<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 26, 2000
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
DRUG EMPORIUM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 31-1064888
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
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155 HIDDEN RAVINES DRIVE
POWELL, OHIO 43065
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.10 PAR VALUE
7 3/4% Convertible Subordinate Debentures Due October 1, 2014
Preferred Share Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At May 22, 2000 there were 13,193,285 shares of Drug Emporium common
stock outstanding. The aggregate market value of shares of common stock held by
non-affiliates of the Registrant as of May 22, 2000 was approximately
$13,660,311 based on a closing price of $1.125 per share on the Nasdaq National
Market on such date.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report, to the
extent not set forth herein, is incorporated herein by reference from the
registrant's definitive proxy statement relating to the annual meeting of
stockholders to be held on July 12, 2000, which definitive proxy statement shall
be filed with the Securities and Exchange Commission within 120 days after the
end of the fiscal year to which this Annual Report relates.
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<TABLE>
TABLE OF CONTENTS
<CAPTION>
PART I
<S> <C>
ITEM 1. Business
ITEM 2. Properties
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters
ITEM 6. Selected Financial Data
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain beneficial Owners and Management
ITEM 13. Certain Relationships and related Transactions
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
</TABLE>
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PART I
ITEM 1. BUSINESS
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This Annual Report on Form 10-K and the documents incorporated
herein by reference contain forward-looking statements based on current
expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by management. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Cautionary Statements Concerning Forward-Looking Statements."
INTRODUCTION
In 1977, the first Drug Emporium store was opened in Columbus,
Ohio. As of February 26, 2000, the Company operates 137 company-owned stores,
known as Drug Emporium, F&M Super Drug Stores and Vix Drug Stores. In addition
to the Company-owned stores, as of February 26, 2000, there are 42 franchise
stores. The stores specialize in discount-priced merchandise, including health
and beauty aids, vitamins, cosmetics, greeting cards and pharmacy. Drug Emporium
also operates DrugEmporium.com, an online drug store selling competitively
priced health and beauty aids, cosmetics, vitamins and prescription drugs.
DrugEmporium.com is an subsidiary of the Company that operates with key
organizational and customer links to Drug Emporium, Inc. The accompanying
financial statements include amounts related to company-owned stores and
DrugEmporium.com only.
The Company's common stock trades on the Nasdaq National Market
under the symbol DEMP. As of February 26, 2000, there were 13,193,285 shares
outstanding. Drug Emporium's 7-3/4% convertible subordinated debentures, due
October 1, 2014, are traded on the Nasdaq National Market under the symbol
DEMPG.
STORE OPERATIONS
Company stores range in size from 18,000 to 49,000 square feet,
with a typical store having approximately 27,000 square feet, including retail
selling space and storage space in the rear of each store. Retail selling space
on average accounts for 80% of each store's total square footage.
Each store has a manager, one or two assistant managers, a head
pharmacist, and approximately 8 to 12 additional full-time employees and
approximately 24 part-time employees. The stores are grouped into six
operational regions, each overseen by a regional director or regional vice
president. The regional director or vice president's responsibilities include
visiting stores and assuring that Company standards for buying, merchandising,
customer service, store appearance and store procedures are maintained.
The Company's stores are located primarily in shopping centers on
major commercial thoroughfares. The capital expenditure required to fixture and
equip a new store averages $350,000. Pre-opening expenses, including salaries
and promotional expenses, average $75,000 per store, and each store requires
approximately $1,400,000 in initial inventory.
The typical trade area for a Drug Emporium store exceeds 200,000
people within a defined area, usually five miles. The customer profile is 80
percent middle-to-upper income women between the ages of 21 and 65 who shop on a
two-and-a-half week cycle.
Drug Emporium stores accommodate an average of 6,000 shoppers per
week and provide an environment for shoppers seeking a pleasant and social
shopping experience. Drug Emporium fills a unique tenant category in a shopping
center's merchandising mix and Drug Emporium stores are well received by both
hard and soft goods national retailers.
Most stores are open seven days a week for a total of 84 hours per
week. In addition, the Company operates a total of thirty-five 24-hour stores.
Each store has a similar layout, generally with the pharmacy located in the rear
of the store. Company stores accept payment in cash, check or credit card and
from third-party providers.
The table set forth below lists the 179 Company-owned and franchise
Drug Emporium stores by market as of February 26, 2000:
COMPANY-OWNED:
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Philadelphia, PA . . . . . . . . . . . . . . . . . . 28
Columbus, Cincinnati and Dayton, OH . . . . . . . . 23
Los Angeles, San Francisco and San Diego CA . . . . 21
Atlanta and Augusta, GA . . . . . . . . . . . . . . 15
Detroit, MI . . . . . . . . . . . . . . . . . . . . 15
Buffalo and Rochester, NY . . . . . . . . . . . . . 12
Baltimore, MD and Washington, DC . . . . . . . . . . 7
Milwaukee, WI . . . . . . . . . . . . . . . . . . . 6
Louisville, KY . . . . . . . . . . . . . . . . . . . 2
Minneapolis, MN . . . . . . . . . . . . . . . . . . 3
St. Louis, MO . . . . . . . . . . . . . . . . . . . 4
Oklahoma City, OK . . . . . . . . . . . . . . . . . 1
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137
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INDEPENDENT FRANCHISES:
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Dallas, Ft. Worth, TX . . . . . . . . . . . . . . . 16
Lafayette, Shreveport, LA, and Amarillo, Abilene,
Denton, Longview, Lubbock, Tyler and Waco, TX,
Little Rock, AR, and Wichita, KS . . . . . . . . . 11
Charlotte, Raleigh, Durham, Concord, NC . . . . . . 6
Barboursville, Charleston, WV . . . . . . . . . . . 4
Virginia Beach,VA . . . . . . . . . . . . . . . . . 2
Victoria, Brownsville, TX . . . . . . . . . . . . . 2
Union City, NJ . . . . . . . . . . . . . . . . . . 1
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42
When selecting store location, the Company considers various
geographic and demographic factors, including population around the site, income
level within that area, proximity to major shopping centers, traffic count,
accessibility of site, proximity of competitors and available parking spaces.
Market research may be utilized through an outside market research firm which
identifies, among other things, trade area, trade area potential, demographic
factors, competitors and competitors' sales/strengths/weaknesses, and projects
three-year anticipated sales volumes.
Company and, to a limited extent, franchisee pharmacy matters are
supervised by the Director of Pharmacy who directs compliance with state and
federal pharmacy regulations and training.
FRANCHISE OPERATIONS
Drug Emporium's franchise-store network consists of 42 stores. Drug
Emporium maintains a Franchise Advisory Board designed to provide a forum to
evaluate and discuss issues and concerns of the Company and its franchisees.
Under its franchise system, the Company permits franchisees to operate Drug
Emporium stores in a specific geographic area based on ADIs (areas of dominant
influence of television signals). Prospective franchisees generally must make a
minimum equity investment of $1,000,000 per store and establish an acceptable
line of credit in the amount of $500,000 per store. The Company advises
franchisees in site selection, store layout, and establishing purchasing and
advertising policies.
The current franchise agreement provides for franchise royalties at
a minimum rate of $6,000 per store for the second year and $25,000 per year per
store for stores open three years or more against the following percentage
royalties: 1% on gross sales from $3.5 million to $6 million, 2% from $6 million
to $8 million, 3% from $8 million to $10 million, and 1.25% on gross sales over
$10 million.
In addition, each franchisee must also spend at least 1% of gross
sales for advertising. The current franchise agreement permits the Company to
require that .6% of the 1% advertising expenditure be contributed to a national
advertising program if such program is established by the Company.
The Company may either open its own stores or allow other
franchisees to open stores in a franchisee's territory outside a defined area
for each existing store if the franchisee fails to comply with the development
schedule agreed upon by the Company and the franchisee.
Eleven franchise stores were sold or closed during Fiscal 2000,
while one franchise store was opened.
ACQUISITION OF FRANCHISEES
The Company, from time to time, has acquired or sought to acquire
certain of its franchise operations. The Company's decision to pursue the
acquisition of a franchisee is based on the Company's evaluation of the growth
opportunities in a particular market, the impact the acquisition would have on
earnings per share and the quality of the franchisee's existing management.
Since 1983, the Company has acquired franchisees located in Los Angeles,
Washington, D.C., Atlanta, Cincinnati, Milwaukee, Minneapolis, St. Louis,
Charleston, S.C., Indianapolis, Orlando, Louisville, Oklahoma City, San Diego
and Baton Rouge. The Company plans to evaluate future opportunities to acquire
appropriate franchisees from time to time and may use cash or securities to pay
for such acquisitions.
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MERCHANDISING AND MARKETING
The Company's merchandising goal is to provide customers with the
widest available selection of health and beauty aids, cosmetics, prescription
drugs and general merchandise at everyday low prices. The Company estimates that
approximately 60% of a typical store's sales mix is health and beauty aids and
general merchandise, 33% pharmacy items and 7% cosmetics.
The Company is continuing to aggressively oversee strategies
designed to lower the total cost of acquiring merchandise in order to continue
to be competitive with other national and regional chain discounters. The
Company is continuing to invest in and upgrade its electronic in-store and
backdoor receiving systems.
During Fiscal 2000, the Company's primary pharmacy supplier and
general merchandise distributor, McKesson Drug, accounted for over 35% of the
Company's purchases. No other single vendor accounted for more than 10% of the
Company`s purchases. While the Company purchases from over 7,000 vendors, a
majority of its business is conducted with approximately 500 vendors. The
Company believes it is a significant customer for most of these 500 vendors.
The Company advertises through the use of television, radio,
newspaper and direct mail. Most advertising in Fiscal 2000 was print-based,
utilizing newspaper tabloids running approximately twice per month. Point of
sale advertising is also used. The Company's strategy of clustering stores
within ADI markets is an important factor in maximizing the effectiveness of its
advertising expenditures. The Company works with an advertising agency that
coordinates advertising for the entire chain.
CUSTOMER SERVICE
The Company believes that its commitment to customer service is an
important ingredient of its success. The Company encourages its managers and
other employees to be responsible to customers. The stores are designed to make
products easily accessible. Store employees are trained to be friendly and
helpful to customers.
COMPETITION
The sale of deep discount health and beauty aids, cosmetics,
vitamins and prescription drugs is highly competitive. The Company believes that
the principal bases of competition in this market are price, product variety,
service, site location and customer recognition. The Company also believes that
there exist only a few similar companies, most of which are regional chains. The
Company`s stores compete not only with those similar companies but with numerous
conventional drug stores with national or regional images, and also with
supermarkets, mass merchants and category-specific discount stores. Many of the
Company's supermarket, mass merchant and conventional drug store competitors
have more outlets and substantially greater financial resources than the Company
or have more convenient locations than Company stores. The Company believes that
its prices are competitive and that it offers greater product variety and better
service than its competitors. The Company also believes that the smaller size of
its stores compared to the major discount competitors provides a better shopping
experience and allows a better selection of sites in tight real estate markets
that exist in some major cities. The Company's ability to expand successfully
into new markets is especially sensitive to the competitive factors in those
markets.
DrugEmporium.Com
In March 1997, the Company established an electronic commerce site
on the internet with the URL DrugEmporium.com. This experimental site served as
the foundation for the Company's development of a superior online drug store,
also known as DrugEmporium.com. The new site, which was relaunched in September
1999, emphasizes customer service, selection, price and convenience.
The Company has established a separate subsidiary for its
e-commerce drug store. The Company has invested substantial resources in order
to enhance the business processes around the site and those efforts are ongoing
in nature. In addition the Company has made material financial commitments
related to its online drugstore. Management believes that the Company has
sufficient borrowing capacity under its tranche B subordinated loan with BackBay
Capital to fund the operations of DrugEmporium.com through the second quarter of
fiscal 2001. Beyond that timeframe, the Company will need to either secure
additional financing for DrugEmporium.com, enter into a strategic partnership or
investigate other options in order to ensure that DrugEmporium.com has
sufficient working capital to continue operations.
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Although the Company expects to be successful in executing one of these options,
there is no guarantee that this will happen. The Company has engaged an
investment banking firm to raise new capital for DrugEmporium.com to a strategic
partner and anticipates that such a transaction would occur prior to the third
quarter of Fiscal 2001. Finally, the Company expects the operating results for
its Internet subsidiary to negatively impact its consolidated operating results
for at least the next several quarters.
EMPLOYEES AND TRAINING
At February 26, 2000, the Company had a total of approximately
5,500 employees, both full-time and part-time, of which 160 were corporate staff
personnel. None of the employees are covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.
Drug Emporium believes that the training of store employees is one
of the most important elements of its business. The Company conducts training
classes at its headquarters, and senior management works closely with regional
and district managers in this regard.
REGULATION
The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime and other working conditions. A
portion of the Company's personnel are paid at rates related to the federal
minimum wage, and accordingly, further increases in the minimum wage increase
the Company's labor costs.
The prescription drug business is subject to the federal Food, Drug
and Cosmetic Act, Drug Abuse Prevention and Control Act and Fair Packaging and
Labeling Act relating to the content and labeling of drug products, comparable
state statutes and state regulation regarding record keeping and licensing
matters. These regulatory functions contain civil and criminal penalties for
violations.
SERVICE MARKS
The Company has obtained federal registrations for the service
marks DRUG EMPORIUM, DRUG EMPORIUM and design, the Drug Emporium logo and
SAVINGS SO BIG YOU NEED A SHOPPING CART (re-filed), DE DIRECT (the words),
DRUGEMPORIUM.COM and DE DIRECT (STYLIZED). The marks DRUG EMPORIUM EXPRESS,
EMPORIUM GOLD, DRUG EMPORIUM CONSUMER DIRECT, and DE DIRECT (the design) are
pending marks.
The mark DRUG EMPORIUM and design has been registered in Arizona,
Washington, Minnesota, Nebraska, Wisconsin, Texas, West Virginia, New York,
Nevada, Missouri, Kentucky, Indiana, California, Kansas, New Jersey, South
Carolina and North Carolina. DRUG EMPORIUM has been registered in Florida,
Wisconsin, Tennessee, New York and Maryland.
The mark DRUG EMPORIUM and design has been registered in Mexico,
Japan, France, Canada, Australia and the United Kingdom. SAVINGS SO BIG YOU NEED
A SHOPPING CART is registered in Canada and Mexico and the Drug Emporium Logo is
registered in Canada.
Federal registration of a mark does not create new substantive
rights to use the mark or to assert rights based on ownership, but it does
provide additional remedies for the protection of the mark.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Served as
Name: Age: Position: Officer Since: (1)
- ----- ---- --------- ------------------
<S> <C> <C> <C>
David L. Kriegel 54 Chairman of the Board, Chief Executive 1992
Officer, President and Director
Terry L. Moore 50 Chief Financial Officer, Treasurer 1999
A. Joel Arnold 64 Senior Vice President 1995
Thomas H. Ziemke 57 Senior Vice President 1998
Jane H. Lagusch 54 Vice President, Secretary 1986
</TABLE>
(1) Officers serve until their successors are chosen and are qualified
subject to earlier removal by the board of directors, and subject to
rights, if any, under employment contracts.
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DAVID L. KRIEGEL
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Since December 1992, Mr. Kriegel has been the Chairman and Chief
Executive Officer of the Company and since June of 1994 also has been President
of the Company. Mr. Kriegel is Chairman and Chief Executive Officer of Kriegel
Holding Company, Inc., a privately-owned corporation dealing with real estate
and distribution. Mr. Kriegel is a Director of Tele Spectrum Worldwide, Inc., a
publicly held company and a trustee of Ohio Northern University.
Terry L. Moore
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Since October 1, 1999, Mr. Moore has served as Chief Financial
Officer. Mr. Moore was previously Controller of the Company and is a Certified
Public Accountant. Prior to joining Drug Emporium, Mr. Moore was the Chief
Financial Officer and Treasurer for Shoe Corporation of America for three years
and prior to that was both the Chief Financial Officer and Chief Executive
Officer for Nationwise Automotive, Inc. Both of these companies were Columbus
based, multi-state retailers.
A. JOEL ARNOLD
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Mr. Arnold was appointed to the office of Senior Vice President in
1995. He is responsible for store operations, merchandising, pharmacy and loss
control. A registered pharmacist, Mr. Arnold has 40 years' experience in the
retail drug industry.
THOMAS H. ZIEMKE
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In March of 1998, Mr. Ziemke was appointed to the office of Senior
Vice President with responsibility for marketing and purchasing. Mr. Ziemke has
been associated with Drug Emporium since 1984 when he became the operator of the
Los Angeles based Drug Emporium franchise. He became Vice President of Western
Operations when the Company purchased the franchise in 1987 and served in that
capacity until his promotion to Senior Vice President.
JANE H. LAGUSCH
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Mrs. Lagusch has been associated with the Company in various
capacities since 1980 and has been an officer of the Company since 1986. She was
appointed to her current position, Vice President and Secretary of the Company,
in 1993. Mrs. Lagusch has responsibility for corporate administrative functions.
ITEM 2. PROPERTIES
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Most of the Company's stores are occupied pursuant to long-term
leases that vary as to rental provisions, expiration dates, renewal options,
rental amounts and payment provisions. The Company does not deem any individual
store's lease to be significant in relation to its overall operations. For
information as to the amount of the Company's rental obligations for retail
store leases, see Note 4 of Notes to Consolidated Financial Statements.
The Company also leases office space in Columbus, Ohio for its
internet subsidiary as well as a distribution center in Louisville, Kentucky to
support fulfillment of internet merchandise sales. The office space lease is a
three year lease that expires in September 2002 and the fulfillment center lease
is a five year lease that expires in September 2004.
The Company owns a 33,000 square foot executive office building and
the surrounding land for use as its principal office in Powell, Ohio. The
Company also owns a portion of the building and land at one of its Detroit area
store locations.
ITEM 3. LEGAL PROCEEDINGS
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On March 7, 2000, certain franchisees of Drug Emporium
("Franchisees") filed a Demand for Arbitration ("Demand") with the American
Arbitration Association against Drug Emporium and Drug Emporium.com ("Drug
Emporium entities"). In the Demand, Franchisees assert claims in contract, tort
and under the Texas Deceptive Trade Practices Act, alleging that Drug Emporium
and Drug Emporium.com have encroached upon their franchisees through the
establishment of on-line stores on the internet which makes sales in the
territories in which Franchisees' stores are located. Franchisees seek
declaratory and injunctive relief and unspecified money damages encompassing
Franchisees' alleged losses to date, punitive damages, and treble damages under
the Texas Deceptive Trade Practices Act. The Drug Emporium entities filed a
response to the Demand on April 17, 2000.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matter was submitted to a vote of the Company's stockholders
during the fourth quarter ended February 26, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's common stock is traded on the Nasdaq National Market
under the symbol DEMP. The following table sets forth, for the quarterly periods
shown, the high and low sale price per share as reported on the Nasdaq National
Market:
<TABLE>
<CAPTION>
Fiscal Quarter Ended High Low
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<S> <C> <C>
May 30, 1998 $ 4.563 $3.813
August 29, 1998 $ 4.813 $3.750
November 28, 1998 $ 4.688 $3.188
February 27, 1999 $ 8.688 $4.125
May 29, 1999 $11.625 $4.500
August 28, 1999 $10.500 $6.813
November 27, 1999 $ 7.500 $3.875
February 26, 2000 $ 8.688 $3.625
</TABLE>
DIVIDENDS
The Company paid no dividends in Fiscal 2000 or 1999. The Company
anticipates that all of its income in the foreseeable future will be retained
for the development and expansion of its business and the repayment of
indebtedness. Management does not anticipate paying dividends on its common
stock in the foreseeable future. Additionally, the company's credit facilities
contain financial covenants which restrict the ability to pay dividends.
HOLDERS
At May 22, 2000 the Company estimates it had approximately 618
record holders of its common stock.
ITEM 6. SELECTED FINANCIAL DATA
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The following selected financial data should be read in conjunction
with the Consolidated Financial Statements, including the related notes, and
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Consolidated Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended
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February 26, February 27, February 28, March 1, March 2,
2000 1999 1998 1997 1996
(52 weeks) (52 weeks) (52 weeks) (53 weeks) (52 weeks)
(in thousands, except
per share data)
<S> <C> <C> <C> <C> <C>
Net sales $904,878 $839,443 $836,405 $855,016 $738,772
Gross margin 187,967 176,729 178,289 185,475 160,146
Selling, administrative
and occupancy expenses 209,146 171,444 169,584 172,560 146,774
Operating income (loss) before
special charges (credits) (21,179) 5,285 8,705 12,915 13,372
Special (credits) charges -- (6,760) (2,092) 2,800 3,000
Interest, net 8,467 5,487 7,653 7,882 6,468
Income (loss) before
income taxes (29,646) 6,558 3,144 2,233 3,904
Provision (benefit) for
income taxes (1,636) 2,759 1,453 1,081 1,562
Net income (loss) $(28,010) $ 3,799 $ 1,691 $ 1,152 $ 2,342
Per Share Data:
Earnings (loss) (1) $ (2.12) $ 0.29 $ 0.13 $ 0.09 $ 0.18
Cash dividends -- -- -- -- --
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Shareholders' equity $ 2.07 $ 4.19 $ 3.90 $ 3.77 $ 3.68
Consolidated Balance Sheet Data:
Working capital $ 25,832 $ 64,632 $ 79,113 $ 76,302 $ 80,195
Total assets $265,225 $230,689 $219,784 $243,319 $243,898
Non-current liabilities $ 51,830 $ 53,775 $ 60,330 $ 63,523 $ 67,391
Total shareholders' equity $ 27,257 $ 55,222 $ 51,390 $ 49,567 $ 48,545
</TABLE>
(1) Represents basic and diluted per share amounts as defined by Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS No. 128).
Earnings (loss) per share amounts prior to 1998 have been restated as required
to comply with FAS No. 128.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
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The following discussion should be read in conjunction with the
consolidated financial statements and notes to those statements and the other
financial information appearing elsewhere in this Form 10-K. In addition to
historical information, the following discussion and other parts of this Form
10-K contain forward-looking information that involves risks and uncertainties.
(See Cautionary Statement Concerning Forward-Looking Statements below).
The following table sets forth selected items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales for the years
indicated.
<TABLE>
<CAPTION>
Year Ended
February 26, February 27, February 28,
2000 1999 1998
(52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C>
Net sales (in thousands) $904,878 $839,443 $836,405
Gross margin 20.8% 21.0% 21.3%
Selling, administrative and
occupancy expense 23.1% 20.4% 20.3%
Operating income (loss) (2.3%) 0.6% 1.0%
</TABLE>
Fiscal 2000 operating results were significantly impacted by the start-up losses
of the Company's internet subsidiary, Drug Emporium.com. For Fiscal 2000, Drug
Emporium.com had operating losses of $13.9 million representing (1.5) percent of
consolidated net sales.
Sales
Total sales for Fiscal 2000 increased by 7.8 percent over the prior year. This
increase was primarily the result of additional sales from the twelve Vix stores
that were acquired in February 1999. Comparable store sales increased by .4
percent while average sales per store for Fiscal 2000 based on a weighted
average number of stores were up 3.1 percent over Fiscal 1999 due to the
comparable store sales increase as well as the closure of five under-performing
stores.
Total sales for Fiscal 1999 increased .4 percent from Fiscal 1998, while
comparable store sales for the year showed an increase of 1.3 percent. The total
sales increase was due to additional sales from the Vix acquisition and the
aforementioned comparable store sales increase, offset by a sales reduction that
resulted from a lower average store count for the year. Average sales per store
for Fiscal 1999 based on a weighted average number of stores were up 3.4 percent
versus Fiscal 1998 due to the comparable store sales increase as well as the
closure of six under-performing stores.
Pharmacy sales as a percentage of total sales were 32 percent, 31 percent, and
29 percent in Fiscal years 2000, 1999, and 1998, respectively. Management
expects that pharmacy sales will continue to increase as a percentage of total
sales in Fiscal 2001.
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The following table lists stores opened or acquired and stores closed for the
years indicated:
<TABLE>
<CAPTION>
Year Ended
February 26, February 27, February 28,
2000 1999 1998
(52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C>
Number of stores at
beginning of year 141 135 138
Stores opened or acquired 1 12 1
Stores closed (5) (6) (4)
Total stores at end of year 137 141 135
</TABLE>
Gross Margin
Fiscal 2000 gross margins were lower than the prior year primarily due to the
impact of accounts receivable write offs (0.7% of net sales), which adversely
affected gross margins. Before this write off, pharmacy margins would have come
in flat with the prior year at 21.4 percent. Lower pharmacy margins were offset
by higher non-pharmacy margins, which resulted from improved category
management. In total, gross margin was 20.8 percent for the year. Before the
effect of the aforementioned accounts receivable write off, total gross margin
for the year as a percentage of sales was 21.5 percent, compared to 21.3 percent
for Fiscal 1999. The company anticipates total gross margins for Fiscal 2001 to
be comparable to the adjusted total gross margin recorded in Fiscal 2000.
In Fiscal 1999 the Company recorded a $1.7 million one-time inventory write down
due to store closure-related inventory liquidations and other inventory
write-downs. The non-recurring inventory-related costs of this special charge
were recorded as a component of gross margin in accordance with Emerging Issues
Task Force (EITF) Issue No. 96-9. Excluding the impact of this write-down, total
gross margin as a percentage of sales for Fiscal 1999 was 21.3 percent, the same
as Fiscal 1998.
Selling, Administrative and Occupancy
In Fiscal 2000, total SA&O expense as a percentage of net sales increased by
2.7% versus Fiscal 1999. 1.2% of this increase is related to brick and mortar
operations, while the remaining 1.5% is related to DrugEmporium.com, the
company's start-up internet subsidiary that was relaunched in Fiscal 2000. The
increase in the brick and mortar SA&O was equally distributed in the areas of
payroll, advertising, other operating expenses, and lower franchise fees.
Included in Fiscal 2000 SA&O expenses is $1.3 million of special charges related
to advertising, insurance, non-income taxes and other items. In addition,
franchise fees, which are netted against other operating expenses, were lower in
Fiscal 2000 primarily due to the termination of the Western Drug Distributors,
Inc. franchise agreement in Fiscal 1999, as well as a lower franchise store
count versus the prior year. Franchise fees were $2,421,000, $3,435,000, and
$4,794,000 in Fiscal 2000, 1999 and 1998 respectively.
Total SA&O expenses as a percentage of net sales increased in Fiscal 1999
compared to Fiscal 1998 by .1%. The increase in Fiscal 1999 over Fiscal 1998 is
a result of lower franchise fees, higher other operating expenses offset by
lower payroll, occupancy and advertising costs.
Special Charges (Credits)
The impact of special charges (credits) classified in the Company's Fiscal 1999
and 1998 Statements of Operations and descriptions of the components of the
charges (credits) are shown below:
<TABLE>
<CAPTION>
Year Ended
February 27, February 28,
1999 1998
(in thousands, except per share data) (52 weeks) (52 weeks)
<S> <C> <C>
Reconciliation of Net Income
to Net Income before
Special Charges (Credits):
Net income $ 3,799 $ 1,691
Special charges (credits),
net of income taxes (3,036) (1,255)
Net income before
special charges (credits) $ 763 $ 436
Earnings per share before
special charges (credits)
(basic and diluted) $ 0.06 $ 0.03
</TABLE>
10
<PAGE> 11
One Time Gain Related to the Sale of
Western Drug Distributors
During Fiscal 1999 the Company entered into an agreement with Western Drug
Distributors, Inc., its franchise store operator in the Seattle and Portland
area, to terminate Western Drug's franchise agreement. The termination was
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.
Special Charges
During Fiscal 1999, as a result of an ongoing review of its business operations,
the Company recorded special and nonrecurring charges of $9.4 million. The
charges included 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 under-performing 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 margins in the
Fiscal 1999 statement of operations due to store closure-related inventory
liquidations and other inventory write downs. The non-recurring
inventory-related costs of the special charge have been recorded as a component
of gross margins in accordance with Emerging Issues Task Force (EITF) Issue No.
96 - 9.
Settlement of Litigation and Recovery of Legal Costs
Subsequent to the end of Fiscal 1998, the Company reached a confidential
settlement agreement with one of its franchisees to resolve a longstanding
lawsuit. The impact of the settlement and associated legal costs is reflected in
the Fiscal 1998 results, net of a third-party recovery. The Company also
recorded a recovery of related prior period legal costs as a special credit in
Fiscal 1998.
Interest, Net
Net interest expense increased in Fiscal 2000 due to a higher average balance on
the Company's revolving credit facility versus Fiscal 1999 as well as higher
interest rates during the year. This higher average revolver balance was a
result of the acquisition of the VIX stores in February 1999, funding for
DrugEmporium.com, the termination of the Company's third party factoring program
with McKesson Pay Systems and higher average inventories levels resulting from
the Company carrying additional product lines.
In Fiscal 1999, net interest expense decreased from Fiscal 1998 due to a lower
average balance on the Company's revolving credit facility versus the prior
year. The lower average revolver balance was primarily a result of the pay down
of the revolver with the $15.4 million in proceeds that resulted from the
termination of the company's franchise agreement with Western Drug Distributors,
Inc. and inventory reductions.
Income Taxes
Primarily because of current and future projected losses for DrugEmporium.com,
the Company was precluded from recording a full deferred tax benefit for Fiscal
2000. The income tax benefit appearing in the Fiscal 2000 Consolidated Statement
of Operations results from the Company's net loss for the year that is eligible
for tax loss "carryback". However, the portion of the current year benefit that
relates to tax loss "carryforward" was not recorded.
Acquisitions
On February 5, 1999 the Company completed its purchase of substantially all of
the assets of the Vix drug store chain, which operates twelve deep discount drug
stores in the Buffalo and Rochester, New York areas. Both areas represent new
markets for the Company. The acquired stores were operated under the Vix name by
Tops, a division of Ahold International. The Company paid $31.2 million in cash
for the assets of the business and assumed all store real estate leases. No
other liabilities were assumed. The acquisition was accounted for as a purchase.
11
<PAGE> 12
Inventory Valuation
The Company uses the LIFO method of accounting for its inventories. Under this
method, the cost of merchandise sold reported in the financial statements
approximates current cost. The Company uses an estimated percentage rate of
inflation determined at the beginning of the fiscal year in computing its LIFO
charges throughout the fiscal year. This LIFO charge is adjusted at each
year-end based upon the actual weighted average percentage rate of inflation.
<TABLE>
<CAPTION>
Year Ended
February 26, February 27, February 28,
2000 1999 1998
<S> <C> <C> <C>
LIFO provision
(in thousands) $2,495 $1,035 $709
Inflation rate 1.4% .8% .4%
</TABLE>
Inventory turnover was approximately 3.5 turns for Fiscal 2000 versus 4.0 turns
for the prior fiscal year. During Fiscal 2000, the company continued to realize
the benefits of the "Mission Critical" inventory reduction initiative that was
implemented on a company wide basis in Fiscal 1998 despite adding several new
product lines in Fiscal 2000. As a result of its ongoing inventory management
efforts, the Company expects to continue to control per-store inventory levels
and realize the resulting positive effect on inventory turnover and liquidity.
Liquidity and Capital Resources
As of February 26, 2000, the Company's revolving credit facility consisted of
outstanding borrowings of $86 million. During Fiscal 2000 and subsequent to
February 26, 2000, the Company amended its revolving credit facility agreement
(the "Agreement") with Fleet Retail Finance, Inc. that expires October 31, 2003.
The Agreement as amended allows for revolving borrowings of up to $110 million
subject to requirements to maintain a $15 million excess availability amount
measured on a rolling thirty day average basis. Borrowing availability is also
subject to an advance rate against both inventory and accounts receivable
collateral after providing collateral coverage for $12.5 million in term debt
that was obtained subsequent to February 26, 2000 to finance the working capital
requirements of DrugEmporium.com. At the Company's current inventory and
receivable levels, the collateral borrowing base after providing collateral for
term debt, excedes the $110 million credit facility limit.
The Company's borrowing rate can fluctuate between the bank's prime rate and a
LIBOR-based rate, depending on the ability of the company to meet certain
financial performance measures and the company's average excess availability
position against the $110 million commitment. At February 26, 2000, the weighted
average borrowing rate was 7.48 percent. The Agreement requires a commitment fee
on the revolver of .25 percent on the unused available credit and has no
compensating balance requirements. Borrowings made pursuant to the Agreement are
secured by substantially all assets of the Company.
Terms of the amended Agreement require compliance with certain financial
covenants including minimum earnings before taxes, interest, depreciation and
amortization as well as capital expenditure limitations. In addition, the
facility limits the Company's investment, loans and/or advances to
DrugEmporium.com to an aggregate amount of $30.5 million inclusive of the $12.5
million term debt financing obtained subsequent to February 26, 2000. Under the
Agreement the repurchase of the Company's convertible subordinate debentures and
stock and the payment of dividends are permitted, subject to certain
restrictions.
As noted above, subsequent to February 26, 2000, the Company obtained a $12.5
million term note to finance the working capital requirements of
DrugEmporium.com. The term note matures May 1, 2002. With this $12.5 million of
funding the Company anticipates that the cash resources of DrugEmporium.com will
support operations at least through the second quarter of Fiscal 2001 at which
time the Company will be at the funding limit under the Agreement. The Company
has engaged an investment banking firm to raise new capital for DrugEmporium.com
or assist in a merger or sale of DrugEmporium.com to a strategic partner and
anticipates that such a transaction would occur prior to the third quarter of
fiscal 2001. If the Company is not successful with such a transaction,
additional debt financing would be required to support the operations of
DrugEmporium.com, however, there can be no assurance that additional financing
will be available. In the event new capital is not raised, a sale or merger does
not occur, or additional debt financing is not available, the Company will have
to consider other alternatives including ceasing operations of DrugEmporium.com.
12
<PAGE> 13
Certain of these alternatives could cause evaluation of the assets of
DrugEmporium.com for impairment and a charge to recognize lease and other
financial obligations not previously recognized in the Company's balance sheet.
These items could have a material adverse impact on the Company's financial
position and results of operations.
The Company believes that internally generated funds and borrowings available
under its Agreement are sufficient to finance the Company's current brick and
mortar operations including funding the $2.5 million convertible subordinated
debt sinking fund requirement in fiscal 2001 and if required the assumption of
DrugEmporium.com leases and other financial obligations.
During Fiscal 2000, operations used $55.5 million of cash versus $53.5 million
of cash provided by operations in the prior year. The major components of the
Fiscal 2000 negative operating cash flow were the net cash loss from operations
of approximately $14.5 million, an $11.2 million decrease in accounts payable
and accrued liabilities, and a $7.5 million, $19.9 million and $ 2.4 million
increase in accounts receivable, inventory and other assets, respectively. The
Company anticipates reductions in both its per store inventory levels and its
number of days of accounts receivable outstanding during Fiscal 2001, and thus
its borrowing needs, due to its ongoing efforts to more effectively manage these
assets. The Company invested $18.6 million in cash for capital expenditures in
Fiscal 2000 versus $5.7 million in the prior year. Fiscal 2001 capital
expenditures included $7.2 million related to the brick and mortar operations
and $11.4 million related to DrugEmporium.com. The Company borrowed
approximately $74 million in Fiscal 2001 to support operating and investing
activities.
The Company's Fiscal 2000 balance sheet reflects net working capital of $25.8
million versus net working capital of $64.6 million at the end of the prior
year. The decrease in net working capital is primarily the result of the
Company's net loss for the year as well as a disproportionate decrease in
accounts payable relative to inventory.
Impact of Year 2000
In prior years the Company discussed the nature and progress of its plans to
become Year 2000 ready. Prior to December 31, 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the year 2000 date change.
The Company's total Year 2000 cost was $1,500,000, with $1,375,000 related to
the purchase of hardware and software that was capitalized and $125,000 that was
expensed as incurred. The majority of the Company's Year 2000 compliance costs
were incurred in Fiscal 1999. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its internal systems, or the
products or services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its suppliers and vendors
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed properly.
Cautionary Statement Concerning 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 Form 10-K
report 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 following functions among
others that could affect the outcome of the Company's forward-looking
statements:
Industry and Market Factors.
- ----------------------------
o Competition as to price and selection from other drugstore
chains, from supermarkets, mail order companies, membership
clubs, and other internet companies and from other third party
plans.
13
<PAGE> 14
o Health maintenance organizations, managed care organizations,
pharmacy benefit management companies and other third party
payers attempting to reduce prescription drug costs which
results in downward pressure on pharmacy margins.
o Economic conditions generally or in the Drug Emporium markets.
o Federal and/or state regulatory and legislative actions,
including internet regulation taxes and pharmacy regulations.
o Customer preferences and spending patterns.
Operating Factors.
- ------------------
o The ability to secure a financial or strategic partner for its
on-line store.
o The ability to economically eliminate under-performing stores.
o The ability to implement or adjust to new technologies for
both brick and mortar stores and the on-line store.
o The ability to continue to purchase on favorable terms.
o The ability to attract, hire and retain key personnel.
o The ability to improve operating margins.
o The ability to secure and maintain key contracts and
relationships relating to both internet and brick and mortar
operations.
ITEM 7 (A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ------------------------------------------------------------------------
The Company has not entered into any derivative financial
instruments. The Company's primary market risk exposure relates to interest rate
risk. The company has managed its interest rate risk by balancing its exposure
between fixed and variable rates while attempting to minimize its interest
costs. The Company has a balance of $86 million on its revolving credit facility
at February 26, 2000, which is subject to a variable rate of interest based on
LIBOR or prime rate. Assuming borrowings at February 26, 2000, a one-hundred
basis point change in interest rates would impact interest expense by
approximately $860,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Refer to the Index to Financial Statements on F-1 for the required
information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
Certain of the information required by this Item 10 is set forth
under Item 1. "Executive Officers of the Company." The remainder of the
information is incorporated by reference to the Company's Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the Annual
Meeting of Stockholders to be held July 12, 2000.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
Incorporated by reference to the Company's Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the Annual
Meeting of Stockholders to be held July 12, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
14
<PAGE> 15
Incorporated by reference to the company's Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the Annual
Meeting of Stockholders to be held July 12, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Incorporated by reference to the Company's Proxy Statement to be
filed with the Securities and Exchange Commission in connection with the Annual
Meeting of Stockholders to be held July 12, 2000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) Document filed as part of this report:
(1) Financial Statements
The financial statements listed in the accompanying Table of
Contents to Financial Statements and Financial Statement
Schedules at page F-1 are filed as part of this form 10-K.
(2) Financial Statement Schedule.
The financial statement schedule listed in the accompanying
Table of Contents to Financial Statements and financial
Statement Schedule at page F-1 is filed as part of this Form
10-K.
All other schedules have been omitted because they are not
applicable, or not required, or the information is disclosed
in the Financial Statements or notes thereto.
(3) Exhibits. (See (c) below)
(b) Report on form 8-K
There were no reports on Form 8-K filed by us during the fourth quarter of the
fiscal year ended February 26, 2000.
(c) Exhibits.
The following is a list of exhibits filed as part of this annual report
on Form 10-K. where so indicated by footnote, exhibits which were
previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the previous
filing is indicated in parentheses.
(3) Exhibits List
-------------
(3) Articles of Incorporation and By-Laws
-------------------------------------
3.1 Restated Certificate of Incorporation (Incorporated
by reference to Exhibit 3.3 to the Company's S-1
Registration Statement No. 33-21755)
3.2 Bylaws
(10) Material Contracts
------------------
10.1 Drug Emporium, Inc. 1983 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the
Company's S-1 Registration Statement Registration No.
33-21755) **
10.2 Drug Emporium, Inc. 1984 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.3 to the
Company's S-1 Registration Statement Registration No.
33-21755) **
15
<PAGE> 16
10.3 Drug Emporium, Inc. 1987 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the
Company's S-1 Registration Statement Registration No.
33-21755) **
10.4 Drug Emporium, Inc. 1990 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.41 to the
Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1990) **
10.5 Drug Emporium, Inc. 1987 Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.5 to
the Company's S-1 Registration Statement Registration
No. 33-21755) **
10.7 Form of License and Franchise Agreement (incorporated
by reference to Exhibit 10.7 to the Company's S-1
Registration Statement Registration No. 33-21755)
10.8 Form of Option Agreement (incorporated by reference
to Exhibit 10.8 to the Company's S-1 Registration
Statement Registration No. 33-21755)
10.10 Loan and Security Agreement dated as of October 28,
1998, between Drug Emporium, Inc. and BankBoston
Retail Finance, (incorporated by reference to Exhibit
10.1 of the Company's Form 10-Q for the period ended
November 28, 1998)
(a). First Amendment dated May 11, 1999 to the Loan
and Security Agreement dated as of October 28, 1998
(incorporated by reference to Exhibit 10.2 of the
company Form 10-Q for the period ending August 28,
1999.)
(b). Second Amendment dated September 15, 1999 to the
Loan and Security Agreement dated as of October 28,
1998 (incorporated by reference to Exhibit 10.3 of
the Company form 10-Q for the period ending August
28, 1999.)
(c). Third Amendment dated December 10, 1999 to the
Loan and Security Agreement dated as of October 28,
1998 (incorporated by reference to Exhibit 10.4 of
the Company Form 10-Q for the period ending November
27, 1999.)
(d). Fourth Amendment dated March 8, 2000 to the Loan
and Security Agreement dated as of October 28, 1998
(filed herewith).
(e). Fifth Amendment dated May 10, 2000 to the Loan
and Security Agreement dated as of October 20, 1998
(filed herewith).
10.11 Employment contract dated March 11, 1993 between
David L. Kriegel and Drug Emporium, Inc.
(incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended
February 27, 1993) **
10.12 Drug Emporium, Inc. 1993 Incentive Stock Option Plan
(incorporated by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal
year ended February 27, 1993) **
10.13 Drug Emporium, Inc. 1993 Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.13 to
the Company's Annual Report on Form 10-K for the
fiscal year ended February 27, 1993) **
16
<PAGE> 17
10.15 Amendment dated December 2, 1997 to Employment
Agreement made March 11, 1993, by and between Drug
Emporium, Inc. and David L. Kriegel (incorporated by
reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-K for the fiscal year ended
February 28, 1998)**
10.16 Form of Employment Security Agreements between Drug
Emporium, Inc. and each of A. Joel Arnold and Jane H.
Lagusch, dated December 2, 1997 (incorporated by
reference to Exhibit 10.16 to the Company's Annual
Report on form 10-K for the fiscal year ended
February 28, 1998)**
10.18 Consulting Agreement dated December 2, 1997, between
David L. Kriegel and Drug Emporium, Inc.
(incorporated by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1998) **
10.19 Drug Emporium, Inc. 1999 Stock Incentive Plan
(incorporated by reference to Exhibit 99.1 to the
Company's Registration Statement on Form S-8,
Registration No. 333-85215).
10.20 Drug Emporium.com 1999 Stock Incentive Plan filed
herewith.
*(21) Subsidiaries of Registrant
--------------------------
21.1 The Company has the following subsidiaries, all of
which, except DrugEmporium.com, are wholly-owned:
State of
Name Incorporation
---------------------------------------------------
Drug Emporium Express, Inc. Delaware
D.E. Michigan Management Co. Delaware
Drug Emporium of Michigan, Inc. Delaware
Drug Emporium of Maryland, Inc. Delaware
Emporium Venture, Inc. Ohio
Houston Venture, Inc. Ohio
RJR Drug Distributors Inc. Delaware
DrugEmporium.com, Inc. Delaware
*(23) Consent of Experts
------------------
23.1 Consent of Ernst & Young LLP
17
<PAGE> 18
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8, Numbers 33-25768 and 33-69638) of Drug Emporium, Inc. and
subsidiaries of our report dated April 18, 2000 except for Notes 3 & 4 as to
which the date is May 11, 2000, with respect to the consolidated financial
statements of Drug Emporium, Inc. and subsidiaries, included in this Annual
Report (Form 10-K) for the year ended February 26, 2000.
/s/ Ernst & Young LLP
Columbus, Ohio
May 25, 2000
18
<PAGE> 19
*(27) Financial Data Schedule
-----------------------
27.1 Financial Data Schedule of the Company
*Included with this Annual Report on Form 10-K
**Compensatory plans, contracts or agreements
(b) Reports on Form 8-K
-------------------
None.
19
<PAGE> 20
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DRUG EMPORIUM, INC.
(Registrant)
Date: May 26, 2000 By: /s/ David L. Kriegel
- ------------------ ---------------------
David L. Kriegel
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: May 26, 2000
/s/ Terry L. Moore /s/ David L. Kriegel
- ------------------ ---------------------
Terry L. Moore David L. Kriegel
Chief Financial Officer Chief Executive Officer and Director
/s/ Robert W. McCurdy
---------------------
Robert W. McCurdy
Director
/s/ William Sweet, Jr.
----------------------
William Sweet, Jr.
Director
/s/ Wesley Wright
---------------------
Wesley Wright
Director
20
<PAGE> 21
DRUG EMPORIUM, INC. AND SUBSIDAIRIES
TABLE OF CONTENTS
PART II - FINANCIAL INFORMATION
ITEM 8. FINANCIAL STATEMENTS
REGISTRANT
DRUG EMPORIUM, INC. AND SUBSIDAIRIES
Report of Independent Public Accountants . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of February 26, 2000
and February 27, 1999 . . . . . . . . . . . . . . . . . . . . . . . . F-3
For the years ended February 26, 2000, February 27, 1999, February 28, 1998
Consolidated Statements of Operations . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity . . . . . F-4
Consolidated Statements of Cash Flows . . . . . . . . . . F-4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-5
FINANCIAL STATEMENT SCHEDULE
Report of Independent Public Accountants . . . . . . . . . . . . . . S-1
Schedule II - Valuation and Qualifying Accounts for the Years Ended
February 26, 2000; February 27, 1999 and February 28, 1998 . . . . . S-2
F-1
<PAGE> 22
Report of Independent Auditors
Board of Directors
Drug Emporium, Inc.
We have audited the accompanying consolidated balance sheets of Drug Emporium,
Inc. and subsidiaries as of February 26, 2000 and February 27, 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended February 26, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Drug
Emporium, Inc. and subsidiaries at February 26, 2000 and February 27, 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended February 26, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Columbus, Ohio
April 18, 2000
except for Notes 3 and 4 as
to which the date is May 11 ,2000
F-2
<PAGE> 23
<TABLE>
Consolidated Balance Sheets
<CAPTION>
(in thousands)
Assets February 26, 2000 February 27, 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 708 $ 893
Accounts receivable 25,840 18,323
Inventories 182,148 164,789
Other current assets 3,274 2,319
-------- --------
Total current assets 211,970 186,324
Property and equipment, net 40,079 30,708
Goodwill 9,252 10,237
Other assets 3,924 3,420
-------- --------
Total assets $265,225 $230,689
======== ========
<CAPTION>
(dollars in thousands)
Liabilities and shareholders' equity February 26, 2000 February 27, 1999
<S> <C> <C>
Current liabilities:
Revolving credit line $ 85,968 $ 15,106
Accounts payable 69,580 80,393
Accrued liabilities 21,912 22,047
Deferred income 3,645 3,904
Current maturities of long-term debt 5,033 242
-------- --------
Total current liabilities 186,138 121,692
Deferred rent 3,643 3,850
Long-term debt 48,187 49,925
-------- --------
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
13,193,000 in 2000; 13,186,000 in 1999 1,320 1,319
Additional paid-in capital 32,199 32,155
Retained earnings(deficit) (6,262) 21,748
-------- --------
Total shareholders' equity 27,257 55,222
-------- --------
Total liabilities and shareholders' equity $265,225 $230,689
======== ========
</TABLE>
See accompanying notes.
<TABLE>
Consolidated Statements of Operations
<CAPTION>
Year Ended
(in thousands, except February 26, 2000 February 27, 1999 February 28, 1998
per share amounts) (52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C>
Net sales $904,878 $839,443 $836,405
Cost of sales 716,911 662,714 658,116
-------- -------- --------
Gross margin 187,967 176,729 178,289
Selling, administrative and
occupancy expenses 209,146 171,444 169,584
Special credits -- (6,760) (2,092)
Interest expense, net 8,467 5,487 7,653
Income (loss) before provision
(benefit) for income taxes (29,646) 6,558 3,144
Provision (benefit) for income taxes (1,636) 2,759 1,453
-------- -------- --------
Net income (loss) $(28,010) 3,799 $ 1,691
Earnings (loss) per share
(basic and diluted) $ (2.12) $ 0.29 $ 0.13
Weighted average number of common
shares used in computing earnings
per share:
Basic 13,192 13,180 13,180
Diluted 13,192 13,214 13,197
</TABLE>
See accompanying notes.
F-3
<PAGE> 24
<TABLE>
Consolidated Statements of Shareholders' Equity
<CAPTION>
Common Common Additional Total
Stock Stock Paid-In Retained Shareholders'
(in thousands) Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance at March 2, 1997 13,153 $1,315 $31,994 $ 16,258 $ 49,567
Exercise of stock options 27 3 129 -- 132
Net income -- -- -- 1,691 1,691
Balance at February 28, 1998 13,180 $1,318 $32,123 $ 17,949 $ 51,390
Exercise of stock options 6 1 32 -- 33
Net income -- -- -- 3,799 3,799
Balance at February 27, 1999 13,186 $1,319 $32,155 $ 21,748 $ 55,222
Exercise of stock options 7 1 44 -- 45
Net loss -- -- -- (28,010) (28,010)
Balance at February 26, 2000 13,193 $1,320 $32,199 $ (6,262) $ 27,257
</TABLE>
See accompanying notes.
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended
February 26, 2000 February 27, 1999 February 28, 1998
(in thousands) (52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C>
Operating activities
Net income (loss) $(28,010) $ 3,799 1,691
Adjustments to reconcile to
cash provided by
(used in) operations:
Depreciation and amortization 11,027 8,798 7,345
Deferred income taxes (115) 24 610
LIFO provision 2,495 1,035 709
Cash provided by (used for)
current assets and liabilities:
Accounts payable and
accrued liabilities (11,172) 23,843 (2,725)
Accounts receivable (7,517) (913) (2,885)
Inventories at current cost (19,854) 19,637 19,948
Other (2,393) (2,766) 1,268
-------- -------- -------
Net cash provided by (used in)
operating activities (55,539) 53,457 25,961
Investing activities
Purchase of property and
equipment, net (18,605) (5,737) (2,949)
Payment for purchase of
retail stores,
net of cash acquired -- (31,175) --
-------- -------- -------
Net cash used for investing
activities (18,605) (36,912) (2,949)
Financing activities
Net borrowings (repayments)
under revolving credit line 70,862 (7,094) (19,400)
Proceeds from long term debt
and capital lease obligations 4,680 -- --
Principle payments on long
term debt and capital
lease obligations (1,583) (9,341) (3,608)
-------- -------- -------
Net cash provided by
(used for) financing activities 73,959 (16,435) (23,008)
-------- -------- -------
Increase (decrease) in cash
and cash equivalents (185) 110 4
Cash and cash equivalents,
beginning of year 893 783 779
-------- -------- -------
Cash and cash equivalents,
end of year $ 708 $ 893 $ 783
</TABLE>
See accompanying notes.
F-4
<PAGE> 25
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of Drug Emporium,
Inc. and subsidiaries (the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Nature of Operations
The Company is primarily in the business of operating and franchising retail
stores specializing in the sale of health and beauty care products,
over-the-counter medication, prescription drugs, greeting cards, cosmetics and
highly-consumable products primarily in an everyday-low-price format. During
Fiscal 2000, the stores operated under the names of Drug Emporium, F&M Super
Drug Stores, and Vix Deep Discount. As of year-end, approximately eighty percent
of the Company-owned stores were located in the states of California, Georgia,
Michigan, New Jersey, New York, Ohio and Pennsylvania.
Drug Emporium also operates Drug Emporium.com, its online drug store subsidiary
selling competitively priced health and beauty aids, cosmetics, vitamins and
prescription drugs. The operations of Drug Emporium.com effectively commenced in
September 1999 upon the relaunch of the Company's internet site.
As noted in Note 3, subsequent to February 26, 2000, the Company obtained a
$12.5 million term note to finance the working capital requirements of
DrugEmporium.com. The term note matures May 1, 2002. With this $12.5 million of
funding the Company anticipates that the cash resources of DrugEmporium.com will
support operations at least through the second quarter of Fiscal 2001 at which
time the Company will be at its funding limit for Drug Emporium.com under its
revolving credit facility agreement. The Company has engaged an investment
banking company to raise new capital for DrugEmporium.com or assist in a merger
or sale of DrugEmporium.com to a strategic partner and anticipates that such a
transaction would occur prior to the third quarter of fiscal 2001. If the
Company is not successful with such a transaction additional debt financing
would be required to support the operations of DrugEmporium.com, however, there
can be no assurance that additional financing will be available. In the event
new capital is not raised, a sale or merger does not occur, or additional debt
financing is not available, the Company will have to consider other alternatives
including ceasing operations of DrugEmporium.com. Certain of these alternatives
could cause evaluation of the assets for impairment and a charge to recognize
lease and other financial obligations not previously recognized in the Company's
balance sheet. These items could have a material adverse impact on the Company's
financial position and results of operations.
Fiscal Year
The fiscal year of the Company is the 52-53 week period ending on the Saturday
closest to the end of February. The quarter and fiscal year ends for 2000 and
1999 were as follows:
Fiscal year 2000 Fiscal year 1999
---------------- ----------------
First quarter May 29, 1999 May 30, 1998
Second quarter August 28, 1999 August 29, 1998
Third quarter November 27, 1999 November 28, 1998
Year end February 26, 2000 February 27, 1999
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand and deposits at financial institutions with maturities of less than three
months.
Accounts Receivable
F-5
<PAGE> 26
The Company uses the allowance method of accounting for uncollectible accounts.
Accounts receivable are stated net of allowances for uncollectible accounts of
$4,818,000 and $1,051,000 as of February 26, 2000 and February 27, 1999,
respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by use
of the last-in, first-out (LIFO) method. If current cost had been used,
inventories would have been approximately $25,281,000 and $22,786,000 higher
than reported at February 26, 2000 and February 27, 1999, respectively. Cost of
sales is primarily computed on an estimated basis and adjusted based on physical
inventory counts which are generally taken at all locations twice annually.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of owned assets. The Company
accounts for certain costs for computer software developed or obtained for
internal use in accordance with SOP 98-1, "Accounting for the Costs of Computer
Software Developed ot Obtained for Internal Use." The Company depreciates the
cost of computer software over a three year period. Leasehold improvements are
amortized over the estimated useful life of the asset or the term of the lease,
whichever is shorter. Assets under capital leases are included in property and
equipment in the consolidated balance sheet.
Goodwill
Goodwill is amortized over 15 years using the straight-line method. The Company
amortized $985,000, $580,000 and $548,000, of goodwill during Fiscal 2000, 1999,
and 1998, respectively. Accumulated amortization was $5,886,000 and $4,901,000
at February 26, 2000 and February 27, 1999, respectively.
Pre-Opening Expenses
Expenditures related to the opening of new stores, other than expenditures for
capital assets, are charged against earnings when incurred.
Impairment of Long-Lived Assets
The Company groups and evaluates goodwill by the related market of the stores
acquired that resulted in the recorded goodwill. The Company groups an evaluates
property and equipment and other intangible assets (i.e., favorable lease
interest) at an individual store level, which is the lowest level at which
individual cash flows can be identified. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. Whenever these events occur, the Company
measures impairment by comparing the carrying amount of the asset to the asset's
estimated discounted future cash flows. If the carrying amount exceeds the
asset's estimated discounted future cash flows, an impairment loss is recorded.
Debt Issuance Costs
Debt issuance costs incurred in connection with the convertible subordinated
debt are amortized using a straight-line method over the term of the debt.
Amortization expense related to the issuance costs is reported as interest
expense and approximated $55,000 in 2000, $55,000 in 1999, and $55,000 in 1998.
Accumulated amortization was $574,000 and $519,000 at February 26, 2000 and
February 27, 1999, respectively.
Advertising Costs
The external costs incurred to produce media advertising are charged to expense
when the advertising takes place. Costs associated with DrugEmporium.com's web
portal advertising contracts are amortized on a straight-line basis over the
period such advertising is expected to be used. Gross advertising costs, before
vendor reimbursements, as a percentage of net sales, were 2.8 percent, 2.4
percent, 2.6 percent in Fiscal 2000, 1999 and 1998, respectively.
Franchise Arrangements
Arrangements with franchisees and licensees who operate throughout the United
States generally provide for initial fees, new store opening fees and continuing
payments to the Company based upon a percentage of sales. The fees, when earned,
and related costs are recorded net and included as a reduction to the Company's
selling, administrative and occupancy expenses. Net franchise fees were
$2,421,000, $3,435,000, and $4,794,000 in Fiscal 2000, 1999 and 1998,
respectively.
F-6
<PAGE> 27
During Fiscal 1999 the Company entered into an agreement with western Drug
Distributors, Inc., its franchise store operator in the Seattle and Portland
area, to terminate Western Drug's franchise agreement. The termination was
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 included in the net
special credit in the company's Statement of Operations.
Vendor Contract Income Recognition
From time to time the Company enters into contracts with various suppliers for
the purchase of merchandise for sale. These contracts may provide for
contractual payments from vendors in exchange for product conversion, product
placement, coverage of operational costs, purchase commitments, or similar
inducements. The Company records vendor contract payments as a reduction of cost
of sales over the life of the contract in the case of payments made with
recourse, or when receivable in the case of non-recourse payments.
Store Closure Expense
During Fiscal 1999, as a result of an ongoing review of its business operations,
the Company recorded special and nonrecurring charges 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 margins in the
Fiscal 1999 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 margins
in accordance with Emerging Issues Task Force (EITF) Issue No. 96 - 9.
The activity in the store closing reserve in fiscal 2000 consisted of
expenditures of $3,672,000. The remaining reserve at February 26, 2000 is
$2,856,000.
Reclassifications
Certain amounts in prior years' financial statements have been reclassified to
conform to the Fiscal 2000 presentation.
Note 2 - Revolving Credit Line
As of February 26, 2000, the Company's revolving credit facility consisted of
outstanding borrowings of $86 million. During fiscal 2000 and subsequent to
February 26, 2000, the Company amended its revolving credit facility agreement
(the "Agreement") with Fleet Retail Finance, Inc. that expires October 31, 2003.
The Agreement as amended allows for revolving borrowings of up to $110 million
subject to requirements to maintain a $15 million excess availability amount
measured on a rolling thirty day average basis. Borrowing availability is also
subject to an advance rate against both inventory and accounts receivable
collateral after providing collateral coverage for $12.5 million in term debt
that was obtained subsequent to February 26, 2000 to finance the working capital
of DrugEmporium.com. At the Company's current inventory and receivable levels,
the collateral borrowing base after providing collateral for term debt, excedes
the $110 million credit facility limit. The Company has classified the
outstanding borrowings under the credit facility as current liabilities as the
Company utilizes the borrowings principally to support working capital
requirements.
The Company's borrowing rate can fluctuate between the bank's prime rate and a
LIBOR-based rate, depending on the ability of the company to meet certain
financial performance measures and the company's average excess availability
position against the $110 million commitment. At February 26, 2000, the weighted
average borrowing rate was 7.48 percent. The Agreement requires a commitment fee
on the revolver of .25 percent on the unused available credit and has no
compensating balance requirements. Borrowings made pursuant to the Agreement are
secured by substantially all assets of the Company.
Terms of the amended Agreement require compliance with certain financial
covenants including earnings before taxes, interest, depreciation and
amortization amounts and capital expenditure limitations. In addition, the
facility limits the Company's investment, loans and/or advances to Drug
Emporium.com to an aggregate amount of $30.5 million inclusive of the $12.5
million term debt financing obtained subsequent to
F-7
<PAGE> 28
February 26, 2000 as described in Note 3. The repurchase of the Company's
convertible subordinated debentures and stock and the payment of dividends are
permitted, although some restrictions apply.
Note - 3 Long-Term Debt
Following is a summary of long-term debt at February 26, 2000 and February 27,
1999:
<TABLE>
<CAPTION>
(in thousands) February 26, 2000 February 27, 1999
<S> <C> <C>
Convertible subordinate debentures $49,421 $49,421
Obligations under capital lease 3,175 37
Other 624 709
------- -------
Total long term debt 53,220 50,167
Less current maturities (5,033) (242)
------- -------
$48,187 $49,925
</TABLE>
The Company has $49,421,000 of 7.75 percent convertible subordinate debentures
outstanding. These debentures are unsecured obligations of the Company and may
be converted into common stock of the Company at any time prior to maturity,
unless previously redeemed. The conversion rate is 65.1466 shares per $1,000
principal amount of debentures (or approximately $15.35 per share), subject to
certain adjustments under the terms of these debentures. These debentures are
redeemable at the option of the company at 100.7 percent of par plus accrued
interest. This redemption rate will decline by .7 percent, to par on October 1,
1999. The debentures are subject to a sinking fund, commencing October 1, 2000,
calculated to retire at lease 70 percent of the debentures prior to the final
maturity date of October 1, 2014. The Company has reserved 3,387,624 shares of
common stock for issuance upon conversion of the debentures. During Fiscal 2000,
the convertible debentures traded in a range of 51.0 percent to 91.5 percent of
par, with a year-end price of 51.00 percent of par.
During Fiscal 2000, the Company entered into two capital leases to finance
software totaling $4,680,000. Accumulated amortization of the software at
February 26, 2000 was $1,333,000. The aggregate future payments of principal and
imputed interest, respectively, under these capital leases are $2,112,000 and
$1,123,000 in fiscal 2001, $974,000 and $20,000 in fiscal 2002 and $89,000 and
$1,000 in fiscal 2003.
The aggregate annual principal payments of all long-term debt outstanding as of
February 26, 2000 for the five succeeding fiscal years and thereafter are as
follows: 2001, $4,910,000; 2002, $3,734,000; 2003, $2,589,000; 2004, $2,500,000;
2005, $2,500,000 and thereafter $36,987,000.
Subsequent to February 26, 2000, the Company obtained a $12.5 million term note
to fund the working capital requirements of DrugEmporium.com. The term note
matures May 1, 2002. The term note bears interest at 12.5% payable monthly and
an additional 2.5% applied to the unpaid principal balance on a quarterly basis
and payable upon maturity. The term note is subject to an early payment
termination fee, however, in no event shall the term notes be prepaid prior to
December 10, 2000.
Subsequent to February 26, 2000, the company also executed a note payable
totaling $1,500,000 to finance software costs. The note bears an interest rate
of 10.6 percent with principal payments of $712,000 and $788,000 due in fiscal
2001 and 2002, respectively.
Note 4 - Operating Leases, Other Commitments and Contingencies
The Company leases retail stores office space, computer software and certain
equipment under noncancelable operating leases which expire at various dates.
Certain of the store leases require contingent rentals based upon sales in
excess of specified amounts. Retail store and office space leases generally
requite the Company to pay utilities, common area maintenance, insurance and
taxes. Certain leases are renewable with escalation clauses. Lease expense
(excluding lease expense for closed stores from the date closed) was
$35,480,000, and $33,052,000, and $33,732,000, during Fiscal 2000, 1999 and
1998, respectively.
Future minimum lease payments under noncancelable operating leases at February
26, 2000 are as follows: 2001, $33,989,000; 2002, $30,357,000; 2003,
$25,405,000; 2004, $20,182,000; 2005, $14,513,000; thereafter, $31,424,000.
F-8
<PAGE> 29
At February 26, 2000, the future minimum lease payments for closed stores total
approximately $7,808,000 for which there are subleases in force aggregating
$5,969,000. At February 26, 2000, the Company had additional commitments for
online advertising and site hosting totaling $4.9 million.
The Company is party to routine claims and litigation incidental to its
business. The Company believes the ultimate resolution of these routine matters
will not have a material adverse effect on its financial position and results of
operations or cash flows.
Note 5 - Property and Equipment
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
(in thousands) February 26, 2000 February 27, 1999 February 28, 1998
<S> <C> <C> <C>
Land and building $ 3,331 $ 3,331 $ 3,331
Furniture, fixtures and
computer hardware and software 59,803 44,817 40,188
Acquired leases and leasehold
improvements 32,682 31,311 26,449
95,816 79,459 69,968
Less allowances for
depreciation and amortization (55,737) (48,751) (43,191)
-------- -------- --------
$ 40,079 $ 30,708 $ 26,777
</TABLE>
Note 6 - Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Primarily because of
current and projected losses of Drug Emporium.com, the Company recorded a
valuation allowance for net operating loss carryforwards generated during Fiscal
2000. The tax amounts recorded in the consolidated balance sheets consisted of
the following:
<TABLE>
<CAPTION>
Tax Affected Amounts
(in thousands) February 26, 2000 February 27, 1999
<S> <C> <C>
Deferred tax assets:
Loss and AMT credit carryforwards $ 9,917 $ 2,329
Store closing reserve 1,066 2,315
Allowance for receivables 1,638 357
Property and equipment 728 878
Other 858 496
Deferred tax asset valuation allowance (7,616) --
------- -------
6,591 6,375
Deferred tax liabilites:
Inventory valuation (2,688) (2,448)
Deferred income (3,254) (3,393)
Other (649) (649)
(6,591) (6,490)
------- -------
Net deferred tax liability (0) (115)
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ($1,900) $2,494 $ 579
State and local 379 242 264
------- ------ ------
Total current (1,521) 2,736 843
Deferred (115) 24 610
------- ------ ------
(1,636) $2,760 $1,453
</TABLE>
F-9
<PAGE> 30
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
(in thousands) 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Tax provision (benefit)
at statutory rate $(10,080) $2,230 $1,069
State income tax, net 250 160 174
Goodwill 186 186 186
Deferred tax asset valuation allowance 7,616 -- --
Other, net 392 184 24
-------- ------ ------
(1,636) $2,760 $1,453
</TABLE>
The Company received refunds, net of income taxes paid, of $2,060,000 during
Fiscal 1998, and made income tax payments of $478,000 in Fiscal 1999. At
February 26, 2000, the Company has $2,561,000 of alternative minimum tax credit
carry forwards which have no expiration dates and $21,635,000 in net operating
loss carry forwards which expire in 2020.
Note 7 - Shareholders' Equity
The Company has authorized 2,000,000 shares of $1.00 par value preferred stock.
The terms of the preferred stock are subject to determination by the Company's
Board of Directors. The Company has a shareholder rights plan which provides for
the distribution of a right to purchase one-hundredth of a share of preferred
stock to each holder of common stock. The rights become exercisable upon the
occurrence of certain triggering events, as defined in the plan. The Company has
reserved 33,900 shares of Series A Preferred Stock in connection with the rights
to be distributed under the plan with respect to the reserved shares of common
stock.
Note 8 - Stock Option Plans
The Company has adopted stock option plans for key employees. Under such plans,
the Board of Directors may grant options for shares of common stock at a price
not less than 100 percent of the fair market value of the shares on the date of
grant. If an employee owns stock possessing more than 10 percent of the total
combined voting power of the Company, the option price must be 110 percent of
the fair market value on the date of grant. The options vest based on the term
of the optionee's continuous employment at 10 percent to 30 percent per year.
Service prior to date of grant is considered under certain plans.
In accordance with the provisions of SFAS No. 123, the Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee stock
options and, accordingly does not recognize compensation costs when the exercise
price of its employee stock options is equal to or greater than the fair market
value of the stock at the grant date. If the Company had elected to recognize
compensation cost based on the fair value of the options granted at grant date
as prescribed by SFAS No. 123, net income (loss) would have been impacted by
$483,000, $125,000 and $55,000, in Fiscal 2000, 1999, and 1998, respectively.
The financial effects of applying SFAS No. 123 for providing proforma
disclosures are not likely to be representative of the effects on reported net
income and earnings per share for future years.
The estimated fair value of the options is amortized into expense over the
options' vesting periods. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for Fiscal 2000, 1999, and 1998. Risk-free interest
rate of 6.5 percent; no dividend yield; volatility factor of the expected market
price of the Company's common stock of .38 in fiscal 2000, .44 in fiscal 1999,
and .44 in fiscal 1998; and a weighted-average expected life of each option of
five years.
A summary of the Company's stock option activity during 2000, 1999, and 1998 and
related information follows:
<TABLE>
<CAPTION>
Shares Under Option
(in thousands, except per share amounts) 2000 1999 1998
<S> <C> <C> <C>
Outstanding, beginning of year 868 796 916
Granted (at $4.16 to $6.50 per share) 951 152 --
Cancelled (83) (74) (93)
</TABLE>
F-10
<PAGE> 31
<TABLE>
<S> <C> <C> <C>
Exercised (at $4.81 to $8.81 per share) (8) (6) (27)
Outstanding, end of year
(at prices ranging from $4.03 to $8.81 per share) 1,728 868 796
Exercisable, end of year
(at prices ranging from $4.03 to $8.81 per share) 420 678 655
</TABLE>
The weighted average per share price for options outstanding was $6.38, $5.23
and $5.02 at the end of fiscal years 2000, 1999, and 1998 respectively.
At the end of fiscal years 2000, 1999, and 1998, there were 686,000, 55,000, and
187,000 shares, respectively, reserved for future grants.
Note 9 - Acquisitions
On February 5, 1999 the Company completed its purchase of substantially all of
the assets of the Vix drug store chain, which operates twelve deep discount drug
stores in the Buffalo and Rochester, New York areas. Both areas represent new
markets for the Company. The acquired stores were operated under the Vix name by
Tops, a division of Ahold International. The Company paid $31.2 million in cash
for the assets of the business and assumed all store real estate leases. No
other liabilities were assumed. The acquisition was accounted for as a purchase.
The Fiscal 1999 consolidated statement of operations reflects the results of
operations of the acquired stores since the date acquired.
Note 10 - Defined Contribution Plan
The Company provides a defined contribution 401(k) plan to substantially all
employees. Participants may make voluntary contributions to the plan of up to 15
percent of their compensation. Approximately $176,000, $151,000 and $154,000 was
charged to expense for this plan in fiscal years 2000, 1999 and 1998,
respectively.
Note 11 - Settlement of Litigation
During Fiscal 1999, the Company reached a confidential settlement agreement with
one of its franchisees to resolve a longstanding lawsuit. The impact of the
settlement and associated legal costs was accounted for and reflected in the
Fiscal 1998 results, net of a third-party recovery. The Company recorded a
$2,092,000 recovery of related prior period legal costs as a special credit in
Fiscal 1998.
Note 12 - Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 2000 1999 1998
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings (loss) per share (28,010) $ 3,799 $ 1,691
Denominator:
Denominator for basic earnings (loss)
per share - weighted-average shares 13,192 13,180 13,180
Effect of dilutive securities:
Employee stock options -- 34 17
Denominator for diluted earnings
per share - adjusted weighted-average
shares 13,192 13,214 13,197
Basic and diluted earnings (loss)
per share $ (2.12) $ 0.29 $ 0.13
</TABLE>
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, therefore, the effect would be
antidilutive. The effect of the 7.75% convertible debentures is also
antidilutive and thus excluded in the calculation of diluted earnings per share.
Note 13 - Business Segments
The Company operates in two business segments: retail store based operations
(brick-and-mortar) and the operations of the Company's online retail internet
store, Drug Emporium.com (online). The accounting policies of the segments are
substantially the same as those described in Note 1. The Company evaluates
segment performance based on operating income (loss). The operations of Drug
Emporium.com began in fiscal 2000 and therefore in prior years the Company
operated as one business segment.
F-11
<PAGE> 32
The following is a reconciliation of the significant components of the segments'
net sales for fiscal 2000.
<TABLE>
<CAPTION>
Brick-and-Mortar Online
Segment Segment Total
<S> <C> <C> <C>
Pharmacy $293,075 $ 100 $293,175
General Merchandise $610,751 $ 952 $611,703
Net Sales $903,826 $1,052 $904,878
</TABLE>
The following is a reconciliation of the company's business segments to the
consolidated fiscal 2000 consolidated financial statements.
<TABLE>
<CAPTION>
Brick-and-Mortar Online
Segment Segment Total
<S> <C> <C> <C>
Net Sales $903,826 $ 1,052 $904,878
Operating loss (7,291) (13,888) (21,179)
Depreciation and
Amortization (9,790) (1,237) (11,027)
Total assets 250,997 14,228 265,225
Capital expenditures 7,186 11,451 18,637
</TABLE>
Note 14 - Quarterly Financial Data (Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Earnings (loss) Earnings (loss)
Per Common Per Common
Net Gross Net Share Share Stock Prices Dividends Paid
Sales Profit Income (loss) (Basic) (Diluted) High Low Per Common Share
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000:
First quarter $226,212 $ 48,791 $ 224 $ .02 $ .02 $11.63 $4.50 --
Second quarter 223,146 49,350 (806) (.06) (.06) 10.50 6.81 --
Third quarter 218,548 44,919 (7,625)(1) (.58) (.58) 7.50 3.88 --
Fourth quarter 236,972 44,907 (19,803)(2) (1.50) (1.50) 5.75 3.63 --
-------- -------- -------- ------ ------
$904,878 $187,967 $(28,010) $(2.12) $(2.12)
1999:
First quarter $209,172 $ 43,629 $ 728 $ .06 $ .06 $ 4.56 $3.81 --
Second quarter 204,845 42,570 3,286 .25 .24 4.81 3.75 --
Third quarter 199,132 42,881 (767) (.06) (.06) 4.69 3.19 --
Fourth quarter 226,294 47,649 552 .04 .04 8.69 4.13 --
-------- -------- -------- ------ ------
$839,443 $176,729 $ 3,799 $ .29 $ .29
</TABLE>
(1) Third quarter Fiscal 2000 includes a $3.3 million net loss from
DrugEmporium.com
(2) Fourth quarter 2000 includes a net loss from DrugEmporium.com of $7.1
million, accounts receivable write offs of $6.7 million and recording
of a deferred tax valuation allowance of $7.6 million.
F-12
<PAGE> 1
DRUG EMPORIUM, INC.
BY-LAWS
Updated Through September 29, 1999
ARTICLE I - SHAREHOLDERS
------------------------
Advance Notice of Proposals/Procedures at Annual Shareholders Meeting
1.1 Annual Meeting
--------------
An annual meeting of the shareholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place on such
date, and at such time during the months of June or July as the Board of
Directors shall each year fix, or if the Board of Directors fails to fix a date
and time for the meeting any year, at 10:30 A.M. the third Tuesday of June of
each year if not a legal holiday, but if that day is a legal holiday under Ohio
law, the annual meeting shall be held on the first succeeding day which is not a
Sunday or legal holiday. If for any reason the election of directors is not held
at the annual meeting or any adjournment thereof, the Board of Directors shall
cause the election to be held at a special shareholders' meeting as soon
thereafter as is convenient. At such special meeting, the shareholders may elect
directors and transact any other business with the same effect as at an annual
meeting.
1.2 Special Meetings
----------------
Special meetings of the shareholders, for any purpose or purposes
prescribed in the notice of the meeting, may be called by a majority of the
Board of Directors or the chief executive officer. Upon delivery to the
president or secretary of a request in writing for a shareholders' meeting by
any persons entitled to call such meeting, it shall be the duty of the officer
to whom the request was delivered to give notice to the shareholders of such
meeting. Said request shall specify the objects or purposes and the date and
hour for such meeting. The date shall be at least ten and not more than sixty
days after delivery of the request. If, upon a request, such officer does not
within five days call the meeting, the persons making such request may call it
by giving notice as provided in 3 of these by-laws, or by causing it to be given
by any designated representative.
<PAGE> 2
1.3 Notice of Meetings
------------------
Written notice of the place, date, and time of all meetings of the
shareholders shall be given, not less than ten nor more than sixty days before
the date on which the meeting is to be held, to each shareholder entitled to
vote at such meeting, except as otherwise provided herein or required by law
(meaning, here and hereinafter, as required from time to time by the General
Corporation Law of the State of Delaware or the certificate of incorporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date, and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
days after the date for which the meeting was originally noticed, or if a new
record date is fixed for the adjourned meeting shall be given in conformity
herewith. At any adjourned meeting, any business may be transacted which might
have been transacted at the original meeting.
1.4 Quorum
------
At any meeting of the shareholders, the holders of one-third of all of
the shares of the stock entitled to vote at the meeting, present in person or by
proxy, shall constitute a quorum for all purposes, unless or except to the
extent that the presence of a larger number may be required by law.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of the stock entitled to vote
who are present, in person or by proxy, may adjourn the meeting to another
place, date, or time.
If a notice of any adjourned special meeting of share-holders is sent
to all shareholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
2
<PAGE> 3
1.5 Organization
------------
Meetings of shareholders shall be presided over by the chairman of the
board, if any, or in his absence by the vice chairman of the board, if any, or
in his absence by the chairman of the executive committee, if any, or in his
absence by the president, if any, or in his absence by an executive vice
president, if any, or in his absence by a senior vice president, if any, or in
his absence by a vice president, or in the absence of the foregoing persons by a
chairman designated by the Board of Directors, or in the absence of such
designation by a chairman chosen at the meeting by the vote of a majority in
interest of the shareholders present in person or represented by proxy and
entitled to vote thereat. The secretary or in his absence an assistant
secretary, or in the absence of the secretary and all assistant secretaries a
person whom the chairman of the meeting shall appoint, shall act as secretary of
the meeting and keep a record of the proceedings thereof.
1.6 Conduct of Business
-------------------
The Board of Directors of the corporation shall be entitled to make
such rules or regulations for the conduct of meetings of shareholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts as, in the judgment of such chairman, are necessary,
appropriate or convenient for the proper conduct of the meeting, including,
without limitation, establishing an agenda or order of business for the meeting,
rules and procedures for maintaining order at the meeting and the safety of
those present, limitations on participation in such meeting to shareholders of
record of the corporation and their duly authorized and constituted proxies, and
such other persons as the chairman shall permit, restrictions on entry to the
meeting after the time fixed for the commencement thereof, limitations on the
time allotted to questions or comments by participants and regulation of the
opening and closing of the polls for balloting and matters which are to be voted
on by ballot. Unless and to the extent determined by the Board of Directors or
the chairman of the meeting, meetings of shareholders shall not be required to
be held in accordance with rules of parliamentary procedure.
1.7 Proxies and Voting
------------------
At any meeting of the shareholders, every shareholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing filed in
accordance with the procedure established for the meeting.
Each shareholder shall have one vote for every share of stock entitled
to vote which is registered in his name on the record date for the meeting,
except as otherwise provided herein or required by law.
Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder as proxy. Such
proxy authorization may be prepared, transmitted and delivered in writing, by
electronic transmission, or by any other means permitted by law, in accordance
with the procedures established for the meeting.
3
<PAGE> 4
All voting, except where otherwise required by law, may be by a voice
vote; provided, however, that upon demand therefore by a shareholder entitled to
vote or his proxy, a stock vote shall be taken. Every stock vote shall be taken
by ballots, each of which shall state the name of the shareholder or proxy
voting and such other information as may be required under the procedure
established for the meeting. Every vote taken by ballots shall be counted by an
inspector or inspectors appointed by the chairman of the meeting.
All elections of directors shall be determined by a plurality of the
votes cast, and except as otherwise required by law, all other matters shall be
determined by a majority of the votes cast.
1.8 Stock List
----------
A complete list of shareholders entitled to vote at any meeting of
shareholders, arranged in alphabetical order and showing the address of each
such shareholder and the number of shares registered in his name, shall be open
to the examination of any such shareholder, for any purpose germane to the
meeting, during ordinary business hours for a period of at least ten (10) days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or if not
so specified, at the place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during
the whole time thereof and shall be open to the examination of any such
shareholder who is present. This list shall presumptively determine the identity
of the shareholders entitled to vote at the meeting and the number of shares
held by each of them.
1.9 Procedures for Nomination of Directors
--------------------------------------
Advance Notice Procedures for Nomination of Directors and Proposal of Business
by Shareholders
(a) To be properly brought before an annual meeting of shareholders,
nominations of persons for election to the Board of Directors and the proposal
of business to be considered by the shareholders at the meeting must be: (i)
specified in the notice of the meeting (or any supplement thereto) given by or
at the direction of the Board of Directors, (ii) otherwise properly be brought
before the meeting by or at the direction of the Board of Directors, or (iii)
otherwise be properly brought before the meeting by a shareholder of the
corporation who is a shareholder of record at the time of the giving of the
notice required by these by-laws, who is entitled to vote at the meeting and who
complies with the advance notice procedures set forth in these by-laws.
(b) For nominations or other business to be properly brought before an
annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary of the corporation and any such business
must otherwise be a proper matter for shareholder action under
4
<PAGE> 5
Delaware law. To be timely, a shareholder's notice must be delivered to or
mailed and received by the secretary at the principal executive offices of the
corporation not less than forty-five (45) days nor more than one hundred twenty
(120) days before the date on which the corporation first mailed its proxy
materials for the prior year's annual meeting of shareholders; provided,
however, that in the event that the corporation did not hold an annual meeting
in the prior year or the date of the annual meeting has changed by more than
thirty (30) days from the prior year, then notice by the shareholder to be
timely must be so received not sooner than one hundred eighty (180) days and not
later than the later of seventy-five (75) days before the annual meeting or ten
(10) days following the date on which public announcement of the date of the
annual meeting is first made. Such shareholder's notice shall set forth (i) as
to each person, if any, whom the shareholder proposes to nominate for election
or re-election as a director: (A) the name, age, business address and residence
address of such person, (B) the principal occupation or employment of such
person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the shareholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the shareholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for
elections of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including, without limitation such person's written consent to
being named in the proxy statement, if any, as a nominee and to serving as a
director if elected); (ii) as to any other business that the shareholder desires
to bring before the meeting, a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting; (iii) as to the shareholder giving the notice, (A) the
name and address, as they appear on the corporation's books, of the shareholder,
(B) the class, series (if any) and number of shares of the corporation which are
beneficially owned by the shareholder, and (C) any material interest of the
shareholder in such business; and (iv) any other information that is required to
be provided by the shareholder pursuant to Regulation 14A under the Exchange
Act, in his capacity as a proponent to a shareholder proposal. Notwithstanding
the foregoing, in order to include information with respect to a shareholder
proposal in the proxy statement and form of proxy for a meeting of shareholders,
a shareholder must provide notice as required by the regulations promulgated
under the Exchange Act.
(c) Only such business shall be conducted at a special meeting of
shareholders as shall have been brought before the meeting pursuant to the
corporation's notice of meeting. Nominations of persons for election to the
Board of Directors may be made at a special meeting of shareholders at which
directors are to be elected pursuant to the corporation's notice of meeting (a)
by or at the direction of the Board of Directors or (b) by a shareholder of the
corporation who is a shareholder of record at the time of the giving of the
notice required by these by-laws, who is entitled to vote at the meeting and who
complies with the notice procedures set forth in these by-laws. Nominations by
shareholders of persons for election to the Board of Directors may be made at
such a special meeting of shareholders if the shareholder's notice is delivered
to the secretary at the principal executive offices of the corporation not more
than one hundred twenty (120) days before such special meeting and not later
than the later of sixty (60) days before such special meeting or ten (10) days
following the date on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
5
<PAGE> 6
(d) Notwithstanding anything in these by-laws to the contrary, only
such persons who are nominated in accordance with the procedures set forth in
these by-laws shall be eligible to serve as directors and only such business
shall be conducted at a meeting of shareholders as shall have been brought
before the meeting in accordance with the procedures set forth in these by-laws.
The chairman of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was made in
accordance with the procedures set forth in these by-laws, and, if he should
determine that any proposed nomination or business was not in compliance with
these by-laws, to declare at the meeting that any such proposed nomination or
other business not properly brought before the meeting shall not be made or
transacted.
(e) For purposes of these by-laws, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 9,
13, 14 or 15(d) of the Exchange Act.
(f) Notwithstanding the foregoing provisions of this by-law, (i) a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this by-law, (ii) nothing in this by-law shall be deemed to affect any
rights of shareholders to request inclusion of proposals in the corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
1.10 Procedures for Proposing Consideration of Business
--------------------------------------------------
Unless proposed by a majority of the Board of Directors, no business
shall be eligible for consideration at annual or special meetings of
stockholders unless a written statement setting forth the business and the
purpose therefor is delivered to the Board of Directors not less than sixty (60)
days prior to the annual or special meeting at which such business is to occur.
6
<PAGE> 7
ARTICLE II - BOARD OF DIRECTORS
-------------------------------
2.1 Number and Term of Office
-------------------------
The number of directors who shall constitute the whole board shall be
such number not less than three nor more than fifteen as the Board of Directors
shall at the time have designated. Unless otherwise fixed by the Board of
Directors, the number of directors who shall constitute the whole board shall be
seven (7).
Whenever the authorized number of directors is increased between annual
meetings of the shareholders, a majority of the directors then in office shall
have the power to elect such new directors for the balance of a term and until
their successors are elected and qualified. Any decrease in the authorized
number of directors shall not become effective until the expiration of the term
of the directors then in office unless, at the time of such decrease, there
shall be vacancies on the board which are being eliminated by the decrease.
2.2 Vacancies
---------
If the office of any director becomes vacant by reason of death,
resignation, disqualification, removal or other cause, a majority of the
directors remaining in office, although less than a quorum, may elect a
successor for the unexpired term.
2.3 Regular Meetings
----------------
Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
2.4 Special Meetings
----------------
Special meetings of the Board of Directors may be called by one-third
of the directors then in office or by the chief executive officer and shall be
held at the principal office of the Company or such other place as approved by a
majority of the directors, on such date, and at such time as they or he shall
fix. Notice of the place, date, and time of each such special meeting shall be
given each director by whom it is not waived by mailing written notice not less
than three days before the meeting or by giving notice by telephone, telecopy,
facsimile, E-mail, telegram or other similar method not less than eighteen hours
before the meeting. Unless otherwise indicated in the notice thereof, any and
all business may be transacted at a special meeting.
2.5 Quorum
------
7
<PAGE> 8
At any meeting of the Board of Directors, one-third of the total number
of the whole board, but not less than two, shall constitute a quorum for all
purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
2.6 Participation in Meetings by Conference Telephone
-------------------------------------------------
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such board or committee by means of conference
telephone or similar communications equipment that enables all persons
participating in the meeting to hear each other. Such participation shall
constitute presence in person at such meeting.
2.7 Conduct of Business
-------------------
At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
2.8 Powers
------
The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the corporation, including, without limiting the generality of the
foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges
on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any officer of the corporation with or without cause, and
from time to time to devolve the powers and duties of any officer upon
any other person for the time being;
8
<PAGE> 9
(5) To confer upon any officer of the corporation the power to appoint,
remove and suspend subordinate officers and agents;
(6) To adopt from time to time such stock, option, stock purchase,
bonus or other compensation plans for directors, officers and agents of
the corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other
benefit plans for directors, officers and agents of the corporation and
its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with these
by-laws, for the management of the corporation's business and affairs.
2.9 Compensation of Directors
-------------------------
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
directors.
2.10 Resignation of Directors
------------------------
Any director may resign by giving written notice to the president or
secretary of the corporation. Such resignation shall be effective at the time
specified therein. Unless otherwise specified therein, the acceptance of a
resignation shall not be necessary to make it effective.
9
<PAGE> 10
ARTICLE III - COMMITTEES
------------------------
3.1 Committees of the Board of Directors
------------------------------------
The Board of Directors, by a vote of a majority of the whole board, may
from time to time designate committees of the board, with such lawfully
delegable powers and duties as it thereby confers, to serve at the pleasure of
the board and shall, for those committees and any others provided for herein,
elect a director or directors to serve as the member or members, designating, if
it desires, other directors as alternative members who may replace any absent or
disqualified member at any meeting of the committee. Any committee so designated
may exercise the power and authority of the Board of Directors to declare a
dividend or to authorize the issuance of stock if the resolution which
designates the committee or a supplemental resolution of the Board of Directors
shall so provide. In the absence or disqualification of any member of any
committee and any alternate member in his place, the member or members of the
committee present at the meeting and not disqualified from voting, whether or
not he or they constitute a quorum, may by unanimous vote appoint another member
of the Board of Directors to act at the meeting in the place of the absent or
disqualified member.
3.2 Conduct of Business
-------------------
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third of the members shall constitute
a quorum unless the committee shall consist of one or two members, in which
event one member shall constitute a quorum; and all matters shall be determined
by a majority vote of the members present. Action may be taken by any committee
without a meeting if all members thereof consent thereto in writing, and the
writing or writings are filed with the minutes of the proceedings of such
committee.
10
<PAGE> 11
ARTICLE IV - OFFICERS
---------------------
4.1 Generally
---------
The officers of the corporation shall consist of a chief executive
officer, president, one or more vice-presidents, a secretary, a treasurer and
such other subordinate officers as may from time to time be appointed by the
Board of Directors . There may, in addition, be a chairman of the board, at any
times during which the Board of Directors shall see fit to cause such office to
be filled. Officers shall be elected by the Board of Directors, which shall
consider that subject at its first meeting after every annual meeting of
shareholders. Each officer shall hold his/her office until his/her successor is
elected and qualified or until his/her earlier resignation or removal. Any
number of offices may be held by the same person. The Board of Directors shall
fix the compensation of each officer, if any.
4.2 The Chairman of the Board
-------------------------
The Chairman of the Board, if and while there be an incumbent of the
office, shall preside at all meetings of the shareholders and of the directors
at which he/she is present. He/she shall see that all orders and resolutions of
the Board of Directors are carried into effect. He/she shall from time to time
report to the Board of Directors all matters within his/her knowledge which the
interest of the corporation may require to be brought to the notice of the
Board.
4.3 The Chief Executive Officer
---------------------------
The Chief Executive Officer of the corporation, subject to the
provisions of these by-laws and to the direction of the Board of Directors,
shall have the responsibility for the general management and control of the
affairs and business of the corporation and shall perform all duties and have
all powers which are commonly incident to the office of Chief Executive or which
are delegated to him/her by the Board of Directors. He/she shall have general
supervision and direction of all of the other officers and agents of the
corporation. He/she shall have power to sign all stock certificates, contracts
and other instruments of the corporation which are authorized. Provided,
however, that when there is no incumbent of this office the President shall be
Chief Executive Officer.
4.4 President
---------
The President shall be the Chief Operating Officer of the corporation.
He/she shall have responsibility for general operation and supervision of the
affairs and business of the corporation and shall perform all additional duties
and have all additional powers which are delegated to him/her by the Chief
Executive Officer. He/she shall have power to sign all stock certificates,
contracts and other instruments of the corporation which are authorized.
4.5 Vice Presidents
---------------
11
<PAGE> 12
Each vice-president shall perform such duties as the Board of Directors
shall prescribe. In the absence or disability of the president, the
vice-president who has served in such capacity for the longest time shall
perform the duties and exercise the powers of the president.
4.6 Treasurer
---------
The treasurer shall have the custody of all monies and securities of
the corporation and shall keep regular books of account. He/she shall make such
disbursements of the funds of the corporation as are proper and shall render
from time to time an account of all such transactions and of the financial
conditions of the corporation.
4.7 Secretary
---------
The secretary shall issue all authorized notices for, and shall keep
minutes of, all meetings of the shareholders and the Board of Directors. He/she
shall have charge of the corporate books.
4.8 Delegation of Authority
-----------------------
The Board of Directors may form time to time delegate the powers or
duties of any officer to any other officers or agents, notwithstanding any
provision hereof.
4.9 Removal
-------
Any officer of the corporation may be removed at any time, with or
without cause, by the Board of Directors.
4.10 Action with Respect to Securities of Other Corporations
-------------------------------------------------------
Unless otherwise directed by the Board of Directors, the Chief
Executive Officer or the President shall have the power to vote and otherwise
act on behalf of the corporation, in person or by proxy, at any meeting of
shareholders of or with respect to any action of shareholders of any other
corporation in which this corporation may hold securities and otherwise to
exercise any and all rights and powers which this corporation may possess by
reason of its ownership of securities in such other corporation.
12
<PAGE> 13
ARTICLE V - STOCK
-----------------
5.1 Certificates of Stock
---------------------
Each shareholder shall be entitled to a certificate signed by, or in
the name of the corporation by, the chief executive officer the president or a
vice-president, and by the secretary or an assistant secretary, or the treasurer
or an assistant treasurer, certifying the number of shares owned by him. Any of
or all the signatures on the certificate may be facsimile.
5.2 Transfers of Stock
------------------
Transfers of stock shall be made only upon the transfer books of the
corporation kept at an office of the corporation or by transfer agents
designated to transfer shares of the stock of the corporation. Except where a
certificate is issued in accordance with 5.4 of these by-laws, an outstanding
certificate for the number of shares involved shall be surrendered for
cancellation before a new certificate is issued therefor.
5.3 Record Date
-----------
The Board of Directors may fix a record date, which shall not be more
than sixty nor less than ten days before the date of any meeting of
shareholders, nor more than sixty days prior to the time for the other action
hereinafter described, as of which there shall be determined the shareholders
who are entitled: to notice of or to vote at any meeting of shareholders or any
adjournment thereof; to express consent to corporate action in writing without a
meeting; to receive payment of any dividend or other distribution or allotment
of any rights; or to exercise any rights with respect to any change, conversion
or exchange of stock or with respect to any other lawful action.
5.4 Lost, Stolen or Destroyed Certificates
--------------------------------------
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
5.5 Regulations
-----------
The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.
13
<PAGE> 14
ARTICLE VI - NOTICES
--------------------
6.1 Notices
-------
Whenever notice is required to be given to any shareholder, director,
officer, or agent, such requirement shall not be construed to mean personal
notice. Such notice may in every instance be effectively given by depositing a
writing in a post office or letter box, in a postpaid, sealed wrapper, or by
dispatching a prepaid telegram, addressed to such shareholder, director, officer
or agent at his or her address as the same appears on the books of the
corporation. The time when such notice is dispatched shall be the time of the
giving of the notice.
6.2 Waivers
-------
A written waiver of any notice, signed by a shareholder, director,
officer, or agent whether before or after the time of the event for which notice
is to be given, shall be deemed equivalent to the notice required to be given to
such shareholder, director officer or agent. Neither the business nor the
purpose of any meeting need be specified in such a waiver.
14
<PAGE> 15
ARTICLE VII - MISCELLANEOUS
---------------------------
7.1 Facsimile Signatures
--------------------
In addition to the provisions for the use of facsimile signatures
elsewhere specifically authorized in these by-laws, facsimile signatures of any
officer or officers of the corporation may be used whenever and as authorized by
the Board of Directors or committee thereof.
7.2 Corporate Seal
--------------
The Board of Directors may provide a suitable seal, containing the name
of the corporation, which seal shall be in charge of the secretary. If and when
so directed by the Board of Directors or a committee thereof, duplicates of the
seal may be kept and used by the treasurer or by any assistant secretary or
assistant treasurer.
7.3 Reliance upon Books, Reports and Records
----------------------------------------
Each director, each member of any committee designated by the Board of
Directors, and each officer of the corporation shall, in the performance of his
duties be fully protected in relying in good faith upon the books of account or
other records of the corporation, including reports made to the corporation by
its officers, by an independent certified public accountant, or by an appraiser
selected with reasonable care.
7.4 Fiscal Year
-----------
The fiscal year of the corporation shall be fixed by the Board of
Directors.
7.5 Time Periods
------------
In applying any provision of these by-laws which require that an act be
done or not done a specified number of days prior to an event or that an act be
done during a period of a specified number of days prior to an event, calendar
days shall be used, the day of the doing of the act shall be excluded and the
day of the event shall be included.
15
<PAGE> 16
ARTICLE VIII - AMENDMENTS
-------------------------
8.1 Amendments
----------
These by-laws may be amended or added to, or repealed and superseded by
new by-laws by the directors of the Company or as provided in the Restated
Certificate of Incorporation.
16
<PAGE> 1
Exhibit 10.10(d)
FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------
This Fourth Amendment to Loan and Security Agreement (the "Fourth
Amendment") is made as of this ___ day of March, 2000 by and between
Fleet Retail Finance Inc., formerly known as 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 party
to the Agreement (defined below)
and
Back Bay Capital Funding LLC, a Delaware Limited Liability
Company with offices at 40 Broad Street, Boston, Massachusetts 02109
(the "Term Lender")
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 herein contained and benefits to be
derived herefrom.
W I T N E S S E T H:
WHEREAS, on October 28, 1998 the Agent, the Lenders and the Borrower
entered in a certain Loan and Security Agreement, as amended by a First
Amendment to Loan and Security Agreement dated May 11, 1999 a Second Amendment
to Loan and Security Agreement dated September __, 1999, and a Third Amendment
to Loan and Security Agreement dated December 10, 1999 (the "Agreement"); and
WHEREAS, the Borrower, the Agent, and the Lenders desire to amend
certain of the provisions of the Agreement to include a Term Loan in the amount
of $7,500,000.00 to be funded by the Term Lender;
NOW, THEREFORE, it is hereby agreed among the Agent, the Lenders, the
Term Lender, and the Borrower as follows:
1. Capitalized Terms. All capitalized terms used herein and not
otherwise defined shall have the same meaning herein as in the Agreement.
-1B
<PAGE> 2
2. Amendment to Article 1. Article 1 of the Loan Agreement is hereby
amended by the addition of the following defined terms:
"APPRAISED INVENTORY LIQUIDATION VALUE": The product of (a) the Cost of
Acceptable Inventory (net of Inventory Reserves) multiplied by
(b) that percentage determined by the then most recent
appraisal of the Borrower"s Inventory undertaken at the
request of the Agent as reflecting that appraiser's estimate
of the net realization on the liquidation of the Borrower"s
Inventory expressed as a percent of the Cost of Acceptable
Inventory.
"BASELINE COVENANT BREACH": For three (3) consecutive days,
(A) The aggregate of (i) the unpaid principal balance of
the Loan Account plus (ii) Availability Reserves plus
(iii) the Stated Amount of all then outstanding
L/C's, plus (iv) the then unpaid principal balance of
the Term Loan
exceeds
(B) the lesser of
(i) 63% of the Cost of Acceptable Inventory, or
(ii) 94% of the Appraised Inventory Liquidation Value
plus
(C) 80% of the face amount of Acceptable Accounts (net of
A/R Reserves).
"CURRENT PAY INTEREST": Is defined in Section 2(A)-4(a)(i).
"E-COMMERCE SALE": The sale of all or substantially all of the assets
of the assets of or Borrower"s equity interest in E-Commerce.
"PIK INTEREST": Defined in Section 2(A)-4(a)(ii).
"TERM LENDER": Defined in the Preamble.
"TERM LOAN": Defined in Section 2A-1.
"TERM LOAN COMMITMENT FEE": Described in Section 2A-5.
"TERM LOAN EARLY TERMINATION FEE": Defined in Section 2A-3.
"TERM LOAN FEES": The Term Loan Commitment Fee, the Term Loan Early
Termination Fee, and all other fees (such as a fee (if any) on
account of the execution of an amendment of any Loan Document)
payable by the Borrower in respect of the Term Loan other than
any amount payable to an Agent as reimbursement for any cost
or expense incurred by the Agent on account of the discharge
of the Agent's duties under the Loan Documents.
"TERM LOAN MATURITY DATE": One (1) year from the date of this
Agreement.
"TERM NOTE": Defined in Section 2A-2.
-2B
<PAGE> 3
3. Amendments to Article 1. The following definitions in Article 1 of
the Loan Agreement are hereby amended to read as follows:
"FIXED CHARGE RATIO": The decimal equivalent (determined on a
trailing/rolling 12 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 (inclusive
of any principal payments made to the Term Lender less any
amounts deemed capital expenditures for the purpose of the
calculation of the numerator above), capital leases, income
taxes, dividends, and capital stock repurchases.
"LENDER":Collectively and each individually, each Revolving Credit
Lender and the Term Lender, except that all references to the
"Lenders" in Article 2 of the Loan Agreement (exclusive of
Article 2A) mean and refer to the Revolving Credit Lenders.
4. Amendment to Article 2. Article 2 of the Loan Agreement is hereby
amended by the addition of the following Article 2A:
Article 2A. The Term Loan:
2A-1. Commitment to Make Term Loan.
(1) Subject to satisfaction of all conditions precedent by on
or prior to the date of this Agreement, the Borrower shall borrow from
the Term Lender and the Term Lender shall lend to the Borrower the sum
of $7,500,000.00 (the "TERM LOAN"), repayable with interest as provided
herein.
(2) The proceeds of the Term Loan shall be used to provide
working capital support for E-Commerce and for general working capital
purposes.
2A-2. The Term Note. The obligation to repay the Term Loan, with
interest as provided herein, shall be evidenced by a Note (the "TERM NOTE") in
the form of EXHIBIT 2A-2, annexed hereto, executed by the Borrower. Neither the
original nor a copy of the Term Note shall be required, however, to establish or
prove any Liability. In the event that the Term Note is ever lost, mutilated, or
destroyed, the Borrower shall execute a replacement thereof and deliver such
replacement to the Agent.
-3B
<PAGE> 4
2A-3. Payment of Principal of the Term Loan.
(3) Except as provided in Section 2A-3(b), the Borrowers may
not repay all or any portion of the principal balance of the Term Loan
prior to the repayment in full of all Liabilities under the Revolving
Credit and the termination of any obligation, under the Revolving
Credit, of the Agent, or any Working Capital Lender to make any loans
or to provide any financial accommodations.
(4) The Term Loan may be repaid as follows:
(1) On the Term Loan Maturity Date or earlier at the
Borrower"s option, at any time after the sale of E-Commerce,
provided that in either event each of the following conditions
is met:
(1) Availability, immediately following the
making of such prepayment, is not less than $25
Million.
(2) The Agent shall have been provided with
the following:
(1) A Certificate of the Borrower's
President or Chief Financial Officer that,
with the exception of those accounts which
are the subject of a good faith dispute, all
accounts payable by the Borrower are within
usual and customary trade terms.
(2) A forecast, prepared in a
manner which is consistent with those
previously provided to the Agent, which
reflects that Availability, for the shorter
of the then next 12 months or the period
through the Maturity Date will not be less
than $15 Million.
(3) EBITDA for the then most recent 12 month
period, shall not be less than $12 Million, excluding
E-Commerce for the entire period if E-Commerce was
sold at the time of calculation, or $5 Million if
E-Commerce was not sold at the time of calculation.
(4) No Suspension Event is then extant and
no Event of Default shall have occurred or will occur
by reason of the making of such prepayment.
(5) The Borrower shall pay the Agent, for the account of the
Term Lender, the "TERM LOAN EARLY TERMINATION FEE" (so referred to
herein) equal to $750,000.00 less the
-4B
<PAGE> 5
Commitment Fee, and all paid and accrued and unpaid (but only if paid
when due and payable) Current Pay Interest, and PIK Interest (but only
if paid when due and payable), not to be less than $0.
(6) The Borrower shall repay the then entire unpaid balance of
the Term Loan and all accrued and unpaid interest and fees thereon on
or before the earlier of (i) the Term Loan Maturity Date, or (ii) the
Termination Date.
2A-4. Interest On The Term Loan.
(7) The unpaid principal balance of the Term Loan shall bear
interest, until repaid, fixed at 14% per annum, payable as follows:
(1) Interest on the unpaid principal balance of the
Term Loan, equal to 11.5% per annum ("CURRENT PAY INTEREST")
shall be payable monthly in arrears, on the first day of each
month, and on the Maturity Date.
(2) Accrued Interest on the unpaid principal balance
of the Term Loan, equal to 2.5% per annum ("PIK INTEREST") ,
shall be added to the then unpaid principal balance of the
Term Note quarterly, on the first day of each April, July,
October, and January hereafter.
(8) Following the occurrence of any Event of Default (and
whether or not Acceleration has taken place), at the direction of the
Term Lender, Current Pay Interest shall be 13.5% per annum and PIK
Interest shall remain at 2.5% per annum.
2A-5. Term Loan Commitment Fee. As compensation for the Term Lender's
having committed to make the Term Loan, the Term Lender has earned the Term Loan
Commitment Fee of $225,000.00, payable at closing.
2A-6. Payments On Account of Term Loan. The Borrower authorizes the
Agent to determine and to pay over directly to the Term Loan Lender any and all
amounts due and payable from time to time under or on account of the Term Loan
as advances under the Revolving Credit it being understood, however, that the
authorization of the Agent provided in this Section 2A-6 shall
-5B
<PAGE> 6
not excuse the Borrower from fulfilling its obligations to the Term Lender on
account of the Term Loan nor place any obligation on the Agent to do so. The
Agent shall provide prompt advice to the Borrower of any amount which is so paid
over by the Agent to the Term Lender pursuant to this Section 2A-6.
5. Amendment to Article 5. Article 5 of the Loan Agreement is hereby
amended by the addition of the following Section 5-13:
5-13. Inventory. The value of the Borrower"s Inventory
calculated at Cost shall at all times be equal to or greater than
$140,000,000.00.
6. Revisions to Exhibits. Exhibit 2-21 (Acceptable Voting Rights) and
Exhibit 5-4 (Borrowing Base Certificate) are hereby replaced with Exhibit 2-21
and Exhibit 5-4 annexed hereto.
7. Ratification of Loan Documents. Except as provided herein, all terms
and conditions of the Agreement and of the other Loan Documents remain in full
force and effect. Furthermore, except as provided herein, all warranties and
representations made in the Agreement and in the other Loan Documents remain in
full force and effect. The Borrower hereby ratifies and confirms that the grant
of security interest set forth in Article 8 of the Loan Agreement is intended to
constitute a grant of security interest in favor of the Agent on behalf of all
Lenders, including, without limitation, the Term Lender.
8. Conditions to Effectiveness. This Fourth Amendment shall not be
effective until each of the following conditions precedent have been fulfilled
to the satisfaction of the Agent and the Lenders:
(1) This Fourth Amendment shall have been duly executed and
delivered by the respective parties hereto.
(2) No Suspension Event shall have occurred and be continuing.
(3) The Borrower shall have provided such additional
instruments and documents to the Agent as the Agent and the Agent's
counsel may have reasonably requested.
(4) The Agent shall promptly notify the Borrower when such
conditions are satisfied.
(5) The Borrower shall have paid to the Agent for the account
of the Term Lender, the Term Loan Commitment Fee.
-6B
<PAGE> 7
9. Miscellaneous.
(1) This Fourth Amendment may be executed in several
counterparts and by each party on a separate counterpart, each of which
when so executed and delivered shall be an original, and all of which
together shall constitute one instrument.
(2) This Fourth Amendment expresses the entire understanding
of the parties with respect to the transactions contemplated hereby. No
prior negotiations or discussions shall limit, modify, or otherwise
affect the provisions hereof.
(3) Any determination that any provision of this Fourth
Amendment or any application hereof is invalid, illegal or
unenforceable in any respect and in any instance shall not effect the
validity, legality, or enforceability of such provision in any other
instance, or the validity, legality or enforceability of any other
provisions of this Fourth Amendment.
(4) The Borrower shall pay on demand all costs and expenses of
the Agent, including, without limitation, reasonable attorneys' fees,
in connection with the preparation, negotiation, execution and delivery
of this Fourth Amendment.
(5) The Borrower warrants and represents that the Borrower has
consulted with independent legal counsel of the Borrower's selection in
connection with this Fourth Amendment and is not relying on any
representations or warranties of any Lender or the Agent or their
respective counsel in entering into this Fourth Amendment.
-7B
<PAGE> 8
IN WITNESS WHEREOF, the parties have caused this Fourth Amendment to
Loan and Security Agreement to be executed by their duly authorized officers as
a sealed instrument as of the date first above written.
DRUG EMPORIUM, INC.
("Borrower")
By:_____________________________________
Name:___________________________________
Title:__________________________________
FLEET RETAIL FINANCE INC.
("Agent")
By:_____________________________________
Name:___________________________________
Title:__________________________________
The "LENDERS"
FLEET RETAIL FINANCE INC.
By:______________________________________
Print Name:______________________________________
Title:______________________________________
-8B
<PAGE> 9
NATIONAL CITY COMMERCIAL FINANCE, INC.
By:______________________________________
Print Name:______________________________________
Title:______________________________________
-9B
<PAGE> 10
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By:______________________________________
Print Name:______________________________________
Title:______________________________________
LASALLE BUSINESS CREDIT, INC.
By:______________________________________
Print Name:______________________________________
Title:______________________________________
BACK BAY CAPITAL FUNDING LLC
By:______________________________________
Print Name:______________________________________
Title:______________________________________
-10B
<PAGE> 1
Exhibit 10.10(e)
FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
This Fifth Amendment to Loan and Security Agreement (the "Fifth
Amendment") is made as of this 10th day of May, 2000 by and between
Fleet Retail Finance Inc., formerly known as 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 party
to the Agreement (defined below)
and
Back Bay Capital Funding LLC, a Delaware Limited Liability
Company with offices at 40 Broad Street, Boston, Massachusetts 02109
(the "Term Lender")
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 herein contained and benefits to be
derived herefrom.
W I T N E S S E T H:
WHEREAS, on October 28, 1998 the Agent, the Lenders and the Borrower
entered in a certain Loan and Security Agreement, as amended by a First
Amendment to Loan and Security Agreement dated May 11, 1999, a Second Amendment
to Loan and Security Agreement dated September 15, 1999, a Third Amendment to
Loan and Security Agreement dated December 10, 1999, and a Fourth Amendment to
Loan and Security Agreement dated March 8, 2000, 1999 (the "Agreement"); and
WHEREAS, the Borrower, the Agent, the Lenders, and the Term Lender
desire to amend certain of the provisions of the Agreement;
NOW, THEREFORE, it is hereby agreed among the Agent, the Lenders, the
Term Lender, and the Borrower as follows:
1. Capitalized Terms. All capitalized terms used herein and not
otherwise defined shall have the same meaning herein as in the Agreement.
-1B
<PAGE> 2
2. Amendment to Article 1. The definition of "Availability Reserves"
contained in Article 1 of the Agreement is hereby amended by the addition of the
following subparagraphs thereto:
(ix) all Accounts processed by McKesson Corporation,
McKesson Pay Systems, Inc., or any entity related
thereto.
(x) If the value of the Borrower"s Acceptable Inventory,
valued at cost, falls below $180,000,000.00, 10
percent of the amount of Acceptable Inventory less
then $180,000,000.00.
(xi) If the value of the Borrower"s Acceptable Accounts
falls below $12,000,000.00, 80 percent of the Amount
of Acceptable Accounts less than $12,000,000.00.
3. Amendment to Article 1: Article 1 of the Agreement is hereby amended
by deleting the definition of "EBITDA" and replacing it with the following:
"EBITDA":The Borrower's earnings (exclusive of one time noncash
nonrecurring gains or losses arising subsequent to February
27, 2000), 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. Any increase in an asset investment account
(or reduction in a liability investment account) related to
E-Commerce shall be subtracted from EBITDA, to the extent that
the Borrower"s calculation of EBITDA does not otherwise make
such subtraction.
4. Amendment to Article 1. Article 1 of the Agreement is hereby amended
by deleting the definition of "Libor Margin" and replacing it with the
following:
"LIBOR MARGIN": (a) Until Section (b) of this Definition is in
effect: 200 basis points.
(b) Commencing June 2000, 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 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: LIBOR MARGIN
PRICING GRID
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
MARGIN
TRAILING/ROLLING 12 MONTH (BASIS
TIER FIXED CHARGE RATIO AVERAGE EXCESS AVAILABILITY POINTS)
- ----------------------------------------------------------------------------
<S> <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 less than 1.7 and greater than N/A 150
1.25
- ----------------------------------------------------------------------------
IV less than 1.25 and greater N/A 200
than 1.0
- ----------------------------------------------------------------------------
V less than or equal to 1.0 N/A 225
- ----------------------------------------------------------------------------
</TABLE>
-2B
<PAGE> 3
5. Amendment to Article 1. Article 1 of the Agreement is hereby amended
by deleting the definition of "Term Loan Maturity Date" and replacing it with
the following:
"Term Loan Maturity Date": May 1, 2002.
6. Amendment to Article 2A. Section 2A-1 of the Agreement is hereby
amended to read as follows:
2A-1. Commitment to Make Term Loan.
(1) Subject to satisfaction of all conditions precedent by on
or prior to the date of this Agreement, the Borrower shall borrow from
the Term Lender and the Term Lender shall lend to the Borrower the sum
of $12,500,000.00 (the "TERM LOAN"), repayable with interest as
provided herein.
(2) The proceeds of the Term Loan shall be used to provide
working capital support for E-Commerce and for general working capital
purposes.
7. Replacement of Term Note. The Term Note annexed to the Agreement as
EXHIBIT 2A-2 is replaced with the Term Note annexed hereto as EXHIBIT 2A-2.
8. Amendment to Article 2A. Section 2A-3(b)(i)(3) of the Agreement is
hereby amended to read as follows:
(3) EBITDA for the then most recent 12 month period, shall not
be less than (i) $18 Million, excluding E-Commerce for the entire
period if E-Commerce was sold at the time of calculation, or (ii) $7
Million if E-Commerce was not sold at the time of calculation.
9. Amendment to Article 2A. Section 2A-3(c) of the Agreement is hereby
amended to read as follows:
(c) The Borrower shall pay the Agent, for the account of the
Term Lender, the "TERM LOAN EARLY TERMINATION FEE" (so referred to
herein) equal to $1,375,000.00 less the Additional Term Loan Commitment
Fee (as defined herein), and, with respect to all payments made after
May 10, 2000, all paid and accrued and unpaid (but only if paid when
due and payable) Current Pay Interest, and PIK Interest (but only if
paid when due and payable), not to be less than $0. To the extent of
any partial prepayments of the
-3B
<PAGE> 4
Term Loan, which shall only be made in the amount of $2,500,000 or
greater, such Term Loan Early Termination Fee shall be paid on a pro
rata basis at the time of partial prepayment, based upon the percentage
of the Term Loan prepaid. In no event shall the Term Loan be prepaid
prior to December10, 2000.
10. Amendment to Article 2A. Section 2A-4(a) of the Agreement is hereby
amended to read as follows:
2A-4. Interest On The Term Loan.
(1) The unpaid principal balance of the Term Loan shall bear
interest, until repaid, fixed at 15% per annum, payable as follows:
(i) Interest on the unpaid principal balance of the
Term Loan, equal to 12.5% per annum ("CURRENT PAY INTEREST")
shall be payable monthly in arrears, on the first day of each
month, and on the Term Loan Maturity Date.
(ii) Accrued Interest on the unpaid principal balance
of the Term Loan, equal to 2.5% per annum ("PIK INTEREST") ,
shall be added to the then unpaid principal balance of the
Term Note quarterly, on the first day of each April, July,
October, and January hereafter.
(b) Following the occurrence of any Event of Default (and
whether or not Acceleration has taken place), at the direction of the
Term Lender, Current Pay Interest shall be 14.5% per annum and PIK
Interest shall remain at 2.5% per annum.
11. Amendment to Article 2A. Article 2A of the Agreement is hereby
amended by the addition of the following Section 2A-7:
2A-7. Term Loan Annual Fee. As compensation for the Term
Lender's having committed to increase and extend the term of the Term
Loan, on May 10, 2000 the Term Lender shall have earned and the
Borrower shall pay the Term Loan Annual Fee of 2.5% of the principal
balance of the Term Loan outstanding on May 10, 2001.
12. Amendment to Article 5. Effective as of February 26, 2000, Section
5-12 of the Agreement is hereby amended to read as follows:
(a) EBITDA: The Borrower shall not permit or suffer its
EBITDA, tested as of the last day of each fiscal quarter on the basis
set forth below, to be less than the following:
<TABLE>
MINIMUM CONSOLIDATED EBITDA:
<CAPTION>
"()" Denotes Negative
- --------------------------------------------------------------------------------
BASIS TESTED MINIMUM EBITDA
- --------------------------------------------------------------------------------
<S> <C>
Quarter Ending February, 2000 ($10,200,000)
- --------------------------------------------------------------------------------
Two Quarters Ending May, 2000 ($15,994,362)
- --------------------------------------------------------------------------------
Three Quarters Ending August, 2000 ($18,089,773)
- --------------------------------------------------------------------------------
Four Quarters Ending November, 2000 ($20,965,521)
- --------------------------------------------------------------------------------
Four Quarters Ending February, 2001 ($5,956,307)
- --------------------------------------------------------------------------------
</TABLE>
-4B
<PAGE> 5
For fiscal quarters thereafter, minimum EBITDA shall be established based upon
reasonable projections prepared by the Borrower and agreed upon by the Agent.
In the event that E-Commerce is not consolidated with the Borrower for the
purpose of calculating EBITDA then the covenants described above shall be reset
at a minimum of 80 percent of reasonable projections to be prepared by the
Borrower and agreed upon by the Agent.
In the event that the Borrower fails to furnish projections to the Agent or, if
furnished, the Agent and the Borrower fail to agree to any proposed projections,
then until the Borrower and the Agent reach agreement as to any projections the
Borrower shall at all times maintain minimum Availability, after giving effect
to all then held checks (if any); accounts payable which are beyond credit terms
then accorded the Borrower and overdrafts of not less than $10,000,000.00.
13. CAPITAL EXPENDITURES The Borrower will not suffer or permit its
Capital Expenditures to exceed the following:
<TABLE>
CAPITAL EXPENDITURES
<CAPTION>
----------------------------------------------------------------
Fiscal Year Ending Maximum for fiscal Year
----------------------------------------------------------------
<S> <C>
February, 2001 $8,500,000
----------------------------------------------------------------
February, 2002 9,000,000
----------------------------------------------------------------
February, 2003 9,500,000
----------------------------------------------------------------
</TABLE>
14. Amendment to Article 5. Section 5-13 of the Agreement is hereby
amended to read as follows:
5-13. Value of Collateral. The value of the Borrower"s
Acceptable Inventory calculated at Cost shall at all times be equal to
or greater than $170,000,000.00. The value of the Borrower"s Acceptable
Accounts shall at all times be equal to or greater than $10,000,000.00
15. Amendment to Article 5. Article 5 is hereby amended by the addition
of the following Section 5-14 thereto:
5-14. Minimum Excess Availability. Availability after giving
effect to all then held checks (if any); accounts payable which are
beyond credit terms then accorded the Borrower and overdrafts shall not
be less than $15,000,000.00, measured on a rolling thirty (30) day
average basis.
16. Waiver of Compliance with Sections 4-18, 4-19, 4-20 and 4-23. The
Lenders waive compliance by the Borrower with the terms of Sections 4-18, 4-19,
4-20 and 4-23 of the Agreement in connection with the investments in and/or
loans to be made in connection with the continued operation
-5B
<PAGE> 6
of Borrower's commerce business ("E-Commerce", which term includes
DrugEmporium.com Inc. and the business to be carried on by it), including
without limitation, any amount invested in, advanced to or paid or incurred by
or on behalf of E-Commerce up to a maximum aggregate amount of $30,500,00.00. No
further amounts shall be advanced to E-COMMERCE directly or indirectly,
including by way of any additional trade support.
17. Additional Tem Loan Commitment Fee. As compensation for the Term
Lender's having committed to increase the Term Loan from $7,500,000.00 to
$12,500,000.00, the Term Lender has earned the Additional Term Loan Commitment
Fee (so referred to herein) of $150,000.00, payable at closing.
18. Amendment Fee. As compensation for the Revolving Credit Lenders'
having committed to enter into this Fifth Amendment the Borrower shall pay to
the Agent for the benefit of the Revolving Credit Lenders, at closing, an
amendment fee in the amount of $165,000.00.
19. Ratification of Loan Documents. Except as provided herein, all
terms and conditions of the Agreement and of the other Loan Documents remain in
full force and effect. Furthermore, except as provided herein, all warranties
and representations made in the Agreement and in the other Loan Documents remain
in full force and effect. The Borrower hereby ratifies and confirms that the
grant of security interest set forth in Article 8 of the Agreement is intended
to constitute a grant of security interest in favor of the Agent on behalf of
all Lenders, including, without limitation, the Term Lender.
20. Conditions to Effectiveness. This Fifth Amendment shall not be
effective until each of the following conditions precedent have been fulfilled
to the satisfaction of the Agent and the Lenders:
(1) This Fifth Amendment shall have been duly executed and
delivered by the respective parties hereto.
(2) No Suspension Event shall have occurred and be continuing.
(3) The Borrower shall have provided such additional instruments
and documents to the Agent as the Agent and the Agent's
counsel may have reasonably requested.
(4) The Agent shall promptly notify the Borrower when such
conditions are satisfied.
(5) The Borrower shall have paid to the Agent for the account of
the Term Lender, the Additional Term Loan Commitment Fee.
(6) Availability after giving effect to all then held checks (if
any); accounts payable which are beyond credit terms then
accorded the Borrower, any overdrafts, and the funding of the
Term Loan, shall not be less than $25,000,000.00.
(7) The Borrower shall have furnished the Agent with
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<PAGE> 7
corporate resolutions authorizing the execution of this
Amendment and the documents contemplated herein.
21. Miscellaneous.
(8) This Fifth Amendment may be executed in several counterparts
and by each party on a separate counterpart, each of which
when so executed and delivered shall be an original, and all
of which together shall constitute one instrument.
(9) This Fifth Amendment expresses the entire understanding of the
parties with respect to the transactions contemplated hereby.
No prior negotiations or discussions shall limit, modify, or
otherwise affect the provisions hereof.
(10) Any determination that any provision of this Fifth Amendment
or any application hereof is invalid, illegal or unenforceable
in any respect and in any instance shall not effect the
validity, legality, or enforceability of such provision in any
other instance, or the validity, legality or enforceability of
any other provisions of this Fifth Amendment.
(11) The Borrower shall pay on demand all costs and expenses of the
Agent, including, without limitation, reasonable attorneys'
fees, in connection with the preparation, negotiation,
execution and delivery of this Fifth Amendment.
(12) The Borrower warrants and represents that the Borrower has
consulted with independent legal counsel of the Borrower's
selection in connection with this Fifth Amendment and is not
relying on any representations or warranties of any Lender or
the Agent or their respective counsel in entering into this
Fifth Amendment.
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<PAGE> 8
IN WITNESS WHEREOF, the parties have caused this Fifth Amendment to
Loan and Security Agreement to be executed by their duly authorized officers as
a sealed instrument as of the date first above written.
DRUG EMPORIUM, INC.
("Borrower")
By:_____________________________________
Name:___________________________________
Title:__________________________________
FLEET RETAIL FINANCE INC.
("Agent")
By:_____________________________________
Name:___________________________________
Title:__________________________________
The "LENDERS"
FLEET RETAIL FINANCE INC.
By:_________________________________
Print Name:_________________________________
Title:_________________________________
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<PAGE> 9
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:_________________________________
BACK BAY CAPITAL FUNDING LLC
By:_________________________________
Print Name:_________________________________
Title:_________________________________
-9B
<PAGE> 1
Exhibit 10.19
DRUGEMPORIUM.COM, INC.
1999 STOCK INCENTIVE PLAN
SECTION 1. PURPOSES. The purposes of the DrugEmporium.com, Inc. 1999
Stock Incentive Plan (the "Plan") are to promote the long-term interests of
DrugEmporium.com and its Subsidiaries by (i) attracting, retaining and rewarding
high-quality executives and other key employees and directors of, and advisors
and consultants to, the Company and its Subsidiaries, (ii) motivating such
persons by enabling them to acquire or increase a proprietary interest in the
Company in order to align the interests of such persons with the Company's
stockholders, and (iii) providing such persons with incentives to pursue and
participate in the long-term growth, profitability and financial success of the
Company.
SECTION 2. DEFINITIONS. In addition to the terms defined elsewhere in
the Plan, the following terms as used in the Plan shall have the meanings set
forth below:
(a) "Award" means any Option, SAR (including Limited SAR), Restricted
Stock, Deferred Stock, Performance Award, Dividend Equivalent or Other
Stock-Based Award, together with any other right or interest granted to a
Participant under the Plan.
(b) "Award Agreement" means any written agreement, contract or other
instrument or document evidencing any Award which may, but need not, be executed
or acknowledged by a Participant.
(c) "Board" means the Board of Directors of the Company.
(d) "Change in Control" has the meaning given to such term in Section
9(b)(i) of the Plan.
(e) "Change in Control Price" has the meaning given to such term in
Section 9(b)(ii) of the Plan.
(f) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, together with the rules, regulations and interpretations
promulgated thereunder, and any successor provisions, rules, regulations and
interpretations.
(g) "Committee" means any committee of directors designated by the
Board, in its discretion, to administer the Plan. Unless otherwise determined by
the Board, the Committee shall consist of two or more directors, each of whom
shall be (i) a "non-employee director" within the meaning of Rule 16b-3 under
the Exchange Act, unless administration of the Plan by "non-employee directors"
is not then required in order for exemptions under Rule 16b-3 to apply to
transactions under the Plan, and (ii) an "outside director" as defined under
Section 162(m) of the Code, unless administration of the Plan by "outside
directors" is not then required in order to qualify for tax deductibility under
Section 162(m) of the Code. If at any time or to any extent the Board shall
delegate the administration of the Plan to the Committee, then the functions of
the Board specified in this Plan shall be exercised by the Committee.
(h) "Company" means DrugEmporium.com, Inc., a Delaware corporation,
together with any successor thereto.
(i) "Covered Employee" means any individual who is or, in the
determination of the Board, is likely to be a "covered employee" within the
meaning of Section 162(m) of the Code.
(j) "Deferred Stock" means a right, granted to a Participant under
Section 6(e) hereof, to receive cash, Shares, other Awards or other property
equal in value to dividends paid with respect to a specified number of Shares,
or other periodic payments.
(k) "Director" means any individual who is a member of the Board.
<PAGE> 2
(l) "Dividend Equivalent" means a right granted to a Participant under
Section 6(g) hereof to receive cash, Shares, other Awards or other property
equal in value to dividends paid with respect to a specific number of Shares, or
other periodic payments.
(m) "Effective Date" means November 1, 1999.
(n) "Eligible Person" means an officer, employee or director of, or an
advisor or consultant to, the Company or a Subsidiary.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, together with the rules, regulations and
interpretations promulgated thereunder, and any successor provisions, rules,
regulations and interpretations.
(p) "Fair Market Value" means the fair market value of the property or
other item being valued, as determined by the Board in the good faith exercise
of its discretion or by procedures established by the Board; provided, however,
that if the Shares are traded as of any date, on an established stock exchange,
stock market or stock system, then the fair market value of Shares as of such
date means the closing sale price of the Shares on such date or, if there are no
sales on such date, then the closing sale price of the Shares on the most recent
date prior to such date on which there was a sale of Shares, as reported on the
Nasdaq Stock Market, on any other quotation system approved by the National
Association of Securities Dealers, Inc. or on any national securities exchange
on which Shares are then listed or quoted, which constitutes the primary trading
market for the Shares.
(q) "Incentive Stock Option" or "ISO" means an Option that is intended
to meet the requirements of Section 422 of the Code or any successor provision
thereto and is expressly designated as an Incentive Stock Option.
(r) "Limited SAR" means a right granted to a Participant under Section
6(c) hereof.
(s) "Non-Qualified Stock Option" or "NQSO" means an Option that is not
intended to be an Incentive Stock Option.
(t) "Option" means an option granted under Section 6(b) hereof to
purchase Shares or other Awards at a specific price during a specific time.
(u) "Other Stock-Based Awards" means Awards granted to a Participant
under Section 6(h) hereof.
(w) "Participant" means any Eligible Person who has been granted an
Award under the Plan which remains outstanding, including a person who is no
longer an Eligible Person.
(x) "Performance Award" means a right granted under Section 8 hereof to
receive Awards based upon performance criteria specified by the Board.
(y) "Person" means any individual, corporation, partnership, limited
liability company, association, joint-stock company, trust, unincorporated
organization, government or political subdivision thereof or other entity.
(z) "Plan" means this DrugEmporium.com, Inc. 1999 Stock Incentive Plan,
as amended from time to time in accordance with the provisions hereof.
(aa) "Publicly Traded" means, with respect to the Shares, that the
Shares have been registered pursuant to Section 12 of the Exchange Act and are
listed and traded on the Nasdaq Stock Market, any national securities exchange,
or on any other stock exchange, stock market or stock quotation system.
(bb) "Restricted Stock" means any Shares granted under Section 6(d)
hereof.
(cc) "Related Party" has the meaning given to such term in Section
9(b)(iii) hereof.
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<PAGE> 3
(dd) "Rule 16b-3" means Rule 16b-3 as from time to time in effect and
applicable to the Plan and the Participants, as promulgated and interpreted by
the SEC under Section 16 of the Exchange Act, including any successor rule
thereto.
(ee) "SEC" means the Securities and Exchange Commission or any
successor thereto and shall include the staff thereof.
(ff) "Shares" means shares of common stock, par value $.001 per share,
of the Company, or such other securities of the Company as may be designated by
the Board from time to time.
(gg) "Stock Appreciation Right" or "SAR" means a right granted to a
Participant under Section 6(c) hereof, to be paid an amount measured by the
appreciation in the Fair Market Value of shares from the date of grant to the
date of exercise.
(hh) "Subsidiary" means any corporation (whether now or hereafter
existing) which, on the date of determination, qualifies as a subsidiary
corporation of the Company under Section 425(f) of the Code, and any successor
provisions thereto.
(ii) "Voting Securities" has the meaning given to such term in Section
9(b)(iv) hereof.
SECTION 3. ADMINISTRATION.
(a) Authority of the Board. The Plan shall be administered by
the Board, or if and to the extent the Board so directs and delegates, by the
Committee. Subject to the terms of the Plan and applicable law, and in addition
to other express powers and authorizations conferred on the Board by the Plan,
the Board shall have full power and authority to: (i) designate Participants
from among the Eligible Persons; (ii) determine the type or types of Awards to
be granted to an Eligible Person; (iii) determine the number of Awards to be
granted, the number of Shares or amount of cash or other property to which an
Award will relate, the terms and conditions of any Award (including, but not
limited to, any exercise price, grant price or purchase price, any exercise or
vesting periods, any limitation or restriction, any schedule for lapse of
limitations, forfeiture restrictions or restrictions on exercisability or
transferability, and any accelerations or waivers thereof, based in each case on
such considerations as the Board shall determine), and all other matters to be
determined in connection with an Award; (iv) determine whether, to what extent
and under what circumstances Awards may be settled or exercised in cash, Shares,
other securities, other Awards or other property, or Awards may be accumulated,
vested, exchanged, surrendered, canceled, forfeited or suspended; (v) determine
whether, to what extent and under what circumstances cash, Shares, other
securities, other Awards, other property and other amounts payable with respect
to an Award shall be deferred either automatically or at the election of the
Participant or of the Committee; (vi) interpret and administer the Plan and any
instrument or agreement relating to, or Award made under, the Plan; (vii)
prescribe the form of each Award Agreement, which need not be identical for each
Participant; (viii) adopt, amend, suspend, waive or rescind such rules and
regulations and appoint such agents as it shall deem necessary or desirable for
the administration of the Plan; (ix) correct any defect or supply any omission
or reconcile any inconsistency, and to construe and interpret the Plan, the
rules and regulations, any Award Agreement or other instrument entered into or
Award made under the Plan; and (x) make any other determinations and decisions
and take any other action that the Board deems necessary or desirable for the
administration of the Plan.
(b) Exercise of Authority. Unless otherwise expressly provided
in the Plan, all designations, determinations, interpretations and other
decisions under or with respect to the Plan or any Award shall be within the
sole discretion of the Board, may be made at any time and shall be final,
conclusive and binding upon all Persons, including the Company, its
Subsidiaries, Eligible Persons, Participants, holders or beneficiaries of
Awards, and stockholders. The express grant of any specific power to the Board,
and the taking of any action by the Board, shall not be construed as limiting
any power or authority of the Board. The Board may delegate to officers or
managers of the Company or any Subsidiary, or committees thereof, the authority,
subject to such terms as the Board shall determine, to perform such functions,
including administrative functions, as the Board may determine, to the extent
that such delegation will not result in the loss of an exemption under Rule
16b-3 for Awards granted to Participants subject to Section 16 of the Exchange
Act in respect of the Company and will not cause Awards
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<PAGE> 4
intended to qualify as "performance-based compensation" under Section 162(m) of
the Code of the Code to fail to so qualify. The Board may appoint agents to
assist it in administering the Plan.
(c) Delegation to a Committee. Notwithstanding anything to the
contrary contained herein, the Board may at any time, or from time to time,
appoint a Committee and delegate to such Committee the authority of the Board to
administer the Plan, including to the extent provided by the Board, the power to
further delegate such authority. Upon such appointment and delegation, any such
Committee shall have all the powers, privileges and duties of the Board in the
administration of the Plan to the extent provided in such delegation, except for
the power to appoint members of the Committee and to terminate, modify or amend
the Plan. The Board may from time to time appoint members of any such Committee
in substitution for or in addition to members previously appointed, may fill
vacancies in such Committee and may discharge such Committee. Any such Committee
shall hold its meetings at such times and places as it shall deem advisable. At
any meeting of any such Committee, a majority of the members of such Committee
shall constitute a quorum, and all determinations at such Committee meeting
shall be made by a majority of such quorum. Any determination reduced to writing
and signed by all of the members of such Committee shall be fully as effective
as if it had been made by a majority vote at a meeting duly called and held.
(d) Limitation of Liability. The Board, the Committee, if any,
and each member of each shall be entitled to, in good faith, rely or act upon
any report or other information furnished to him or her by any executive
officer, other officer or employee of the Company or a Subsidiary, the Company's
independent auditors, legal counsel, other consultants or any other agents
assisting in the administration of the Plan. Members of the Board and of the
Committee, if any, and any officer or employee of the Company or a Subsidiary
acting at the direction or on behalf of the Board and of the Committee, if any,
shall not be personally liable for any action or determination taken or made in
good faith with respect to the Plan, and shall, to the extent permitted by law,
be fully indemnified and protected by the Company with respect to any such
action or determination.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) Shares Available. Subject to adjustment as provided in
Section 4(b) hereof, the total number of Shares with respect to which Awards may
be granted under the Plan shall be 4,800,000. If any Shares covered by an Award
granted under the Plan, or to which such an Award relates, are forfeited, or if
an Award otherwise terminates or is canceled without the delivery of Shares, or
if payment is made to the Participant in the form of cash or other property
other than Shares, then the Shares covered by such Award, or to which such Award
relates, or the number of Shares otherwise counted against the aggregate number
of Shares with respect to which Awards may be granted, to the extent of any such
settlement, forfeiture, termination or cancellation, shall again be, or shall
become, Shares with respect to which Awards may be granted, to the extent
permissible under Rule 16b-3 and Section 162(m) of the Code. In the event that
any Option or other Award granted hereunder is exercised through the delivery of
Shares, the number of Shares available for Awards under the Plan shall be
increased by the number of Shares surrendered, to the extent permissible under
Rule 16b-3. For purposes of this Section 4(a), the number of Shares to which an
Award relates shall be counted against the number of Shares reserved and
available under the Plan at the time of grant of the Award, unless such number
of Shares cannot be determined at that time, in which case the number of Shares
actually distributed pursuant to the Award shall be counted against the number
of Shares reserved and available under the Plan at the time of distribution;
provided, however, that Awards related to or retroactively added to, or granted
in tandem with, substituted for or converted into, other Awards shall be counted
or not counted against the number of Shares reserved and available under the
Plan in accordance with procedures adopted by the Committee so as to ensure
appropriate counting but avoid double counting; and provided, further, that the
number of Shares deemed to be issued under the Plan upon exercise of an Option
or an Other Stock-Based Award in the nature of a stock purchase right shall be
reduced by the number of Shares surrendered by the Participant in payment of the
exercise or purchase price of the Award.
(b) Adjustments. In the event that any dividend or other
distribution (whether in the form of cash, Shares, other securities or other
property), recapitalization, forward or reverse stock split, reorganization,
merger, consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, exchange of Shares or other securities of the Company, or other
similar corporate transaction or event affects the Shares such that an
adjustment is necessary or determined by the Board to be appropriate in order to
prevent dilution or enlargement of the Participants' rights under the Plan, then
the Board shall proportionately adjust any or all of (i) the number and
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<PAGE> 5
kind of Shares or other securities of the Company (or number and kind of other
securities or property) which may thereafter be issued in connection with
Awards; (ii) the number and kind of Shares or other securities of the Company
(or number and kind of other securities or property) issued or issuable with
respect to outstanding Awards; and (iii) the grant, exercise or purchase price
with respect to any Award; provided, in each case, that with respect to Awards
of Incentive Stock Options, no such adjustment shall be authorized to the extent
that such authority would cause the Plan to violate Section 422(b)(1) of the
Code, as from time to time amended.
(c) Sources of Shares. Any Shares delivered pursuant to an
Award may consist, in whole or in part, of authorized and unissued Shares or of
treasury Shares, including Shares repurchased by the Company for purposes of the
Plan.
(d) Annual Limits on Awards. Subject to adjustment as provided
in Section 4(b) hereof the maximum number of Shares subject to Awards in any
combination that may be granted during any one fiscal year of the Company to any
one Participant shall be limited to 300,000.
SECTION 5. ELIGIBILITY. Awards may be granted under the Plan only to
Eligible Persons, except that (a) only Eligible Persons who are employees of the
Company or a Subsidiary shall be eligible for the grant of Incentive Stock
Options, and (b) only Non-Employee Directors shall receive Director Options in
accordance with Section 6(b)(v) hereof.
SECTION 6. SPECIFIC TERMS OF AWARDS.
(a) General. Subject to the provisions of the Plan and any
applicable Award Agreement, Awards may be granted as set forth in this Section
6. In addition, the Board may impose on any Award or the exercise thereof, at
the date of grant or thereafter (subject to the terms of Section 10 hereof),
such additional terms and conditions, not inconsistent with the provisions of
the Plan, as the Board shall determine, including terms requiring forfeiture of
Awards in the event of termination of employment by the Participant and terms
permitting a Participant to make elections pertaining to his Award. Subject to
the provisions of the Plan, the Board shall have the right to accelerate the
vesting or exercising of any Award granted under the Plan. Except as provided in
Section 7(a) hereof, or as required by applicable law, Awards shall be granted
for no consideration other than prior and future services.
(b) Options. Subject to the provisions of the Plan, the Board
is authorized to grant Options to Eligible Persons on the following terms and
conditions:
(i) Exercise Price. The exercise price per Share of
an Option shall be determined by the Board; provided, however, that,
except as provided in Section 7(a) or with respect to Options granted
pursuant to a merger or other corporate transaction, such exercise
price shall not be less than the Fair Market Value of a Share on the
date of grant of such Option.
(ii) Option Term. The term of each Option shall be
determined by the Board.
(iii) Methods of Exercise. The Board shall determine
the time or times at which or the circumstances under which an Option
may be exercised in whole or in part (including based on achievement of
performance goals and/or service requirements), the methods by which
such exercise price may be paid or deemed to be paid, and the form of
such payment, including, without limitation, cash, Shares, other
outstanding Awards or other property (including notes or other
contractual obligations of Participants to make payment on a deferred
bases, to the extent permitted by law) or any combination thereof,
having a Fair Market Value equal to the exercise price.
(iv) Incentive Stock Options. The terms of any
Incentive Stock Option granted under the Plan shall comply in all
material respects with the provisions of Section 422 of the Code or any
successor provision thereto. Incentive Stock Options may only be issued
to employees of the Company or a Subsidiary. Anything in the Plan to
the contrary notwithstanding, no term of the Plan relating to ISOs
(including any SAR in tandem therewith) shall be interpreted, amended
or altered, nor shall any discretion
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<PAGE> 6
or authority granted under the Plan be exercised, so as to disqualify
either the Plan or any ISO under Section 422, unless the Participant
has first requested the change that will result in such
disqualification.
(c) Stock Appreciation Rights. The Board is authorized to
grant Stock Appreciation Rights to Eligible Persons on the following terms and
conditions:
(i) Right to Payment. A Stock Appreciation Right
shall confer on the Participant to whom it is granted a right to
receive, upon exercise thereof, the excess of (A) the Fair Market Value
of a Share on the date of exercise (or, in the case of a Limited SAR,
the Fair Market Value determined by reference to the Change in Control
Price), or, if the Board shall so determine in the case of any such
right other than one related to any Incentive Stock Option, at any time
during a specified period before or after the date of exercise, over
(B) the grant price of the Stock Appreciation Right as determined by
the Board as of the date of grant of the Stock Appreciation Right,
which, except as provided in Section 7(a) hereof, shall not be less
than the Fair Market Value of a Share on the date of grant.
(ii) Other Terms. The term, methods of exercise,
methods of settlement and any other terms and conditions of any Stock
Appreciation Right shall be determined by the Board. Limited SARs that
may only be exercised in connection with a Change in Control or other
event as specified by the Board may be granted on such terms, not
inconsistent with this Section 6(c), as the Board may determine. SARs
and Limited SARs may be awarded either on a free-standing basis or in
tandem with other Awards.
(d) Restricted Stock. The Board is authorized to grant
Restricted Stock to Eligible Persons on the following terms and conditions:
(i) Grant and Restrictions. Restricted Stock shall be
subject to such restrictions on transferability, risk of forfeiture and
other restrictions as the Board may impose (including, without
limitation, limitations on the right to vote Restricted Stock or the
right to receive dividends thereon), which restrictions may lapse
separately or in combination at such times, under such circumstances
(including based on the achievement of performance goals and/or future
service requirements), in such installments, or otherwise, as the Board
shall determine at the time of grant or thereafter. Except to the
extent restricted under the terms of the Plan and any Award Agreement
relating to the Restricted Stock, a Participant granted Restricted
Stock shall have all of the rights of a stockholder, including the
right to vote the Restricted Stock and the right to receive dividends
thereon (subject to any mandatory reinvestment or other requirement
imposed by the Board). During the restricted period applicable to the
Restricted Stock, subject to Section 11 hereof, the Restricted Stock
may not be sold, transferred, pledged, hypothecated, margined or
otherwise encumbered by the Participant.
(ii) Forfeiture. Except as otherwise determined by
the Committee at the time of grant or thereafter, upon termination of
employment or service on the Board (as determined under criteria
established by the Board) during the applicable restriction period,
Restricted Stock that is at that time subject to restrictions shall be
forfeited and reacquired by the Company; provided, however, that
restrictions on Restricted Stock shall be waived in whole or in part in
the event of terminations resulting from specified causes, and the
Committee may in other cases waive in whole or in part restrictions on
or the forfeiture of Restricted Stock.
(iii) Certificates for Shares. Restricted Stock
granted under the Plan may be evidenced in such manner as the Board
shall determine, including, without limitation, issuance of
certificates representing Shares. Certificates representing Shares of
Restricted Stock shall be registered in the name of the Participant and
shall bear an appropriate legend referring to the terms, conditions and
restrictions applicable to such Restricted Stock, and the Board may
require that the Company retain physical possession of the
Certificates, and that the Participant deliver a stock power to the
Company, endorsed in blank, relating to the Restricted Stock.
(iv) Dividends and Splits. As a condition to the
grant of an Award of Restricted Stock, the Board may require that any
cash dividends paid on a share of Restricted Stock be automatically
reinvested in additional shares of Restricted Stock or applied to the
purchase of additional Awards under
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<PAGE> 7
the Plan. Unless otherwise determined by the Board, Shares distributed
in connection with a stock split or stock dividend, and other property
distributed as a dividend, shall be subject to restrictions and a risk
of forfeiture to the same extent as the Restricted Stock with respect
to which such Shares or other property has been distributed.
(e) Deferred Stock. The Board is authorized to grant Deferred
Stock to Eligible Persons on the following terms and conditions:
(i) Issuance and Limitations. Delivery of Shares
shall occur upon expiration of the deferral period specified for the
Award of Deferred Stock by the Board. In addition, an Award of Deferred
Stock shall be subject to such limitations (including a risk of
forfeiture) as the Committee may impose (if any), which limitations may
lapse at the expiration of the deferral period or at other specified
times (including based on achievement of performance goals and/or
future service requirements, separately or in combination, in
installments or otherwise, as the Committee shall determine at the time
of grant or thereafter. A Participant awarded Deferred Stock shall have
no voting rights and shall have no rights to receive dividends in
respect of Deferred Stock, unless and only to the extent that the
Committee shall award Dividend Equivalents in respect of such Deferred
Stock.
(ii) Forfeiture. Except as otherwise determined by
the Board upon termination of employment with or service to the Company
(as determined under criteria established by the Board) during the
applicable deferral period or portion thereof to which forfeiture
conditions apply, Deferred Stock that is at that time subject to
deferral (other than a deferral at the election of the Participant)
shall be forfeited; provided, however, that the Board may provide, by
rule or regulation or in any Award Agreement or may determine in any
individual case, that restriction or forfeiture conditions relating to
Deferred Stock shall be waived in whole or in part in the event of
terminations resulting from specified causes, and the Board may in
other cases waive in whole or in part the forfeiture of Deferred Stock.
(f) Bonus Shares and Awards in Lieu of Obligations. The Board
is authorized to grant Shares or other Awards as a bonus to Eligible Persons or
in lieu of obligations to pay cash or deliver other property under the Plan or
under other plans or compensatory arrangements (including salary requirements),
provided that, in the case of Participants subject to Section 16 of the Exchange
Act, the amount of such grants remains within the discretion of the Board to the
extent necessary to ensure that acquisitions of Shares or other Awards are
exempt from liability under Section 16(b) of the Exchange Act. Shares or Awards
granted hereunder shall be subject to such other terms as shall be determined by
the Board.
(g) Dividend Equivalents. The Board is authorized to grant
Dividend Equivalents to a Participant. Dividend Equivalents shall confer upon
the Participant rights to receive, currently or on a deferred basis, cash,
Shares, other Awards or other property equal in value to dividends paid with
respect to a specified number of Shares, or otherwise, as determined by the
Board. The Board may provide that Dividend Equivalents shall be paid or
distributed when accrued or shall be deemed to have been reinvested in
additional Shares or Awards or other investment vehicles, and subject to such
restrictions or transferability and risk of forfeiture, as the Board may
specify. Dividend Equivalents may be awarded on a free-standing basis or with
another Award.
(h) Other Stock-Based Awards. The Board is authorized, subject
to limitations under applicable law, to grant to Participants such other Awards
that are denominated or payable in, valued in whole or in part by reference to,
or otherwise based on, or related to, Shares, as deemed by the Board to be
consistent with the purposes of the Plan, including, without limitation,
purchase rights for Shares, Shares awarded which are not subject to any
restrictions or conditions, convertible or exchangeable debt securities or other
rights convertible or exchangeable into Shares, Awards with value and payment
contingent upon performance of the Company or any other factors designated by
the Board, and Awards valued by reference to the book value of Shares or the
value of securities of or the performance of specified Subsidiaries as the Board
determines. The Board shall determine the terms and conditions of such awards.
Except as provided in Section 7(a) hereof, Shares or securities delivered
pursuant to an Award in the nature of a purchase right granted under this
Section 6(h) shall be purchased for such consideration, paid for at such times,
by such methods and in such forms, including, without limitation, cash, Shares,
other outstanding Awards or other property or any combination thereof, as the
Committee shall determine.
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Cash awards, as an element of or supplement to any other Award under the Plan,
may also be granted pursuant to this Section 6(h).
(i) Exchange Provisions. The Board may at any time offer to
exchange or buy out any previously granted Award for a payment in cash, Shares,
another Award or other property, based on such terms and conditions as the Board
shall determine and communicate to the Participant at the time that such offer
is made.
SECTION 7. GENERAL TERMS OF AWARDS.
(a) Stand-Alone, Additional, Tandem and Substitute Awards.
Awards granted under the Plan may, in the discretion of the Board, be granted
either alone or in addition to, in tandem with or in substitution or exchange
for, any other Award granted under the Plan or any award granted under any other
plan of the Company or any Subsidiary (subject to the terms of Section 10
hereof), or any other right of a Participant to receive payment from the Company
or any Subsidiary. Such additional, tandem, substitute or exchange Awards may be
granted at any time. If an Award is granted in substitution or exchange for
another Award or award, the Board shall require the surrender of such other
Award or award in consideration for the grant of the new Award. The exercise
price of any Option, the grant price of any Stock Appreciation Right or the
purchase price of any other Award conferring a right to purchase Share
retroactively granted in tandem with an outstanding Award or award shall be
either not less than the Fair Market Value of Shares at the date of grant of the
later Award or equal to the Fair Market Value of Shares at the date of grant of
the earlier Award or award. Notwithstanding the foregoing, the exercise price of
any Option, grant price of any Stock Appreciation Right or purchase price of any
other Award conferring a right to purchase Shares which is granted in exchange
or substitution for an option, stock appreciation right or other award granted
by the Company (other than in connection with a transaction described in Section
9(a) hereof) shall not be less than the exercise price, grant price or purchase
price of the exchanged or substituted Option, Stock Appreciation Right or other
Award, and outstanding Awards shall not be amended (other than in connection
with a transaction described in Section 4(b) hereof to reduce the exercise
price, grant price or purchase price of any such Award.
(b) Decisions Required to be Made by the Board. Other
provisions of the Plan and any Award Agreement notwithstanding, if any decision
regarding an Award or the exercise of any right by a Participant, at any time
such Participant is subject to Section 16 of the Exchange Act or is a Covered
Employee under Section 162(m) of the Code, is required to be made or approved by
the Board in order that a grant to or transaction by such Participant will be
exempt under Rule 16b-3 or qualify as "qualified performance-based compensation"
for purposes of Section 162(m) of the Code then the Board shall retain full and
exclusive power and authority to make such decision or to approve or disapprove
any such decision by the Participant.
(c) Term of Awards. The term of each Award shall be for such
period as may be determined by the Board; provided, however, that in no event
shall the term of any Incentive Stock Option, or a Stock Appreciation Right
granted in tandem therewith, exceed a period of ten years from the date of its
grant.
(d) Form and Timing of Payment of Awards. Subject to the terms
of the Plan and any applicable Award Agreement, payments or substitutions to be
made by the Company or a Subsidiary upon the grant, exercise or settlement of an
Award may be made in such forms as the Board shall determine at the time of
grant or thereafter (subject to the terms of Section 10 hereof), including,
without limitation, cash, Shares, other Awards or other property or any
combination thereof, and may be made in a single payment or substitution, in
installments or on a deferred basis, in each case in accordance with rules and
procedures established by the Board. Such rules and procedures may include,
without limitation, provisions for the payment or crediting of reasonable
interest on installment or deferred payments or the grant or crediting of
Dividend Equivalents in respect of installment or deferred payments. The
settlement of any Award may be accelerated, and cash paid in lieu of Shares in
connection with such settlement, in the discretion of the Board or upon
occurrence of one or more specified events (in addition to a Change in Control).
(e) Exemptions from Section 16(b) Liability. It is the intent
of the Company that the grant of any Awards to or other transaction by a
Participant who is subject to Section 16 of the Exchange Act shall be exempt
under Rule 16b-3 (except for transactions acknowledged in writing to be
non-exempt by such Participant). Accordingly, if any provision of the Plan or
any Award Agreement does not comply with the requirements of Rule
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16b-3 as then applicable to any such transaction, such provision shall be
construed or deemed amended to the extent necessary to conform to the applicable
requirements of Rule 16b-3 so that such Participant shall avoid liability under
Section 16(b).
(f) Share Certificates. All certificates for Shares delivered
under the terms of the Plan shall be subject to such stop-transfer orders and
other restrictions as the Committee may deem advisable under federal or state
securities laws, rules and regulations thereunder, and the rules of any national
securities exchange, the Nasdaq Stock Market or any other automated quotation
system on which Shares are listed or quoted. The Board may cause a legend or
legends to be placed on any such certificates to make appropriate reference to
such restrictions or any other restrictions or limitations that may be
applicable to Shares. In addition, during any period in which Awards or Shares
are subject to restrictions or limitations under the terms of the Plan or any
Award Agreement, or during any period during which delivery or receipt of an
Award or Shares has been deferred by the Board or a Participant, the Board may
require any Participant to enter into an agreement providing that certificates
representing Shares issuable or issued pursuant to an Award shall remain in the
physical custody of the Company or such other Person as the Committee may
designate.
SECTION 8. PERFORMANCE AWARDS.
(a) Performance Conditions. The right of a Participant to
exercise or receive a grant or settlement of any Award, and the timing thereof,
may be subject to such performance conditions as may be specified by the Board.
The Board may use such business criteria and other measures of performance as it
may deem appropriate in establishing any performance conditions, and may
exercise its discretion to reduce or increase the amounts payable under any
Award subject to performance conditions, except as limited under Section 8(b)
hereof in the case of a Performance Award intended to qualify under Section
162(m) of the Code.
(b) Performance Awards Granted to Designated Covered
Employees. If the Board determines that a Performance Award to be granted to an
Eligible Person who is designated by the Board as likely to be a Covered
Employee should qualify as "performance-based compensation" for purposes of
Section 162(m) of the Code, the Board shall comply with the pre-established
performance goals and other terms set forth in this Section 8(b).
(i) Performance Goals Generally. The performance
goals for such Performance Awards shall consist of one or more business criteria
and a targeted level or levels of performance with respect to each of such
criteria, as specified by the Board consistent with this Section 8(b).
Performance goals shall be objective and shall otherwise meet the requirements
of Section 162(m) of the Code, including the requirement that the level or
levels of performance targeted by the Board result in the achievement of
performance goals being "substantially uncertain." The Board may determine that
such achievement of performance be granted, exercised and/or settled upon
achievement of any one performance goal or that two or more of the performance
goals must be achieved as a condition to grant, exercise and/or settlement of
such Performance Awards. Performance goals may differ for Performance Awards
granted to any one Participant or to different Participants.
(ii) Business Criteria. One or more of the following
business criteria for the Company, on a consolidated basis, and/or for specified
Subsidiaries or business units of the Company (except with respect to the total
stockholder return and earnings per share criteria), shall be used by the Board
in establishing performance goals for such Performance Awards: (1) earnings per
share; (2) revenues; (3) cash flow; (4) return on investment; (5) return on net
assets, assets, capital or equity; (6) economic value added; (7) operating
margin; (8) net income; (9) pretax earnings; (10) pretax earnings before
interest, depreciation and amortization; (11) pretax operating earnings after
interest expense and before extraordinary or special items; (12) operating
earnings; (13) total stockholder return; (14) price of the shares (and changes
thereof); and (15) any of the above goals as compared to the performance of a
published or special index deemed applicable by the Board including, but not
limited to, the Standard & Poor's 500 Stock Index or a group of comparable
companies.
(iii) Performance Period; Timing for Establishing
Performance Goals. Achievement of performance goals in respect of such
Performance Awards shall be measured over a performance period of up to 10
years, a specified by the Board. Performance goals shall be established not
later than 90 days
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after the beginning of any performance period applicable to such Performance
Awards or at such other date as may be required or permitted for
"performance-based compensation" under Section 162(m) of the Code.
(iv)Performance Award Pool. The Board may establish a
Performance Award pool, which shall be an unfunded pool for purposes of
measuring performance of the Company in connection with Performance Awards. The
amount of such Performance Award pool shall be based upon the achievement of a
performance goal or goals based on one or more of the business criteria set
forth in Section 8(b)(ii) hereof during the given performance period, as
specified by the Board in accordance with Section 8(b)(iii) hereof. The Board
may specify the amount of the Performance Award pool as a percentage of any such
business criteria, a percentage thereof in excess of a threshold amount, or as
another amount which need not bear a strictly mathematical relationship to such
business criteria.
(v) Settlement of Performance Awards; Other Terms.
Settlement of such Performance Awards shall be in cash, Stock, other Awards or
other property, in the discretion of the Board. The Board may, in its
discretion, reduce the amount of a settlement otherwise to be made in connection
with such Performance Awards, but may not exercise discretion to increase any
such amount payable to a Covered Employee in respect of a Performance Award
subject to this Section 8(b). The Board shall specify the circumstances in which
such Performance Awards shall be paid or forfeited in the event of termination
of employment by the Participant prior to the end of a performance period or
settlement of Performance Awards.
(c) Written Determinations. All determinations by the Board as
to the establishment of performance goals, the amount of any Performance Award
pool or potential individual Performance Awards and as to the achievement of
performance goals relating to Performance Awards under Section 8(b) hereof shall
be made in writing in the case of any Award intended to qualify under Section
162(m) of the Code. The Board may not delegate any responsibility relating to
such Performance Awards.
(d) Status of Section 8(b) Awards under Section 162(m) of the
Code. It is the intent of the Company that Performance Awards under Section 8(b)
granted to persons who are designated by the Committee as likely to be Covered
Employees within the meaning of Section 162(m) of the Code and the regulations
thereunder shall, if so designated by the Board, constitute "performance-based
compensation" within the meaning of Section 162(m) of the Code of the Code and
the regulations thereunder. The foregoing notwithstanding, because the Board
cannot determine with certainty whether a given participant will be a Covered
Employee with respect to a fiscal year that has not yet been completed, the term
Covered Employee as used herein shall mean only a person designated by the
Committee, at the time of grant of Performance Awards or an Annual Incentive
Award, as likely to be a Covered Employee with respect to that fiscal year. If
any provision of the Plan as in effect on the date of adoption or any agreements
relating to performance Awards or Annual Incentive Awards that are designated as
intended to comply with Section 162(m) of the Code does not comply or is
inconsistent with the requirements of Section 162(m) of the Code, such provision
shall be construed or deemed amended to the extent necessary to conform to such
requirements.
SECTION 9. CHANGE IN CONTROL.
(a) Acceleration of Exercisability and Lapse of Restrictions
and Cash-Out of Awards upon "Change in Control". In the event of a Change in
Control occurring after the Shares are Publicly Traded, subject only to the
applicable restrictions set forth in Section 11(a) hereof, the following
provisions shall apply unless otherwise provided in the Award Agreement, and:
(i) All outstanding Awards, pursuant to which the
Participant may have a right to exercise which was not previously exercisable
and vested, shall become fully exercisable and vested as of the time of the
Change in Control and shall remain exercisable and vested for the balance of the
stated term of such Award without regard to any termination of employment or
services by the Participant.
(ii) Unless the right to lapse of restrictions or
limitations is waived or deferred by a Participant prior to such lapse, all
restrictions (including risks of forfeiture and deferrals) on outstanding Awards
subject to restrictions or limitations under the Plan shall lapse and such
Awards shall be deemed fully vested as of the time of the Change in Control.
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(iii) All performance criteria, goals and other
conditions to payment of Awards under which payments of cash, Shares or other
property are subject to conditions shall be deemed to be achieved or fulfilled
as of the time of the Change in Control.
(iv) For a period of 60 days following a Change in
Control, each Participant may elect to surrender any outstanding Award and to
receive, in full satisfaction therefor, a cash payment equal to the value of
such Award calculated on the basis of the Change in Control Price of any Shares
or the Fair Market Value of any property other than Shares relating to such
Award; provided, however, that in the case of an Incentive Stock Option, or a
Stock Appreciation Right granted in tandem therewith, the payment shall be based
upon the Fair Market Value of Shares on the date which the Change in Control
occurred; provided further, however, that in the case of a Change in Control
described in Section 9(b)(i)(C) or (D) hereof, the payment described in this
sentence shall not necessarily be made in cash but instead shall be made in the
same form (i.e., cash, Shares, other securities or combination thereof) as
holders of Shares receive in exchange for their Shares in the transaction that
results in the Change in Control. In the event that an Award is granted in
tandem with another Award such that the Participant's right to payment for such
Award is an alternative to payment of another Award, the Participant electing to
surrender any such tandem Award shall surrender all alternative Awards related
thereto and receive payment for the Award which produces the highest payment to
the Participant.
(b) Definition of Certain Terms. For purposes of this
Section 9, the following definitions, in addition to those set forth in Section
2, shall apply:
(i) "Change in Control" means and shall be deemed to
have occurred if, after the Shares are Publicly traded:
(A) any Person, other than the Company or a
Related Party, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act, except that a Person shall be deemed to be the
beneficial owner of all Shares that such Person has the right to acquire
pursuant to any agreement or arrangement or upon exercise, conversation rights,
warrants, options or otherwise, without regard to the 60 day period referred to
in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting
Securities representing 25% or more of the total voting power of all the then
outstanding Voting Securities, except that there shall be excluded from the
number of Voting Securities deemed to be beneficially owned by a Person a number
of Voting Securities representing not more than 10 percent of the then
outstanding voting power if such Person is (1) eligible to file a Schedule 13G
pursuant to Rule 13-1(b)(1) under the Exchange Act with respect to Voting
Securities or (2) an underwriter who becomes the beneficial owner of more than
20% of the then outstanding Voting Securities pursuant to a firm commitment
underwriting agreement with the Company; or
(B) the individuals who, as of the effective
date of the Plan, constitute the members of the Board together with those
directors who are first elected subsequent to such date and whose election by
the Board or nomination for election by the Company's stockholders was approved
by a vote of at least a majority of the members of the Board then still in
office who were either directors as of the effective date of the Plan or whose
election or nomination for election was previously so approved (the "Continuing
Directors"), cease for any reason to constitute at least a majority of the
members of the Board; or
(C) the consummation of a merger,
consolidation, recapitalization or reorganization of the Company, reverse spilt
of any class of Voting Securities, or in an acquisition of securities or assets
by the Company, other than (1) any such transaction which would result in at
least 75% of the total voting power represented by the voting securities of the
surviving entity outstanding immediately after such transaction being
beneficially owned by at least 75% of the holders of outstanding Voting
Securities immediately prior to the transaction, with the voting power of each
such continuing holder relative to other such continuing holders not
substantially altered in the transaction, or (2) any such transaction which
would result in a Related Party beneficially owning more than 50% of the voting
securities of the surviving entity outstanding immediately after such
transaction; or
(D) the stockholders of the Company approve
a plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of
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the Company's assets other than (1) any such transaction which would result in a
Related Party owning or acquiring more than 50 percent of the assets owned by
the Company immediately prior to the transaction, or (2) a sale or disposition
immediately after which such assets will be owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of the common stock of the Company immediately prior to such sale or
disposition.
(E) any other event occurs which the Board
determines, in its discretion, would materially alter the structure of the
Company or its ownership.
(ii) "Change in Control Price" means, with respect to
a Share, the higher of (A) the highest Fair Market Value of the Shares at any
time during the 60 calendar days preceding and the 60 days following the Change
in Control; or (B) the highest price paid per Share in a transaction which
either (1) results in a Change in Control or (2) would be consummated but for
another transaction which results in a Change in Control and, if it were
consummated, would result in a Change in Control. With respect to clause (B) in
the preceding sentence, the "price paid" will be equal to the sum of (1) the
face amount of any portion of the consideration consisting of cash or cash
equivalents and (2) the Fair Market Value of any portion of the consideration
consisting or real or personal property other than cash or cash equivalents, as
established by an independent appraiser selected by the Board.
(iii) "Related Party" means (A) a Subsidiary of the
Company; or (B) an employee or group of employees of the Company or any
majority-owned Subsidiary of the Company; or (C) a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any
majority-owned Subsidiary of the Company; or (D) an entity owned directly or
indirectly by the stockholders of the Company in substantially the same
proportion as their ownership of Voting Securities.
(iv) "Voting Securities or Security" means any
securities of the Company which carry the right to vote generally in the
election of directors.
SECTION 10. AMENDMENTS TO AND TERMINATION OF THE PLAN AND AWARDS. The
Board may amend, alter, suspend, discontinue or terminate the Plan or the
Committee's authority to grant Awards under the Plan without the consent of
stockholders or Participants, except that any amendment, alteration, suspension,
discontinuation or termination shall be subject to approval of the Company's
stockholders not later than the annual meeting next following such Board action
if stockholder approval is required by any federal or state law or regulation or
the rules of the Nasdaq Stock Market or on any national securities exchange,
stock market or automated quotation system on which the Shares are then listed,
traded or quoted, or if the Board in its discretion determines that obtaining
such stockholder approval is for any reason advisable; provided, however, that,
without the consent of the Participant, no amendment, alteration, suspension,
discontinuation or termination of the Plan may materially and adversely affect
the rights of such Participant under any Award theretofore granted to him. The
Board may waive any conditions or rights under, amend any terms of, or amend,
alter, suspend, discontinue or terminate, any Award theretofore granted,
prospectively or retrospectively; provided, however, that, without the consent
of the Participant, no amendment, alteration, suspension, discontinuation or
termination of any Award may materially and adversely affect the rights of such
Participant under any Award theretofore granted to him.
SECTION 11. GENERAL PROVISIONS.
(a) Compliance with Legal and Other Requirements. The Company
may, to the extent deemed necessary or advisable by the Board, postpone the
issuance or delivery of Shares or payment of other benefits under any Award
until completion of such registration or qualification of such Shares (or
exemption therefrom) or other required action under any federal or state law,
rule or regulation, listing or other required action with respect to the Nasdaq
Stock Market or any national securities exchange, automated quotation system or
any other stock exchange or stock market upon which the Shares or other
securities of the Company are listed or quoted, or compliance with any other
obligation of the Company, as the Board may consider appropriate, and may
require any Participant to make such representations, furnish such information
and comply with or be subject to such other conditions as it may consider
appropriate in connection with the issuance or delivery of Shares or payment of
other benefits in compliance with applicable laws, rules, and regulations,
listing requirements, or other obligations. The foregoing notwithstanding, in
connection with a Change in Control occurring after the Common Stock is Publicly
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Traded, the Company shall take or cause to be taken no action, and shall
undertake or permit to arise no legal or contractual obligation, that results or
would result in any postponement of the issuance or delivery of Stock or payment
of benefits under any Award or the imposition of any other conditions on such
issuance, delivery or payment, to the extent that such postponement of other
condition would represent a greater burden on a Participant than existed on the
90th day preceding the Change in Control.
(b) Transferability. No Award granted under the Plan, nor any
other rights acquired by a Participant under the Plan, shall be assignable or
transferable by a Participant, other than by a will or the laws of descent and
distribution, or pursuant to a qualified domestic relations order as defined
under the Code or Title I of the Board of Retirement Income Security Act of 1974
("QDRO"), and each such Award or right shall be exercisable during the
Participant's lifetime only by the Participant or, if admissible under
applicable law, by the Participant's guardian or legal representative or a
transferee receiving such Award pursuant to a QDRO; provided, however, that the
Board may, in its sole discretion, authorize all or a portion of an Award to be
transferable by the Participant, but only to (i) any immediate family members of
the Participant, (ii) any trust or trusts for the exclusive benefit of such
immediate family members, or (iii) a partnership or limited liability company in
which such immediate family members are the only partners or members, provided
that (A) there may be no consideration for any such transfer, other than an
interest in a transferee's partnership, limited liability company or other
similar entity, (B) the Award Agreement related to the Award must expressly
provide for such transferability in a manner consistent with this section 11(b),
(C) the Board, in granting an Award, may impose additional restrictions on
transfer or prohibit such transfer entirely, (D) following any transfer, any
such Award shall continue to be subject to the same terms and conditions as were
applicable immediately prior to transfer, provided that for purposes of the
Plan, any reference to a Participant shall be deemed to refer to the transferee,
(E) in the event of a transferee's death, an Award may be exercised by the
personal representative of the transferee's estate or, if no personal
representative has been appointed, by the successor or successors in interest
determined under the transferee's will or under the applicable laws of descent
and distribution. Following any such transfer, any transferee shall continue to
be subject to the same terms and conditions as were applicable immediately prior
to transfer, provided for purposes of Section 11(b) hereof, the term
"Participant" shall be deemed to refer to the transferee, and any event of
termination of employment of the Participant as set forth in the Award Agreement
or in this Plan shall continue to be applied with respect to the original
Participant, following which the Award shall be exercisable by the transferee
only to the extent, and for the period specified by, the Award Agreements.
(c) No Rights to Awards; No Stockholder Rights. Nothing in the
Plan shall be construed as giving any Participant, Eligible Person or other
Person any right to claim to be granted any Award under the Plan, or to be
treated uniformly with other Participants and Eligible Persons. No Award shall
confer on any Participant any of the rights of a stockholder of the Company
unless and until Shares are in fact issued to such Participant in connection
with the terms of such Award. Notwithstanding the foregoing, in connection with
each grant of Restricted Stock hereunder, the applicable Award shall specify if
and to what extent the Participant shall not be entitled to the rights of a
stockholder in respect of such Restricted Stock.
(d) Withholding. The Company or any Subsidiary is authorized
to withhold from any Award granted or any payment due under the Plan, including
from a distribution of Shares, amounts of withholding and other taxes due with
respect to an Award, its exercise or any payment thereunder, and to take such
other action as the Committee may deem necessary or advisable to enable the
Company and Participants to satisfy obligations for the payment of withholding
taxes and other tax obligations relating to any Awards. This authority shall
include authority to withhold or receive Shares, Awards or other property and to
make cash payments in respect thereof in satisfaction of such tax obligations.
(e) No Right to Employment. Nothing contained in the Plan or
any Award Agreement shall confer, and no grant of an Award shall be construed
as, (i) conferring, upon any Participant or any Eligible Person, any right to
continue in the employ or service of the Company or any Subsidiary or (ii)
interfering in any way with the right of the Company or any Subsidiary to (A)
terminate any Participant's or Eligible Person's employment or service at any
time or (B) increase or decrease the compensation of any Participant or Eligible
Person from the rate in existence at the time of granting of an Award, except as
may be expressly provided in any Award Agreement or other compensation
arrangement.
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(f) Unfunded Status of Awards; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant
pursuant to an Award, nothing contained in the Plan or any Award shall give any
such Participant any rights that are greater than those of a general unsecured
creditor of the Company; provided, however, that the Board may authorize the
creation of trusts or make other arrangements to meet the Company's obligations
under the Plan to deliver cash, Shares or other property pursuant to any Award,
which trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Board otherwise determines.
(g) No Limit on Other Compensatory Arrangements Nothing
contained in the Plan shall prevent the Company or any Subsidiary from adopting
or continuing in effect other or additional compensation arrangements (which may
include, without limitation, employment agreements with executives and
arrangements which relate to Awards under the Plan), and such arrangements may
be either generally applicable only in specific cases.
(h) No Fractional Shares. No fractional Shares shall be issued
or delivered pursuant to the Plan or any Award. The Board shall determine
whether cash, other Awards or other property shall be issued or paid in lieu of
fractional Shares or whether such fractional Shares or any rights thereto shall
be forfeited or otherwise eliminated.
(i) Governing Law. The validity, interpretation, construction
and effect of the Plan, any rules and regulations relating to the Plan and any
Award Agreement shall be governed by the laws of the State of Delaware (without
regard to provisions governing conflicts of laws) and applicable federal law.
(j) Severability.
(i) If any provision of the Plan or any Award is
or becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under any law deemed amended to conform to applicable laws or, if it
cannot be construed or deemed amended without, in the determination of the
Board, materially altering the intent of the Plan, it shall be deleted and the
remainder of the Plan shall remain in full force and effect; provided, however,
that, unless otherwise determined by the Board, the provision shall not be
construed or deemed amended or deleted with respect to any Participant whose
rights and obligations under the Plan are not subject to the law of such
jurisdiction or the law deemed applicable by the Board.
(ii) If any of the terms or provisions of the Plan
conflict with the requirements of applicable law or applicable rules and
regulations thereunder, including the requirements of Section 162(m) of the
Code, Rule 16b-3 and/or Section 422A of the Code, then such terms or provisions
shall be deemed inoperative to the extent necessary to avoid the conflict with
applicable law, or applicable rules and regulations, without invalidating the
remaining provisions hereof. With respect to ISOs, if the Plan does not contain
any provision required to be included herein under Section 422A of the Code,
such provisions shall be deemed to be incorporated herein with the same force
and effect as if such provision had been set out at length herein; provided,
further, that to the extent any Option which is intended to qualify as an ISO
cannot so qualify, such Option, to that extent, shall be deemed to be a
Nonqualified Stock Option for all purposes of the Plan.
(k) Rule 16b-3 Compliance. With respect to persons subject to
Section 16 of the Exchange Act, transactions under the Plan are intended to
comply with all applicable terms and conditions of Rule 16b-3 and any successor
provisions. To the extent that any provision of the Plan or action by the Board
fails to so comply, it shall be deemed null and void, to the extent permitted by
law and deemed advisable by the Board.
(l) Headings. Headings are given to the sections and
subsections of the Plan solely as a convenience to facilitate reference. Such
headings shall not be deemed in any way material or relevant to the construction
or interpretation of the Plan or any provision thereof.
(m) Award Agreements. Each Award hereunder shall be evidenced
by an Award Agreement which shall be delivered to the Participant and shall
specify the terms and conditions of the Award and any rules
14
<PAGE> 15
applicable thereto. Such terms may include, but are not limited to, the effect
on such Award of the death, retirement or other termination of employment of a
Participant and the effect, if any, of a change in control of the Company.
(n) Indemnification. Each person who is or shall have been a
member of the Committee, if any, or of the Board shall be indemnified and held
harmless by the Company against and from any loss, cost, liability or expense
that may be imposed upon or reasonably incurred by him in connection with or
resulting from any claim, action, suit or proceeding to which he may be made a
party or in which he may be involved by reason of any action taken or failure to
act under the Plan and against and from any and all amounts paid by him in
settlement thereof, with the Company's approval, or paid by him in satisfaction
of any judgment in any such action, suit or proceeding against him, provided he
shall give the Company an opportunity, at its own expense, to handle and defend
the same before he undertakes to handle and defend it on his own behalf. The
foregoing right of indemnification shall not be exclusive and shall be
independent of any other rights of indemnification to which such persons may be
entitled under the Company's Certificate of Incorporation or By-laws, by
contract, as a matter of law, or otherwise.
(o) Construction. For purposes of the Plan, the following
rules of construction shall apply: (i) the word "or" is disjunctive but not
necessarily exclusive; (ii) words in the singular include the plural; words in
the plural include the singular; and words in the neuter gender include the
masculine and feminine genders; and (iii) words in the masculine or feminine
gender include the other and neuter genders.
SECTION 12. EFFECTIVE DATE AND TERMINATION.
(a) Effective Date. The Plan shall become effective as of
November 1, 1999, the date the Plan was adopted and approved by the sole
stockholder of the Company.
(b) Termination. Awards may not be granted under the Plan
after October 31, 2009. Unless otherwise expressly provided in the Plan or in an
applicable Award Agreement, any Award granted hereunder may, and the authority
of the Board to amend, alter, adjust, suspend, discontinue or terminate any such
Award or to waive any conditions or rights under any such Award shall, continue
after October 31, 2009.
15
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-START> FEB-28-1999
<PERIOD-END> FEB-26-2000
<EXCHANGE-RATE> 1
<CASH> 708
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<PP&E> 95,816
<DEPRECIATION> 55,737
<TOTAL-ASSETS> 265,225
<CURRENT-LIABILITIES> 186,138
<BONDS> 48,187
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 265,225
<SALES> 904,878
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<CGS> 716,911
<TOTAL-COSTS> 209,146
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<INTEREST-EXPENSE> 8,467
<INCOME-PRETAX> (29,646)
<INCOME-TAX> (1,636)
<INCOME-CONTINUING> (28,010)
<DISCONTINUED> 0
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<NET-INCOME> (28,010)
<EPS-BASIC> (2.12)
<EPS-DILUTED> (2.12)
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