-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nm2CFfBDcnn1LKSfgUV/Vv2KPGR8BOL+7UWtFtcKGNi5ZgQI+Oq21Q/MtyJ3p/q/ bKK2dd3rC+GnTeZetQDUaQ== 0000950152-97-004186.txt : 19970526 0000950152-97-004186.hdr.sgml : 19970526 ACCESSION NUMBER: 0000950152-97-004186 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970301 FILED AS OF DATE: 19970523 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRUG EMPORIUM INC CENTRAL INDEX KEY: 0000832922 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 311064888 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16998 FILM NUMBER: 97613936 BUSINESS ADDRESS: STREET 1: 155 HIDDEN RAVINES DR CITY: POWELL STATE: OH ZIP: 43065 BUSINESS PHONE: 6145487080 MAIL ADDRESS: STREET 1: 155 HIDDEN RAVINES DR CITY: POWELL STATE: OH ZIP: 43065 FORMER COMPANY: FORMER CONFORMED NAME: NEW DE INC DATE OF NAME CHANGE: 19940518 10-K 1 DRUG EMPORIUM, INC. ANNUAL REPORT 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended March 1, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ____________ to ____________ Commission File Number 0-16998 DRUG EMPORIUM, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 31-1064888 (STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.) ---------- 155 HIDDEN RAVINES DRIVE POWELL, OHIO 43065 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) ---------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.10 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject so such filing requirements for the past 90 days. Yes __X__ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At May 16, 1997, there were 13,179,785 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 16, 1997 was approximately $57,661,559 based on a closing price of $4.375 per share on Nasdaq National Market on such date. DOCUMENTS INCORPORATED BY REFERENCE Part II, Items 6., 7. and 8., and Part IV, Item 14. incorporate by reference portions of the Drug Emporium, Inc. Annual Report to Stockholders for the year ended March 1, 1997. Part III, Items 10., 11., 12., and 13. incorporate by reference portions of the Drug Emporium, Inc. Proxy Statement for the 1997 Annual Meeting of Stockholders. With the exception of the information specifically incorporated by reference, the Drug Emporium, Inc. Annual Report to Stockholders for the year ended March 1, 1997 is not deemed filed as part of this report. 2 ITEM 1. BUSINESS INTRODUCTION In 1977, the first Drug Emporium store was opened in Columbus, Ohio. Today, the Company operates 138 company-owned stores, known as Drug Emporium, F&M Super Drug Stores and "big D" stores. In addition to the Company-owned stores, as of March 1, 1997, there are 88 franchise stores, and three stores operating under a license agreement. The accompanying financial statements include only amounts related to company-owned stores. All the stores specialize in discount-priced merchandise, including health and beauty aids, cosmetics and greeting cards. All stores with the exception of the two "big D" stores operate full service pharmacies. The Company's common stock trades on the Nasdaq National Market under the symbol DEMP. As of March 1, 1997, there were 13,153,485 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 19,000 to 38,000 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 75% of each store's total square feet. Each store has a manager, one or two assistant managers, a head pharmacist, and approximately 8 to 12 additional full-time employees. The stores are grouped into 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 and store appearance are maintained. The Company's stores are located primarily in shopping centers on major commercial thoroughfares. The capital expenditures required to fixture and equip a store averages $250,000. Pre-opening expenses, including salaries and promotional expenses, average $50,000 per store, and each store requires approximately $1,000,000 in initial inventory. The typical trade area for a Drug Emporium store encompasses 200,000 people in 75,000 households within a defined area, usually five miles. The customer profile is 80 percent middle-to-upper income women between the ages of 25 and 54 who shop on a two-and-a-half week cycle. Drug Emporium stores accommodate 8,000 to 12,000 shoppers per week and provide an environment for shoppers seeking a pleasant and social shopping experience. Drug Emporium fills a unique tenant category in a shopping center's merchandising mix. Preferably placed adjacent to a supermarket chain store, Drug Emporium stores are well received by both hard and soft goods national retailers. Most stores are open seven days a week for a total of 80 hours a week. In addition, the Company operates 24-hour stores in certain markets. 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 229 Company, franchise and licensed Drug Emporium stores by market as of March 1, 1997:
WHOLLY-OWNED: ------------- Atlanta, Augusta, GA,..........................................................................20 Philadelphia, PA...............................................................................28 Los Angeles, San Francisco, and San Diego CA...................................................21 Columbus, Cincinnati, Dayton, OH...............................................................22 Detroit, MI....................................................................................17 Baltimore, MD and Washington, DC...............................................................10 Milwaukee, WI.................................................................................. 7 St. Louis, MO and Oklahoma City, OK............................................................ 5 Louisville, KY................................................................................. 4 Minneapolis, MN............................................................................... 4 --- 138 ===
3
INDEPENDENT FRANCHISES: ----------------------- Seattle, Tacoma, WA............................................................................20 Dallas, Ft. Worth, TX..........................................................................15 Lafayette, Shreveport, LA, and Amarillo, Abilene, Denton, Longview, Lubbock, Tyler and Waco TX, Little Rock, AR, and Wichita KS...............................................................11 Phoenix, Tucson, AZ............................................................................ 9 San Antonio, Austin, Houston, TX.............................................................. 60 Charlotte, Raleigh, Durham, Concord, NC........................................................ 6 Virginia Beach, VA............................................................................. 4 Barboursville, Charleston, WV.................................................................. 4 Independence and Kansas City, MO and Overland Park KS.......................................... 3 Greensboro, Winston-Salem, NC.................................................................. 2 Union City, NJ................................................................................. 2 Victoria, Brownsville, TX...................................................................... 2 Nashville, TN.................................................................................. 2 Morris Plains, NJ.............................................................................. 1 Omaha, NE...................................................................................... 1 -- 88 == LICENSEES: ---------- Richmond, VA 3 ==
The Company considers various geographic and demographic factors, including population around the site, income level within that area, proximity to major shopping malls, traffic count, accessibility of site, proximity of competitors and available parking spaces. Extensive market research 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. The Company has implemented a computerized pharmacy system across its network of Company stores. Most franchisees have installed similar systems. The system simplifies the preparation of labels and maintenance of patient profiles. FRANCHISE OPERATIONS Drug Emporium continues to have a strong franchise-and-licensed- store network consisting of 88 franchise and 3 licensed stores. Drug Emporium maintains a Franchise Advisory Board designed to provide a forum to investigate 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 Company selects its franchisees carefully and works closely with them to increase the likelihood of success for each franchisee. Prospective franchisees sign confidentiality agreements in addition to a non-compete clause contained within the executed franchise agreement. Upon execution of a franchise agreement, the franchisee must pay a nonrefundable $25,000 fee for the first store and a $10,000 commitment fee for each additional store designated for that market. The balance of the $25,000 store fee ($15,000) is payable upon the opening of each subsequent designated store in the market. The current franchise agreement provides for franchise royalties at a minimum rate of $6,000 per store for the second year and $25,000 per year per store for stores open three years or more against the following percentage royalties: 1% on gross sales from $3.5 million to $6 million, 2% from $6 million to $8 million, 3% from $8 million to $10 million, and 1.25% on gross sales over $10 million. In addition, each franchisee must pay .1% of gross sales to the Company to offset the cost of developing advertising. Each franchisee must also spend at least 1% of gross sales for advertising. The current franchise agreement permits the Company to require that .6% of the 1% advertising expenditure be contributed to a national advertising program if such program is established by the Company. 4 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. During Fiscal 1997, Drug Emporium franchisees opened a total of five new stores and one store was opened under a license agreement. One franchise changed ownership and four franchise stores closed during the year. The license agreement allows the Drug Emporium retail concept to be operated within a grocery store with the Drug Emporium portion of sales generating a royalty fee. During fiscal 1997, licensees were charged a flat royalty fee of 1.25% of sales. 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 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. 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 66% of a typical store's sales mix is health and beauty aids and general merchandise, 26% pharmacy items and 8% cosmetics. The Company is continuing to aggressively oversee strategies designed to lower the total cost of acquiring merchandise in order to continue to be competitive with other national and regional chain discounters. The Company is continuing to invest in and upgrade its electronic in-store scanning and backdoor receiving systems. During fiscal 1997, the Company's primary pharmacy supplier and general merchandise distributor, McKesson Drug, accounted for over 30% of the Company's purchases. No other single vendor accounted for more than 10% of the Company's purchases. The Company purchases from over 500 vendors, although the great majority of the business is conducted with approximately 100 vendors. The Company believes it is a significant customer for each of these 100 vendors. The Company advertises through the use of television, radio, newspaper and direct mail. Point of sale advertising is also used. The Company's strategy of clustering stores within ADI markets is an important factor in maximizing the effectiveness of its advertising expenditures. The Company works with an advertising agency that coordinates advertising for the entire chain. Benefits of centralization include efficiencies of buys with media, coordination of chain-wide promotional activities, and ability to negotiate better prices with vendors. 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 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, the major one being Phar-Mor Inc. The Company's stores compete not only with those similar companies but with numerous other drug stores with national or regional images, and also with supermarkets, combination stores and discount stores. Many of the Company's supermarket, combination store and discount and retail drug store competitors have more outlets and substantially greater financial resources than the Company or have 5 more convenient locations than Company stores. The Company believes that its prices are competitive and that it offers greater product variety and better service than its competitors. The Company also believes that the smaller size of its stores compared to the major discount competitors provides a better shopping experience and allows a better selection of sites in tight real estate markets that exist in some major cities. The Company's ability to expand successfully into new markets is especially sensitive to the competitive factors in those markets. EMPLOYEES AND TRAINING At March 1, 1997, the Company had a total of approximately 6,500 employees, both full-time and part-time, of which 173 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 recordkeeping and licensing matters. These regulatory functions contain civil and criminal penalties for violations. The sale of franchises by the Company is subject to regulation by the Federal Trade Commission and various states in which it currently does business or in which the Company may do business in the future. Such regulations generally require the prior registration or an exemption from registration for the sale of franchises and delivery to prospective franchisees of a franchise disclosure document. No assurances can be given that any future changes in the existing laws or the promulgation of new laws will not adversely affect the Company. SERVICE MARKS The Company has obtained federal registrations of the servicemark "Drug Emporium" and "Savings So Big You Need A Shopping Cart" for retail drug store services "Drug Emporium" for technical aid and assistance in the establishment and operation of retail drug stores and "Drug Emporium", plus design, for retail drug store services. Federal registration of the service marks "Food and Drug Emporium," "Drug Emporium RX," and "Drug Emporium Express" are currently pending. The mark "Drug Emporium" has been registered in the states of Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia and Wisconsin, as well as Mexico and Puerto Rico. The mark "Savings So Big You Need A Shopping Cart" has been filed and is pending in Canada and Mexico. The mark "Drug Emporium," plus design, and the shopping cart design have been filed in Mexico, Japan and France, and the shopping cart design is registered in Canada. The Company believes that these marks are of material importance to its business. Federal registration of a mark does not create new substantive rights to use the mark or to assert rights based on ownership, but it does provide additional remedies for the protection of the mark. 6 EXECUTIVE OFFICERS OF THE COMPANY The Company's executive officers are:
Name Age Position (1) Served as Officer Since - ---------------------------------------------------------------------------------------------------------------------- David L. Kriegel 51 Chairman of the Board, Chief Executive 1992 Officer, President and Director Timothy S. McCord 38 Chief Financial Officer and Treasurer 1994 Jane H. Lagusch 51 Vice President, Secretary 1990 A. Joel Arnold 61 Senior Vice President 1995
(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. DAVID L. KRIEGEL Since December 1992, Mr. Kriegel has been the Chairman and Chief Executive Officer of the Company. Mr. Kriegel is Chairman and Chief Executive Officer of Kriegel Holding Company, Inc., a privately-owned corporation dealing with consumer products, real estate and distribution. Until January 1993, Mr. Kriegel was Vice President of Cardinal Health and Marketing Group, a division of Cardinal Distribution, Inc., a publicly owned company. From September 1988 to December 1990, Mr. Kriegel was Corporate Vice President of Roundy's Inc., a cooperative food distributor. Mr. Kriegel is a director of Bank One, Lima, N.A. TIMOTHY S. McCORD Since June 1994, Mr. McCord, a Certified Public Accountant, has served as Chief Financial Officer, and in June 1996 he was elected to the office of Treasurer. From June 1993 to June 1994, Mr. McCord was Controller of the Company. Previous to joining the Company, Mr. McCord was employed by Ernst & Young LLP, the external auditors to the Company, for ten years. JANE H. LAGUSCH 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. A. JOEL ARNOLD Mr. Arnold was appointed to the office of Senior Vice President on June 15, 1995. He formerly held the position of Director of Merchandising and Operations in which he served for two years. A registered pharmacist, Mr. Arnold has 37 years' experience in the retail drug industry. 7 ITEM 2. PROPERTIES 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 stores lease to be significant in relation to its overall operations. For information as to the amount of the Company's rental obligations for retail store leases, see Note 5 of Notes to Consolidated Financial Statements. The Company owns a 20,000 square foot executive office building and the surrounding land for use as its principal office in Powell, Ohio. The Company also owns the building and land at one of its Detroit area store locations. ITEM 3. LEGAL PROCEEDINGS Nortex Drug Distributors, Inc. v. Drug Emporium, Inc., Case No. C2-93-767, filed August 6, 1993 which is pending in the United States District Court, Southern District of Ohio, Eastern Division. The plaintiff claims a loss of investment capital, out-of-pocket expenses, loss of profits and goodwill, fraud, interference with contract, and deceptive trade practices. Plaintiff also seeks a declaration that the non-compete provision in the franchise agreement is unenforceable. The Company is aggressively defending this suit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the Nasdaq National Market under the symbol DEMP. The following table sets forth, for the quarterly periods shown, the high and low sale price per share as reported on Nasdaq National Market:
Fiscal Quarter Ended High Low - ------------------------------------------------------------------------------------------------------------------ May 27, 1995 $4.750 $4.000 August 26, 1995 $5.063 $4.000 November 25, 1995 $5.063 $3.875 March 2, 1996 $4.250 $3.250 June 1, 1996 $4.313 $3.250 August 31, 1996 $4.563 $3.688 November 30, 1996 $4.625 $3.875 March 1, 1997 $5.750 $4.125
The Company paid no dividends in fiscal 1997 or 1996. The Company's bank credit agreement prohibits payment of dividends, stock repurchases and acquisition of the Company's convertible subordinated debt. At April 28, 1997, the number of holders of record of the Company's common stock, without determination of the number of individual participants in security positions, was approximately 4,908. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item 6 is incorporated by reference from page 12 of the Drug Emporium, Inc. Annual Report to Stockholders for the year ended March 1, 1997. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item 7 is incorporated by reference from pages 13 and 14 of the Drug Emporium, Inc. Annual Report to Stockholders for the year ended March 1, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item 8 is incorporated by reference from pages 15 through 22 of the Drug Emporium, Inc. Annual Report to Stockholders for the year ended March 1, 1997. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain of the information required by this Item 10 is set forth under Item 1. "Executive Officers of the Company." * ITEM 11. EXECUTIVE COMPENSATION * ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT * ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS * * Reference is made to information under the captions "Election of Directors," "Executive Compensation," "Security Ownership of Certain Beneficial Owners and Management," and "Certain Relationships and Related Transactions," in the Company's Proxy Statement for the Annual Meeting of Stockholders to be held June 25, 1997. The Company mailed its definitive proxy statement to stockholders on or about May 19, 1997. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following Consolidated Financial Statements of Drug Emporium, Inc. are incorporated by reference in Item 8 from the pages set forth below of the Drug Emporium, Inc. Annual Report to Stockholders for the year ended March 1, 1997.
Page Nos. of Annual Report ------------- Consolidated Balance Sheets as of March 1, 1997 and March 2, 1996 15 Consolidated Statements of Operations for each of the Three Fiscal Years in the Period Ended March 1, 1997 16 Consolidated Statements of Shareholders' Equity for each of the Three Fiscal Years in the Period Ended March 1, 1997 16
9 Consolidated Statements of Cash Flows for each of the Three Fiscal Years in the Period Ended March 1, 1997 17 Notes to Consolidated Financial Statements 18-22 Report of Independent Auditors 23
(2) Financial Statement Schedules Schedules for which provision is made in Regulation S-X are not required under the instructions contained therein, are inapplicable, or the information is included in the footnotes to the Consolidated Financial Statements. (3) Exhibits List (3) Articles of Incorporation and By-Laws 3.3 Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.3 to the Company's S-1 Registration Statement No. 33-21755) (10) Material Contracts 10.1 Drug Emporium, Inc. 1983 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Company's S-1 Registration Statement Registration No. 33-21755) ** 10.2 Drug Emporium, Inc. 1984 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Company's S-1 Registration Statement Registration No. 33-21755) ** 10.3 Drug Emporium, Inc. 1987 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Company's S-1 Registration Statement Registration No. 33-21755) ** 10.4 Drug Emporium, Inc. 1990 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1990) ** 10.5 Drug Emporium, Inc. Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.5 to the Company's S-1 Registration Statement Registration No. 33-21755) ** 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 Third Amended and Restated Revolving Credit and Term Loan Agreement dated as of November 13, 1995, between Drug Emporium, Inc. and Bank One, Columbus, NA (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q for the period ended November 25, 1995) 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 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) ** *10.14 Amendments No. 1, 2 and 3 to Third Amended and Restated Revolving Credit and Term Loan Agreement dated as of November 13, 1995, (between Drug Emporium, Inc. and Bank One, Columbus, NA) and $5,000,000 Term Note dated April 18, 1997 ** *10.15 Amendment to Employment Agreement made the 11th day of March 1993 by and between Drug Emporium, Inc. and David L. Kriegel dated September 25, 1996, and Employment Security Agreements between Drug Emporium, Inc. and each of A. Joel Arnold, Jane H. Lagusch and Timothy S. McCord, dated September 25, 1996 ** *(11) Statement re Computation of Per Share Earnings 11.1 Computation of Per Share Earnings is readily computable from information disclosed in the financial statements and therefore is not included as a separate exhibit. *(13) Annual Report to Security Holders, Form 10Q or Quarterly Report to Security Holders 13.1 Annual Report to Stockholders for Fiscal Year Ended March 1, 1997. (limited to those portions incorporated herein) *(21) Subsidiaries of Registrant 21.1 The Company has the following wholly-owned subsidiaries:
State of Name Incorporation ------------------------------------------------------------------------ Drug Emporium of Michigan, Inc. Delaware Drug Emporium of Maryland, Inc. Delaware Winter Fern Drug Distributors, Inc. Ohio RJR Drug Distributors Inc. Delaware Houston Venture, Inc. Ohio Emporium Venture, Inc. Ohio
*(23) Consent of Experts 23.1 Consent of Ernst & Young LLP (27) Financial Data Schedule 27.1 Financial Data Schedule of the Company *Included with this Annual Report on Form 10-K **Compensatory plans, contracts or agreements (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of fiscal 1997. 11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DRUG EMPORIUM, INC. (Registrant) Date: May 19, 1997 By: /s/ David L. Kriegel ------------------------------ David L. Kriegel Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date: May 19, 1997 /s/ Timothy S. McCord /s/ David L. Kriegel ------------------------------------- ------------------------------------ Timothy S. McCord David L. Kriegel Chief Financial Officer and Treasurer Chairman and Chief Executive Officer /S/ Michael P. Leach /s/ Thomas D. Igoe ------------------------------------- ------------------------------------ Michael P. Leach Thomas D. Igoe Controller Director /s/ Robert S. Meeder, Sr. ------------------------------------ Robert S. Meeder, Sr. Director /s/ William L. Sweet, Jr. ------------------------------------ William L. Sweet, Jr. Director /s/ V. J. Wiechart, Sr. ------------------------------------ V. J. Wiechart, Sr. Director
EX-10.14 2 EXHIBIT 10.14 1 AMENDMENT NO. 1 TO THIRD AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT THIS AMENDMENT NO. 1, dated as of February 23, 1996 (the "Amendment") to the Third Amended and Restated Revolving Credit and Term Loan Agreement dated as of November 13, 1995 (the "Agreement"), is between DRUG EMPORIUM, INC., a Delaware corporation (the "Borrower"), and BANK ONE, COLUMBUS, NA (the"Bank"). WHEREAS, the Borrower has determined that the leases for certain retail stores which were assigned to Borrower or its affiliates from F&M Distributors, Inc., as previously identified by Borrower, provide for below market rents (the "Below Market Leases"); and WHEREAS, the Borrower desires to characterize the Below Market Leases as tangible, rather that intangible assets of the Borrower and its affiliates; and WHEREAS, the Borrower and the Bank have agreed to amend the Agreement on the terms and conditions hereinafter set forth; NOW THEREFORE, in consideration of the mutual agreements hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. AMENDMENT OF THE AGREEMENT. The definition of "Tangible Net Worth" as set forth in Section 10.1 of the Agreement is hereby amended by the addition of the following language at the end of the existing language: Notwithstanding the provisions of the preceding clause (b), "Tangible Net Worth" shall not be reduced by up to $3,957,000 of assets made up of the Below Market Leases which amount shall be treated, for purposes of this definition, as tangible assets amortized over a period not to exceed ten years. Section 2. REAFFIRMATION; NO DEFAULT. The Borrower hereby certifies that as of the date hereof: 2.1. REAFFIRMATION. The representations and warranties of the Borrower contained in the Agreement are correct and accurate as though made on and as of the date hereof. 2.2. NO EVENTS OF TERMINATION. After giving effect to this Amendment, no event has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. 1 2 Section 3. APPLICABLE LAW. This Amendment shall be deemed to be a contract made under the laws of the State of Ohio and for all purposes shall be construed in accordance with the laws of such state. Section 4. COSTS AND EXPENSES. The Borrower hereby agrees to pay on demand all costs and expenses in connection with the preparation, execution and delivery of this Amendment and any other documents to be delivered in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel to the Bank with respect thereto. Section 5. COUNTERPARTS. This Amendment may be signed in any number of counterparts with the same effect as if the signatures thereto were upon the same instrument. Complete sets of counterparts shall be lodged with the Borrower and the Bank. Section 6. CONFESSION OF JUDGMENT. Borrower hereby authorizes any attorney at law to appear for Borrower, in an action on this Amendment or the Agreement, at any time after the same becomes due, as herein provided, in any court of record in or of the State of Ohio, or elsewhere, to waive the issuing and service of process against Borrower and to confess judgment in favor of the holder of the Agreement as hereby amended or the party entitled to the benefits of the Agreement as so amended against Borrower for the amount that may be due, with interest at the rate provided in the Agreement and costs of suit, and to waive and release all errors in said proceedings and judgment, and all petitions in error, and right of appeal from the judgment rendered. Section 7. SUPPLEMENTAL AGREEMENT. The Amendment is hereby made supplemental to and as part of the Agreement. All of the terms and provisions of the Agreement, as amended above, shall remain in full force and effect from and after the date first above written, as the same may be later amended, supplemented or otherwise modified from time to time. 2 3 The parties hereto have caused this Amendment to be duly executed by their respective duly authorized officers as of the date first above written. BANK ONE, COLUMBUS, NA By: Elizabeth E. Cadwallader, Vice President DRUG EMPORIUM, INC. By: David L. Kriegel, Chief Executive Officer WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. 3 4 ACKNOWLEDGMENT AND CONSENT Each of the undersigned (collectively, the "Guarantors" and individually, a "Guarantor") hereby (a) acknowledges that it has reviewed the foregoing Amendment No. 1 to Third Amended and Restated Revolving Credit and Term Loan Agreement and consents to the terms and provisions thereof; (b) acknowledges that consent of the undersigned is not necessary to make the Subsidiary Guaranties given to the Bank by the Guarantors pursuant to the Agreement (the "Guaranties") effective as to such Amendment No. 1; (c) acknowledges that the granting of such consent by the Guarantors does not establish a pattern therefor and, whether or not future consents are granted by the Guarantors to further amendments, the obligations of the Guarantors under the Guaranties will not be affected thereby; and (d) ratifies and affirms its respective Guaranty. Dated as of the 23rd day of February, 1996. CENTERLINE, INC. WINTER FERN DRUG DISTRIBUTIONS, INC. By: By: Its: Its: RJR DRUG DISTRIBUTIONS INC. HOUSTON VENTURE, INC. By: By: Its: Its: EMPORIUM VENTURE, INC. DRUG EMPORIUM OF MARYLAND, INC. By: By: Its: Its: 4 5 DRUG EMPORIUM OF MICHIGAN, INC. By: Its: 5 6 AMENDMENT NO. 2 TO THIRD AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT DATED AS OF NOVEMBER 13, 1995 THIS AMENDMENT NO. 2 ("Amendment") is dated as of May 24, 1996, between DRUG EMPORIUM, INC. (the "Borrower") and BANK ONE, COLUMBUS, NA (the "Bank"). WITNESSETH: THAT the Borrower and the Bank, parties to that certain Third Amended and Restated Revolving Credit and Term Loan Agreement dated as of November 13, 1995, as amended by Amendment No. 1 dated February 23, 1996 (the "Agreement"), have agreed to amend the Agreement on the terms and conditions hereinafter set forth. Terms not otherwise defined herein are used as defined in the Agreement as amended hereby. NOW, THEREFORE, the Borrower and the Bank hereby agree as follows: SECTION 1. AMENDMENT OF THE AGREEMENT. The Agreement is, effective the date hereof, hereby amended as follows: SECTION 1.1. Section 1.1.1 shall be amended by deleting "February 28" and inserting in place thereof "May 31". SECTION 1.2. The first sentence in Section 1.1.2 shall be amended by deleting "$45,000,000 thereafter'' and inserting in place thereof "$60,000,000 from May 24, 1996 until and including February 28, 1997 or (c) $55,000,000 thereafter." SECTION 1.3. Section 4.2 shall be amended by adding the following to the end thereof: "As an additional condition precedent to the obligation of the Bank to provide or extend any Credit hereunder, Borrower shall furnish to the Bank an aging report regarding the Accounts." SECTION 1.4. The chart in Section 7.4 shall be deleted and replaced with the following: - 1 - 7 PERIOD RATIO - -------------------------------------------------------------------------- Date hereof until and including August 31, 1996 1.60:1.00 - -------------------------------------------------------------------------- September 1, 1996 until and including March 1, 1997 1.50:1.00 - -------------------------------------------------------------------------- March 2, 1997 until and including March 1, 1998 1.35:1.00 - -------------------------------------------------------------------------- March 2, 1998 and thereafter 1.25:1.00 - -------------------------------------------------------------------------- SECTION 1.5. Section 7.5 shall be amended by deleting "March 31" and inserting in place thereof "August 31". SECTION 1.6. The definition of "Borrowing Base" under Section 10.1 shall be deleted and replaced with the following: "Borrowing Base" means the Net Value of Eligible Accounts plus the Net Value of eligible Inventory. SECTION 1.7. The definition of "Borrowing Base Certificate" under Section 10.1 shall be deleted and replaced with the following: "Borrowing Base Certificate" means a certificate, in the form required by the Bank, signed by a duly authorized officer of the Borrower, that computes the Borrowing Base, together with any memo of returns and credits, remittance report, schedule of Accounts and such other supporting documents and materials which the Bank, in its sole discretion, may require to be delivered with such certificate, in the form attached hereto. SECTION 1.8. The definition of "Current Assets" under Section 10.1 shall be deleted and replaced with the following: "Current Assets" means all assets which may properly be classified as current assets in accordance with generally accepted accounting principles applied on a consistent basis plus 100% of any LIFO reserve as of the date of determination, except that amounts due from unconsolidated Subsidiaries and Affiliates shall be excluded. - 2 - 8 SECTION 1.9. The definition of "Current Liabilities" under Section 10.1 shall be deleted and replaced with the following: "Current Liabilities" means all Liabilities as may properly be classified as current Liabilities in accordance with generally accepted accounting principles applied on a consistent basis, plus 40% of any LIFO reserve as of the date of determination, and the principal amount of all Revolving Credit Loans which are outstanding hereunder but shall not include up to $3,000,000 in reserves reasonably established by the Borrower in February 1996 in connection with the Disposition. SECTION 1.10. The definition of "LIBO Rate Period" under Section 10.1 shall be amended by deleting the words "plus 60% of any LIFO reserve". SECTION 1.11. The following new definitions shall be added in Section 10.1: "Account" means and includes all accounts (whether or not earned by performance), contract rights, chattel paper, instruments, documents, general intangibles (including, without limitation, tax refunds and tax refund claims) and all other forms of obligations owing to the Borrower, whether secured or unsecured, whether now existing or hereafter created, and whether or not specifically assigned to the Bank under the Loan Documents, all guaranties and other security therefor, all merchandise returned to or repossessed by the Borrower, and all rights of stoppage in transit and all other rights and remedies of an unpaid vendor, lienor or secured party. "Customer" means any Person who is obligated as an account debtor or other obligor on, under or in connection with any Account. "Defaulted Account" means an Account that a Customer has not satisfied in full on or before the 90th day after the date an invoice is issued. "Eligible Account" means each Account of the Borrower which, at the time of determination, meets all the following qualifications: (a) the Borrower has lawful and absolute title to such Account, subject only to the Lien of the Bank given by the Agreement; such Lien constitutes a perfected Lien in the Account prior to the rights of any other Person and such Account is not subject to any other Lien whatsoever; (b) the Borrower has the full unqualified right to grant a Lien in such Account to the Bank as security and collateral for the amounts owing hereunder - 3 - 9 and under the Notes; (c) the Account is evidenced by an invoice issued to the proper Customer and is not evidenced by any instrument or chattel paper; (d) the Account arose from the sale of goods by the Borrower in the ordinary course of business, which goods have been shipped or delivered to the Customer under such Account; and such sale was an absolute sale and not on consignment, approval or a sale-and-return basis; (e) no notice of the bankruptcy, receivership, reorganization, insolvency, or financial embarrassment of the Customer has been received by the Borrower; (f) the Account is a valid, legally enforceable obligation of the Customer, and is not subject to any dispute, offset, counterclaim, or other defense on the part of such Customer; (g) it is not a Defaulted Account; (h) the terms of the Account require payment no more than 90 days from the date an invoice is issued; (i) the Customer on the Account is not (1) the United States of America or any foreign government, or any department, agency or instrumentality thereof, (2) the Borrower, or any Affiliate, or (3) located outside the United States or Canada, unless the sale is secured by a letter of credit on which the Bank is the sole beneficiary and the form, substance and issuer of which are acceptable to the Bank; (j) the Borrower is not indebted to the Customer on the Account (or any affiliate of such Customer) for any goods provided or services rendered to the Borrower; (k) the Account is not owing by any Customer with 25% or more of the value of its outstanding Accounts not qualifying as Eligible Accounts; (l) the Account is an Account representing all or part of the sales price of merchandise, insurance and service within the meaning of Section 3(c)(5) of the Investment Company Act of 1940, as amended; (m) a purchase of the Account would constitute a "current transaction " within the meaning of Section 3(a)(3) of the Securities Act of 1933, as amended; (n) the Account is denominated and payable only in United States dollars in the United States; and (o) the Bank, acting in its sole discretion, has not notified the Borrower the Account may not be considered as an Eligible Account. "Net Value of Eligible Accounts" means 75% of the lower of the book value or collectible value of Eligible Accounts, as reflected in the Borrower's books in accordance with GAAP, net of all credits, discounts and allowances (including all unissued credits in the form of a competitive allowance or otherwise); provided, however, that the Net Value of Eligible Accounts shall not exceed $7,500,000. - 4 - 10 "Net Value of Eligible Inventory" means (a) 40% of the value of the Eligible Inventory from the date hereof until and including December 31, 1996 or (b) 35% of the value of the Eligible Inventory thereafter. SECTION 1.12. Section 10.2 shall be amended and restated in its entirety as follows: 10.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements of Borrower, provided however, that for the purposes of calculating the financial covenants in Section 7.2., 7.3., 7.4., 7.5. and 7.6., the LIBO Fixed Charge Coverage Ratio and the LIBO Senior Leverage Ratio, the Borrower may exclude up to $3,000,000 of a one-time non-cash charge incurred in fiscal 1997 as a result of adopting SASB 121. SECTION 2. CONDITIONS PRECEDENT TO EXTENSION OF CREDIT. Prior to the extension of Credit hereunder, Borrower shall furnish to the Bank all of the following, each dated the date hereof in form and substance satisfactory to the Bank: SECTION 2.1. Landlord Waivers. A Landlord's Waiver and Consent substantially in the form attached hereto as Exhibit A from those of its landlords in the jurisdictions where Eagleville Pharmacy, Inc.'s stores are located and where such landlords are given a statutory Lien superior to or para passu with the Lien granted to the Bank under the Loan Documents. SECTION 2.2. Financing Statements. Copies of duly completed and executed Uniform Commercial Code financing statements or statements of assignment or statements of amendment with respect to the property covered by the Security Agreement, in proper form for filing in all jurisdictions in which such filing is necessary or appropriate to establish, perfect, protect and preserve the rights, titles, interests, remedies, powers, privileges and Liens of the Bank in the Accounts, Inventory and other personal property of Eagleville Pharmacy, Inc. being acquired by the Borrower. SECTION 2.3. Liens and Other Searches. Results of record searches by a Person satisfactory to the Bank, of the Uniform Commercial Code filings which may have been filed with respect to the personal property of Borrower in the state and county filing offices and real estate records in each of the jurisdictions requested by the Bank, and of judgment and tax Liens with respect to Borrower. SECTION 2.4. Consent of Guarantors. A properly executed Consent of Guarantor of each of the guarantors under the Agreement. - 5 - 11 SECTION 2.5. Revolving Credit Note. A properly executed First Amendment to Third Amended and Restated Revolving Credit Note, issued by the Borrower to the Bank in the principal amount of $60,000,000 in the form attached hereto as Exhibit B. SECTION 2.6. Opinion of Counsel. The favorable opinion of Emens, Kegler, Brown, Hill & Ritter, addressed to the Bank in the form attached to the Agreement as Exhibit 4.7(k). SECTION 2.7. Assignment of Indemnification Right. A properly executed Assignment of Indemnification Right in the form attached hereto as Exhibit C. SECTION 2.8. Estoppel Letters. An estoppel letter agreement executed by each secured creditor acknowledging that it no longer has a Lien in the inventory of Eagleville Pharmacy, Inc., substantially in the form attached hereto as Exhibit D. SECTION 3. GOVERNING LAWS. This Amendment No. 2 shall be governed by and construed in accordance with the laws of the State of Ohio. SECTION 4. COSTS AND EXPENSES. All costs and expenses of the Bank in connection with the preparation, execution and delivery of this Amendment No. 2 and the other documents to be delivered in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of outside legal counsel incurred by the Bank or any Persons participating in the Loans pursuant to Section 9 of the Agreement with respect thereto shall be paid by the Borrower, on demand. SECTION 5. COUNTERPARTS. This Amendment No. 2 may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be original and all of which when taken together shall constitute one and the same agreement. SECTION 6. CONFESSION OF JUDGMENT. The Borrower hereby authorizes any attorney at law to appear for the Borrower, in an action on the Agreement, at any time after the same becomes due, as herein provided, in any court of record in or of the State of Ohio, or elsewhere, to waive the issuing and service of process against the Borrower and to confess judgment in favor of the holder of the Agreement or the party entitled to the benefits of the Agreement against the Borrower for the amount that may be due, with interest at the rate herein mentioned and costs of suit, and to waive and release all errors in said proceedings and judgment, and all petitions in error, and right of appeal from the judgment rendered. SECTION 7. REAFFIRMATION OR REPRESENTATIONS AND WARRANTIES; NO DEFAULTS. The Borrower hereby expressly acknowledges and confirms that the representations and warranties of the Borrower set forth in Section 5 of the Agreement are true and accurate on this date with the same. - 6 - 12 effect as if made on and as of this date; that no financial condition or circumstance exists which would inevitably result in the occurrence of an Event of Default under Section 8 of the Agreement; and that no event has occurred or no condition exists which constitutes, or with the running of time or the giving of notice would constitute an Event of Default under Section 8 of the Agreement. SECTION 8. REAFFIRMATION OF DOCUMENTS. Except as herein expressly modified, the parties hereto ratify and confirm all of the terms, conditions warranties and covenants of the Agreement, and all security agreements, pledge agreements, mortgage deeds, assignments, subordination agreements, or other instruments or documents executed in connection with the Agreement, including provisions for the payment of the Notes pursuant to the terms of the Agreement. This Amendment No. 2 does not constitute the extinguishment of any obligation or indebtedness previously incurred, nor does it in any manner affect or impair any security interest granted to the Bank, all of such security interests to be continued in full force and effect until the indebtedness described herein is fully satisfied. - 7 - 13 The Borrower and the Bank have executed this Amendment No. 2 as of the date first above written. BANK ONE, COLUMBUS, NA By: Name: Elizabeth E. Cadwallader Its: Vice President WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. -8- 14 DRUG EMPORIUM, INC. By: Name: Its: -9- 15 EXHIBIT A FORM OF LANDLORD'S WAIVER AND CONSENT -10- 16 EXHIBIT B FIRST AMENDMENT TO THIRD AMENDED AND RESTATED REVOLVING CREDIT NOTE -11- 17 EXHIBIT C ASSIGNMENT OF INDEMNIFICATION RIGHT -12- 18 EXHIBIT D ESTOPPEL LETTER -13- 19 AMENDMENT NO. 3 TO THIRD AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT DATED AS OF NOVEMBER 13, 1995 THIS AMENDMENT NO. 3 ("Amendment") is dated as of December 13, 1996, between DRUG EMPORIUM, INC. (the "Borrower") and BANK ONE, COLUMBUS, NA (the "Bank"). WITNESSETH: THAT the Borrower and the Bank, parties to that certain Third Amended and Restated Revolving Credit and Term Loan Agreement dated as of November 13, 1995, as amended by Amendment No. 1 dated February 23, 1996 and Amendment No. 2 dated May 24, 1996 (the "Agreement"), have agreed to amend the Agreement on the terms and conditions hereinafter set forth. Terms not otherwise defined herein are used as defined in the Agreement as amended hereby. NOW, THEREFORE, the Borrower and the Bank hereby agree as follows: SECTION 1. AMENDMENT OF THE AGREEMENT. The Agreement is, effective the date hereof, hereby amended as follows: SECTION 1.1. Section 1.1.1 shall be amended by deleting "May 31, 1999" and inserting in place thereof "May 31, 2000". SECTION 1.2. Section 1.1.3(a) shall be amended by deleting "180 after the date of issuance" and inserting in place thereof "180 days after the date of issuance for documentary Letters of Credit or 365 days after the date of issuance for standby Letters of Credit"; and by adding the following to the end thereof "provided however, that the face amount of standby Letters of Credit shall never exceed $2,000,000." SECTION 1.3. Section 1.3.1 shall be amended by deleting "3/8 of 1%" and inserting in place thereof "1/4 of 1%". SECTION 1.4. Section 1.3.2 shall be amended by adding the following to the end of the first sentence thereof "provided however, that the Borrower shall pay an issuance fee of two percent (2%) per annum of the face amount of standby Letters of Credit." 20 SECTION 1.5. Section 1.5.2 shall be deleted and replaced in its entirety with the following: 1.5.2. Interest on Variable Rate Loans. Each Variable Rate Loan shall bear interest on the unpaid principal balance of such Loan for each day from the day such Loan is made until it becomes due, at a fluctuating rate per annum equal to the rate set forth in Section 1.9. Interest on all Variable Rate Loans shall be calculated on the basis of the actual number of days elapsed over a year of 360 days. Any change in the interest rate on a Variable Rate Loan due to a change in the Prime Rate shall take effect, without notice to Borrower, at the opening of business on the date of such change in the Prime Rate. Interest on the Variable Rate Loans shall be payable quarterly on the last day of each February, May, August and November commencing on the first such date following the initial Variable Rate Loan. SECTION 1.6. Section 1.5.3 shall be deleted and replaced in its entirety with the following: 1.5.3. Interest on LIBO Rate Loans. Each LIBO Rate Loan shall bear interest on the outstanding principal amount of such Loan for each day from the day such Loan is made until it becomes due, at a rate per annum equal to the rate set forth in Section 1.9. Borrower shall pay, with respect to each LIBO Rate Loan, such additional amounts as shall be determined pursuant to Section 1.6. Interest on each LIBO Rate Loan shall be payable at the maturity of such Loan. Interest on all LIBO Rate Loans shall be calculated on the actual number of days elapsed over a year of 360 days. SECTION 1.7. A new Section 1.9 shall be added that reads as follows: 1.9. INTEREST RATES. The interest rate for Variable Rate Loans and LIBO Rate Loans shall be based upon the Borrower's LIBO Fixed Charge Coverage Ratio and LIBO Senior Leverage Ratio. If the Borrower satisfies both conditions or the applicable section of the following chart, then the Borrower may borrow at the corresponding rates:
- ------------------------------------------------------------------- -------------------------- ------------------------ APPLICABLE RATIO VARIABLE RATE LOANS LIBO RATE LOANS - ------------------------------------------------------------------- -------------------------- ------------------------ LIBO Fixed Charge Coverage Ratio of 1.20:1.00 or greater, and a Prime Rate minus 50 LIBO Rate + 175 LIBO Senior Leverage Ratio of 1.05:1.0 or less basis points basis points - ------------------------------------------------------------------- -------------------------- ------------------------ LIBO Fixed Charge Coverage Ratio of 1.10:1.00 or greater, and a Prime Rate LIBO Rate + 200 LIBO Senior Leverage Ratio of 1.20:1.0 or less basis points - ------------------------------------------------------------------- -------------------------- ------------------------ LIBO Fixed Charge Coverage Ratio of 1.05:1.00 or greater, and a Prime Rate LIBO Rate + 225 LIBO Senior Leverage Ratio of 1.35:1.0 or less basis points - ------------------------------------------------------------------- -------------------------- ------------------------ LIBO Fixed Charge Coverage Ratio of less than 1.05:1.00, or a Prime Rate Not Available LIBO Senior Leverage Ratio of more than 1.35:1.0 - ------------------------------------------------------------------- -------------------------- ------------------------
- 2 - 21 SECTION 1.8. Section 2.2.2 shall be deleted and replaced in its entirety with the following: 2.2.2. Unless Borrower has elected, from time to time, in accordance with the provisions of Section 2.2.3 to cause all or a portion of the Term Note to bear interest at a LIBO Rate, the Term Note shall bear interest on the unpaid principal balance thereof calculated on the basis of the actual number of days elapsed over a year of 360 days on the unpaid principal balance thereof at a fluctuating rate per annum equal to the rate for Variable Rate Loans set forth in Section 1.9. Any change in the interest rate due to a change in the Prime Rate shall take effect, without notice to Borrower, at the opening of business on the date of the change in the Prime Rate. SECTION 1.9. The chart in Section 7.2 shall be deleted and replaced with the following:
------------------------------------------------------------- --------------------------- PERIOD TANGIBLE NET WORTH ------------------------------------------------------------- --------------------------- August 31, 1996 until and including February 28, 1998 $53,000,000 ------------------------------------------------------------- --------------------------- March 1, 1998 and thereafter $56,000,000 ------------------------------------------------------------- ---------------------------
SECTION 1.10. The chart in Section 7.3 shall be deleted and replaced with the following:
-------------------------------------------------------------------- -------------------- PERIOD RATIO -------------------------------------------------------------------- -------------------- From each October 1 until and including the following March 31 1.35:1.00 -------------------------------------------------------------------- -------------------- During the remainder of each year 1.50:1.00 -------------------------------------------------------------------- --------------------
SECTION 1.11. The chart in Section 7.4 shall be deleted and replaced with the following:
-------------------------------------------------------------------- -------------------- PERIOD RATIO -------------------------------------------------------------------- -------------------- November 1, 1996 and thereafter 1.50:1.00 -------------------------------------------------------------------- --------------------
- 3 - 22 SECTION 1.12. The chart in Section 7.6 shall be deleted and replaced with the following:
-------------------------------------------------------------------- -------------------- PERIOD RATIO -------------------------------------------------------------------- -------------------- November 1, 1996 and thereafter 1.05:1.00 -------------------------------------------------------------------- --------------------
SECTION 1.13. The definition of "Letter of Credit" under Section 10.1 shall be amended by deleting the second sentence. SECTION 1.14. The definition of "LIBO Rate" under Section 10.1 shall be deleted and replaced in its entirety with the following: "LIBO Rate" means, as of the date of each LIBO Rate Loan, the rate of interest (rounded upward, if necessary, to the next highest 1/16th of 1%) at which the Bank was offered deposits in United States dollars in the London Interbank LIBO Market on the second London Banking Day preceding the date of such LIBO Rate Loan for delivery on the date of such LIBO Rate Loan, for deposits for a like period as such LIBO Rate Loan and in an amount equal to the amount of such LIBO Rate Loan plus the applicable basis point margin set forth in Section 1.9 and any additional costs provided for in Section 1.5.4. SECTION 1.15. The definition of "LIBO Rate Period" under Section 10.1 shall be amended by (i) deleting "2.0:1.0" and inserting in place thereof "1.35:1.0", and (ii) deleting "1.10:1.00" and inserting in place thereof "1.05:1.0". SECTION 2. CONDITIONS PRECEDENT TO EXTENSION OF CREDIT. Prior to the extension of Credit hereunder, Borrower shall furnish to the Bank all of the following, each dated the date hereof in form and substance satisfactory to the Bank: SECTION 2.1. Liens and Other Searches. Results of record searches by a Person satisfactory to the Bank, of the Uniform Commercial Code filings which may have been filed with respect to the personal property of Borrower in the state and county filing offices and real estate records in each of the jurisdictions requested by the Bank, and of judgment and tax Liens with respect to Borrower. SECTION 2.2. Consent of Guarantors. A properly executed Consent of Guarantor of each of the guarantors under the Agreement. SECTION 2.3. Revolving Credit Note. A properly executed Second Amendment to Third Amended and Restated Revolving Credit Note, issued by the Borrower to the Bank in the principal amount of $60,000,000 in the form attached hereto as Exhibit A. SECTION 2.4. Opinion of Counsel. The favorable opinion of Borrower's counsel, addressed to the Bank in the form attached to the Agreement as Exhibit 4.7(k). - 4 - 23 SECTION 3. GOVERNING LAW. This Amendment No. 3 shall be governed by and construed in accordance with the laws of the State of Ohio. SECTION 4. COSTS AND EXPENSES. All costs and expenses of the Bank in connection with the preparation, execution and delivery of this Amendment No. 3 and the other documents to be delivered in connection herewith, including, without limitation, the reasonable fees and out-of-pocket expenses of outside legal counsel incurred by the Bank or any Persons participating in the Loans pursuant to Section 9 of the Agreement with respect thereto shall be paid by the Borrower, on demand. SECTION 5. COUNTERPARTS. This Amendment No. 3 may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. SECTION 6. CONFESSION OF JUDGMENT. The Borrower hereby authorizes any attorney at law to appear for the Borrower, in an action on the Agreement, at any time after the same becomes due, as herein provided, in any court of record in or of the State of Ohio, or elsewhere, to waive the issuing and service of process against the Borrower and to confess judgment in favor of the holder of the Agreement or the party entitled to the benefits of the Agreement against the Borrower for the amount that may be due, with interest at the rate herein mentioned and costs of suit, and to waive and release all errors in said proceedings and judgment, and all petitions in error, and right of appeal from the judgment rendered. SECTION 7. REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES; NO DEFAULTS. The Borrower hereby expressly acknowledges and confirms that the representations and warranties of the Borrower set forth in Section 5 of the Agreement are true and accurate on this date with the same effect as if made on and as of this date; that no financial condition or circumstance exists which would inevitably result in the occurrence of an Event of Default under Section 8 of the Agreement; and that no event has occurred or no condition exists which constitutes, or with the running of time or the giving of notice would constitute an Event of Default under Section 8 of the Agreement. SECTION 8. REAFFIRMATION OF DOCUMENTS. Except as herein expressly modified, the parties hereto ratify and confirm all of the terms, conditions, warranties and covenants of the Agreement, and all security agreements, pledge agreements, mortgage deeds, assignments, subordination agreements, or other instruments or documents executed in connection with the Agreement, including provisions for the payment of the Notes pursuant to the terms of the Agreement. This Amendment No. 3 does not constitute the extinguishment of any obligation or indebtedness previously incurred, nor does it in any manner affect or impair any security interest granted to the Bank, all of such security interests to be continued in full force and effect until the indebtedness described herein is fully satisfied. - 5 - 24 The Borrower and the Bank have executed this Amendment No. 3 as of the date first above written. BANK ONE, COLUMBUS, NA By: /s/ ELIZABETH E. CADWALLADER ------------------------------------ Name: Elizabeth E. Cadwallader Its: Vice President WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. DRUG EMPORIUM, INC. By: /s/ DAVID L. KRIEGEL ------------------------------------ Name: David L. Kriegel, Its: Chief Executive Officer - 6 - 25 EXHIBIT A SECOND AMENDMENT TO THIRD AMENDED AND RESTATED REVOLVING CREDIT NOTE - 7 - 26 TERM NOTE $5,000,000 Powell, Ohio April 18, 1997 On or before May 30, 1997, (the "Maturity Date") for value received, the undersigned, DRUG EMPORIUM, INC., a Delaware corporation (the "Company"), hereby promises to pay to the order of BANK ONE, COLUMBUS, NA (the "Lender") or its assigns, as further provided in this promissory note ("Note"), the principal amount of Five Million Dollars ($5,000,000), together with interest on the unpaid principal balance from time to time outstanding hereunder until paid in full, at the rates determined and payable at the times as herein specified. Both principal and interest are payable in federal funds or other immediately available money of the United States of America at the Main Office of the Lender, Bank One, Columbus, NA, 100 East Broad Street, Columbus, Ohio. Section 1. Defined Terms. Term not defined herein have the meanings given to them in the Third Amended and Restated Revolving Credit and Term Loan Agreement, dated as of November 13, 1995, between the Company and the Lender, as amended by Amendment No. 1 dated May 24, 1996, Amendment No. 2 dated May 24, 1996 and Amendment No. 3 dated December 13, 1996, and as the same may be amended, modified or supplemented from time to time (the "Agreement"). Section 2. Payments. The principal amount of this Note and all accrued interest thereon are due and payable on the Maturity Date. 2.1. Interest. Interest on the outstanding principal amount, for each day from the date hereof until this Note is paid in full, shall be at a rate per annum equal to the rate of interest for such day publicly announced from time to time by the Lender as its prime rate. All interest under this Note shall be computed on the basis of the actual days elapsed in a year of 360 days. Section 3. Prepayment. The principal of this Note may be prepaid in whole at any time or in part from time to time. Section 4. Security. This note is secured by and entitled to the benefits of (a) the Security Agreement, (b) the Pledge Agreement, (c) the Subsidiary Guaranties and (d) the Subsidiary Security Agreements, each as amended from time to time (collectively, the "Security Documents"). Section 5. Default. 5.1. Events of Default. There shall exist an "Event of Default" if any of the following occurs: 5.1.1. The Company fails to make a payment of interest or principal on the Note when and as due. 27 5.1.2. An "Event of Default" (as defined in Section 8 of the Agreement) occurs under the Agreement. 5.2. Acceleration. At any time after an Event of Default, the Lender shall have the right to make a demand for payment upon the Company, whereupon the principal amount of this Note, all accrued interest thereon, all fees, costs and all such other amounts owing hereunder and under the Security Documents shall become forthwith due and payable, without presentment, demand, protest or other notice of any kind, all of which is hereby expressly waived by the Company, notwithstanding anything contained in the Security Documents to the contrary. In respect of the Collateral (as defined in the Security Documents) or any part thereof, the Lender shall have such rights and remedies as are provided by the UCC and such other rights and remedies in respect thereof which the Lender may have at law or in equity or under the Security Documents, including without limitation the right to enter any premises where any of the Collateral is located and take possession of the same without demand or notice and without prior judicial hearing or legal proceedings, which the Company hereby expressly waives, and to sell all or any portion of the Collateral at public or private sale after 10 days' notice, which the Company hereby agrees is reasonable notice for such sale, at such place or places and at such time or times and in such manner and upon such terms, whether for cash or on credit, as the Lender in its sole discretion may determine, as well as such other rights and remedies as are provided in the Security Documents. Upon any such sale of any of the Collateral, the Lender may purchase all or any of the Collateral being sold, free from any equity or right of redemption. The Lender shall apply the proceeds of any such sale and any proceeds received by the Lender from the collection of accounts and proceeds to the Obligations (as defined in the Security Documents). If such proceeds are insufficient to pay the amounts required by law, the Company shall be liable for any deficiency in the amount so realized from its Collateral. The rights and remedies of the Lender expressly specified in the Agreement are cumulative and not exclusive of any other rights and remedies which the Lender would otherwise have. If the Lender commences a proceeding to take possession of the Collateral under this Note or the Security Documents, the Company waives the requirement, if any, that the Lender post a bond or any other type of security. Section 6. Setoffs. Upon the occurrence of any Event of Default, the holder hereof shall have the right to setoff against all obligations of the Company hereunder or under any of the Security Documents, whether matured or unmatured, all amounts owing to the Company or any wholly-owned subsidiary of the Company by the holder hereof or any affiliate of the holder hereof, whether or not then due and payable, and all other funds or property of the Company or any wholly-owned subsidiary of the Company on deposit with or otherwise held by or in the custody of the holder hereof or any affiliate of the holder hereof for the beneficial account of the Company or any wholly-owned subsidiary of the Company. Section 7. Miscellaneous. 7.1. Successors and Assigns. Whenever in this Note either of the parties is referred to, such reference shall include the successors and assigns of such party; and all terms and provisions 2 28 of this Note shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 7.2. Notices. Notices, demands and communications shall be deemed to have been properly given to Company when faxed to (614) 548-6541 or deposited in the United States mail, registered or certified, postage prepaid, and addressed to Company at 155 Hidden Ravines Drive, Powell, Ohio 43065, Attention: Chief Executive Officer, or hand delivered to the same address. Any communication to the Lender shall be deemed properly given if faxed, hand delivered or similarly mailed as follows: Bank One, Columbus, NA Commercial Loan Department 100 East Broad Street Columbus, Ohio 43271-0170 Fax: (614) 248-5518 7.3. No Implied Waivers. No delay on the part of the Lender in exercising any right, power or privilege granted hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof. The rights and remedies herein expressly specified are cumulative and not exclusive of any other rights and remedies which the Lender would otherwise have. 7.4. Amendments, Modifications, Etc. No amendment, modification, termination, or waiver of any provision of this Note nor consent to any departure by Company therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice or demand on Company in any case shall entitle Company to any other or further notice or demand in similar or other circumstances. 7.5. Applicable Law. This Note shall be deemed to be contracts made under the laws of the State of Ohio, and for all purposes shall be construed in accordance with the laws of such state. 7.6. Severability. Any provision of this Note which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. 7.7. Expenses. All fees, costs or expenses, including reasonable fees and expenses of outside legal counsel incurred by the Lender in connection with the preparation, administration, amendment, modification or enforcement of the Note shall be paid by Company on demand. 7.8. Counterparts. This Note may be signed in any number of counterparts with the same effect as if the signatures thereto were upon the same instrument. Complete sets of counterparts shall be lodged with Company and the Lender. 3 29 7.9. Entire Agreement. The Note and Security Documents set forth the entire understanding between the parties concerning the subject matter thereof and incorporate all prior negotiations and understandings. There are no covenants, promises, agreements, conditions or understandings, either oral or written, between them relating to the subject matter of this Note other than those set forth in the Note and Security Documents. No representation or warranty has been made by or on behalf of any party to the Note and Security Documents (or any officer, director, employee or agent thereof) to induce the other parties to enter into the Note and Security Documents or to abide by or consummate any transactions contemplated by any term of the Note, except representations and warranties, if any, expressly set forth or referred to in the Note and Security Documents. 7.10. Headings. Headings of the sections of this Note are for convenience only and shall not affect the construction of this Note. 7.11. Effective Date. This Note shall become effective upon the execution of a counterpart hereof by each of the parties. 7.12. Confession of Judgment. Company hereby authorizes any attorney at law to appear for Company, in an action on the Note, at any time after the same becomes due, as herein provided, in any court of record in or of the State of Ohio, or elsewhere, to waive the issuing and service of process against Company and to confess judgment in favor of the holder of the Note or the party entitled to the benefits of the Note against Company for the amount that may be due, with interest at the rate herein mentioned and costs of suit, and to waive and release all errors in said proceedings and judgment, and all petitions in error, and right of appeal from the judgment rendered. 7.13. Time. Unless otherwise stated, all time references set forth herein are stated in Columbus, Ohio time. 7.14. Consent to Jurisdiction; Service. As a specifically bargained inducement for the transactions set forth herein, the parties hereto specifically agree that any action, suit or proceeding in respect of or arising from or out of this Note, its validity or performance, shall be initiated and prosecuted as to all parties and their successors and assigns at Columbus, Ohio except to the extent that such exclusive jurisdiction would be inconsistent with the Lender's exercise of its rights under Section 7.12 hereof. The parties hereto consent to and submit to the exercise of jurisdiction over their person by any court situated at Columbus, Ohio, including without limitation the United States District Court for the Southern District of Ohio and having jurisdiction over the subject matter hereof and the Company hereby irrevocably appoints and designates CT Corporation System its current agent for service of process in the State of Ohio (the "Agent") as its true and lawful attorney in fact and duly authorized agent for service of legal process and agrees that service of such process upon such attorney in fact shall constitute personal service of such process upon such party. Company hereby agrees to maintain the Agent as its statutory agent for service of process in the State of Ohio during the term of this Note. 4 30 7.15. Waiver of Jury Trial. THE LENDER AND THE COMPANY HEREBY VOLUNTARILY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN THE LENDER AND THE COMPANY ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THE COMPANY AND THE LENDER IN CONNECTION WITH THIS NOTE, OR ANY OTHER NOTE OR DOCUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT TO THE LENDER TO ENTER INTO THE FINANCING TRANSACTIONS WITH THE COMPANY. IT SHALL NOT IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND OR MODIFY THE LENDER'S ABILITY TO PURSUE ITS REMEDIES INCLUDING, BUT NOT LIMITED TO, ANY CONFESSION OF JUDGMENT OR COGNOVIT PROVISION CONTAINED IN THIS NOTE OR ANY OTHER DOCUMENT RELATED HERETO. WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY OTHER CAUSE. DRUG EMPORIUM, INC. By: /s/ TIMOTHY S. MCCORD -------------------------------------------- Timothy S. McCord, Chief Financial Officer 5 EX-10.15 3 EXHIBIT 10.15 1 Exhibit 10.15 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT amends the Employment Agreement made the 11th day of March, 1993 by and between DRUG EMPORIUM, INC., a Delaware Corporation having its principal executive offices at 155 Hidden Ravines Drive, Powell, Ohio 43065 (the "Company"), and DAVID L. KRIEGEL, an individual residing at 8626 Scotscraig Court, Dublin, Ohio 43017 ("Kriegel"), and is entered into this ____ day of _________________, 1996. WHEREAS Kriegel is employed as Chairman and Chief Executive Officer of Company, and has served in that capacity since December 1, 1992; and WHEREAS the Company is approached from time to time by outside individuals and others who have an interest in acquiring all or a portion of the Company's stock, some of whom have a background indicating the capability of operating the Company, and some of whom do not; and WHEREAS the Company desires to evaluate such individuals, companies and potential offers in the best interests of its shareholders, without the distraction of the effect of a change in control on its Chief Executive Officer; and WHEREAS the Company also wants to assure managerial continuity and stability during any takeover attempt. NOW, THEREFORE, in consideration of the foregoing and of the agreements and covenants herein contained, Company and Kriegel agree that the Employment Agreement between them dated March 11, 1993, be amended as follows: 1. The Company agrees that if: a. There is a change in control of the Company as defined herein; and b. Kriegel leaves the employment of the Company for any reason, other than discharge for cause as defined in the Employment Agreement between Kriegel and Company, within one year after such change in control; then (1) Kriegel shall receive, in a lump sum, a cash payment in the amount of the total of the salary and bonus received by Kriegel from the Company in the last three full fiscal years prior to the date of the change in control; (2) Kriegel shall continue to receive all employment benefits, including medical benefits, health insurance and other, to which he may be entitled as a member of senior management of the Company for a period of 36 months after the date of such change of control; 2 (3) Kriegel shall receive an additional retirement benefit, over and above that to which he would normally be entitled under the Company's retirement plans, equal to the actuarial equivalent of the additional amount Kriegel would have earned under such retirement plans or programs had he accumulated three additional continuous years of service. Such amount shall be paid to Kriegel in a cash lump sum payment at his normal retirement age, or, at Kriegel's option, at his early retirement age as provided for in such retirement plan. Notwithstanding the provisions of subparagraphs (1), (2) and (3) above, the aggregate present value of the payments in the nature of compensation Kriegel shall receive hereunder shall not exceed an amount determined by multiplying three (3) times the aggregate present value of Kriegel's base amount calculated in accordance with Internal Revenue Code Section 280G by ninety-nine percent (99%). 2. The amounts paid to Kriegel hereunder shall be considered severance pay in consideration of the past services he has rendered to the Company and in consideration of his continued service from the date hereof to his entitlement to those payments. Kriegel shall have no duty to mitigate his damages by seeking other employment. Should Kriegel actually receive payments from any other employment, the payments called for hereunder shall not be reduced or offset by any such payments. 3. As used herein, the term "change in control" shall mean either: a. The ownership (whether direct or indirect) of shares in excess of 50% of the outstanding shares of common stock of the Company by a person or group of persons not directors of the Company as of the date of this agreement; or b. The occurrence of both of the following: (1) The ownership (whether direct or indirect) of shares in excess of 20% of the outstanding shares of common stock of the Company by a person or group of persons not directors of the Company as of the date of this Agreement; and (2) Any change in the composition of the Board of Directors of the Company resulting in a majority of the directors of the Company as of the date of this Agreement no longer constituting a majority; provided, however, that in making such determination, directors who were elected by, and on the recommendation of, such present majority shall be treated as present directors. 4. The arrangements called for by this Amendment are not intended to have any effect on Kriegel's participation in any other benefits available to executive personnel or to 2 3 preclude other compensation or additional benefits as may be authorized by the Company or its board from time to time. 5. This Amendment shall be binding and shall inure to the benefit of the respective successors, assigns, legal representatives and heirs to the parties hereto. 6. This Amendment shall terminate if, prior to any change in control as defined herein, Kriegel shall voluntarily resign, retire, become permanently and totally disabled, or voluntarily take another position requiring a substantial portion of his time. This Amendment shall also terminate if Kriegel's employment as Chairman and Chief Executive Officer of the Company shall have been terminated for any reason by the board of directors of the Company for any reason prior to a change in control as defined herein. DRUG EMPORIUM, INC. By: --------------------------- --------------------------- David L. Kriegel Its: --------------------------- 3 4 EMPLOYMENT SECURITY AGREEMENT This Employment Security Agreement is made as of the _____ day of __________________________, 1996, by and between DRUG EMPORIUM, INC., a Delaware Corporation having its principal executive offices at 155 Hidden Ravines Drive, Powell, Ohio 43065 (the "Company"), and _________________, an individual employed by the Company (the "Executive"). WHEREAS, Executive is employed by the Company in a key executive capacity and possesses intimate knowledge of the business and affairs of the Company and is a valuable asset to the operations of the Company; and WHEREAS, the Company is approached from time to time by outside individuals and others who have an interest in acquiring all or a portion of the Company's stock, some of whom have a background indicating the capability of operating the Company, and some of whom do not; and WHEREAS, the Company desires to evaluate such individuals, companies and potential offers in the best interests of its shareholders, without the distraction of the effect of change in control on Executives; and WHEREAS, the Company also wants to assure managerial continuity and stability during any takeover attempt. NOW, THEREFORE, in consideration of the foregoing, and of the agreements and covenants herein contained, Company and Executive agree as follows: 1. This Agreement shall be effective and binding immediately upon its execution, but it shall not become operative unless and until a "change in control" of the Company, as defined hereinbelow, shall occur. The date of such change in control is referred to herein as the "operative date" of this Agreement. 2. As used herein, the term "change in control" shall mean either: a. The ownership (whether direct or indirect) of shares in excess of 50% of the outstanding shares of common stock of the Company by a person or group of persons not directors of the Company as of the date of this agreement; or b. The occurrence of both of the following: (1) The ownership (whether direct or indirect) of shares in excess of 20% of the outstanding shares of common stock of the Company by a person or group of persons not directors of the Company as of the date of this Agreement; and 5 (2) Any change in the composition of the Board of Directors of the Company resulting in a majority of the directors of the Company as of the date of this Agreement no longer constituting a majority; provided, however, that in making such determination, directors who were elected by, and on the recommendation of, such present majority shall be treated as present directors. 3. The term of this Agreement shall commence with the operative date and shall continue for a term of two calendar years thereafter. During the term of this Agreement, the Company agrees to continue the Executive in the employ of the Company, and the Executive agrees to remain in the employ of the Company, in the Executive's then-present capacity with no diminution of responsibility, and to exercise such authority and perform such duties as are commensurate with the authority exercised and duties performed by the Executive during the six months immediately prior to the operative date of this Agreement. Such services shall be performed in the same metropolitan area where the Executive was employed immediately prior to the operative date, or at such other location as the Company may reasonably require or to which Company and Executive may agree. 4. During the term of this Agreement, Executive shall be compensated at a base salary, bonus, stock option and employee benefit level commensurate with the salary, bonus, stock option and benefits to which the Executive was entitled in the twelve months prior to the operative date, or such greater amount provided by the Company for Executives of comparable duties. 5. The employment of Executive under this Agreement may be terminated, and the Executive not be entitled to the benefits set forth herein, only upon the occurrence of one or more of the following events: a. Death of the Executive; or b. The Executive becoming permanently disabled within the meaning of, and the receipt of disability payments pursuant to, the long-term disability plan in effect for management employees of the Company immediately prior to the operative date; or c. Termination by the Company for cause, as defined below; or d. Voluntary resignation by the Executive as defined below. 6. As used herein, the term "cause" shall mean the Executive (1) failed in a material and substantial way to perform his duties hereunder, (2) materially breached any of his other obligations set forth herein, or (3) committed a material act of malfeasance, disloyalty, dishonesty or breach of trust against the Company. The termination or discharge of the 2 6 Executive for any reason other than those specified as constituting cause shall be a termination without cause and a breach of this Agreement. No termination for cause under the preceding paragraph shall be deemed to have occurred without prior service of a written notice of termination to the Executive specifying the factual basis for the allegation of cause, and the failure of the Executive to cure such basis within 30 days after the notice. 7. The Executive's resignation shall not be "voluntary" and shall not be a reason for termination of the Agreement in the event that: a. Without the express written consent of the Executive, the Executive reasonably determines that he is assigned any duties inconsistent with his position, duties, responsibility and status with the Company at the operative date, or his authority, position or title in effect immediately prior to the operative date is materially changed; b. The compensation, benefits or perquisites of the Executive in effect at the operative date of this Agreement are materially reduced; c. The Company fails to continue in effect any benefit or compensation plan providing the Executive with substantially similar benefits to those which the Executive enjoyed as of the operative date; or d. In the event that unreasonable relocation or excessive travel demands in comparison to those in effect as of the operative date are made upon the Executive. 8. In the event of a breach of this Agreement by the Company or the termination of the Executive's employment during the term of this Agreement other than for cause as defined above, then: a. Executive shall receive, in a lump sum, a cash payment in the amount of the total of the salary and bonus received by Executive from the Company in the last two full fiscal years prior to the operative date; b. Executive shall continue to receive all employment benefits, including medical benefits, health insurance and other, to which he may be entitled as a member of senior management of the Company for a period of 24 months after the operative date; and c. Executive shall receive an additional benefit, over and above that to which he would normally be entitled under the Company's retirement plans, equal to the actuarial equivalent of the additional amount Executive would 3 7 have earned under such retirement plans or programs had he accumulated two additional continuous years of service. Such amount shall be paid to Executive in a cash lump sum payment as his normal retirement age, or, at Executive's option, at his early retirement age as provided for in such retirement net plan. Notwithstanding the provisions of subparagraphs a., b. and c. above, the aggregate present value of the payments in the nature of compensation Executive shall receive hereunder shall not exceed an amount determined by multiplying three (3) times the aggregate present value of Executive's base amount calculated in accordance with Internal Revenue Code Section 280G by ninety-nine percent (99%). 9. The amounts paid to Executive hereunder shall be considered severance pay in consideration of the past services Executive has rendered to the Company, and in consideration of continued service from the date hereof to Executive's entitlement to those payments. Executive shall have no duty to mitigate damages by seeking other employment. Should Executive actually receive payments from any other employment, the payments called for hereunder shall not be reduced or offset by any such payments. 10. In the event Executive's employment is terminated after the operative date: a. For twenty-four (24) months after the termination of Executive's employment hereunder, Executive shall not, unless acting with the prior written consent of Company: (1) Directly or indirectly, for himself, or on behalf of or in conjunction with any entity, solicit or endeavor to recruit or hire, as an employee, consultant, agent or representative, any person who was an employee of the Company within six months of the date that the Executive first solicited or endeavored to recruit or hire such person. (2) Discourage or otherwise attempt to prevent any person from doing business with the Company. b. In the event that the provisions of this Section should ever be deemed to exceed the time limitations permitted by applicable law, then such provisions shall be deemed reformed to the maximum time limitations permitted by applicable law. c. Executive specifically acknowledges and agrees that the remedy at law for any breach of the provision of this section will be inadequate and that the Company, in addition to any other relief available to it, shall be entitled to temporary and permanent injunctive relief without the necessity of 4 8 providing actual damage. The provision of this Section 10 shall remain applicable to Executive until a final decision of a court of competent jurisdiction is entered finding that Executive was discharged by the Company in violation of Section 5 hereof. 11. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but shall not otherwise be assignable, transferable or delegable by the Company. The failure of the Company to obtain such an assignment shall be a breach of this Agreement, in which event the date of succession or transfer shall be deemed to be the date of the breach. 12. This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. All amounts payable to the Executive shall be paid, in the event of the Executive's death, to the Executive's estate, heirs and representatives. This Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor, surviving or resulting corporation or other entity to which all or substantially all of the Company's business and assets shall be transferred. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company. 13. Executive's right to receive payments hereunder shall not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by his will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section, the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 14. This Agreement and the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Ohio, without giving effect to the principles of conflict of laws of such State. Any dispute arising out of this Agreement shall be determined by arbitration in Columbus, Ohio under the rules of the American Arbitration Association then in effect and judgment upon any award pursuant to such arbitration may be enforced in any court having jurisdiction thereof. 15. Miscellaneous 5 9 a. Enforcement: The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby. b. Withholding: The Company shall be entitled to withhold from amounts to be paid to the Executive hereunder any federal, state or local withholding or other taxes or charges which it is from time to time required to withhold. The Company shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise. c. Expenses and Interest: If, after a change in control of the Company any claim or legal or arbitration proceeding shall be made or brought to recover damages for breach hereof, the Executive shall recover from the Company prejudgment interest on any money judgment or arbitration award obtained by the Executive, calculated at the rate of interest announced by Bank One Columbus, Ohio from time to time at its prime rate, calculated from the date that payments to him should have been made under this Agreement. d. Payment Obligations Absolute: The Company's obligation during and after the term of this Agreement to pay the Executive the compensation and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against him or anyone else. All amounts payable by the Company hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Company shall be final and the Company will not seek to recover all or any part of such payment from the Executive or from whosoever may be entitled thereto, for any reason whatsoever. e. Waiver and Entire Agreement: No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. NO agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof 6 10 have been made by either party which are not set forth expressly in this Agreement. f. Notices: For all purposes of this Agreement, all communications including without limitation notices, consents, requests or approvals, provided for herein shall be in writing and shall be deemed to have been duly given when delivered or five business days after having bene mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to the Executive at his principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of change of address shall be effective only upon receipt. g. Severability: The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the date first written above. DRUG EMPORIUM, INC. By: ---------------------------------- Its: --------------------------------- EXECUTIVE: --------------------------- 7 EX-23.1 4 EXHIBIT 23.1 1 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 4, 1997, with respect to the consolidated financial statements of Drug Emporium, Inc. and subsidiaries incorporated by reference in this Annual Report (Form 10-K) for the year ended March 1, 1997. ERNST & YOUNG LLP Columbus, Ohio May 19, 1997 EX-27 5 EXHIBIT 27
5 1,000 12-MOS MAR-01-1997 MAR-03-1996 MAR-01-1997 779 0 14,525 0 187,949 206,531 68,918 38,506 243,319 130,229 63,523 0 0 1,315 48,252 243,319 855,016 855,016 669,541 172,560 2,800 0 7,882 2,233 1,081 1,152 0 0 0 1,152 .09 .09
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