a)(i) All statutes, rules, regulations, orders, or
other requirements having the force of law and (ii) all court
orders and injunctions, arbitrator's decisions, and/or similar
rulings, in each instance ((i) and (ii)) of or by any federal,
state, municipal, and other governmental authority, or court,
tribunal, panel, or other body which has or claims
jurisdiction over such Person, or any property of such Person,
or of any other Person for whose conduct such Person would be
responsible.
(b) That Person's charter, certificate of
incorporation, articles of organization, and/or other
organizational documents, as applicable; and (c) that Person's
by-laws and/or other instruments which deal with corporate or
similar governance, as applicable.
"RESERVE PERCENTAGE": The decimal equivalent of that rate applicable to
a Lender under regulations issued from time to time by the
Board of Governors of the Federal Reserve System for
determining the maximum reserve requirement of that Lender
with respect to "Eurocurrency liabilities" as defined in such
regulations. The Reserve Percentage applicable to a particular
Eurodollar Loan shall be based upon that in effect during the
subject Interest Period, with changes in the Reserve
Percentage which take effect during such Interest Period to
take effect (and to consequently change any interest rate
determined with reference to the Reserve Percentage) if and
when such change is applicable to such loans.
"RESERVES": All (if any) Availability Reserves, A/R Reserves, and
Inventory Reserves.
"REVOLVING CREDIT": Is defined in Section 2-1.
"REVOLVING CREDIT NOTE": Is defined in Section 2-7.
"REVOLVING CREDIT LOAN": A term of convenience which refers to so much
of the unpaid principal balance of the Loan Account as bears
the same rate of interest for the same Interest Period. (See
Section 2-9(c)).
"SEC": The Securities and Exchange Commission.
.19 .
<PAGE> 26
"STATED AMOUNT": The maximum amount for which an L/C may be honored.
"SUSPENSION EVENT": Any occurrence, circumstance, or state of facts
which (a) is an Event of Default; or (b) would become an Event
of Default if any requisite notice were given and/or any
requisite period of time were to run and such occurrence,
circumstance, or state of facts were not absolutely cured
within any applicable grace period.
"TERMINATION DATE": The earliest of (a) the Maturity Date; or (b) the
occurrence of any event described in Section 10-12 hereof; or
(c) date set by notice by the Agent to the Borrower, which
notice sets the Termination Date on account of the occurrence
of any Event of Default other than as described in Section
10-12 hereof.
"UCC": The Uniform Commercial Code as presently in effect in
Massachusetts (Mass. Gen. Laws, Ch. 106).
"YEAR 2000 PROBLEM": The risk that a computer application (hardware or
software) may not be able to recognize certain dates or
properly perform date sensitive functions involving dates
prior to and after December 31, 1999.
ARTICLE 2 - THE REVOLVING CREDIT:
2-1. Establishment of Revolving Credit.
(a) The Lenders hereby establish a revolving line of
credit (the "REVOLVING CREDIT") in the Borrower's favor pursuant to which each
Lender, subject to, and in accordance with, the within Agreement, acting through
the Agent, shall make loans and advances and otherwise provide financial
accommodations to and for the account of the Borrower as provided herein, in
each instance equal to that Lender's Commitment Percentage of Availability, up
to the maximum amount of that Lender's Dollar Commitment. The amount available
for borrowing under the Revolving Credit shall be determined by the Agent by
reference to Availability, as determined by the Agent from time to time.
(b) As used herein, the following terms have the
following meanings:
(i) "AVAILABILITY" refers at any time to the
result of the following:
(A) Borrowing Base.
Minus
(B) The then unpaid principal balance of the
Loan Account.
Minus
(C) The then Stated Amount of all L/C's.
.20 .
<PAGE> 27
(ii) "BORROWING BASE" refers at any time to the
lesser of 2-1(b)(ii)(A) or 2-1(b)(ii)(B),
where:
(A) is the Loan Ceiling.
(B) is the result of the following:
(I) The A/R Advance Rate of the
face amount of Acceptable
Accounts (net of A/R
Reserves)
Plus
(II) The Inventory Advance Rate
of the Cost of Acceptable
Inventory (net of Inventory
Reserves).
Minus
(III) The then aggregate of the
Availability Reserves.
(c) Availability shall be based upon Borrowing Base
Certificates furnished as provided in Section 5-4 hereof.
(d) The proceeds of borrowings under the Revolving Credit
shall be used solely for (i) working capital purposes of the Borrower, (ii)
Capital Expenditures, (iii) Permitted Acquisitions, (iv) the retirement or
repurchase of the Borrower's Senior Unsecured Convertible Subordinated
Debentures in the approximate face amount of $50,000,000.00, provided no such
payment, retirement, or repurchase shall be made after the occurrence of any
Suspension Event or Event of Default or if such payment, retirement, or
repurchase gives rise to an Event of Default, (v) repayment of outstanding loans
and other obligations to BankOne, N.A. and its affiliates, and (vi) those
purposes described in Section 4-19(a) and (b), below, all solely to the extent
permitted by the within Agreement.
2-2. Advances in Excess of Borrowing Base. No Lender has any
obligation to make any loan or advance, or otherwise to provide any credit for
the benefit of the Borrower such that the balance of the Loan Account exceeds
the Borrowing Base. The making of loans, advances, and credits and the providing
of financial accommodations in excess of the Borrowing Base is for the benefit
of the Borrower and does not affect the obligations of the Borrower hereunder;
such loans, advances, credits, and financial accommodations constitute
Liabilities. The making of any such loans, advances, and credits and the
providing of financial accommodations, on any one occasion such that the
Borrowing Base is exceeded shall not obligate any Lender to make any such loans,
credits, or advances or to provide any financial accommodation on any other
occasion nor to permit such loans, credits, or advances to remain outstanding.
2-3. Risks of Value of Collateral. The Agent's reference to a given
asset in connection with the making of loans, credits, and advances and the
providing of financial accommodations under the Revolving Credit and/or the
monitoring of compliance with the provisions hereof shall not be deemed a
.21 .
<PAGE> 28
determination by the Agent or any Lender relative to the actual value of the
asset in question. All risks concerning the collectability of the Borrowers
accounts and the saleability of the Borrower's Inventory are and remain upon the
Borrower. All Collateral secures the prompt, punctual, and faithful performance
of the Liabilities whether or not relied upon by the Agent or by any Lender in
connection with the making of loans, credits, and advances and the providing of
financial accommodations under the Revolving Credit.
2-4. Loan Requests.
(a) Subject to the provisions of the within Agreement, a
loan or advance under the Revolving Credit duly and timely requested by the
Borrower shall be made pursuant hereto, provided that:
(i) Borrowing Base will not be exceeded; and
(ii) The Revolving Credit has not been suspended
as provided in Section 2-4(i).
(b) Requests for loans and advances under the Revolving
Credit may be requested by the Borrower in such manner as may from time
to time be acceptable to the Agent.
(c) Subject to the provisions of the within Agreement,
the Borrower may request a Revolving Credit Loan and elect an interest
rate and Interest Period to be applicable to that Revolving Credit Loan
by giving the Agent notice no later than the following:
(i) If such Revolving Credit Loan is or is to be
converted to a Base Margin Loan: By 11:30AM on the Business Day on
which the subject Revolving Credit Loan is to be made or is to be so
converted. Base Margin Loans requested by the Borrower, other than
those resulting from the conversion of a Libor Loan, shall not be less
than $10,000.00.
(ii) If such Revolving Credit Loan is, or is to
be continued as, or converted to, a Libor Loan: By 1:00PM Three (3)
Libor Business Days before the end of the then applicable Interest
Period. Libor Loans and conversions to Libor Loans shall each be not
less than $1,000,000.00 and in increments of $100,000.00 in excess of
such minimum.
(iii) Any Libor Loan which matures while a
Suspension Event is extant shall be converted, at the option of the
Agent to a Base Margin Loan notwithstanding any notice from the
Borrower that such Loan is to be continued as a Libor Loan.
(d) Any request for a Revolving Credit Loan or for the
conversion of a Revolving Credit Loan which is made after the applicable
deadline therefor, as set forth above, shall be deemed to have been made at the
opening of business on the then next Business Day or Libor Business Day, as
applicable. Each request for a Revolving Credit Loan or for the conversion of a
Revolving Credit Loan shall be made in such manner as may from time to time be
acceptable to the Agent
(e) If, during the sixty (60) days immediately preceding
the day on which a loan request is made there has been no unpaid principal
balance in the Loan Account on account of loans and
.22 .
<PAGE> 29
advances under the Revolving Credit, the loan so requested shall be made
(subject to all other provisions of the within Agreement) no later than the
Second Business Day after (and not counting) the day on which the loan otherwise
would have been made as provided above.
(f) The Borrower may request that the Agent cause the
issuance of L/C's for the account of the Borrower as provided in Section 2-16.
(g) The Agent may rely on any request for a loan or
advance, or other financial accommodation under the Revolving Credit which the
Agent, in good faith, believes to have been made by a person duly authorized to
act on behalf of the Borrower and may decline to make any such requested loan or
advance, or issuance, or to provide any such financial accommodation pending the
Agent's being furnished with such documentation concerning that person's
authority to act as may be satisfactory to the Agent.
(h) A request by the Borrower for loan or advance, or
other financial accommodation under the Revolving Credit shall be irrevocable
and shall constitute certification by the Borrower that as of the date of such
request, each of the following is true and correct:
(i) There has been no material adverse change in
the Borrower's financial condition from the most recent financial
information furnished Agent or any Lender pursuant to this Agreement.
(ii) The Borrower is in compliance with, and has
not breached any of, its covenants contained in this Agreement.
(iii) Each representation which is made herein or
in any of the Loan Documents (defined below) is then true and complete
as of and as if made on the date of such request.
(iv) No Suspension Event is then extant.
(i) Upon the occurrence from time to time of any
Suspension Event:
(i) The Agent may suspend the Revolving Credit
immediately.
(ii) Neither the Agent nor any Lender shall be
obligated, during such suspension, to make any loans or advance, or to
provide any financial accommodation hereunder or to seek the issuance
of any L/C.
(iii) The Agent may suspend the right of the
Borrower to request any Libor Loan or to convert any Base Margin Loan
to a Libor Loan.
(iv) If the Suspension Event is an Event of
Default, the Agent may exercise all rights and remedies on account
thereof.
2-5. Making of Loans Under Revolving Credit.
(a) A loan or advance under the Revolving Credit shall be
made by the transfer of the proceeds of such loan or advance to the Funding
Account or as otherwise instructed by the Borrower.
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(b) A loan or advance shall be deemed to have been made
under the Revolving Credit (and the Borrower shall be indebted to the Agent for
the amount thereof immediately) at the following:
(i) The Agent's initiation of the transfer of
the proceeds of such loan or advance in accordance with the Borrower's
instructions (if such loan or advance is of funds requested by the
Borrower).
(ii) The charging of the amount of such loan to
the Loan Account (in all other circumstances).
(c) There shall not be any recourse to or liability of
the Agent or any Lender, on account of any delay in the receipt, and/or any
loss, of funds which constitute a loan or advance under the Revolving Credit,
the wire transfer of which was properly initiated by the Agent in accordance
with wire instructions provided to the Agent by the Borrower.
2-6. The Loan Account.
(a) An account ("LOAN ACCOUNT") shall be opened on the
books of the Agent. A record may be kept in the Loan Account of all loans made
under or pursuant to this Agreement and of all payments thereon.
(b) The Agent may also keep a record (either in the Loan
Account or elsewhere, as the Agent may from time to time elect) of all interest,
fees, service charges, costs, expenses, and other debits owed the Agent or the
Lenders on account of the Liabilities and of all credits against such amounts so
owed.
(c) All credits against the Liabilities shall be
conditional upon final payment to the Agent for the Account of each Lender of
the items giving rise to such credits. The amount of any item credited against
the Liabilities which is charged back against Agent or any Lender for any reason
or is not so paid shall be a Liability and shall be added to the Loan Account,
whether or not the item so charged back or not so paid is returned.
(d) Except as otherwise provided herein, all fees,
service charges, costs, and expenses for which the Borrower is obligated
hereunder are payable on demand. In the determination of Availability, the Agent
may deem fees, service charges, accrued interest, and other payments as having
been advanced under the Revolving Credit after such amounts are then due and
payable.
(e) The Agent, without the request of the Borrower, may
advance under the Revolving Credit any interest, fee, service charge, or other
Liabilities and may charge the same to the Loan Account notwithstanding that
such amount so advanced may result in Borrowing Base's being exceeded. Such
action on the part of the Agent shall not constitute a waiver of the Agent's
rights and Borrower's obligations under Section 2-8(b). Any amount which is
added to the principal balance of the Loan Account as provided in this Section
2-6(e) shall bear interest , subject to Section 2-9(f), at the Base
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<PAGE> 31
Margin Rate.
(f) Any statement rendered by the Agent or any Lender to
the Borrower concerning the Liabilities shall be considered correct and accepted
by the Borrower and shall be conclusively binding upon the Borrower unless the
Borrower provides the Agent with written objection thereto within sixty (60)
days from the mailing of such statement, which written objection shall indicate,
with particularity, the reason for such objection. The Loan Account and the
Agent's books and records concerning the loan arrangement contemplated herein
and the Liabilities shall be prima facie evidence and proof of the items
described therein.
2-7. The Revolving Credit Notes. The obligation to repay loans and
advances under the Revolving Credit, with interest as provided herein, shall be
evidenced by Notes (each, a "REVOLVING CREDIT NOTE") in the form of EXHIBIT 2-7,
annexed hereto, executed by the Borrower, one payable to each Lender. Neither
the original nor a copy of any Revolving Credit Note shall be required, however,
to establish or prove any Liability. In the event that any Revolving Credit Note
is ever lost, mutilated, or destroyed, the Borrower shall execute a replacement
thereof and deliver such replacement to the Agent.
2-8. Payment of The Loan Account.
(a) The Borrower may repay all or any portion of the
principal balance of the Loan Account from time to time until the Termination
Date. Such payments shall be applied first to Base Margin Loans and only then to
Libor Loans
(b) The Borrower, without notice or demand from the Agent
or any Lender, shall pay the Agent that amount, from time to time, which is
necessary so that the unpaid balance of the Loan Account does not exceed the
Borrowing Base. Such payments shall be applied first to Base Margin Loans and
only then to Libor Loans
(c) The Agent shall endeavor to cause those application of
payments (if any), pursuant to Sections 2-8(a) and 2-8(b) against Libor Loans
then outstanding in such manner as results in the least cost to the Borrower,
but shall not have any affirmative obligation to do so nor liability on account
of the Agent's failure to have done so. In no event shall action or inaction
taken by the Agent excuse the Borrower from any indemnification obligation under
Section 2-8(e).
(d) The Borrower shall repay the then entire unpaid
balance of the Loan Account and all other Liabilities on the Termination Date.
(e) The Borrower shall indemnify each Lender and hold each
Lender harmless from and against any loss, cost or expense (including loss of
anticipated profits) which such Lender may sustain or incur (including, without
limitation, by virtue of acceleration after the occurrence of any Event of
Default) as a consequence of the following:
(i) Default by the Borrower in payment of the
principal amount of or any
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<PAGE> 32
interest on any Libor Loan as and when due and payable, including any
such loss or expense arising from interest or fees payable by such
Lender to lenders of funds obtained by it in order to maintain its
Libor Loans
(ii) Default by the Borrower in making a borrowing
or conversion after the Borrower has given (or is deemed to have given)
a request for a Revolving Credit Loan or a request to convert a
Revolving Credit Loan from one applicable interest rate to another.
(iii) The making of any payment on a Libor Loan or
the making of any conversion of any such Loan to a Base Margin Loan on
a day that is not the last day of the applicable Interest Period with
respect thereto, including interest or fees payable by such Lender to
lenders of funds obtained by it in order to maintain any such Loans as
"breakage fees" (so-called).
2-9. Interest Rates.
(a) Each Revolving Credit Loan shall bear interest at the
Base Margin Rate unless timely notice is given (as provided in Section
2-4(c)(ii) that the subject Revolving Credit Loan (or a portion thereof) is, or
is to be converted to, a Libor Loan.
(b) Each Revolving Credit Loan which consists of a Libor
Loan shall bear interest at the applicable Libor Rate.
(c) Subject to the provisions hereof, the Borrower, by
notice to the Agent, may cause all or a part of the unpaid principal balance of
the Loan Account to bear interest at the Base Margin Rate or the Libor Rate as
specified from time to time by the Borrower. For ease of reference and
administration, each part of the Loan Account which bears interest at the same
interest and for the same Interest Period is referred to herein as if it were a
separate "Revolving Credit Loan".
(d) The Borrower shall not select, renew, or convert any
interest rate for a Revolving Credit Loan such that, in addition to interest at
the Base Margin Rate, there are more than Five (5) Libor Rates applicable to the
Revolving Credit Loans at any one time.
(e) The Borrower shall pay accrued and unpaid interest on
each Revolving Credit Loan in arrears as follows:
(i) On the applicable Interest Payment Date for
that Revolving Credit Loan.
(ii) On the Termination Date and on the End
Date.
(iii) Following the occurrence of any Event of
Default, with such frequency as may be determined by the Agent.
(f) Following the occurrence of any Event of Default (and
whether or not the Agent exercises the Agent's rights on account thereof), all
Revolving Credit Loans shall bear interest, at the option of the Agent at rate
which is the aggregate of the Base Margin Rate plus Two Percent (2%) per annum.
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2-10. Commitment Fee. As compensation for the commitment of BBRF
included herein to make loans and advances to the Borrower and as compensation
for its maintenance of sufficient funds available for such purpose, BBRF has
earned a COMMITMENT FEE (so referred to herein) at the times and in the amounts
as set forth the Fee Letter.
2-11. Agent's Fee. As compensation for BBRF serving as Agent
hereunder and in addition to any other fee or expense paid by the Borrower on
account of the Revolving Credit, the Borrower shall pay the Agent an AGENT'S FEE
(so referred to herein) at the times and in the amounts as set forth the Fee
Letter.
2-12. Line (Unused) Fee. In addition to any other fee by the
Borrower on account of the Revolving Credit, the Borrower shall pay the Agent,
for the benefit of the Lenders, a LINE (UNUSED) FEE (so referred to herein),
quarterly in arrears, equal to 0.25% per annum of the difference between the
average unpaid principal balance of Loan Account and the Loan Ceiling.
2-13. Early Termination Fee.
(a) In the event that the Termination Date occurs, for any
reason, prior to the first anniversary of this Agreement,, the Borrower shall
pay the Agent, for the benefit of the Lenders, the EARLY TERMINATION FEE (so
referred to herein)equal to 0.5% of the Loan Ceiling in effect as of such
closing, provided, however, no Early Termination Fee shall be payable if such
termination is in concert with the establishment of a replacement working
capital facility provided or agented by BBRF or any of its affiliates (it being
understood that the forgoing does not constitute the commitment or agreement of
BankBoston Retail Finance Inc. or any of its Affiliates to so refinance the
Liabilities).
2-14 Concerning Fees. The Borrower shall not be entitled to any
credit, rebate or repayment of the Commitment Fee, Line (Unused) Fee, Early
Termination Fee, or other fee previously earned by the Agent or any Lender
pursuant to this Agreement notwithstanding any termination of the within
Agreement or suspension or termination of the Agent's and any Lender's
respective obligation to make loans and advances hereunder.
2-15. Agent's and Lenders' Discretion.
(a) Each reference in the Loan Documents to the exercise of
discretion or the like by the Agent or any Lender shall be to that Person's
exercise of its judgement, in good faith (which shall be presumed), based upon
that Person's consideration of any such factor as the Agent or that Lender,
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<PAGE> 34
taking into account information of which that Person then has actual knowledge,
believes:
(i) Will or reasonably could be expected to
affect the value of the Collateral, the enforceability of the Agent's
security and collateral interests therein, or the amount which the
Agent would likely realize therefrom (taking into account delays which
may possibly be encountered in the Lender's realizing upon the
Collateral and likely Costs of Collection).
(ii) Indicates that any report or financial
information delivered to the Agent or any Lender by or on behalf of the
Borrower is incomplete, inaccurate, or misleading in any material
manner or was not prepared in accordance with the requirements of the
within Agreement.
(iii) Constitutes a Suspension Event.
(b) In the exercise of such judgement, the Agent and each
Lender also may take into account any of the following factors:
(i) Those included in, or tested by, the
definitions of "Acceptable Inventory," "Retail," and "Cost".
(ii) Material changes in or to the mix of the
Borrower's Inventory.
(iii) Seasonality with respect to the Borrower's
Inventory and patterns of retail sales.
(iv) Such other factors as the Agent and each
Lender determines as having a material bearing on credit risks
associated with the providing of loans and financial accommodations to
the Borrower.
(v) Any discretion otherwise granted to the Agent
elsewhere in this Agreement.
(c) The burden of establishing the failure of the Agent
or any Lender to have acted in a reasonable manner in such Person's exercise of
discretion shall be the Borrower's.
2-16. Procedures For Issuance of L/C's.
(a) The Borrower may request that the Agent cause the
issuance of L/C's for the account of the Borrower. Each such request shall be in
such manner as may from time to time be acceptable to the Agent.
(b) The Agent will cause the issuance of any L/C so
requested by the Borrower, provided that, at the time that the request is made,
the Revolving Credit has not been suspended as provided in Section 2-4(i) and if
so issued:
(i) The aggregate Stated Amount of all L/C's
then outstanding, does not exceed Ten Million Dollars and No Cents
($10,000,000.00).
(ii) The expiry of the L/C is not later than the
earlier of Thirty (30) days prior
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<PAGE> 35
to the Maturity Date (unless the Borrower provides cash collateral
reasonably acceptable to the Agent in an amount equal to 105% of the
Stated Amount of any L/C having an expiry after that date) or the
following:
(A) Standby's: One (1) year from
initial issuance.
(B) Documentary's: One Hundred (100)
days from issuance.
(iii) Borrowing Base would not be exceeded.
(c) The Borrower shall execute such documentation to
apply for and support the issuance of an L/C as may be required by the Issuer.
(d) There shall not be any recourse to, nor liability of,
the Agent or any Lender on account of
(i) Any delay or refusal by an Issuer to issue
an L/C;
(ii) Any action or inaction of an Issuer on
account of or in respect to, any L/C.
(e) The Agent, without the request of the Borrower, may
advance under the Revolving Credit (and charge to the Loan Account) the amount
of any honoring of any L/C and other amount for which the Borrower, the Issuer,
or the Lenders become obligated on account of, or in respect to, any L/C. Such
advance shall be made whether or not a Suspension Event is then extant or such
advance would result in Borrowing Base's being exceeded. Such action shall not
constitute a waiver of the Agent's rights under Section 2-8(b) hereof.
2-17. Fees For L/C's.
(a) The Borrower shall pay to the Agent a fee, for the
benefit of the Lenders, on account of L/C's, the issuance of which had been
procured by the Agent, monthly in arrears, and on the Termination Date and on
the End Date, equal to .75% per annum of the weighted average Stated Amount of
all L/C's outstanding during the period in respect of which such fee is being
paid.
(b) In addition to the fee to be paid as provided in
Subsection 2-17(a), above, the Borrower shall pay to the Agent (or to the
Issuer, if so requested by Agent), on demand, all issuance, processing,
negotiation, amendment, and administrative fees and other amounts charged by the
Issuer on account of, or in respect to, any L/C.
2-18. Concerning L/C's.
(a) None of the Issuer, the Issuer's correspondents, or
any advising, negotiating, or paying bank with respect to any L/C shall be
responsible in any way for:
(i) The performance by any beneficiary under any
L/C of that beneficiary's obligations to the Borrower.
(ii) The form, sufficiency, correctness,
genuineness, authority of any person
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<PAGE> 36
signing; falsification; or the legal effect of; any documents called
for under any L/C if (with respect to the foregoing) such documents on
their face appear to be in order.
(b) The Issuer may honor, as complying with the terms of
any L/C and of any drawing thereunder, any drafts or other documents otherwise
in order, but signed or issued by an administrator, executor, conservator,
trustee in bankruptcy, debtor in possession, assignee for the benefit of
creditors, liquidator, receiver, or other legal representative of the party
authorized under such L/C to draw or issue such drafts or other documents.
(c) Unless otherwise agreed to, in the particular
instance, the Borrower hereby authorizes any Issuer to:
(i) Select an advising bank, if any.
(ii) Select a paying bank, if any.
(iii) Select a negotiating bank.
(d) All directions, correspondence, and funds transfers
relating to any L/C are at the risk of the Borrower. The Issuer shall have
discharged the Issuer's obligations under any L/C which, or the drawing under
which, includes payment instructions, by the initiation of the method of payment
called for in, and in accordance with, such instructions (or by any other
commercially reasonable and comparable method). None of the Agent, any Lender,
nor the Issuer shall have any responsibility for any inaccuracy, interruption,
error, or delay in transmission or delivery by post, telegraph or cable, or for
any inaccuracy of translation.
(e) The Agent's, each Lender's, and the Issuer's rights,
powers, privileges and immunities specified in or arising under this Agreement
are in addition to any heretofore or at any time hereafter otherwise created or
arising, whether by statute or rule of law or contract.
(f) Except to the extent otherwise expressly provided
hereunder or agreed to in writing by the Issuer and the Borrower, the L/C will
be governed by the Uniform Customs and Practice for Documentary Credits,
International Chamber of Commerce, Publication No. 500, and any subsequent
revisions thereof.
(g) If any change in any law, executive order or
regulation, or any directive of any administrative or governmental authority
(whether or not having the force of law), or in the interpretation thereof by
any court or administrative or governmental authority charged with the
administration thereof, shall either:
(i) impose, modify or deem applicable any reserve,
special deposit or similar requirements against letters of credit
heretofore or hereafter issued by any Issuer or with respect to which
the Agent, any or any Issuer has an obligation to lend to fund drawings
under any L/C; or
(ii) impose on any Issuer any other condition or
requirements relating to any such letters of credit;
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<PAGE> 37
and the result of any event referred to in Section 2-18(g)(i) or 2-18(g)(ii),
above, shall be to increase the cost to any Issuer of issuing or maintaining any
L/C (which increase in cost shall be the result of such Issuer's reasonable
allocation among that Issuer's letter of credit customers of the aggregate of
such cost increases resulting from such events), then, upon demand by the Agent
and delivery by the Agent to the Borrower of a certificate of an officer of the
subject Issuer describing such change in law, executive order, regulation,
directive, or interpretation thereof, its effect on such Issuer, and the basis
for determining such increased costs and their allocation, the Borrower shall
immediately pay to the Agent, from time to time as specified by the Agent, such
amounts as shall be sufficient to compensate such Issuer for such increased
cost. Any Issuer's determination of costs incurred under Section 2-18(g)(i) or
2-18(g)(ii), above, and the allocation, if any, of such costs among the Borrower
and other letter of credit customers of such Issuer, if done in good faith and
made on an equitable basis and in accordance with such officer's certificate,
shall be conclusive and binding on the Borrower.
(h) The obligations of the Borrower under the within
Agreement with respect to L/C's are absolute, unconditional, and irrevocable and
shall be performed strictly in accordance with the terms hereof under all
circumstances, whatsoever including, without limitation, the following:
(i) Any lack of validity or enforceability or
restriction, restraint, or stay in the enforcement of the within
Agreement, any L/C, or any other agreement or instrument relating
thereto.
(ii) Any amendment or waiver of, or consent to
the departure from, any L/C.
(iii) The existence of any claim, set-off,
defense, or other right which the Borrower may have at any time against
the beneficiary of any L/C.
(iv) Any good faith honoring of a drawing under
any L/C, which drawing possibly could have been dishonored based upon a
strict construction of the terms of the L/C.
2-19. Changed Circumstances.
(a) The Agent may give the Borrower notice of the
occurrence of the following:
(i). The Agent shall have determined in good
faith (which determination shall be final and conclusive) on any day on
which the rate for a Libor Loan would otherwise be set, that adequate
and fair means do not exist for ascertaining such rate.
(ii). The Agent shall have determined in good
faith (which determination shall be final and conclusive) that:
(A) The continuation of or conversion of
any Revolving Credit Loan to a Libor Loan has been made
impracticable or unlawful by the occurrence of a contingency
that materially and adversely affects the applicable market or
compliance by the Agent or any Lender in good faith with any
applicable law or governmental
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<PAGE> 38
regulation, guideline or order or interpretation or change
thereof by any governmental authority charged with the
interpretation or administration thereof or with any request
or directive of any such governmental authority (whether or
not having the force of law).
(B) The indices on which the interest rates
for Libor Loans are based shall no longer represent the
effective cost to the Agent or any Lender for U.S. dollar
deposits in the interbank market for deposits in which it
regularly participates.
(b) In the event that the Agent gives the Borrower notice
of an occurrence described in Section 2-19(a), then, until the Agent notifies
the Borrower that the circumstances giving rise to such notice no longer apply:
(i) The obligation of the Agent and of each
Lender to make Libor Loans of the type affected by such changed
circumstances or to permit the Borrower to select the affected interest
rate as otherwise applicable to any Revolving Credit Loans shall be
suspended.
(ii) Any notice which the Borrower had given the
Agent with respect to any Libor Loan, the time for action with respect
to which has not occurred prior to the Agent's having given notice
pursuant to Section 2-19(a), shall be deemed at the option of the Agent
to not having been given.
2-20. Increased Costs. If, as a result of any requirement of law, or of
the interpretation or application thereof by any court or by any governmental or
other authority or entity charged with the administration thereof, whether or
not having the force of law, which:
(a) subjects any Lender to any taxes or changes the basis
of taxation, or increases any existing taxes, on payments of principal,
interest or other amounts payable by the Borrower to the Agent or any
Lender under this Agreement (except for taxes on the Agent or any
Lender's overall net income or capital imposed by the jurisdiction in
which the Agent or that Lender's principal or lending offices are
located);
(b) imposes, modifies or deems applicable any reserve,
cash margin, special deposit or similar requirements against assets
held by, or deposits in or for the account of or loans by or any other
acquisition of funds by the relevant funding office of any Lender;
(c). imposes on any Lender any other condition with
respect to any Loan Document; or
(d) imposes on any Lender a requirement to maintain or
allocate capital in relation to the Liabilities;
and the result of any of the foregoing, in the such Lender's reasonable opinion,
is to increase the cost to that Lender of making or maintaining any loan,
advance or financial accommodation or to reduce the income receivable by such
Lender in respect of any loan, advance or financial accommodation by an amount
which the such Lender deems to be material, then upon the Agent's giving written
notice thereof,
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<PAGE> 39
from time to time, to the Borrower (such notice to set out in reasonable detail
the facts giving rise to and a summary calculation of such increased cost or
reduced income), the Borrower shall forthwith pay to the Agent, for the benefit
of the subject Lender, upon receipt of such notice, that amount which shall
compensate the subject Lender for such additional cost or reduction in income.
2-21 Lenders' Commitments.
(a) The obligations of each Lender are several and not
joint. No Lender shall have any obligation to make any loan or advance under the
Revolving Credit in excess of the lesser of
(i) that Lender's Commitment Percentage
of the subject loan or advance or of Availability; or
(ii) that Lender's Dollar Commitment,
(b) No Lender shall have any liability to the Borrower
on account of the failure of any other Lender to provide any loan or advance
under the Revolving Credit nor any obligation to make up any shortfall which may
be created by such failure.
(c) The Dollar Commitments, Commitment Percentages, and
identities of the Lenders (but not the overall Commitment) may be changed, from
time to time by the reallocation or assignment of Dollar Commitments and
Commitment Percentages amongst the Lenders or with other Persons who determine
to become "Lenders", provided, however,
(i) Unless an Event of Default has occurred (in
which event, no consent of the Borrower is required) any assignment to
a Person not then a Lender shall be subject to the prior consent of the
Borrower (not to be unreasonably withheld), which consent will be
deemed given unless the Borrower provides the Agent with written
objection, not more than Five (5) Business Days after the Agent shall
have given the Borrower written notice of a proposed assignment).
(ii) Any such assignment or reallocation shall
be on a pro-rata basis such that each reallocated or assigned Dollar
Commitment to any Person remains the same percentage of the overall
Commitment (in terms of dollars) as the reallocated Commitment
Percentage is to such Person.
(d). Upon written notice given the Borrower from time to
time by the Agent, of any assignment or allocation referenced in Section
2-21(c):
(i) The Borrower shall execute one or more
replacement Revolving Credit Notes to reflect such changed Dollar
Commitments, Commitment Percentages, and identities and shall deliver
such replacement Revolving Credit Notes to the Agent (which promptly
thereafter shall deliver to the Borrower the Revolving Credit Notes so
replaced) provided however, in the event that a Revolving Credit Note
is to be exchanged following its acceleration or the entry of an order
for relief under the Bankruptcy Code with respect to the Borrower, the
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<PAGE> 40
Agent, in lieu of causing the Borrower to execute one or more new
Revolving Credit Notes, may issue the Agent's Certificate confirming
the resulting Commitments and Commitment Percentages.
(ii) Such change shall be effective from the
effective date specified in such written notice and any Person added as
a Lender shall have all rights and privileges of a Lender hereunder
thereafter as if such Person had been a signatory to the within
Agreement and any other Loan Document to which a Lender is a signatory
and any person removed as a Lender shall be relieved of any obligations
or responsibilities of a Lender hereunder thereafter.
(e) The Borrower recognizes that the Agent's exercise of
any discretion accorded to the Agent herein and of its rights, remedies, powers,
privileges, and discretions with respect to the Borrower is subject to a certain
Agency Agreement amongst the Agent and the Lenders. The provisions of the Agency
Agreement relating to voting rights of the Lenders shall be subject to the
approval of the Borrower, which approval shall not be unreasonably delayed or
withheld. The Borrower acknowledges that the Borrower's approval of the voting
rights shall be deemed furnished if the voting rights provision described in
EXHIBIT 2-21 hereto are incorporated in the Agency Agreement.
ARTICLE 3 - CONDITIONS PRECEDENT:
As a condition to the effectiveness of this Agreement, the
establishment of the Revolving Credit, and the making of the first loan under
the Revolving Credit, each of the documents respectively described in Sections
3-1 through and including 3-5, (each in form and substance satisfactory to the
Agent) shall have been delivered to the Agent, and the conditions respectively
described in Sections 3-6 through and including 3-10, shall have been satisfied:
3-1. Corporate Due Diligence.
Each of the following with respect to the Borrower and each Guarantor:
(a) A Certificate of corporate good standing issued by the
Secretary of State of the state of incorporation of such entity.
(b) Certificates of due qualification, in good standing,
issued by the Secretary(ies) of State of each State in which the nature of the
Borrower's or Guarantor's business conducted or assets owned requires such
qualification.
(c) A Certificate of the Borrower's and each Guarantor's
Secretary of the due adoption, continued effectiveness, and setting forth the
texts of, each corporate resolution adopted in connection with the establishment
of the loan arrangement contemplated by the Loan Documents and attesting to the
true signatures of each Person authorized as a signatory to any of the Loan
Documents and attaching certified copies of the charter documents and by-laws of
the Borrower.
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<PAGE> 41
3-2. Opinion. An opinion of counsel to the Borrower and the
Guarantors in form and substance satisfactory to the Agent.
3-3. Warehousemen's Waivers. The delivery to the Agent of waivers
or subordinations (each in form satisfactory to the Agent) executed by each of
the Borrower's warehousemen.
3-4. Additional Documents. Such additional instruments and
documents as the Agent or its counsel reasonably may require or request,
including, without limitation, the following:
(a) Open-End Mortgage, Security Agreement,
Assignment of Leases and Rents on the Ohio
Property (not to be recorded at the present
time), and Non-Encumbrance Agreement on the
Ohio Property.
(b) Mortgage on the Michigan Property.
(c) Intercreditor Agreement amongst the Agent,
the Borrower, and McKesson Corporation.
(d) Guaranty to be executed by each Guarantor.
(e) Security Agreement to be executed by each
Guarantor.
(f) Stock Pledge Agreement to be executed by the
Borrower pledging all issued and outstanding
stock of each Guarantor.
3-5. Officers' Certificates. Certificates executed by the President or
the Chief Financial Officer of the Borrower and stating that the representations
and warranties made by the Borrower to the Agent and the Lenders in the Loan
Documents are true and complete as of the date of such Certificate, and that no
event has occurred which is or which, solely with the giving of notice or
passage of time (or both) would be an Event of Default.
3-6. Representations and Warranties. Each of the representations made
by or on behalf of the Borrower in this Agreement or in any of the other Loan
Documents or in any other report, statement, document, or paper provided by or
on behalf of the Borrower shall be true and complete as of the date as of which
such representation or warranty was made and as of the date hereof.
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3-7. Minimum Excess Availability. The Borrowing Base, after giving
effect to the first funding under the Revolving Credit; all then held checks (if
any); accounts payable which are beyond credit terms then accorded the Borrower;
overdrafts; any charges to the Loan Account made in connection with the
establishment of the credit facility contemplated hereby; and L/C's to be issued
at, or immediately subsequent to, such establishment, is not less than
$70,000,000.00.
3-8. All Fees and Expenses Paid. All fees due at or immediately after
the first funding under the Revolving Credit and all costs and expenses incurred
by the Agent in connection with the establishment of the credit facility
contemplated hereby (including the fees and expenses of counsel to the Agent)
shall have been paid.
3-9. No Suspension Event. No Suspension Event shall then exist.
3-10. No Adverse Change. No event shall have occurred or failed to
occur, which occurrence or failure is or could have a materially adverse effect
upon the Borrower's financial condition when compared with such financial
condition at May 30, 1998.
No document shall be deemed delivered to the Agent or any Lender until received
and accepted by the Agent at its head offices in Boston, Massachusetts. Under no
circumstances will the within Agreement take effect until executed and accepted
by the Agent at said head office.
ARTICLE 4 - GENERAL REPRESENTATIONS, COVENANTS AND WARRANTIES:
To induce each Lender to establish the loan arrangement contemplated
herein and to make loans and advances and to provide financial accommodations
under the Revolving Credit (each of which loans shall be deemed to have been
made in reliance thereupon) the Borrower, in addition to all other
representations, warranties, and covenants made by the Borrower in any other
Loan Document, makes those representations, warranties, and covenants included
in the within Agreement.
4-1. Payment and Performance of Liabilities. The Borrower shall pay
each Liability when due (or when demanded if payable on demand) and shall
promptly, punctually, and faithfully perform each other Liability.
4-2. Due Organization - Corporate Authorization - No Conflicts.
(a) The Borrower presently is and shall hereafter remain in
good standing as a
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Delaware corporation and is and shall hereafter remain duly qualified and in
good standing in every other State in which, by reason of the nature or location
of the Borrower's assets or operation of the Borrower's business, such
qualification may be necessary.
(b) Each Related Entity is listed on EXHIBIT 4-2, annexed
hereto. Each Related Entity is and shall hereafter remain in good standing in
the State in which incorporated and is and shall hereafter remain duly qualified
in each other State in which, by reason of that entity's assets or the operation
of such entity's business, such qualification is necessary. The Borrower shall
provide the Agent with prior written notice of any entity's becoming or ceasing
to be a Related Entity.
(c) The Borrower shall not change its State of incorporation nor
its taxpayer identification number.
(d) The Borrower has all requisite corporate power and
authority to execute and deliver all Loan Documents to which the Borrower is a
party and has and will hereafter retain all requisite corporate power to perform
all Liabilities.
(e) The execution and delivery by the Borrower of each Loan
Document to which it is a party; the Borrower's consummation of the transactions
contemplated by such Loan Documents (including, without limitation, the creation
of security interests by the Borrower as contemplated hereby); the Borrower's
performance under those of the Loan Documents to which it is a party; the
borrowings hereunder; and the use of the proceeds thereof:
(i) Have been duly authorized by all necessary
corporate action.
(ii) Do not, and will not, contravene in any material
respect any provision of any Requirement of Law or obligation of the
Borrower.
(iii) Will not result in the creation or imposition of,
or the obligation to create or impose, any Encumbrance upon any assets
of the Borrower pursuant to any Requirement of Law or obligation,
except pursuant to the Loan Documents.
(f) The Loan Documents have been duly executed and delivered by
Borrower and are the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms.
4-3. Trade Names.
(a) EXHIBIT 4-3, annexed hereto, is a listing of:
(i) All names under which the Borrower conducted its business
within the past five (5) years.
(ii) All entities and/or persons within the past five (5) years
with whom the Borrower consolidated or merged, or from whom the
Borrower ever acquired in a single transaction or in a series of
related transactions substantially all of such entity's or person's
assets.
(b) The Borrower will not change its name or conduct its
business under any name
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not listed on EXHIBIT 4-3 except (i) upon not less than twenty-one (21) days
prior written notice (with reasonable particularity) to the Agent and (ii) in
compliance with all other provisions of this Agreement.
4-4. Infrastructure.
(a) The Borrower has and will maintain a sufficient
infrastructure to conduct its business as presently conducted and as
contemplated to be conducted.
(b) Based upon a diligent inquiry undertaken by the Borrower,
it appears that certain computer applications which the Borrower presently
employs do have a Year 2000 Problem. On or before May 1, 1999, the Borrower
shall remedy all Year 2000 Problem deficiencies it may have with existing
computer applications that could have a material adverse effect on the
Borrower's business operations, to the Agent's reasonable satisfaction. The
Borrower will not employ any computer application hereafter unless the Borrower
shall have first made a diligent inquiry to assure that no Year 2000 Problem
will arise on account of the use of such application.
(c) The Borrower owns and possesses, or has the right to use
(and will hereafter own, possess, or have such right to use) all patents,
industrial designs, trademarks, trade names, trade styles, brand names, service
marks, logos, copyrights, trade secrets, know-how, confidential information, and
other intellectual or proprietary property of any third Person necessary for the
Borrower's conduct of the Borrower's business.
(d) The conduct by the Borrower of the Borrower's business
does not presently infringe (nor will the Borrower conduct its business in the
future so as to infringe) the patents, industrial designs, trademarks, trade
names, trade styles, brand names, service marks, logos, copyrights, trade
secrets, know-how, confidential information, or other intellectual or
proprietary property of any third Person.
4-5. Locations.
(a) The Collateral, and the books, records, and papers of
Borrower pertaining thereto, are kept and maintained solely at the Borrower's
chief executive offices at
(i) 155 Hidden Ravines Drive, Powell, Ohio 43065; and
(ii) those locations which are listed on EXHIBIT 4-5,
annexed hereto, which EXHIBIT includes, with respect to each such
location, the name and address of the landlord on the Lease which
covers such location (or an indication that the Borrower owns the
subject location) and of all service bureaus with which any such
records are maintained and the names and addresses of each of the
Borrower's landlords.
(b) The Borrower shall not remove any of the Collateral from
said chief executive office or those locations listed on EXHIBIT 4-5 except to:
(i) accomplish sales of Inventory in the ordinary
course of business; or
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(ii) move Inventory from one such location to
another such location; or
(iii) utilize such of the Collateral as is removed
from such locations in the ordinary course of business (such as motor
vehicles).
(c) The Borrower will not execute any lease other than in
the ordinary course of business, not otherwise in violation of the Agreement,
and subject to furnishing the Agent with ten (10) days notice prior to opening
any new location, and using its best efforts to obtain a landlord's waiver in
favor of the Agent in form reasonably satisfactory to the Agent.
(d) The Borrower may alter, modify, or amend any Lease;
provided that no such amendment shall result in a violation of this Agreement or
in the Borrower's granting a landlord an Encumbrance on any of the Borrower's
assets.
(e) The Borrower shall not cease the conduct of business
from any of its present or future locations without first furnishing the Agent
with at least ten (10) days prior notice thereof, unless any such cessation is
caused by force majeure or other event beyond the control of the Borrower.
(f) Except as otherwise disclosed pursuant to, or
permitted by, this Section 4-5, no tangible personal property of the Borrower is
in the care or custody of any third party or stored or entrusted with a bailee
or other third party and none shall hereafter be placed under such care,
custody, storage, or entrustment.
4-6. Title to Assets.
(a) The Borrower is, and shall hereafter remain, the
owner of the Collateral free and clear of all Encumbrances with the exceptions
of the following (the "PERMITTED ENCUMBRANCES"):
(i) Encumbrances in favor of the Agent.
(ii) Those Encumbrances (if any) listed on
EXHIBIT 4-6(A), annexed hereto.
(iii) Purchase money security interests in
Equipment to secure Indebtedness and/or Leases of Equipment otherwise
permitted hereby not to exceed $15,000,000.00 outstanding at any one
time.
(iv) factoring of accounts receivable to
McKesson.
(v) refinancing of the existing first mortgage
on or sale and leaseback of the Real Property provided no Event of
Default or Suspension Event is then occurring.
(b) Except as set forth in EXHIBIT 4-6(B), annexed
hereto, the Borrower does not and shall not have possession of any property on
consignment to the Borrower.
(c) Subject to Section 4-6(a)(iii) above, the Borrower
shall have the right to enter into Capital Leases, operating leases, and/or
purchase money financing transactions, for the acquisition of Equipment.
4-7. Indebtedness. The Borrower does not and shall not hereafter
have any Indebtedness
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<PAGE> 46
with the exceptions of:
(a) Any Indebtedness to the Lenders.
(b) The Indebtedness (if any) listed on EXHIBIT 4-7, annexed
hereto.
(c) Indebtedness otherwise associated with the acquisition of
Equipment otherwise permitted by the Fixed Charge Ratio limitations
imposed herein (Section 5-12).
4-8. Insurance Policies.
(a) EXHIBIT 4-8, annexed hereto, is a schedule of all
insurance policies owned by the Borrower or under which the Borrower is the
named insured. Each of such policies is in full force and effect. Neither the
issuer of any such policy nor the Borrower is in default or violation of any
such policy.
(b) The Borrower shall have and maintain at all times
insurance covering such risks, in such amounts, containing such terms, in such
form, for such periods, and written by such companies as may be satisfactory to
the Agent. The coverage reflected on EXHIBIT 4-8 presently satisfies the
foregoing requirements, it being recognized by the Borrower, however, that such
requirements may change hereafter to reflect changing circumstances. All
insurance carried by the Borrower shall provide for a minimum of Sixty (60)
days' written notice of cancellation to the Agent and all such insurance which
covers the Collateral shall include an endorsement in favor of the Agent, which
endorsement shall provide that the insurance, to the extent of the Agent's
interest therein, shall not be impaired or invalidated, in whole or in part, by
reason of any act or neglect of the Borrower or by the failure of the Borrower
to comply with any warranty or condition of the policy. In the event of the
failure by the Borrower to maintain insurance as required herein, the Agent , at
its option, may obtain such insurance, provided, however, the Agent's obtaining
of such insurance shall not constitute a cure or waiver of any Event of Default
occasioned by the Borrower's failure to have maintained such insurance. The
Borrower shall furnish to the Agent certificates or other evidence satisfactory
to the Agent regarding compliance by the Borrower with the foregoing insurance
provisions.
(c) The Borrower shall advise the Agent of each claim in
excess of $250,000.00 made by the Borrower under any policy of insurance which
covers the Collateral. Following the occurrence of any Event of Default, the
Borrower will permit the Agent, at the Agent's option in each instance, to the
exclusion of the Borrower, to conduct the adjustment of each such claim (and of
all claims following the occurrence of any Suspension Event). The Borrower
hereby appoints the Agent as the Borrower's attorney in fact, exercisable upon
the occurrence of any Event of Default, to obtain, adjust, settle, and cancel
any insurance described in this section and to endorse in favor of the Agent any
and all drafts and other instruments with respect to such insurance. The within
appointment, being coupled with an interest, is irrevocable until this Agreement
is terminated by a written instrument executed by a duly authorized officer of
the Agent. The Agent shall not be liable on account of any exercise pursuant to
said power except for any exercise in actual willful misconduct and bad faith.
The
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Agent may apply any proceeds of such insurance against the Liabilities, whether
or not such have matured, in such order of application as the Agent may
determine.
4-9. Licenses. Each license, distributorship, franchise, and similar
agreement issued to, or to which the Borrower is a party is in full force and
effect.
4-10. Leases. EXHIBIT 4-10, annexed hereto, is a schedule of all
presently effective Capital Leases. Exhibit 4-5 includes a list of all other
presently effective Leases. Each of such Leases and Capital Leases is in full
force and effect. No party to any such Lease or Capital Lease is in default or
violation of any such Lease or Capital Lease and the Borrower has not received
any notice or threat of cancellation of any such Lease or Capital Lease. The
Borrower hereby authorizes the Agent at any time and from time to time after the
occurrence of any Event of Default to contact any of the Borrower's landlords in
order to confirm the Borrower's continued compliance with the terms and
conditions of the Lease(s) between the Borrower and that landlord and to discuss
such issues, concerning the Borrower's occupancy under such Lease(s), as the
Agent may determine.
4-11. Requirements of Law. The Borrower is in compliance in all
material respects with, and shall hereafter in all material respects comply with
and use its assets in compliance with, all Requirements of Law. The Borrower has
not received any notice of any violation of any Requirement of Law (whether or
not such violation is material), which violation has not been cured or otherwise
remedied.
4-12. Maintain Properties. The Borrower shall:
(a) Keep the Collateral in good order and repair
(ordinary reasonable wear and tear and insured casualty excepted).
(b) Not suffer or cause the waste or destruction of any
material part of the Collateral.
(c) Not use any of the Collateral in violation of any
policy of insurance thereon.
(d) Not sell, lease, or otherwise dispose of any of the
Collateral, other than the following:
(i) The sale of Inventory in compliance with
the within Agreement.
(ii) The disposal of Equipment which is
obsolete, worn out, or damaged beyond repair, which Equipment is
replaced to the extent necessary to preserve or improve the operating
efficiency of the Borrower.
(iii) The turning over to the Agent of all
Receipts as provided herein.
(iv) The sale and leaseback of any Real
Property, provided such lease
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<PAGE> 48
enables the Borrower to use the property in the same manner as
previously used.
(e) Require that substantially all Inventory be held in the
name of the Borrower and not in the name of the Guarantors or any other Related
Entity.
4-13. Pay Taxes.
(a) The Borrower has received written notice from the Internal
Revenue Service that the Internal Revenue Service has completed its examination
of the Borrower's federal income tax returns for all tax years through and
including the Borrower's taxable year referenced on EXHIBIT 4-13, annexed
hereto, and that all deficiencies, assessments, and other amounts asserted as a
result of such examinations have been fully paid or settled. No agreement is
extant which waives or extends any statute of limitations applicable to the
right of the Internal Revenue Service to assert a deficiency or make any other
claim for or in respect to federal income taxes. No issue has been raised in any
such examination which, by application of similar principles, reasonably could
be expected to result in the assertion of a deficiency for any fiscal year open
for examination, assessment, or claim by the Internal Revenue Service.
(b) The Borrower has received written notice from the
respective state and local taxing authorities to which the Borrower is subject
that such authorities have completed their respective examination of the
Borrower's returns for all state and local income, excise, sales, and other
taxes for which the Borrower is liable for the respective tax years referenced
on EXHIBIT 4-13, annexed hereto, and that all deficiencies, assessments, and
other amounts asserted as a result of such examinations have been fully paid or
settled. No agreement is extant which waives or extends any statute of
limitations applicable to the right of any state taxing authority to assert a
deficiency or make any other claim for or in respect to any such state taxes,
except as part of an agreement to contest such tax assessment or audit in good
faith. No issue has been raised in any such examination which, by application of
similar principles, reasonably could be expected to result in the assertion of a
deficiency for any fiscal year open for examination, assessment, or claim by any
state or local taxing authority.
(c) Except as disclosed on said EXHIBIT 4-13, there are no
examinations of or with respect to the Borrower presently being conducted by the
Internal Revenue Service or any other taxing authority, other than ongoing state
sales tax audits.
(d) Except for taxes, assessments, or other governmental
charges which are being contested in good faith by appropriate proceedings, and
as to which no Encumbrance in excess of $250,000.00 has arisen in the Agent's
reasonable judgment, which shall take priority over the Agent's Encumbrance, the
Borrower has, and hereafter shall: pay, as they become due and payable, all
taxes and unemployment contributions and other charges of any kind or nature
levied, assessed or claimed against the Borrower or the Collateral by any person
or entity whose claim could result in an Encumbrance upon any asset of the
Borrower or by any governmental authority; properly exercise any
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<PAGE> 49
trust responsibilities imposed upon the Borrower by reason of withholding from
employees' pay or by reason of the Borrower's receipt of sales tax or other
funds for the account of any third party; timely make all contributions and
other payments as may be required pursuant to any Employee Benefit Plan now or
hereafter established by the Borrower; and timely file all tax and other returns
and other reports with each governmental authority to whom the Borrower is
obligated to so file.
(e) At its option after the occurrence of any Event of
Default, or prior thereto, if the Agent reasonably determines an Encumbrance may
arise which will take priority over the Agent's Encumbrance, the Agent may, but
shall not be obligated to, pay any taxes, unemployment contributions, and any
and all other charges levied or assessed upon the Borrower or the Collateral by
any person or entity or governmental authority, and make any contributions or
other payments on account of the Borrower's Employee Benefit Plan as the Agent ,
in the Agent's discretion, may deem necessary or desirable, to protect,
maintain, preserve, collect, or realize upon any or all of the Collateral or the
value thereof or any right or remedy pertaining thereto, provided, however, the
Agent's making of any such payment shall not constitute a cure or waiver of any
Event of Default occasioned by the Borrower's failure to have made such payment,
nor shall payment be determinative of the existence of an Event of Default.
4-14. No Margin Stock. The Borrower is not engaged in the business
of extending credit for the purpose of purchasing or carrying any margin stock
(within the meaning of Regulations G,U,T, and X of the Board of Governors of the
Federal Reserve System of the United States). No part of the proceeds of any
borrowing hereunder will be used at any time 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.
4-15. ERISA. Neither the Borrower nor any ERISA Affiliate ever has
or hereafter shall:
(a) Materially violate or fail to be in material
compliance with the Borrower's Employee Benefit Plan.
(b) Fail timely to file all reports and filings required
by ERISA to be filed by the Borrower, the failure of which would have a material
adverse affect on the Borrower.
(c) Engage in any "prohibited transactions" or "reportable
events" (respectively as described in ERISA).
(d) Engage in, or commit, any act such that a material
tax or material penalty could be imposed upon the Borrower on account thereof
pursuant to ERISA.
(e) Accumulate any material funding deficiency within the
meaning of ERISA.
(f) Terminate any Employee Benefit Plan such that a lien
could be asserted against any assets of the Borrower on account thereof pursuant
to ERISA.
(g) Be a member of, contribute to, or have any obligation
under any Employee
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<PAGE> 50
Benefit Plan which is a multiemployer plan within the meaning of Section 4001(a)
of ERISA.
4-16. Hazardous Materials.
(a) Except as described in EXHIBIT 4-16, annexed hereto,
the Borrower has never:
(i) Been legally responsible for any release or
threat of release of any Hazardous Material.
(ii) Received notification of any release or
threat of release of any Hazardous Material from any site or vessel
occupied or operated by the Borrower and/or of the incurrence of any
expense or loss in connection with the assessment, containment, or
removal of any release or threat of release of any Hazardous Material
from any such site or vessel.
(b) The Borrower shall:
(i) Dispose of any Hazardous Material only in
compliance with all Environmental Laws.
(ii) Not store on any site or vessel occupied or
operated by the Borrower and not transport or arrange for the transport
of any Hazardous Material, except if such storage or transport is in
the ordinary course of the Borrower's business and is in compliance
with all Environmental Laws.
(c) The Borrower shall provide the Agent with written
notice upon the Borrower's obtaining knowledge of any incurrence of any expense
or loss by any governmental authority or other Person in connection with the
assessment, containment, or removal of any Hazardous Material, for which expense
or loss the Borrower may be liable.
4-17. Litigation. Except as described in EXHIBIT 4-17, annexed
hereto, there is not presently pending or threatened by or against the Borrower
any suit, action, proceeding, or investigation which, if determined adversely to
the Borrower, would have a material adverse effect upon the Borrower's financial
condition or ability to conduct its business as such business is presently
conducted or is contemplated to be conducted in the foreseeable future.
4-18. Permitted Acquisitions. The Borrower may effect acquisitions of
all or of economic units of an enterprise (the "TARGET") subject to the
satisfaction of the following conditions:
(a) The structure of such acquisition shall be reasonably
satisfactory to the Agent and shall either be (i) the acquisition of all of the
capital stock of the Target which, immediately following its acquisition, is
merged into the Borrower, (ii) the acquisition of substantially all of the
assets of the Target, or specific economic units of Target, or (iii) the
creation of or result in the organization of a Related Entity which is a
wholly-owned subsidiary of the Borrower provided that the Agent shall be
furnished such Entity's unlimited guaranty (in form and substance satisfactory
to the Agent), which
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unlimited guaranty shall be secured by a first perfected security interest and
lien on all assets of such Entity subject to Permitted Encumbrances.
(b) The Target is in a business which is similar to that
presently conducted, i.e. a chain of discount retail drug stores, provided,
however, the percentage mix of the Target's inventory concentration reasonably
may vary from the present percentage mix of the Borrower's inventory.
(c) No Event of Default shall occur on account of or as a
direct consequence of the subject acquisition.
(d) Immediately following the consummation of the subject
acquisition, excess Availability shall not be less than $25,000,000.00.
(e) At all times during the 12 months next following the
consummation of any acquisition, excess Availability shall not be less than
$10,000,000.00.
(f) The Agent and the Lenders shall have no obligation to
include any Inventory acquired in such Permitted Acquisition (or Inventory of a
similar type and nature acquired after the Permitted Acquisition) as "Acceptable
Inventory", provided that the Agent and the Lenders will not unreasonably
withhold consent to include such Inventory as "Acceptable Inventory" based upon
appraisals conducted by and satisfactory to the Agent, advance rates which may
be different than those set forth in this Agreement, and subject to such
Inventory being of a similar type as presently maintained by the Borrower, all
as determined in the Agent's sole discretion.
(g) Not less than 30 days prior to a proposed acquisition,
the Borrower shall furnish the Agent with a forecast of the performance of the
Borrower, after giving effect to the proposed acquisition, for the 24 months
following the acquisition, which forecast
(i) shall be prepared following a methodology
which is reasonably satisfactory to the
Agent; and
(ii) demonstrates that the Borrower will be in
compliance with (A) the foregoing minimum
excess Availability requirement during the
period covered by such forecast and (B) the
Fixed Charge Ratio.
4-19. Dividends or Investments. The Borrower shall not:
(a) Pay any cash dividend or make any other distribution in
respect of any class of the Borrower's capital stock after the date of this
Agreement which in the aggregate through the Maturity Date, inclusive of amounts
expended pursuant to Section 4-19(b), below, exceeds $10,000,000.00.
(b) Own, redeem, retire, purchase, or acquire any of the
Borrower's capital stock, after the date of this Agreement which in the
aggregate through the Maturity Date, inclusive of amounts expended pursuant to
Section 4-19(a), above, exceeds $10,000,000.00.
(c) Invest in or purchase any stock or securities or rights
to purchase any such stock or securities, of any corporation or other entity.
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<PAGE> 52
(d) Except as permitted pursuant to Section 4-18 hereof, merge
or consolidate or be merged or consolidated with or into any other corporation
or other entity.
(e) Except as permitted pursuant to Section 4-18 hereof,
consolidate any of the Borrower's operations with those of any other corporation
or other entity.
(f) Except as permitted pursuant to Section 4-18 hereof,
organize or create any Related Entity.
(g) Subordinate any debts or obligations owed to the Borrower
by any third party to any other debts owed by such third party to any other
Person.
(h) Acquire any assets other than in the ordinary course and
conduct of the Borrower's business as conducted at the execution of this
Agreement, except as provided under Section 4-18, above.
(i) Make any payment, whether for early retirement or
repurchase or otherwise, in respect of the Borrower's Senior Unsecured
Convertible Subordinated Debentures if, either before such payment or after
giving effect to such payment, any Suspension Event or Event of Default shall
have occurred.
4-20. Loans. Except as described in EXHIBIT 4-20, annexed hereto,
the Borrower shall not make any loans or advances to, nor acquire the
Indebtedness of, any Person, provided, however, the foregoing does not prohibit
any of the following:
(a) Advance payments made to the Borrower's suppliers in the
ordinary course.
(b) Advances to the Borrower's officers, employees, and
salespersons with respect to reasonable expenses to be incurred by such
officers, employees, and salespersons for the benefit of the Borrower, which
expenses are properly substantiated by the person seeking such advance and
properly reimbursable by the Borrower.
4-21. Protection of Assets. After the occurrence of any Event of
Default, the Agent, in the Agent's discretion, and from time to time, may
discharge any tax or Encumbrance on any of the Collateral, or take any other
action that the Agent may deem necessary or desirable to repair, insure,
maintain, preserve, collect, or realize upon any of the Collateral. The Agent
shall not have any obligation to undertake any of the foregoing and shall have
no liability on account of any action so undertaken except where there is a
specific finding in a judicial proceeding (in which the Agent has had an
opportunity to be heard), from which finding no further appeal is available,
that the Agent had acted in actual bad faith or in a grossly negligent manner.
The Borrower shall pay to the Agent, on demand, or the Agent, in its discretion,
may add to the Loan Account, all amounts paid or incurred by the Lender pursuant
to this section. The obligation of the Borrower to pay such amounts is a
Liability.
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4-22. Line of Business. The Borrower shall not engage in any
business other than the business in which it is currently engaged or a business
reasonably related thereto.
4-23. Affiliate Transactions. Except as described in EXHIBIT 4-23,
annexed hereto, the Borrower shall not make any payment, nor give any value to
any Related Entity except for goods and services actually purchased in the
ordinary course of business by the Borrower from, or sold in the ordinary course
of business by the Borrower to, such Related Entity for a price and on terms
which shall
(a) be competitive and fully deductible as an "ordinary and
necessary business expense" and/or fully depreciable under the Internal Revenue
Code of 1986 and the Treasury Regulations, each as amended; and
(b) no be less favorable from those which would have been
charged in an arms length transaction.
4-24. Additional Assurances.
(a) The Borrower is not the owner of, nor has it any
interest in, any property or asset which, immediately upon the satisfaction of
the conditions precedent to the effectiveness of the credit facility
contemplated hereby (Article 3) will be not be subject to a perfected security
or other collateral interest that is perfected by the filing of a financing
statement in favor of the Agent (subject only to Permitted Encumbrances) to
secure the Liabilities.
(b) The Borrower will not hereafter acquire any asset or
any interest in property which is not, immediately upon such acquisition,
subject to such a perfected security or other collateral interest in favor of
the Agent to secure the Liabilities (subject only to Permitted Encumbrances or
otherwise permitted pursuant to Section 4-6(a) hereof).
(c) The Borrower shall execute and deliver to the Agent
such instruments, documents, and papers, and shall do all such things from time
to time hereafter as the Agent may request to carry into effect the provisions
and intent of this Agreement; to protect and perfect the Agent's security
interests in the Collateral; and to comply with all applicable statutes and
laws, and facilitate the collection of the Receivables Collateral. The Borrower
shall execute all such instruments as may be required by the Agent with respect
to the recordation and/or perfection of the security interests created herein.
(d) The Borrower hereby designates the Agent as and for the
Borrower's true and lawful attorney, with full power of substitution, to sign
and file any financing statements in order to perfect or protect the Agent's
security and other collateral interests in the Collateral exercisable if the
Borrower has failed to sign such financing statements within five (5) days after
receipt from the Agent, or upon the request of the Borrower.
(e) A carbon, photographic, or other reproduction of this
Agreement or of any
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financing statement or other instrument executed pursuant to this Section 4-24
shall be sufficient for filing to perfect the security interests granted herein.
4-25. Adequacy of Disclosure.
(a) All financial statements furnished to the Agent and each
Lender by the Borrower have been prepared in accordance with GAAP consistently
applied and present fairly the condition of the Borrower at the date(s) thereof
and the results of operations and cash flows for the period(s) covered. There
has been no change in the financial condition, results of operations, or cash
flows of the Borrower since the date(s) of such financial statements, other than
changes in the ordinary course of business, which changes have not been
materially adverse, either singularly or in the aggregate.
(b) The Borrower does not have any contingent obligations or
obligation under any Lease or Capital Lease which is not noted in the Borrower's
financial statements furnished to the Agent and each Lender prior to the
execution of the within Agreement.
(c) To the best of the Borrower's knowledge, no document,
instrument, agreement, or paper now or hereafter given the Agent or any Lender
by or on behalf of the Borrower or any guarantor of the Liabilities in
connection with the execution of the within Agreement by the Agent and each
Lender contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact necessary in order to make the statements
therein not misleading. There is no fact known to the Borrower (other than risks
inherent in general economic conditions) which has, or which, in the foreseeable
future could have, a material adverse effect on the financial condition of the
Borrower or any such guarantor which has not been disclosed in writing to the
Agent and each Lender.
4-26 Labor Contract. The Borrower has not been and is not currently
a party to any collective bargaining or other labor contract. There has not
been, there is not presently pending or existing, and there is not threatened,
(a) any strike, slowdown, picketing, work stoppage, or employee grievance
process, (b) any material proceeding against or affecting the Borrower relating
to the alleged violation of any Requirement of Law pertaining to labor relations
or National Labor Relations Board, the Equal Employment Opportunity Commission,
or any comparable governmental body, organizational activity, or other labor or
employment dispute against or affecting the Borrower, or (c) any application for
certification of a collective bargaining agent. No event has occurred or
circumstance exists that could provide the basis for any work stoppage or other
labor dispute. There is no lockout of any employees by the Borrower, and no such
action is contemplated by the Borrower. The Borrower has complied in all
material respects with all Requirements of Law relating to employment, equal
employment opportunity, nondiscrimination, immigration, wages, hours, benefits,
collective bargaining, the payment of social security and similar taxes,
occupational safety and health, and plant closing. The Borrower is not liable
for the payment of any material compensation, damages, taxes, fines, penalties,
or other amounts,
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however, designated, for failure to comply with any of the foregoing
Requirements of Law.
4-27. Other Covenants. The Borrower shall not indirectly do or cause
to be done any act which, if done directly by the Borrower, would breach any
covenant contained in this Agreement.
ARTICLE 5 - FINANCIAL REPORTING AND PERFORMANCE COVENANTS:
5-1. Maintain Records.
(a) The Borrower shall:
(i) At all times, keep proper books of account,
in which full, true, and accurate entries shall be made of all of the Borrower's
transactions, all in accordance with GAAP applied consistently with prior
periods to fairly reflect the financial condition of the Borrower at the close
of, and its results of operations for, the periods in question.
(ii) Timely provide the Agent with those
financial reports, statements, and schedules required by this Article 5 or
otherwise, each of which reports, statements and schedules shall be prepared, to
the extent applicable, in accordance with GAAP applied consistently with prior
periods to fairly reflect the financial condition of the Borrower at the close
of, and its results of operations for, the period(s) covered therein.
(iii) At all times, keep accurate current records
of the Collateral including, without limitation, accurate current stock, cost,
and sales records of its Inventory, accurately and sufficiently itemizing and
describing the kinds, types, and quantities of Inventory and the cost and
selling prices thereof.
(iv) At all times, retain independent certified
public accountants who are reasonably satisfactory to the Agent (the Borrower's
present certified public accountants being satisfactory to the Agent) and
instruct such accountants to fully cooperate with, and be available to, the
Agent and each Lender to discuss the Borrower's financial performance, financial
condition, operating results, controls, and such other matters, within the scope
of the retention of such accountants, as may be raised by the Agent or that
Lender.
(v) Not change the Borrower's fiscal year.
(b) The Agent and each of the Lenders agrees that they
will not disclose without the prior consent of the Borrower (other than to its
employees, Affiliates, advisors or counsel, each of whom shall be directed to
observe this confidentiality obligation) any information with respect to the
Borrower or any Related Entity which is now or in the future furnished pursuant
to this Agreement or any other Loan Document and which is designated by the
Borrower in writing as confidential, provided, however, that the Agent and the
Lenders may disclose any such information (i) as has become generally available
to the public, (ii) as may be required or appropriate in any report, statement
or testimony submitted to any
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municipal, state, or federal regulatory body having or claiming to have
jurisdiction over the Agent or any Lender, (iii) as may be required or
appropriate in respect to any summons or subpoena or in connection with any
litigation, (iv) in order to comply with any law, order, regulation or ruling
applicable to the Agent or any Lender, (v) to any prospective or actual
transferee or participant in connection with any contemplated transfer or
participation of this Agreement, the Liabilities, or any interest therein by the
Agent or any Lender, which transfer or participation is permitted by the terms
of this Agreement and (vi) to the Agent and other Lenders.
5-2. Access to Records.
(a) The Borrower shall accord the Agent and the Agent's
representatives and each Lender at the time access is granted to the Agent, with
access from time to time as the Agent and such representatives may require to
all properties owned by or over which the Borrower has control. The Agent and
the Agent's representatives shall have the right, and the Borrower will permit
the Agent and such representatives from time to time as the Agent and such
representatives may request, to examine, inspect, copy, and make extracts from
any and all of the Borrower's books, records, electronically stored data,
papers, and files. The Borrower shall make all of the Borrower's copying
facilities available to the Agent. Prior to the occurrence of any Event of
Default any Lender's participation in the foregoing shall be at its own expense.
After the occurrence of an Event of Default all such reasonable costs and
expenses shall be paid by the Borrower.
(b) The Borrower hereby authorizes the Agent and the
Agent's representatives to:
(i) Inspect, copy, duplicate, review, cause to be
reduced to hard copy, run off, draw off, and otherwise use any and all
computer or electronically stored information or data which relates to
the Borrower, or any service bureau, contractor, accountant, or other
person, and directs any such service bureau, contractor, accountant, or
other person fully to cooperate with the Agent and the Agent's
representatives with respect thereto.
(ii) Verify at any time the Collateral or any
portion thereof, including verification with Account Debtors, and/or
with the Borrower's computer billing companies, collection agencies,
and accountants and to sign the name of the Borrower on any notice to
the Borrower's Account Debtors or verification of the Collateral.
5-3. Immediate Notice to Agent .
(a) The Borrower shall provide the Agent with written
notice as soon as reasonably possible upon the occurrence of any of the
following events, which written notice shall be with reasonable particularity as
to the facts and circumstances in respect of which such notice is being given:
(i) Any change in the Borrower's Executive
Officers.
(ii) The completion of any physical round of the
Borrower's Inventory
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(together with a copy of the results thereof, certified by the
Borrower's President of Chief Financial Officer).
(iii) Any ceasing of the Borrower's making of
payment, in the ordinary course, to any of its creditors other than on
account of a good faith dispute with the subject creditor.
(iv) Any failure by the Borrower to pay rent at
any of the Borrower's locations, which failure continues for more than
ten (10) days following the day on which such rent first came due.
(v) Any material change in the business,
operations, or financial affairs of the Borrower.
(vi) The occurrence of any Suspension Event.
(vii) Any intention on the part of the Borrower to
discharge the Borrower's present independent accountants or any
withdrawal or resignation by such independent accountants from their
acting in such capacity (as to which, see Subsection 5-1(a)(iv)).
(viii) Any litigation which, if determined adversely
to the Borrower, might have a material adverse effect on the financial
condition of the Borrower.
(b) The Borrower shall:
(i) Provide the Agent, when so distributed, with
copies of any materials distributed to the shareholders of the Borrower
(qua such shareholders).
(ii) Provide the Agent:
(A) When filed, copies of all filings with
the SEC.
(B) When received, copies of all
correspondence from the SEC, other than routine
non-substantive general communications from the SEC.
(iii) At the request of the Agent, add the Agent
as an addressee on any or all mailing lists maintained by or for the
Borrower.
(iv) At the request of the Agent, from time to
time, provide the Agent with copies of all advertising (including
copies of all print advertising and duplicate tapes of all video and
radio advertising).
(v) Provide the Agent, when received by the
Borrower, with a copy of any management letter or similar
communications from any accountant of the Borrower.
5-4. Borrowing Base Certificate. The Borrower shall provide the
Agent by 11:30AM, daily, with a Borrowing Base Certificate (in the form of
EXHIBIT 5-4 annexed hereto, as such form may be revised from time to time by the
Agent). Such Certificate may be sent to the Agent by facsimile transmission.
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5-5. Weekly Reports. Weekly, on Wednesday of each week (as of the
then immediately preceding Saturday) the Borrower shall provide the Agent with a
sales audit report, and an Accounts Receivable Report to the extent that
Accounts are to be included in the Borrowing Base (each in such form as may be
specified from time to time by the Agent ). Such report may be sent to the Agent
by facsimile transmission.
5-6. Monthly Reports.
(a) Monthly, the Borrower shall provide the Agent with
original counterparts of the following (each in such form as the Agent from time
to time may specify):
(i) Within Fifteen (15) days of the end of the
previous month:
(A) Month end Comparable Sales Report.
(B) Only upon request of the Agent, an
Open to Buy Report on which is shown whether inventory levels
are adequate to meet sales projections.
(C) POS Gross Margin Report by
department.
(D) Commencing with the first month of
the Borrower=s fiscal year 2000 (after the Agent's receipt of
the Borrower's fiscal year end statements for the fiscal year
ending on or about February 28, 1999), a Certificate (signed
by the Borrower's President or Chief Financial Officer) on
which shall be indicated (with supporting calculations) the
Borrower's (i) rolling 12 month average excess availability
for the period ending on the last day of the then most
recently completed month and (ii) Fixed Charge Ratio as of the
then most recently completed 12 months (the "PRICING
CERTIFICATE").
(ii) Within Thirty (30) days of the end of the
previous month:
(A) A "General Ledger Inventory Report"
and a Certificate (signed by the Borrower's President or Chief
Financial Officer) concerning the Borrower's Inventory.
(B) Reconciliations of the above
described General Ledger Inventory Report and Inventory
Certificate (Section 5-6(a)(ii)(A)) to Availability and to the
general ledger as of the end of the subject month.
(C) A Gross Margin Reconciliation.
(D) An Accounts Receivable Agings Report
for Acceptable Accounts.
(E) An aging of the Borrower's accounts
payable.
(F) A Store Activity Report.
(G) An internally prepared financial
statement of the Borrower's financial condition the results of
its operations for, the period ending with the end of the
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subject month, which financial statement shall include, at a
minimum, a balance sheet, income statement (on a
"consolidated" basis), cash flow and comparison of same store
sales for the corresponding month of the then immediately
previous year, and which monthly reports due after the fiscal
year end and prior to receipt of annual statements, shall be
subject to year end audit adjustments.
(b) For purposes of Section 5-6(a), above, the first
"previous month" in respect of which the items required by that Section shall be
provided shall be the Borrower's fiscal month ending September 30, 1998 except
that the "previous month", for purposes of Section 5-6(a)(i)(E), shall be as
stated in that Section and for purposes of Section 5-6(a)(ii), above, the first
"previous month" in respect of which the items required by that Section shall be
provided shall be October, 1998.
5-7. Quarterly Reports. Quarterly, within Forty Five (45) days
following the end of each of the Borrower's fiscal quarters, the Borrower shall
provide the Agent with an original counterpart of a management prepared
financial statement of the Borrower for the period from the beginning of the
Borrower's then current fiscal year through the end of the subject quarter, with
comparative information for the same period of the previous fiscal year and a
comparison to projections, which statement shall include, at a minimum, a
balance sheet, income statement (on a store specific and on a "consolidated"
basis), statement of changes in shareholders' equity, and cash flows and
comparisons for the corresponding quarter of the then immediately previous year,
and the Borrower's Form 10Q Report filed with the SEC, and a schedule of
purchases from the Borrower's ten largest vendors (in terms of year to date
purchases), which schedule shall be in such form as may be satisfactory to the
Agent and shall include year to date cumulative purchases and an aging of
payables to each such vendor.
5-8. Annual Reports.
(a) Annually, within ninety (90) days following the end of the
Borrower's fiscal year, the Borrower shall furnish the Agent with an original
signed counterpart of the Borrower's annual financial statement, which statement
shall have been prepared by, and bear the unqualified opinion of, the Borrower's
independent certified public accountants (i.e. said statement shall be
"certified" by such accountants). Such annual statement shall include, at a
minimum (with comparative information for the then prior fiscal year) a balance
sheet, income statement, statement of changes in shareholders' equity, and cash
flows, and the Borrower's Form 10K Report filed with the SEC.
(b) No later than the earlier of Fifteen (15) days prior to
the end of each of the Borrower's fiscal years or the date on which such
accountants commence their work on the preparation of the Borrower's annual
financial statement, the Borrower shall give written notice to such accountants
(with a copy of such notice, when sent, to the Agent) that:
(i) Such annual financial statement will be delivered
by the Borrower to the
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Agent (for subsequent distribution to each Lender).
(ii) One of the primary intentions of the Borrower,
in its engagement of such accountants is to satisfy the
financial reporting requirements set forth in this Article 5.
(iii) The Borrower has been advised that the Agent
(and each Lender) will rely thereon with respect to the
administration of, and transactions under, the credit facility
contemplated by the within Agreement.
(c) Each annual statement shall be accompanied by such
accountant's Certificate indicating that, in the preparation of such annual
statement, such accountants did not conclude that any Suspension Event had
occurred during the subject fiscal year (or if one or more had occurred, the
facts and circumstances thereof).
5-9. Officers' Certificates. The Borrower shall cause the
Borrower's President or Chief Financial Officer to provide such Person's
Certificate with those monthly, quarterly, and annual statements to be furnished
pursuant to this Agreement, which Certificate shall:
(a) Indicate that the subject statement was prepared in
accordance with GAAP consistently applied and presents fairly the financial
condition of the Borrower at the close of, and the results of the Borrower's
operations and cash flows for, the period(s) covered, subject, however to the
following:
(i) usual year end adjustments (this exception shall
not be included in the Certificate which accompanies such annual
statement).
(ii) Material Accounting Changes (in which event,
such Certificate shall include a schedule (in reasonable detail) of the
effect of each such Material Accounting Change) not previously
specifically taken into account in the determination of the financial
performance covenant imposed pursuant to Section 5-12.
(b) Indicate either that (i) no Suspension Event has occurred
or (ii) if such an event has occurred, its nature (in reasonable detail) and the
steps (if any) being taken or contemplated by the Borrower to be taken on
account thereof.
(c) Include calculations concerning the Borrower's compliance
(or failure to comply) at the date of the subject statement with each of the
financial performance covenants included in Section 5-12 hereof.
5-10. Inventories, Appraisals, and Audits.
(a) The Agent and each Lender may participate in and/or
observe each physical count and/or inventory of so much of the Collateral as
consists of Inventory which is undertaken on behalf of the Borrower. Prior to
the occurrence of an Event of Default, any Lender's participation in the
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foregoing shall be at its own expense. After the occurrence of an Event of
Default, all such reasonable costs and expenses shall be paid by the Borrower.
(b) The Borrower shall cause not less than two (2)
physical inventories to be undertaken in each twelve (12) month period during
which this Agreement is in effect (the spacing of the scheduling of which
inventories shall be subject to the Agent's discretion and the Borrower's
reasonable approval) conducted by such inventory takers as are satisfactory to
the Agent and following such methodology as may be satisfactory to the Agent.
(i) The Borrower shall provide the Agent with a
copy of the preliminary results of each such inventory round within ten
(10) days following the completion of such inventory.
(ii) The Borrower shall provide the Agent with a
reconciliation of the results of each such inventory round to the
Borrower's books and records within thirty (30) days following the
completion of such inventory.
(iii) The Agent, in its discretion, following the
occurrence of a Suspension Event, may cause such additional inventories
to be taken as the Agent determines (each, at the expense of the
Borrower).
(c) Cooperate with the Agent and permit the Agent to
undertake (at the expense of the Borrower) inventory appraisals and commercial
finance examinations at such times as the Agent determines; provided that the
Borrower shall not be responsible for the cost of more than one (1) inventory
appraisal and two (2) commercial finance examinations in any twelve month period
unless an Event of Default exists (in which event the Borrower shall be
responsible for all such expenses incurred by the Agent). The Agent shall cap
the cost of commercial finance examinations at $600 per person per day plus
reasonable out of pocket expenses; provided that an examination is routine (by
which is meant that all accounting information customarily to be provided by a
borrower in like circumstances is made available in a timely and organized
manner), it is anticipated that each such commercial finance examination will
involve not more than 6 person days. The Agent causes its appraisals to be
conducted by third parties and will directly pass the cost thereof through to
the Borrower, with no additional charges. The Borrower shall permit any Lender
to participate in any commercial finance examinations. Prior to the occurrence
of any Event of Default any Lender's participation in the foregoing shall be at
its own expense. After the occurrence of an Event of Default all such reasonable
costs and expenses shall be paid by the Borrower.
(d) The Agent from time to time (in all events, at the
Agent's expense) may undertake "mystery shopping" (so-called) visits to all or
any of the Borrower's business premises. The Agent shall provide the Borrower
with a copy of any non-company confidential results of such mystery shopping.
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5-11. Additional Financial Information.
(a) In addition to all other information required to be
provided pursuant to this Article 5, the Borrower promptly shall provide the
Agent (and any guarantor of the Liabilities), with such other and additional
information concerning the Borrower, the Collateral, the operation of the
Borrower's business, and the Borrower's financial condition, including original
counterparts of financial reports and statements, as the Agent may from time to
time request from the Borrower.
(b) The Borrower may provide the Agent, from time to time
hereafter, with updated projections of the Borrower's anticipated performance
and operating results.
(c) In all events, the Borrower, no sooner than Ninety (90)
nor later than Sixty (60) days prior to the end of each of the Borrower's fiscal
years, shall furnish the Agent with an updated and extended projection which
shall include balance sheets, income statements, and statements of cash flow by
quarter, which shall go out at least through the end of the then next fiscal
year.
(d) The Borrower recognizes that all appraisals,
inventories, analysis, financial information, and other materials which the
Agent or any Lender may obtain, develop, or receive with respect to the Borrower
is confidential to the Agent and the Lenders and that, except as otherwise
provided herein, the Borrower is not entitled to receipt of any of such
appraisals, inventories, analysis, financial information, and other materials,
nor copies or extracts thereof or therefrom.
5-12. Financial Performance Covenants. The Borrower shall maintain a
trailing/rolling twelve (12) month Fixed Charge Ratio of not less than 1.15 to 1
(tested monthly). Compliance with such financial performance covenant shall be
made as if no Material Accounting Changes had been made (other than any Material
Accounting Changes specifically taken into account in the setting of such
covenants). The Agent may determine the Borrower's compliance with such
covenants based upon financial reports and statements provided by the Borrower
to the Agent (whether or not such financial reports and statements are required
to be furnished pursuant to the within Agreement) as well as by reference to
interim financial information provided to, or developed by, the Agent, and if so
developed by Agent, and any action is taken by the Agent against the Borrower on
account of the results thereof, Agent shall furnish the Borrower with the
financial information so developed.
ARTICLE 6 - USE AND COLLECTION OF COLLATERAL:
6-1. Use of Inventory Collateral.
(a) The Borrower shall not engage in any sale of the
Inventory other than for fair consideration in the conduct of the Borrower's
business in the ordinary course and shall not engage in sales or other
dispositions to creditors; sales or other dispositions in bulk (other than of
diminimus value); and any use of any of the Inventory in breach of any provision
of this Agreement.
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(b) No sale of Inventory shall be on consignment (except as
described on Exhibit 4-6(b), above), approval, or under any other circumstances
such that, with the exception of the Borrower's customary return policy
applicable to the return of inventory purchased by the Borrower's retail
customers in the ordinary course, such Inventory may be returned to the Borrower
without the consent of the Agent.
6-2. Inventory Quality. All Inventory now owned or hereafter
acquired by the Borrower is and will be of good and merchantable quality and
free from defects (other than defects within customary trade tolerances).
6-3. Adjustments and Allowances. The Borrower may grant such
allowances or other adjustments to the Borrower's Account Debtors as the
Borrower may reasonably deem to accord with sound business practice, provided,
however, the authority granted the Borrower pursuant to this Section 6-3 may be
limited or terminated by the Agent at any time in the Agent's discretion either
(i) after the occurrence of an Event of Default, or (ii) if the amount of such
allowance or adjustment exceeds $250,000.00 per Account Debtor on any Account.
6-4. Validity of Accounts.
(a) The amount of each Account shown on the books, records,
and invoices of the Borrower represented as owing by each Account Debtor is and
will be the correct amount actually owing by such Account Debtor and shall have
been fully earned by performance by the Borrower.
(b) The Agent , from time to time (at the expense of the
Borrower in each instance), may verify the validity, amount, and all other
matters with respect to the Receivables Collateral directly with Account Debtors
(including without limitation, by forwarding balance verification requests to
the Borrower's Account Debtors), and with the Borrower's accountants, collection
agents, and computer service bureaus (each of which is hereby authorized and
directed to cooperate in full with the Lender and to provide the Agent with such
information and materials as the Agent may request. The Agent will only take the
action described in this paragraph upon the occurrence of one of the following:
(i) As part of the Agent's ordinary course field
audit;
(ii) Upon the occurrence of any Suspension Event or
Event of Default; or
(iii) Upon the Agent's reasonable determination that
irregularities exist in the financial reports
furnished by the Borrower with respect to the
Accounts.
(c) The Borrower has no knowledge of any impairment of the
validity or collectibility of any of the Acceptable Accounts and shall notify
the Agent of any such fact immediately after Borrower becomes aware of any such
impairment with respect to any Acceptable Account equal to or greater than
$150,000.00.
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(d) The Borrower shall not post any bond to secure the
Borrower's performance under any agreement to which the Borrower is a party nor
cause any surety, guarantor, or other third party obligee to become liable to
perform any obligation of the Borrower (other than to the Agent ) in the event
of the Borrower's failure so to perform, except as described on EXHIBIT 6-4,
annexed hereto.
6-5. Notification to Account Debtors. The Agent shall have the
right at any time after the occurrence of any Event of Default to notify any of
the Borrower's Account Debtors to make payment directly to the Agent and to
collect all amounts due on account of the Collateral.
ARTICLE 7 - CASH MANAGEMENT. PAYMENT OF LIABILITIES:
7-1 Depository Accounts.
(a) Annexed hereto as EXHIBIT 7-1 is a Schedule of all
present DDA's, which Schedule includes, with respect to each depository (i) the
name and address of that depository; (ii) the account number(s) of the
account(s) maintained with such depository; and (iii) a contact person at such
depository.
(b) The Borrower shall deliver to the Agent, as a condition
to the effectiveness of the within Agreement:
(i) Notification, executed on behalf of the
Borrower, to each depository institution with which any DDA is
maintained (other than the Funding Account or any Local DDA), in form
satisfactory to the Agent, of the Agent's interest in such DDA.
(ii) An agreement (generally referred to as a
"Blocked Account Agreement"), in form satisfactory to the Agent with
any depository institution at which both any DDA (other than the
Funding Account) and the Funding Account is maintained.
(iii) An agreement (generally referred to as a
"Blocked Account Agreement"), in form satisfactory to the Agent, with
any depository institution at which a Blocked Account is maintained.
(c) The Borrower will not establish any DDA hereafter
(other than a Local DDA) unless, contemporaneous with such establishment, the
Borrower delivers to the Agent an agreement (in form satisfactory to the Agent)
executed on behalf of the depository with which such DDA is being established.
7-2. Credit Card Receipts.
(a) Annexed hereto as EXHIBIT 7-2, is a Schedule which
describes all arrangements to which the Borrower is a party with respect to the
payment to the Borrower of the proceeds of all credit
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card charges for sales by the Borrower.
(b) The Borrower shall deliver to the Agent, as a condition
to the effectiveness of the within Agreement, notification, executed on behalf
of the Borrower, to each of the Borrower's credit card clearinghouses and
processors of notice (in form satisfactory to the Agent ), which notice provides
that payment of all credit card charges submitted by the Borrower to that
clearinghouse or other processor and any other amount payable to the Borrower by
such clearinghouse or other processor shall be directed to the Concentration
Account or as otherwise designated from time to time by the Agent. The Borrower
shall not change such direction or designation except upon and with the prior
written consent of the Agent.
7-3. Lockbox.
(a) The Borrower maintains a Lockbox with BankOne, N.A.
(b) The Borrower shall deliver to the Agent, as a condition
to the effectiveness of this Agreement, an agreement (generally referred to as a
"Blocked Account Agreement"), in form satisfactory to the Agent, with any
depository at which a Lockbox is maintained.
(c) The Borrower shall not establish any Lockbox hereafter
unless, contemporaneous with such establishment, the Borrower delivers to the
Agent an agreement (in form satisfactory to the Agent) executed on behalf of the
depository at which such lockbox is maintained.
7-4. The Concentration, Blocked, and Operating Accounts.
(a) The following checking accounts have been or will be
established (and are so referred to herein):
(i) The CONCENTRATION ACCOUNT: Established by the
Agent with BankBoston, N.A.
(ii) The BLOCKED ACCOUNT: Established by the
Borrower with BankOne, N.A.
(iii) The FUNDING/OPERATING ACCOUNT: Established by
the Borrower with BankOne, N.A.
The Borrower acknowledges and agrees that the Blocked Account and
Funding/Operating Account arrangements are temporary. The Borrower will begin
utilizing BankBoston, N.A.'s cash management system (including the remission of
funds directly from Local DDAs to the Concentration Account at BankBoston,
N.A.), as soon as reasonably practicable after the Agent provides notice to the
Borrower that BankBoston, N.A.'s cash management system is set up. Thereafter,
provided no Suspension Event or Event of Default is occurring, the Borrower may
transfer the Funding/Operating Account to another financial institution provided
that blocked account agreements are entered into amongst such institution, the
Borrower, and the Agent, on terms satisfactory to the Agent.
(b) The contents of each DDA (other than the Funding
Account) and of the Blocked
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Account constitutes Collateral and Proceeds of Collateral. The contents of the
Concentration Account constitutes the Agent's property.
(c) The Borrower:
(i) Contemporaneous with the execution of the within
Agreement, shall provide the Agent with such agreement (generally
referred to as a "Blocked Account Agreement") of the depository with
which the Blocked Account is maintained as may be satisfactory to the
Agent; and
(ii) Shall not establish any Blocked Account
hereafter except upon not less than Thirty (30) days prior written
notice to the Agent and the delivery to the Agent of a similar such
agreement.
(d) The Borrower shall pay all fees and charges of, and
maintain such impressed balances as may be required by the Agent or by any bank
in which any account is opened as required hereby (even if such account is
opened by and/or is the property of the Agent).
7-5. Proceeds and Collection of Accounts.
(a) All Receipts constitute Collateral and proceeds of
Collateral and shall be held in trust by the Borrower for the Agent; shall not
be commingled with any of the Borrower's other funds; and shall be deposited
and/or transferred only to the Blocked Account.
(b) The Borrower shall cause the ACH or wire transfer to
the Blocked Account, no less frequently than daily (and whether or not there is
then an outstanding balance in the Loan Account) of
(i) the then contents of each DDA (other than (A)
any Local DDA and (B) the Funding Account), each such transfer to be
net of any minimum balance, estimated not to exceed on average
$2,000.00, as may be required to be maintained in the subject DDA by
the bank at which such DDA is maintained); and
(ii) the proceeds of all credit card charges not
otherwise provided for pursuant hereto.
Telephone advice (confirmed by written notice) shall be provided to the Agent on
each Business Day on which any such transfer is made.
(c) Whether or not any Liabilities are then outstanding,
the Borrower shall cause the ACH or wire transfer to the Concentration Account,
no less frequently than daily, of then entire ledger balance of the Blocked
Account, net of such minimum balance, estimated not to exceed on average
$2,000.00, as may be required to be maintained in the Blocked Account by the
bank at which the Blocked Account is maintained.
(d) In the event that, notwithstanding the provisions of
this Section 7-5, the Borrower receives or otherwise has dominion and control of
any Receipts, or any proceeds or collections of any
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Collateral, such Receipts, proceeds, and collections shall be held in trust by
the Borrower for the Agent and shall not be commingled with any of the
Borrower's other funds or deposited in any account of the Borrower other than as
instructed by the Agent.
(e) The Borrower shall not be in breach of the agreement
to cause any ACH or wire transfer if any such transfer fails to occur or is
misdirected on account of any technical error, not within the reasonable control
of the Borrower.
7-6. Payment of Liabilities.
(a) On each Business Day, the Agent shall apply, towards
the Liabilities, the then collected balance of the Concentration Account (net of
fees charged).
(b) The following rules shall apply to deposits and
payments under and pursuant to this Agreement:
(i) Funds shall be deemed to have been deposited to
the Concentration Account on the Business Day on which
deposited, provided that notice of such deposit is available
to the Agent by 2:00PM on that Business Day.
(ii) Funds paid to the Agent, other than by deposit
to the Concentration Account, shall be deemed to have been
received on the Business Day when they are good and collected
funds, provided that notice of such payment is available to
the Agent by 2:00PM on that Business Day.
(iii) If notice of a deposit to the Concentration
Account (Section 7-6(b)(i)) or payment (Section 7-6(b)(ii)) is
not available to the Agent until after 2:00PM on a Business
Day, such deposit or payment shall be deemed to have been made
at 9:00AM on the then next Business Day.
(iv) All deposits to the Concentration Account and
other payments to the Agent are subject to clearance and
collection.
(c) The Agent shall transfer to the Operating Account any
surplus in the Concentration Account remaining after the application towards the
Liabilities referred to in Section 7-6(a), above (less those amount which are to
be netted out, as provided therein) provided, however, in the event that both
(i) a Suspension Event has occurred and (ii) one or more L/C's are then
outstanding, the Agent may establish a funded reserve of up to 105% of the
aggregate Stated Amounts of such L/C's.
7-7. The Operating Account. Except as otherwise specifically
provided in, or permitted by, the within Agreement, all checks shall be drawn by
the Borrower upon, and other disbursements shall be made by the Borrower solely
from, the Operating Account, except for diminimus amounts relating to the
purchase of regulated merchandise.
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ARTICLE 8 - GRANT OF SECURITY INTEREST:
8-1. Grant of Security Interest. To secure the Borrower's prompt,
punctual, and faithful performance of all and each of the Liabilities, the
Borrower hereby grants to the Agent, for the ratable benefit of the Lenders, a
continuing security interest in and to, and assigns to the Agent, for the
ratable benefit of the Lenders, the following, and each item thereof, whether
now owned or now due, or in which the Borrower has an interest, or hereafter
acquired, arising, or to become due, or in which the Borrower obtains an
interest, and all products, Proceeds, substitutions, and accessions of or to any
of the following (all of which, together with any other property in which the
Agent may in the future be granted a security interest, is referred to herein as
the "COLLATERAL"):
(a) All Accounts and accounts receivable.
(b) All Inventory.
(c) All General Intangibles.
(d) All Equipment.
(e) All Goods.
(f) All Fixtures.
(g) All Chattel Paper.
(h) All books, records, and information relating to the
Collateral and/or to the operation of the Borrower's
business, and all rights of access to such books,
records, and information, and all property in which
such books, records, and information are stored,
recorded, and maintained.
(i) All Investment Property, Instruments, Documents,
Deposit Accounts, policies and certificates of
insurance, deposits, impressed accounts, compensating
balances, money, cash, or other property.
(j) All insurance proceeds, refunds, and premium rebates,
including, without limitation, proceeds of fire and
credit insurance, whether any of such proceeds,
refunds, and premium rebates arise out of any of the
foregoing.(8-1(a) through 8-1(i)) or otherwise.
(k) All liens, guaranties, rights, remedies, and
privileges pertaining to any of the foregoing (8-1(a)
through 8-1(i)), including the right of stoppage in
transit.
(l) All Leasehold Interests.
8-2. Extent and Duration of Security Interest. The within grant of
a security interest shall continue in full force and effect applicable to all
Liabilities until all Liabilities have been paid and/or satisfied in full and
the security interest granted herein is specifically terminated in writing by a
duly
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<PAGE> 69
authorized officer of the Agent.
ARTICLE 9 - AGENT AS BORROWER'S ATTORNEY-IN-FACT:
9-1. Appointment as Attorney-In-Fact. The Borrower hereby
irrevocably constitutes and appoints the Agent as the Borrower's true and lawful
attorney, with full power of substitution, exercisable after the occurrence of
an Event of Default, to convert the Collateral into cash at the sole risk, cost,
and expense of the Borrower, but for the sole benefit of the Agent. The rights
and powers granted the Agent by the within appointment include but are not
limited to the right and power to:
(a) Prosecute, defend, compromise, or release any action
relating to the Collateral.
(b) Sign change of address forms to change the address to
which the Borrower's mail is to be sent to such address as the Agent shall
designate; receive and open the Borrower's mail; remove any Receivables
Collateral and Proceeds of Collateral therefrom and turn over the balance of
such mail either to the Borrower or to any trustee in bankruptcy, receiver,
assignee for the benefit of creditors of the Borrower, or other legal
representative of the Borrower whom the Agent determines to be the appropriate
person to whom to so turn over such mail.
(c) Endorse the name of the Borrower in favor of the
Agent upon any and all checks, drafts, notes, acceptances, or other items or
instruments; sign and endorse the name of the Borrower on, and receive as
secured party, any of the Collateral, any invoices, schedules of Collateral,
freight or express receipts, or bills of lading, storage receipts, warehouse
receipts, or other documents of title respectively relating to the Collateral.
(d) Sign the name of the Borrower on any notice to the
Borrower's Account Debtors or verification of the Receivables Collateral; sign
the Borrower's name on any Proof of Claim in Bankruptcy against Account Debtors,
and on notices of lien, claims of mechanic's liens, or assignments or releases
of mechanic's liens securing the Accounts.
(e) Take all such action as may be necessary to obtain
the payment of any letter of credit and/or banker's acceptance of which the
Borrower is a beneficiary.
(f) Repair, manufacture, assemble, complete, package,
deliver, alter or supply goods, if any, necessary to fulfill in whole or in part
the purchase order of any customer of the Borrower.
(g) Use, license or transfer any or all General
Intangibles of the Borrower.
(h) Appoint any agent or representative for the purpose
of the sale, lease or disposal of the Collateral.
.
9-2. No Obligation to Act. The Agent shall not be obligated to do
any of the acts or to exercise any of the powers authorized by Section 9-1
herein, but if the Agent elects to do any such act or to exercise any of such
powers, it shall not be accountable for more than it actually receives as a
result
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<PAGE> 70
of such exercise of power, and shall not be responsible to the Borrower for any
act or omission to act except for any act or omission to act as to which there
is a final determination made in a judicial proceeding (in which proceeding the
Agent has had an opportunity to be heard) which determination includes a
specific finding that the subject act or omission to act had been grossly
negligent or in actual bad faith.
ARTICLE 10 - EVENTS OF DEFAULT:
The occurrence of any event described in this Article 10 respectively
shall constitute an "EVENT OF DEFAULT" herein. Upon the occurrence of any Event
of Default described in Section 10-12, any and all Liabilities shall become due
and payable without any further act on the part of the Agent or any Lender. Upon
the occurrence of any other Event of Default, any and all Liabilities shall
become immediately due and payable, at the option of the Agent and without
notice or demand. The occurrence of any Event of Default shall also constitute,
without notice or demand, a default under all other agreements between the Agent
or any Lender and the Borrower and instruments and papers given the Agent or any
Lender by the Borrower, whether such agreements, instruments, or papers now
exist or hereafter arise. Each Event of Default shall continue as an Event of
Default unless and until it is specifically waived in writing by the Agent.
10-1. Failure to Pay Revolving Credit. The failure by the Borrower to
pay any amount when due under the Revolving Credit, or, if the Agent, in the
Agent's sole discretion, determines not to charge any amounts due against the
Loan Account, then the failure by the Borrower, upon ten (10) days written
notice by the Agent to pay any such amount.
10-2. Failure To Make Other Payments. The failure by the Borrower to
pay when due (or upon demand, if payable on demand) any payment Liability other
than under the Revolving Credit, or, if the Agent, in the Agent's sole
discretion, determines not to charge any amounts due against the Loan Account,
then the failure by the Borrower, upon ten (10) days written notice by the Agent
to pay any such amount.
10-3. Failure to Perform Covenant or Liability (No Grace Period). The
failure by the Borrower to promptly, punctually, faithfully and timely perform,
discharge, or comply with any covenant or Liability not otherwise described in
Section 10-1 or Section 10-2 hereof, and included in any of the following
provisions hereof:
Section Relates to :
-------------------------------------------
4-6 Title to Assets
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<PAGE> 71
Section Relates to :
-------------------------------------------
4-7 Indebtedness
4-13 Pay taxes
4-23 Affiliate Transactions
4-24(a)(b) Additional Assurances
6-1 Use of Collateral
Article 5* Financial Covenants
Article 7 Cash Management
*except as provided in Section 10-4
10-4. Financial Reporting Requirements. The failure by the Borrower
to promptly, punctually, faithfully and timely perform, discharge, or comply
with the financial reporting requirements included in Article 5, subject,
however, to the following limited number of grace periods applicable to certain
of those requirements:
<TABLE>
<CAPTION>
- ------------------------------------- ------------------ -------------------------- --------------------------------
REPORT / STATEMENT REQUIRED BY GRACE PERIOD NUMBER OF GRACE
SECTION PERIODS
- ------------------------------------- ------------------ -------------------------- --------------------------------
<S> <C> <C> <C>
Borrowing Base Certificates 5-4 One Business Day Ten per fiscal Quarter
- ------------------------------------- ------------------ -------------------------- --------------------------------
Weekly Report 5-5 Two Business Days [Five Three in any 3 months
Business Days for the
first month immediately
following initial
funding of the Revolving
Credit]
- ------------------------------------- ------------------ -------------------------- --------------------------------
Monthly Report (15 Days) 5-6(a)(i) Three Business Days Three in any 12 months
- ------------------------------------- ------------------ -------------------------- --------------------------------
Monthly Reports (30 Days) 5-6(a)(ii) Three Business Days Three in any 12 months
- ------------------------------------- ------------------ -------------------------- --------------------------------
</TABLE>
10-5. Failure to Perform Covenant or Liability (Grace Period). The
failure by the Borrower, upon twenty (20) days written notice by the Agent , to
cure, or to commence to cure and diligently cure within an additional ten (10)
day period, the Borrower's failure to promptly, punctually and faithfully
perform, discharge, or comply with any covenant or Liability not described in
any of Sections 10-1, 10-2, or 10-3 hereof.
10-6. Misrepresentation. The determination by the Agent that any
representation or warranty at any time made by the Borrower to the Agent or any
Lender, was not true or complete in all material respects when given.
10-7. Acceleration of Other Debt; Breach of Lease. The occurrence of
any event such that any Indebtedness of the Borrower to any creditor in excess
of $1,500,000.00, other than the Agent or any Lender could be accelerated or,
without the consent of the Borrower, Leases with aggregate monthly rents of at
least $150,000.00 could be terminated prior to the stated termination date
thereof (whether or not the subject creditor or lessor takes any action on
account of such occurrence).
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<PAGE> 72
10-8. Default Under Other Agreements. The occurrence of any breach
or default under any agreement constituting a Liability, whether such agreement,
instrument, or paper now exists or hereafter arises (notwithstanding that the
Agent may not have exercised its rights upon default under any such other
agreement, instrument or paper).
10-9. Uninsured Casualty Loss. The occurrence of any uninsured loss
in excess of $250,000.00 or theft, damage, or destruction of or to any
substantial portion of the Collateral.
10-10. Judgment. Restraint of Business.
(a) The service of process upon the Agent or any Lender or any
Participant seeking to attach, by trustee, mesne, or other process, any of the
Borrower's funds on deposit with, or assets of the Borrower in the possession
of, the Agent or any Lender or such Participant.
(b) The entry of any judgment against the Borrower in excess
of $500,000.00, which judgment is not satisfied (if a money judgment) or
appealed from (with execution or similar process stayed) within twenty-five (25)
days of its entry.
(c) The entry of any order or the imposition of any other
process having the force of law, the effect of which is to restrain in any
material way the conduct by the Borrower of its business in the ordinary course.
10-11. Business Failure. Any act by, against, or relating to the
Borrower, or its property or assets, which act constitutes the application for,
consent to, or sufferance of the appointment of a receiver, trustee, or other
person, pursuant to court action or otherwise, over all, or any part of the
Borrower's property; the granting of any trust mortgage or execution of an
assignment for the benefit of the creditors of the Borrower, or the occurrence
of any other voluntary or involuntary liquidation or extension of debt agreement
for the Borrower; the offering by or entering into by the Borrower of any
composition, extension, or any other arrangement seeking relief from or
extension of the debts of the Borrower; or the initiation of any judicial or
non-judicial proceeding or agreement by, against, or including the Borrower
which seeks or intends to accomplish a reorganization or arrangement with
creditors; and/or the initiation by or on behalf of the Borrower of the
liquidation or winding up of all or any part of the Borrower's business or
operations (exclusive of store closings in the ordinary course of business).
10-12. Bankruptcy. The failure by the Borrower to generally pay the
debts of the Borrower as they mature; adjudication of bankruptcy or insolvency
relative to the Borrower; the entry of an order for relief or similar order with
respect to the Borrower in any proceeding pursuant to the Bankruptcy Code or any
other federal bankruptcy law; the filing of any complaint, application, or
petition by the Borrower initiating any matter in which the Borrower is or may
be granted any relief from the debts of the Borrower
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<PAGE> 73
pursuant to the Bankruptcy Code or any other insolvency statute or procedure;
the filing of any complaint, application, or petition against the Borrower
initiating any matter in which the Borrower is or may be granted any relief from
the debts of the Borrower pursuant to the Bankruptcy Code or any other
insolvency statute or procedure, which complaint, application, or petition is
not timely contested in good faith by the Borrower by appropriate proceedings
or, if so contested, is not dismissed within thirty (30) days of when filed.
10-13. Default by Guarantor or Related Entity. The occurrence of any
of the foregoing Events of Default with respect to any guarantor of the
Liabilities, or the occurrence of any of the foregoing Events of Default with
respect to any parent (if the Borrower is a corporation), subsidiary, or Related
Entity, as if such guarantor, parent, or Related Entity were the "Borrower"
described therein.
10-14. Indictment - Forfeiture. The indictment of, or institution of
any legal process or proceeding against, the Borrower, under any federal, state,
municipal, and other civil or criminal statute, rule, regulation, order, or
other requirement having the force of law where the relief, penalties, or
remedies sought or available include the forfeiture of any property of the
Borrower and/or the imposition of any stay or other order, the effect of which
could be to restrain in any material way the conduct by the Borrower of its
business in the ordinary course.
10-15. Termination of Guaranty. The termination or attempted
termination of any guaranty by any guarantor of the Liabilities.
10-16. Challenge to Loan Documents.
(a) Any challenge by or on behalf of the Borrower or any
guarantor of the Liabilities to the validity of any Loan Document or the
applicability or enforceability of any Loan Document strictly in accordance with
the subject Loan Document's terms or which seeks to void, avoid, limit, or
otherwise adversely affect any security interest created by or in any Loan
Document or any payment made pursuant thereto.
(b) Any determination by any court or any other judicial or
government authority that any Loan Document is not enforceable strictly in
accordance with the subject Loan Document's terms or which voids, avoids,
limits, or otherwise adversely affects any security interest created by any Loan
Document or any payment made pursuant thereto.
10-17. Change in Control. Any Change in Control.
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<PAGE> 74
ARTICLE 11 - RIGHTS AND REMEDIES UPON DEFAULT:
In addition to all of the rights, remedies, powers, privileges, and
discretions which the Agent is provided prior to the occurrence of an Event of
Default, the Agent shall have the following rights and remedies upon the
occurrence of any Event of Default and at any time thereafter. No stay which
otherwise might be imposed pursuant to Section 362 of the Bankruptcy Code or
otherwise shall stay, limit, prevent, hinder, delay, restrict, or otherwise
prevent the Agent's exercise of any of such rights and remedies.
11-1. Rights of Enforcement. The Agent shall have all of the rights
and remedies of a secured party upon default under the UCC, in addition to which
the Agent shall have all and each of the following rights and remedies:
(a) To collect the Receivables Collateral with or without the
taking of possession of any of the Collateral.
(b) To take possession of all or any portion of the
Collateral.
(c) To sell, lease, or otherwise dispose of any or all of the
Collateral, and/or to appoint an agent or representative to sell, lease, or
otherwise dispose of any or all of the Collateral, in its then condition or
following such preparation or processing as the Agent deems advisable and with
or without the taking of possession of any of the Collateral.
(d) To conduct one or more going out of business sales which
include the sale or other disposition of the Collateral.
(e) To apply the Receivables Collateral or the Proceeds of the
Collateral towards (but not necessarily in complete satisfaction of) the
Liabilities.
(f) To exercise all or any of the rights, remedies, powers,
privileges, and discretions under all or any of the Loan Documents.
11-2. Sale of Collateral.
(a) Any sale or other disposition of the Collateral may be at
public or private sale upon such terms and in such manner as the Agent deems
advisable, having due regard to compliance with any statute or regulation which
might affect, limit, or apply to the Agent's disposition of the Collateral.
(b) The Agent, in the exercise of the Agent's rights and
remedies upon default, may conduct one or more going out of business sales, in
the Agent's own right or by one or more agents and contractors. Such sale(s) may
be conducted upon any premises owned, leased, or occupied by the Borrower. The
Agent and any such agent or contractor, in conjunction with any such sale, may
augment the Inventory with other goods (all of which other goods shall remain
the sole property of the Agent or
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<PAGE> 75
such agent or contractor). Any amounts realized from the sale of such goods
which constitute augmentations to the Inventory (net of an allocable share of
the costs and expenses incurred in their disposition) shall be the sole property
of the Agent or such agent or contractor and neither the Borrower nor any Person
claiming under or in right of the Borrower shall have any interest therein.
(c) Unless the Collateral is perishable or threatens to
decline speedily in value, or is of a type customarily sold on a recognized
market (in which event the Agent shall provide the Borrower with such notice as
may be practicable under the circumstances), the Agent shall give the Borrower
at least seven (7) days prior written notice of the date, time, and place of any
proposed public sale, and of the date after which any private sale or other
disposition of the Collateral may be made. The Borrower agrees that such written
notice shall satisfy all requirements for notice to the Borrower which are
imposed under the UCC or other applicable law with respect to the exercise of
the Agent's rights and remedies upon default.
(d) The Agent and any Lender may purchase the Collateral, or
any portion of it at any sale held under this Article.
(e) If any of the Collateral is sold, leased, or otherwise
disposed of by the Agent on credit, the Liabilities shall not be deemed to have
been reduced as a result thereof unless and until payment is finally received
thereon by the Agent.
(f) The Agent shall apply the proceeds of any exercise of the
Agent's Rights and Remedies under this Article 11 towards the Liabilities in
such manner, and with such frequency, as the Agent determines.
11-3. Occupation of Business Location. In connection with the
Agent's exercise of the Agent's rights under this Article 11, the Agent may
enter upon, occupy, and use any premises owned or occupied by the Borrower, and
may exclude the Borrower from such premises or portion thereof as may have been
so entered upon, occupied, or used by the Agent. The Agent shall not be required
to remove any of the Collateral from any such premises upon the Agent's taking
possession thereof, and may render any Collateral unusable to the Borrower. In
no event shall the Agent be liable to the Borrower for use or occupancy by the
Agent of any premises pursuant to this Article 11, nor for any charge (such as
wages for the Borrower's employees and utilities) incurred in connection with
the Agent's exercise of the Agent's Rights and Remedies.
11-4. Grant of Nonexclusive License. For the sole purpose of
liquidating the Collateral, including the sale or assignment of any trademark or
tradename, the Borrower hereby grants or agrees to cause to be granted to the
Agent a royalty free nonexclusive irrevocable license to use, apply, and affix
any trademark, trade name, logo, or the like in which the Borrower now or
hereafter has rights, such license being with respect to the Agent's exercise of
the rights hereunder including, without limitation, in
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<PAGE> 76
connection with any completion of the manufacture of Inventory or sale or other
disposition of Inventory.
11-5. Assembly of Collateral. The Agent may require the Borrower to
assemble the Collateral and make it available to the Agent at the Borrower's
sole risk and expense at a place or places which are reasonably convenient to
both the Agent and Borrower.
11-6. Rights and Remedies. The rights, remedies, powers, privileges,
and discretions of the Agent hereunder (herein, the " AGENT'S RIGHTS AND
REMEDIES") shall be cumulative and not exclusive of any rights or remedies which
it would otherwise have. No delay or omission by the Agent in exercising or
enforcing any of the Agent's Rights and Remedies shall operate as, or
constitute, a waiver thereof. No waiver by the Agent of any Event of Default or
of any default under any other agreement shall operate as a waiver of any other
default hereunder or under any other agreement. No single or partial exercise of
any of the Agent's Rights or Remedies, and no express or implied agreement or
transaction of whatever nature entered into between the Agent and any person, at
any time, shall preclude the other or further exercise of the Agent's Rights and
Remedies. No waiver by the Agent of any of the Agent's Rights and Remedies on
any one occasion shall be deemed a waiver on any subsequent occasion, nor shall
it be deemed a continuing waiver. All of the Agent's Rights and Remedies and all
of the Agent's rights, remedies, powers, privileges, and discretions under any
other agreement or transaction are cumulative, and not alternative or exclusive,
and may be exercised by the Agent at such time or times and in such order of
preference as the Agent in its sole discretion may determine. The Agent's Rights
and Remedies may be exercised without resort or regard to any other source of
satisfaction of the Liabilities.
ARTICLE 12 - NOTICES:
12-1. Notice Addresses. All notices, demands, and other communications
made in respect of this Agreement (other than a request for a loan or advance or
other financial accommodation under the Revolving Credit) shall be made to the
following addresses, each of which may be changed upon seven (7) days written
notice to all others given by certified mail, return receipt requested:
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If to the Agent:
BankBoston Retail Finance Inc.
40 Broad Street
Boston, Massachusetts 02109
Attention : Mr. Michael Pizette
Director
Fax : 617 434-4339
With a copy to:
Riemer & Braunstein
Three Center Plaza
Boston, Massachusetts 02108
Attention : Robert E. Paul, Esquire
Fax : 617 723-6831
except for copies of financial reports delivered pursuant to Article 5,
above.
If to the Borrower:
Drug Emporium, Inc.
155 Hidden Ravines Drive
Powell, Ohio 43065
Attention : Mr. Michael P. Leach
Fax : 740 548-4508
With a copy to:
Kegler, Brown, Hill & Ritter
65 East State Street, Suite 1800
Columbus, Ohio 43215
Attention : Allen L. Handlan, Esquire
Fax: : 614 464-2634
12-2. Notice Given.
(a) Except as otherwise specifically provided herein,
notices shall be deemed made and correspondence received, as follows (all times
being local to the place of delivery or receipt):
(i) By mail: the sooner of when actually received
or Three (3) days following deposit in the United States mail, postage
prepaid.
(ii) By recognized overnight express delivery: the
Business Day following the day when sent.
(iii) By Hand: If delivered on a Business Day after
9:00 AM and no later than Three (3) hours prior to the close of
customary business hours of the recipient, when delivered. Otherwise,
at the opening of the then next Business Day.
(iv) By Facsimile transmission (which must include a
header on which the party sending such transmission is indicated): If
sent on a Business Day after 9:00 AM and no later than Three (3) hours
prior to the close of customary business hours of the recipient, one
(1) hour after being sent. Otherwise, at the opening of the then next
Business Day.
(b) Rejection or refusal to accept delivery and inability
to deliver because of a
.71 .
<PAGE> 78
changed address or Facsimile Number for which no due notice was given shall each
be deemed receipt of the notice sent.
ARTICLE 13 - TERM:
13-1. Termination of Revolving Credit. The Revolving Credit shall
remain in effect (subject to suspension as provided in Section 2-4(i) hereof)
until the Termination Date.
13-2. Effect of Termination. On the Termination Date, the Borrower
shall pay the Agent (whether or not then due), in immediately available funds,
all then Liabilities including, without limitation: the entire balance of the
Loan Account; any then remaining installments of the Commitment Fee; any then
remaining balance of the Facility Fee; any accrued and unpaid Line Fee; any
payments due on account of the indemnification obligations included in Section
2-8(e); and all unreimbursed costs and expenses of the Agent and of each Lender
for which the Borrower is responsible; and shall make such arrangements
concerning any L/C's then outstanding as are reasonably satisfactory to the
Agent, which shall include, at the Agent's option, either cash collateral or a
back to back letter of credit in 105 percent of the face amount of any L/C's
then outstanding. Until such payment, all provisions of this Agreement, other
than those contained in Article 2 which place an obligation on the Agent and any
Lender to make any loans or advances or to provide financial accommodations
under the Revolving Credit or otherwise, shall remain in full force and effect
until all Liabilities shall have been paid in full. The release by the Agent of
the security and other collateral interests granted the Agent by the Borrower
hereunder may be upon such conditions and indemnifications as the Agent may
reasonably require, which indemnifications shall be based upon objectively
demonstrable contingencies, including, without limitation, such matters as
uncollected funds or delinquent taxes for which the Agent reasonably believes
that the Agent or the Lenders could be held liable.
ARTICLE 14 - GENERAL:
14-1. Protection of Collateral. The Agent has no duty as to the
collection or protection of the Collateral beyond the safe custody of such of
the Collateral as may come into the possession of the Agent and shall have no
duty as to the preservation of rights against prior parties or any other rights
pertaining thereto. The Agent may include reference to the Borrower (and may
utilize any logo or other distinctive symbol associated with the Borrower) in
connection with any advertising, promotion, or
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<PAGE> 79
marketing undertaken by the Agent.
14-2. Successors and Assigns. This Agreement shall be binding upon
the Borrower and the Borrower's representatives, successors, and assigns and
shall enure to the benefit of the Agent and each Lender and the respective
successors and assigns of each provided, however, no trustee or other fiduciary
appointed with respect to the Borrower shall have any rights hereunder. In the
event that the Agent or any Lender assigns or transfers its rights under this
Agreement, the assignee shall thereupon succeed to and become vested with all
rights, powers, privileges, and duties of such assignor hereunder and such
assignor shall thereupon be discharged and relieved from its duties and
obligations hereunder.
14-3. Severability. Any determination that any provision of this
Agreement or any application thereof is invalid, illegal, or unenforceable in
any respect in any instance shall not affect the validity, legality, or
enforceability of such provision in any other instance, or the validity,
legality, or enforceability of any other provision of this Agreement.
14-4. Amendments. Course of Dealing.
(a) This Agreement and the other Loan Documents incorporate
all discussions and negotiations between the Borrower and the Agent and each
Lender, either express or implied, concerning the matters included herein and in
such other instruments, any custom, usage, or course of dealings to the contrary
notwithstanding. No such discussions, negotiations, custom, usage, or course of
dealings shall limit, modify, or otherwise affect the provisions thereof. No
failure by the Agent or any Lender to give notice to the Borrower of the
Borrower's having failed to observe and comply with any warranty or covenant
included in any Loan Document shall constitute a waiver of such warranty or
covenant or the amendment of the subject Loan Document. No change made by the
Agent in the manner by which Availability is determined shall obligate the Agent
to continue to determine Availability in that manner.
(b) The Borrower may undertake any action otherwise prohibited
hereby, and may omit to take any action otherwise required hereby, upon and with
the express prior written consent of the Agent. No consent, modification,
amendment, or waiver of any provision of any Loan Document shall be effective
unless executed in writing by or on behalf of the party to be charged with such
modification, amendment, or waiver (and if such party is the Agent, then by a
duly authorized officer thereof). Any modification, amendment, or waiver
provided by the Agent shall be in reliance upon all representations and
warranties theretofore made to the Agent by or on behalf of the Borrower (and
any guarantor, endorser, or surety of the Liabilities) and consequently may be
rescinded in the event that any of such representations or warranties was not
true and complete in all material respects when given.
14-5. Power of Attorney. In connection with all powers of attorney
included in this
.73 .
<PAGE> 80
Agreement, the Borrower hereby grants unto the Agent full power to do any and
all things necessary or appropriate in connection with the exercise of such
powers as fully and effectually as the Borrower might or could do, hereby
ratifying all that said attorney shall do or cause to be done by virtue of this
Agreement. No power of attorney set forth in this Agreement shall be affected by
any disability or incapacity suffered by the Borrower and each shall survive the
same. All powers conferred upon the Agent by this Agreement, being coupled with
an interest, shall be irrevocable until this Agreement is terminated by a
written instrument executed by a duly authorized officer of the Agent.
14-6. Application of Proceeds. The proceeds of any collection, sale,
or disposition of the Collateral, or of any other payments received hereunder,
shall be applied towards the Liabilities in such order and manner as the Agent
determines in its sole discretion. The Borrower shall remain liable for any
deficiency remaining following such application.
14-7. Costs and Expenses of Agent and of Lenders.
(a) The Borrower shall pay on demand all Costs of Collection,
including all reasonable expenses of the Agent in connection with the
preparation, execution, and delivery of this Agreement and of any other Loan
Documents, whether now existing or hereafter arising, and all other Costs of
Collection which may be incurred by the Agent in preparing or amending this
Agreement and all other agreements, instruments, and documents related thereto,
or otherwise incurred with respect to the Liabilities, and all Costs of
Collection of the Agent which relate to the credit facility contemplated hereby.
subject to the limitations described in Section 5-10(c), above.
(b) The Borrower shall pay on demand all Costs of Collection
incurred, following the occurrence of any Event of Default, by each Lender in
connection with the enforcement, attempted enforcement, or preservation of any
rights and remedies under this, or any other Loan Document, as well as any such
Costs of Collection in connection with any "workout", forbearance, or
restructuring of the credit facility contemplated hereby.
(c) The Borrower authorizes the Agent to pay all such fees and
expenses and in the Agent's discretion, to add such Costs of Collection to the
Loan Account.
(d) The undertaking on the part of the Borrower in this
Section 14-7 shall survive payment of the Liabilities and/or any termination,
release, or discharge executed by the Agent in favor of the Borrower, other than
a termination, release, or discharge which makes specific reference to this
Section 14-7.
14-8. Copies and Facsimiles. This Agreement and all documents which
relate thereto, which have been or may be hereinafter furnished the Agent or any
Lender may be reproduced by that Person or by the Agent by any photographic,
microfilm, xerographic, digital imaging, or other process, and that
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<PAGE> 81
Person may destroy any document so reproduced. Any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding (whether or not the original is in existence and whether or not such
reproduction was made in the regular course of business). Any facsimile which
bears proof of transmission shall be binding on the party which or on whose
behalf such transmission was initiated and likewise shall be so admissible in
evidence as if the original of such facsimile had been delivered to the party
which or on whose behalf such transmission was received.
14-9. Massachusetts Law. This Agreement and all rights and
obligations hereunder, including matters of construction, validity, and
performance, shall be governed by the laws of The Commonwealth of Massachusetts.
14-10. Consent to Jurisdiction.
(a) The Borrower agrees that any legal action, proceeding,
case, or controversy against the Borrower with respect to any Loan Document may
be brought in the Superior Court of Suffolk County Massachusetts or in the
United States District Court, District of Massachusetts, sitting in Boston,
Massachusetts, as the Agent may elect in the Agent's sole discretion. By
execution and delivery of this Agreement, the Borrower, for itself and in
respect of its property, accepts, submits, and consents generally and
unconditionally, to the jurisdiction of the aforesaid courts.
(b) The Borrower WAIVES personal service of any and all
process upon it, and irrevocably consents to the service of process out of any
of the aforementioned courts in any such action or proceeding by the mailing of
copies thereof by certified mail, postage prepaid, to the Borrower at the
Borrower's address for notices as specified herein, such service to become
effective five (5) Business Days after such mailing.
(c) The Borrower WAIVES any objection based on forum non
conveniens and any objection to venue of any action or proceeding instituted
under any of the Loan Documents and consents to the granting of such legal or
equitable remedy as is deemed appropriate by the Court.
(d) Nothing herein shall affect the right of the Agent to
bring legal actions or proceedings in any other competent jurisdiction.
(e) The Borrower agrees that any action commenced by the
Borrower asserting any claim or counterclaim arising under or in connection with
this Agreement or any other Loan Document shall be brought solely in the
Superior Court of Suffolk County Massachusetts or in the United States District
Court, District of Massachusetts, sitting in Boston, Massachusetts, and that
such Courts shall have exclusive jurisdiction with respect to any such action.
14-11. Indemnification. The Borrower shall indemnify, defend, and
hold the Agent and each Lender and any employee, officer, or agent of any of the
foregoing (each, an "INDEMNIFIED
.75 .
<PAGE> 82
PERSON") harmless of and from any claim brought or threatened against any
Indemnified Person by the Borrower, any guarantor or endorser of the
Liabilities, or any other Person (as well as from attorneys' reasonable fees and
expenses in connection therewith) on account of the relationship of the Borrower
or of any other guarantor or endorser of the Liabilities with the Agent or any
Lender (each of claims which may be defended, compromised, settled, or pursued
by the Indemnified Person with counsel of the Lender's selection, but at the
expense of the Borrower) other than any claim as to which a final determination
is made in a judicial proceeding (in which the Agent and any other Indemnified
Person has had an opportunity to be heard), which determination includes a
specific finding that the Indemnified Person seeking indemnification had acted
in a grossly negligent manner or in actual bad faith. The within indemnification
shall survive payment of the Liabilities and/or any termination, release, or
discharge executed by the Agent in favor of the Borrower, other than a
termination, release, or discharge which makes specific reference to this
Section 14-11.
14-12. Rules of Construction. The following rules of construction
shall be applied in the interpretation, construction, and enforcement of this
Agreement and of the other Loan Documents:
(a) Words in the singular include the plural and words in the
plural include the singular.
(b) Titles, headings (indicated by being underlined or shown
in SMALL CAPITALS) and any Table of Contents are solely for convenience of
reference; do not constitute a part of the instrument in which included; and do
not affect such instrument's meaning, construction, or effect.
(c) The words "includes" and "including" are not limiting.
(d) Text which follows the words "including, without
limitation" (or similar words) is illustrative and not limitational.
(e) Except where the context otherwise requires or where the
relevant subsections are joined by "or", compliance with any Section or
provision of any Loan Document which constitutes a warranty or covenant requires
compliance with all subsections (if any) of that Section or provision. Except
where the context otherwise requires, compliance with any warranty or covenant
of any Loan Document which includes subsections which are joined by "or" may be
accomplished by compliance with any of such subsections.
(f) Text which is shown in italics, shown in BOLD, shown IN
ALL CAPITAL LETTERS, or in any combination of the foregoing, shall be deemed to
be conspicuous.
(g) The words "may not" are prohibitive and not permissive.
(h) The word "or" is not exclusive.
(i) Any reference to a Person's "knowledge" (or words of
similar import) are to such Person's knowledge assuming that such Person has
undertaken reasonable and diligent investigation with respect to the subject of
such "knowledge" (whether or not such investigation has actually been
undertaken).
.76 .
<PAGE> 83
(j) Terms which are defined in one section of any Loan
Document are used with such definition throughout the instrument in which so
defined.
(k) The symbol "$" refers to United States Dollars.
(l) Unless limited by reference to a particular Section or
provision, any reference to "herein", "hereof", or "within" is to the entire
Loan Document in which such reference is made.
(m) References to "this Agreement" or to any other Loan
Document is to the subject instrument as amended to the date on which
application of such reference is being made.
(n) Except as otherwise specifically provided, all
references to time are to Boston time.
(o) In the determination of any notice, grace, or other
period of time prescribed or allowed hereunder:
(i) Unless otherwise provided (I) the day of the act,
event, or default from which the designated period of time begins to
run shall not be included and the last day of the period so computed
shall be included unless such last day is not a Business Day, in which
event the last day of the relevant period shall be the then next
Business Day and (II) the period so computed shall end at 5:00 PM on
the relevant Business Day.
(ii) The word "from" means "from and including".
(iii) The words "to" and "until" each mean "to, but
excluding".
(iv) The word "through" means "to and including".
(p) The Loan Documents shall be construed and interpreted
in a harmonious manner and in keeping with the intentions set forth in Section
14-13 hereof, provided, however, in the event of any inconsistency between the
provisions of the within Agreement and any other Loan Document, the provisions
of the within Agreement shall govern and control.
14-13. Intent. It is intended that:
(a) This Agreement take effect as a sealed instrument.
(b) The scope of the security interests created by this
Agreement be broadly construed in favor of the Agent and the Lenders.
(c) The security interests created by this Agreement secure
all Liabilities, whether now existing or hereafter arising.
(d) All reasonable costs and expenses incurred by the Agent
and, to the extent, and only to the extent specifically provided in the
definition of "Costs of Collection" and in Sections 5-2, 5-10, and 14-7 each
Lender in connection with such Person's relationship(s) with the Borrower shall
be borne by the Borrower.
(e) Unless otherwise explicitly provided herein, the Agent's
consent to any action of
.77 .
<PAGE> 84
the Borrower which is prohibited unless such consent is given may be given or
refused by the Agent in its sole discretion and without reference to Section
2-15 hereof.
(f) To the extent that there is any inconsistency or conflict
between this Agreement and any of the other Loan Documents, the terms of this
Agreement shall control.
14-14. Right of Set-Off. Any and all deposits or other sums at any time
credited by or due to the Borrower from the Agent, any Lender, or any
participant (a "PARTICIPANT") in the credit facility contemplated hereby or from
any Affiliate of the Agent, any Lender, or any Participant and any cash,
securities, instruments or other property of the Borrower in the possession of
the Agent, any Lender, any Participant or any such Affiliate, whether for
safekeeping or otherwise (regardless of the reason such Person had received the
same) shall at all times constitute security for all Liabilities and for any and
all obligations of the Borrower to the Agent and each Lender or any Participant
or any such Affiliate and may be applied or set off against the Liabilities and
against such obligations at any time, whether or not such are then due and
whether or not other collateral is then available to the Agent, any Lender, or
any Participant or any such Affiliate.
14-15. Maximum Interest Rate. Regardless of any provision of any Loan
Document, none of the Agent or any Lender shall be entitled to contract for,
charge, receive, collect, or apply as interest on any Liability, any amount in
excess of the maximum rate imposed by applicable law. Any payment which is made
which, if treated as interest on a Liability would result in such interest's
exceeding such maximum rate shall be held, to the extent of such excess, as
additional collateral for the Liabilities as if such excess were "Collateral."
14-16. Waivers.
(a) The Borrower (and all guarantors, endorsers, and sureties
of the Liabilities) make each of the waivers included in Section 14-16(b),
below, knowingly, voluntarily, and intentionally, and understand that the Agent
and each Lender, in entering into the financial arrangements contemplated hereby
and in providing loans and other financial accommodations to or for the account
of the Borrower as provided herein, whether not or in the future, is relying on
such waivers.
(b) THE BORROWER, AND EACH SUCH GUARANTOR, ENDORSER, AND
SURETY RESPECTIVELY WAIVES THE FOLLOWING:
(i) Except as otherwise specifically required hereby,
notice of non-payment, demand, presentment, protest and all forms of
demand and notice, both with respect to the Liabilities and the
Collateral.
(ii) Except as otherwise specifically required hereby,
the right to notice and/or hearing prior to the Agent's exercising of
the Agent's rights upon default.
.78 .
<PAGE> 85
(iii) THE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR
CONTROVERSY IN WHICH THE AGENT OR ANY LENDER IS OR BECOMES A PARTY
(WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE AGENT
OR ANY LENDER OR IN WHICH THE AGENT OR ANY LENDER IS JOINED AS A PARTY
LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF OR IS IN RESPECT OF,
ANY RELATIONSHIP AMONGST OR BETWEEN THE BORROWER OR ANY OTHER PERSON
AND THE AGENT OR ANY LENDER (AND THE AGENT AND EACH LENDER LIKEWISE
WAIVES THE RIGHT TO A JURY IN ANY TRIAL OF ANY SUCH CASE OR
CONTROVERSY).
(iv) The benefits or availability of any stay,
limitation, hindrance, delay, or restriction (including, without
limitation, any automatic stay which otherwise might be imposed
pursuant to Section 362 of the Bankruptcy Code) with respect to any
action which the Agent may or may become entitled to take hereunder.
.79 .
<PAGE> 86
(v) Any defense, counterclaim, set-off, recoupment,
or other basis on which the amount of any Liability, as stated on the
books and records of the Agent or any Lender, could be reduced or
claimed to be paid otherwise than in accordance with the tenor of and
written terms of such Liability.
(vi) Any claim to consequential, special, or punitive
damages.
DRUG EMPORIUM, INC.
("BORROWER")
By______________________________
Print Name: Michael P. Leach
Title: Chief Financial Officer
BANKBOSTON RETAIL FINANCE INC.
("AGENT")
By_________________________________
Print Name:________________________________
Title:________________________________
The "LENDERS"
BANKBOSTON RETAIL FINANCE INC.
By_________________________________
Print Name:________________________________
Title:________________________________
.80 .
<PAGE> 87
GENERAL ELECTRIC CAPITAL
CORPORATION
By_________________________________
Print Name:________________________________
Title:________________________________
NATIONAL CITY COMMERCIAL FINANCE, INC.
By_________________________________
Print Name:________________________________
Title:________________________________
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By_________________________________
Print Name:________________________________
Title:________________________________
LASALLE BUSINESS CREDIT, INC.
By_________________________________
Print Name:________________________________
Title:________________________________
.81 .
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-28-1998
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<PP&E> 70,730
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0
0
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