SUBORDINATED CONVERTIBLE NOTE PURCHASE AGREEMENT
SUBORDINATED CONVERTIBLE NOTE PURCHASE AGREEMENT
(this "Agreement"), dated as of December 17, 1998,
among PHARMHOUSE CORP., a New York corporation
("Borrower"), and PHAR MOR, INC., a Pennsylvania corporation
("Lender").
WITNESSETH:
WHEREAS, Lender, PHARMACY ACQUISITION CORP., a New
York corporation and wholly-owned subsidiary of Lender
("Merger Subsidiary") and Borrower, propose to enter into an
Agreement and Plan of Merger to be dated as of the date
hereof (the "Merger Agreement"; capitalized terms used
herein and not otherwise defined are used herein as
defined in the Merger Agreement), pursuant to which Merger
Subsidiary will be merged with and into Borrower (the
"Merger"), and each outstanding share of the common stock,
par value $.01, of the Borrower (the "Borrower Common
Stock") will be converted into the right to receive cash on
the basis described in the Merger Agreement; and
WHEREAS, Borrower desires to borrow $2,000,000.00
from Lender in order to meet its working capital needs
pending the closing of the proposed Merger; and
WHEREAS, Lender desires to make a $2,000,000.00 loan
(the "Loan") to Borrower in exchange for the subordinated
convertible promissory note to be issued by Borrower in
substantially the form of Exhibit A hereto (the "Note").
NOW, THEREFORE, in consideration of the premises and
the mutual agreements and covenants hereinafter set
forth, and intending to be legally bound, the parties
hereto hereby agree as follows:
Section 1. Bridge Loan. Upon the execution and
delivery of the Merger Agreement by the parties thereto and
subject to the terms and conditions contained herein, Lender
hereby agrees to make the Loan to Borrower, and Borrower
agrees to issue and sell to Lender, the Note in the
principal amount of $2,000,000.00. All principal and
accrued interest on the Note shall be due and payable upon
the Maturity Date (as defined in the Note).
Section 2. Subordination. The Note and the indebtedness
evidenced thereby, including the principal and interest and
any renewals or extensions thereof, shall at all time be
subordinate and junior in right to the Senior Debt (as
defined in the Note), all in the manner and with the force
and effect set forth in the Note.
Section 3. Optional Conversion.
(a) The Note shall be convertible, at the
option of Lender, into shares of Borrower's common stock,
par value $.01 per share (the "Common Stock"), at any
time on or after the Maturity Date, at the conversion
rate of $3.25 per share, subject to adjustment as
provided in Section 7 below.
(b) To exercise the right of conversion, Lender
shall surrender the Note to Borrower at its office at
the notice address set forth herein, accompanied by a
written notice in the form of Exhibit A to the Note,
properly completed (the "Conversion Notice"). Within five
business days following its receipt of this Note and
Conversion Notice, Borrower shall issue and deliver (i) a
certificate or certificates for the number of full
Conversion Shares issuable, registered in the Lender's name,
and (ii) if less than the entire remaining outstanding
principal balance of this Note is being converted, a
replacement note in the remaining outstanding principal
amount of this Note. Such conversion shall be deemed to
have been effected and the number of Conversion Shares
issuable in connection with such conversion shall be
determined as of the close of business on the date on
which the Note and Conversion Notice shall have been
received by Borrower.
Section 4. Registration Rights.
(a) At any time during the period commencing on
the Maturity Date and expiring five years thereafter, the
holder(s) (the "Holder(s)") of the Note and of the shares
of Common Stock issued or issuable upon conversion of
the Note (the "Note Shares") representing a Majority
(as defined below) of such securities shall have the right
(which right is in addition to the registration rights
under Section 4(b) hereof), exercisable by written notice
to Borrower, to require that Borrower prepare, file and use
its best efforts to have declared effective by the
Securities and Exchange Commission (the "Commission"), on
two occasions, a registration statement and such other
documents, including a prospectus, as may be necessary in
the opinion of both counsel for Borrower and counsel for
the Holder(s), in order to comply with the provisions of
the Securities Act of 1933, as amended (the "Securities
Act") so as to permit a public offering and sale of their
respective Note Shares for 24 consecutive months (or 16
consecutive months in the event of the unavailability of
Form S-3) by such Holder(s) and any other Holder(s) of
Note Shares who notify Borrower within ten days
after receiving notice from Borrower of such request.
Borrower covenants and agrees to give written notice of any
registration request under this Section 4(a) by any
Holder(s) to all other registered Holder(s) of Note or
Note Shares within ten days from the date of the receipt of
any such registration request.
(b) If at any time commencing on the Maturity
Date, Borrower proposes to register any of its securities
under the Securities Act (other than in connection with
a merger, acquisition or exchange offer, pursuant to Form
S-8 or successor form or otherwise on a form which does not
permit registration of the Note Shares) it will give
written notice by registered mail, at least 20 days prior
to the filing of each such registration statement, to the
Holder(s) of the Note and/or Note Shares of its intention to
do so. Upon the written request of any Holder of the
Note and/or Note Shares given within ten days after receipt
of any such notice of its or their desire to include any
Note Shares in such proposed registration statement,
Borrower shall afford such Holder(s) the opportunity to
have such Note Shares registered under such registration
statement. The "piggy-back" registration rights
described in this Section 4(b) shall terminate at such time
as the Note Shares are saleable in one or more transactions
pursuant to Rule 144 of the Securities Act during a 90-day
period. Notwithstanding anything to the contrary contained
in the provisions of this Section 4(b), Borrower shall have
the right at any time after it shall have given written
notice pursuant to this Section 4(b)(irrespective of whether
a written request for inclusion of any such securities shall
have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the
filing but prior to the effective date hereof. Borrower
will undertake commercially reasonable efforts to ensure
that any sales of Note Shares pursuant to such registration
statement shall be effected through the underwriter of the
public offering, if any, and the holders thereof shall
compensate the underwriter in accordance with its customary
compensation practices.
(c) Borrower shall indemnify and hold harmless
the Holder(s) from and against any and all losses, claims,
damages and liabilities caused by any untrue statement of a
material fact contained in any registration statement filed
by Borrower under the Securities Act by reason of this
Agreement, any posteffective amendment to such registration
statements or any prospectus included therein, or caused by
any omission to state therein a material fact required to
be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses,
claims, damages or liabilities are caused by any such
untrue statement or omission based upon information
furnished or required to be furnished in writing to Borrower
by the Holder(s) (or the authorized representatives or
agents of the Holder(s)) expressly for use therein, which
indemnification shall include each person, if any, who
controls the Holder(s) within the meaning of the Securities
Act and each officer, director, employee and agent of the
Holder(s); provided, however, that the indemnification in
this Section 4(c) with respect to any prospectus shall
not inure to the benefit of the Holder(s) (or to the
benefit of any person controlling the Holder(s)) on account
of any such loss, claim, damage or liability arising from
the sale of Note Shares by the Holder(s), if a copy of a
subsequent prospectus correcting the untrue statement or
omission in such earlier prospectus was provided to the
Holder(s) by Borrower prior to the subject sale and the
subsequent prospectus was not delivered or sent by the
Holder(s) to the purchaser of such securities prior to such
sale; and provided further, that Borrower shall not be
obligated to so indemnify the Holder(s) or any other person
referred to above unless the purchaser or other person, as
the case may be, shall at the same time indemnify Borrower,
its directors, each officer signing the registration
statement and each person, if any, who controls Borrower,
within the meaning of the Securities Act, from and against
any and all losses, claims, damages and liabilities caused
by any untrue statement of a material fact contained in any
registration statement or any prospectus required to be
filed or furnished by reason of this Agreement or caused by
any omission to state therein a material fact required to
be stated therein or necessary to make the statements
therein not misleading, insofar as such losses, claims,
damages or liabilities are caused by any untrue statement or
omission based upon information furnished in writing to
Borrower by the Holder(s) expressly for use therein.
(d) If for any reason the indemnification
provided for in the preceding paragraph is held by a court
of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, claim, damage,
liability or expense referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified
party thereunder, shall contribute to the amount paid or
payable by the indemnified party as a result of such loss,
claim, damage or liability in such proportion as is
appropriate to reflect not only the relative benefits
received by the indemnified party and the indemnifying
party, but also the relative fault of the indemnified party
and the indemnifying party, as well as any other relevant
equitable considerations.
(e) All expenses, filing fees and other costs
incurred by Borrower in connection with any registration of
securities pursuant to this Section 4 (exclusive of
underwriting discounts and selling commissions applicable
to any sale of registered securities) shall be borne by
Buyer.
(f) In the case of each registration effected by
Borrower pursuant to this Section 4, Borrower will (i)
furnish to the holders of the Note Shares registered
thereunder such numbers of copies of a prospectus, including
a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents
as such holders may reasonably request in order to
facilitate the disposition of such registered Note Shares
owned by them, and (ii) notify each holder of Note Shares
registered under such registration statement at any time
when a prospectus relating thereto is required to be
delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such
registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of
the circumstances then existing.
(g) For the purposes of this Agreement, the
term "Majority" in reference to the Holders of the Note and
the Note Shares shall mean in excess of 50% of the then
outstanding Note Shares (assuming for such purpose the
conversion of the Note in its entirety) that (i) are not
held by Borrower, by any affiliate, officer, creditor,
employee or agent thereof or by any of their respective
affiliates, members of their family, persons acting as
nominees or in conjunction therewith or (ii) have not been
resold to the public pursuant to a registration statement
filed with the Commission under the Securities Act.
5. Common Stock. Borrower covenants and agrees that
all Note Shares will, upon issuance, be duly and validly
issued, fully paid and non-assessable and that no personal
liability will attach to the holder thereof. Borrower
further covenants and agrees that, during the periods within
which the Note may be converted, Borrower will at all times
have authorized and reserved a sufficient number of shares
of Common Stock for issuance upon conversion of the Note.
6. No Stockholder Rights. The Note shall not entitle
any holder thereof to any voting rights or other rights as
a stockholder of Borrower.
7. Adjustment of Rights. In the event that the
outstanding shares of Common Stock are at any time increased or
decreased or changed into or exchanged for a different
number or kind of share or other security of Borrower,
or of another corporation through reorganization,
merger, consolidation, liquidation, recapitalization, stock
split, combination of shares or stock dividends payable
with respect to such Common Stock, appropriate adjustments
in the number and kind of such securities then subject to
the Note shall be made effective as of the date of such
occurrence so that the position of holder of the Note upon
exercise will be the same as it would have been had it owned
immediately prior to the occurrence of such events the
Common Stock issuable upon conversion of the Note. Such
adjustment shall be made successively whenever any event
listed above shall occur and Borrower will notify the holder
of the Note of each such adjustment. Any fraction of a
share resulting from any adjustment shall be eliminated and
the price per share of the remaining shares subject to the
Note adjusted accordingly.
Section 8. Representations and Warranties of
Borrower. Borrower hereby represents and warrants to Lender
as follows:
(a) Borrower (i) is a corporation duly
organized, validly existing and in good standing under the
laws of the State of New York and (ii) has all requisite
power and authority to carry on its business, to own and
hold its properties and assets, to enter into and perform
this Agreement and to issue and carry out the provisions of
the Note.
(b) The execution, delivery and performance by
Borrower of this Agreement and the Note have been duly
and validly authorized by Borrower's Board of Directors
and no authorization or approval of Borrower's shareholders
is required in connection therewith. This Agreement and
the Note constitute the legal, valid and binding obligations
of Borrower and each is enforceable against Borrower in
accordance with its respective terms, except as such
enforcement may be limited by bankruptcy, insolvency and
other similar laws affecting the enforcement of creditors'
rights generally.
(c) The execution, delivery and performance
by Borrower of this Agreement and the issuance of the Note
(i) will not conflict with, result in a breach of or
constitute a default under any contract, agreement,
indenture, loan or credit agreement, deed of trust,
mortgage, lease, security agreement or other arrangement
to which Borrower is a party or by which Borrower or
any of its properties or assets is bound or affected; (ii)
will not cause Borrower to violate or contravene any
provision of its Certificate of Incorporation or Bylaws; or
(iii) require any authorization, consent, approval, permit,
exemption or other action by or notice to any court or
administrative or governmental body pursuant to the
Certificate of Incorporation or Bylaws of Borrower, any law,
statute, rule or regulation to which Borrower is subject or
any agreement, instrument, order, judgment or decree to
which Borrower is subject.
Section 9. Covenants of Borrower. Borrower makes
the following covenants to lender, upon which Lender is
relying in entering into this Agreement:
(a) Prior to repayment in full of the Note,
Borrower shall not incur any new indebtedness (contingent
or otherwise), except for (i) purchase money
indebtedness incurred in the ordinary course of
business up to $100,000.00 in principal amount; (ii)
unsecured obligations incurred, currently payable and paid
by Borrower in the ordinary course of business; (iii)
indebtedness approved in writing by Lender; and (iv)
additional borrowings pursuant to Borrower's credit
arrangements existing as of the date hereof.
(b) Prior to repayment in full of the Note,
Borrower shall provide Lender with (i) unaudited
financial statements within 45 days of the end of each
of Borrower's first three fiscal quarters and (ii)
audited financial statements within 90 days of the end of
Borrower's fiscal year.
(c) Borrower shall comply in all material
respects with all applicable statutes, rules, regulations
and orders of and all applicable restrictions imposed
by all governmental authorities related to the conduct
of its business and the ownership of its property
(including, without limitation, applicable statutes,
rules, regulations, orders and restrictions relating to
environmental, safety and other similar standards or
controls) unless the failure so to comply would not
have a material adverse effect on the business or
condition (financial or otherwise) of Borrower.
(d) Borrower shall promptly notify Lender of
any material litigation or legal proceedings initiated
against Borrower or any violation or potential violation
of any representation, warranty or covenant under this
Agreement or the Note.
Section 10. Restrictions on Transfer and
Lender Representations. In acquiring the Note and any Note
Shares issuable upon exercise of the Note collectively, the
"Securities"), Lender makes the following representations,
warranties and agreements:
(a) Lender understands that the
Securities will be issued by Borrower without
registration under the Securities Act and without
qualification and/or registration under applicable
state securities laws pursuant to specific
exemptions from registration and/or qualification
contained in the Securities Act and in applicable
state securities laws. Lender understands that the
foregoing exemptions depend upon, among other
things, the bona fide nature of its investment intent
as expressed herein.
(b) Lender agrees that none of the
Securities, nor any interest in the Securities, will
be sold, transferred or otherwise disposed of by it
without registration and/or qualification under the
Securities Act or applicable state securities laws
unless Lender first demonstrates to the satisfaction
of Borrower that specific exemptions from such
registration and qualification requirements are
available with respect to such resale or disposition
or provides Borrower an opinion of counsel
satisfactory to Borrower that a contemplated transfer
may be made without violation of the Securities Act
or applicable state securities laws.
(c) Lender represents and warrants to
Borrower as follows:
(i) Lender is acquiring the
Securities for investment purposes only, for Lender's
own account, and not as nominee or agent for any
other person, and not with a view to, or for resale
in connection with, any distribution thereof within
the meaning of the Securities Act.
(ii) Lender has received all the
information it considers necessary or appropriate to
evaluate the risks and merits of an investment in the
Securities, and has had an opportunity to discuss
Borrower's business, management, financial affairs and
prospects with Borrower's management.
(iii) Lender is an "accredited
investor" within the meaning of Rule 501 Regulation D
promulgated under the Securities Act.
(iv) Lender is able to bear the
economic risks related to a purchase of the
Securities. Lender either has a preexisting personal
or business relationship with Borrower or any of its
officers, directors of controlling persons, or by
reason of Lender's business or financial experience or
the business or financial experience of its
professional advisor who or which is affiliated with
and who or which is not compensated by Borrower or
any affiliated or selling agent of Borrower,
directly or indirectly, has the capacity to protect
his own interests in connection with the subject
transactions.
(d) Lender acknowledges that the
Securities to be issued to it will contain a legend
which prohibits an offer to transfer or a transfer of
all or any portion of the Securities unless the
Securities are registered under the Securities Act or
unless an exemption from registration is available
with respect to such resale or disposition.
Section 11. Miscellaneous.
(a) All notices, requests and other
communications given or made pursuant hereto to any
party hereunder shall be n writing (including
facsimile or similar writing) and shall be given:
if to Lender, to:
Phar Mor, Inc.
00 Xxxxxxx Xxxxx
Xxxx Xxxxxxxxxx, XX 00000
Attention: General Counsel
Facsimile: 000-000-0000
with a copy to:
Xxxxxxx Berlin
Shereff Xxxxxxxx, LLP
0000 X Xxxxxx,X.X., Xxxxx 000
Xxxxxxxxxx, X.X. 00000
Attention: Xxxxxx X. XxXxx, Xx.
Facsimile: 000-000-0000
if to the Borrower, to:
Pharmhouse Corp.
000 Xxxxxxxx
Xxx Xxxx, XX 00000
Attention: General Counsel
Facsimile: 000-000-0000
with a copy to:
Xxxxxxx, Xxxxxxxxx LLP
0 Xxxx Xxxxxx
Xxx Xxxx, XX 00000
Attention: Xxxxxxx X. Xxxxxxxx
Facsimile: 000-000 0000
and to:
Xxxxxxx, Xxxxxxx & Xxxx
000 Xxxxxxxxx Xxxxxx
Xxx Xxxx, XX 00000
Attention: Xxxxxx Xxxx
Facsimile: 000-000-0000
or such other address or facsimile numbers as such
party may hereafter specify for the purpose by
notice to the other parties hereto. Each such
notice, request or other communication shall
be effective (i) if given by facsimile, when such
facsimile is transmitted to the facsimile number
specified in this Section and the appropriate
facsimile confirmation is received, or (ii) if given
by any other means, when delivered at the address
specified in this Section.
(b) In the event of any legal proceeding
between the parties hereto arising out of or
relating to this Agreement, the prevailing party
shall be entitled to recover from the non
prevailing party reasonable expenses,
including without limitation reasonable attorneys'
fees and reasonable accountants' fees.
(c) Any provision of this Agreement or the
Note may be amended or waived if, and only if, such
amendment or waiver is in writing and signed, in the
case of an amendment, by the Holder and Borrower,
or in the case of a waiver, by the party against
whom the waiver is to be effective.
(d) No failure or delay by any party in
exercising any right, power or privilege hereunder
or under the Note shall operate as a waiver
thereof nor shall any single or partial
exercise thereof preclude any other or further
exercise thereof or the exercise of any other
right, power or privilege. The rights and
remedies herein provided shall be cumulative and not
exclusive of any rights or remedies provided by law.
(e) Except as expressly provided in
Section 11(b), all costs and expenses incurred in
connection with this Agreement, the Note and the
transactions contemplated hereby and thereby shall
be paid by the party incurring such cost or expense.
(f) The provisions of this Agreement
and the Note shall be binding upon and inure to the
benefit of the parties hereto and thereto and their
respective successors and assigns, provided that
Borrower may not assign, delegate or otherwise
transfer any of its rights or obligations under this
Agreement or the Note without the prior written
consent of Lender.
(g) This Agreement may be signed in any
number of counterparts, each of which shall be an
original, with he same effect as if the signatures
thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party
hereto shall have received counterparts hereof
signed by all of the other parties hereto.
(h) This Agreement shall be governed by
and construed in accordance with the laws of the
State of New York without reference to the conflict
of laws principles applied in such State.
(i) Any suit, action or proceeding
seeking to enforce any provision of, or based on any
matter arising out of or in connection with this
Agreement, the Note or the transactions contemplated
hereby or thereby shall be brought in any federal
court located in the Southern District of the State
of New York or any New York state court sitting in
New York City, and each of the parties hereto hereby
consents to the exclusive jurisdiction of such
courts (and of the appropriate appellate courts
therefrom) in any such suit, action or proceeding and
waives any objection to venue laid therein. Process
in any such suit, action or proceeding may be served
on any party anywhere in the world, whether within or
without the State of New York. Without limiting the
generality of the foregoing, each party hereto agrees
that service of process upon such party at the
address referred to in Section 5(a), together with
written notice of such service to such party,
shall be deemed effective service of process upon
such party.
(j) EACH PARTY HERETO HEREBY WAIVES ALL
RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
INSTITUTED BY EITHER OF THEM AGAINST THE OTHER WHICH
PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT,
THE NOTE, ANY ALLEGED TORTIOUS CONDUCT BY ANY
PARTY, OR IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES
OUT OF OR RELATES TO THE RELATIONSHIP AMONG THE
PARTIES HERETO.
(k) When a reference is made in this
Agreement to a Section, such reference shall be to a
Section of this Agreement unless otherwise indicated.
Whenever the words "include," "includes" or
"including" are used in this Agreement or the Note
they shall be deemed to be followed by the words
"without limitation." The phrases "the date of this
Agreement," "the date hereof" and terms of similar
import, unless the context otherwise requires, shall
be deemed to refer to December 17, 1998.
(l) If any term or other provision of
this Agreement or of the Note is determined to be
invalid, illegal or incapable of being enforced by
any rule of law, or public policy, all other
conditions and provisions of this Agreement or the
Note, as applicable, shall nevertheless remain in
full force and effect so long as the economic or
legal substance of the transactions contemplated
herein is not affected in any manner materially
adverse to any party hereto. Upon such determination
that any term or other provision is invalid, illegal
or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the
parties as closely as possible in a mutually
acceptable manner.
IN WITNESS WHEREOF, the parties hereto have
caused this Agreement to be duly executed by their
respective authorized officers as of the day and
year first above written.
"LENDER"
"BORROWER"
PHAR MOR, INC., PHARMHOUSE CORP.,
a Pennsylvania corporation a New York corporation
By: By:
Name: Name:
Its: Its:
EXHIBIT A
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND HAS BEEN TAKEN FOR
INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO THE
DISTRIBUTION THEREOF, AND THIS NOTE MAY NOT BE SOLD
OR TRANSFERRED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT COVERING IT
OR THE COMPANY RECEIVES AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE
OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT.
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
$2,000,000.00
December 17, 1998
FOR VALUE RECEIVED, PHARMHOUSE CORP., a New York
corporation ("Maker"), hereby promises to pay on or
before the Maturity Date (as defined below) to PHAR
MOR, INC., a Pennsylvania corporation ("Payee"), at
such place(s) as the holder of this Note shall from
time to time designate, the principal sum set forth
above; plus simple interest from the date hereof at
the rate of eleven percent (11 %) per annum. This
Note is issued pursuant to that certain Subordinated
Convertible Note Purchase Agreement dated as of
December 17, 1998 (the "Agreement") by and between
Maker, as borrower, and Payee, as lender, and is
subject to and entitled to the benefits of the
Agreement. All capitalized terms not otherwise
defined herein shall have the meaning set forth in
the Agreement.
1. All principal and accrued interest on this
Note shall be due and payable upon the earlier of
(a) June 30, 1999 and (b) the date upon which Maker
terminates the Merger Agreement pursuant to
Section 9.01(h) or Section 9.01(l) thereof (the
"Maturity Date"). Payment of principal and interest
shall be made in lawful money of the United States of
America.
2. (a) This Note and the indebtedness
evidenced hereby, including the principal and
interest and any renewals or extensions hereof, shall
at all times be subordinate and junior
in right to the First Senior Debt (as defined below)
and the Second Senior Debt (as defined below) all in
the manner and with the force and effect hereinafter
set forth.
(b) As used herein, the term "First Senior
Debt" shall mean all indebtedness for principal or
interest and all other obligations including,
without limitation, interest or other payments on
such First Senior Debt paid or accruing after
commencement of any insolvency proceeding which
Borrower shall incur under that certain Loan and
Security Agreement dated as of May 15, 1998, among
Foothill Capital Corp., as lender
("Foothill"), and Maker as amended by that certain
First Amendment to Loan and Security Agreement and
Waiver dated as of August 1, 1998, as further amended
by that certain Second Amendment to Loan and Security
Agreement dated as of December 17, 1998, and under
the instruments and agreements executed or delivered
by Maker pursuant thereto in each case as the same
may be amended, supplemented or modified from time to
time;
(c) As used herein, the term "Second
Senior Debt" (collectively, the First Senior Debt and
the Second Senior Debt shall be referred to herein as
the "Senior Debt") shall mean all indebtedness for
principal or interest and all other obligations
including, without limitation, interest or other
payments on such Second Senior Debt paid or accruing
after commencement of any insolvency proceeding,
which Borrower shall incur under that certain Term
Loan and Promissory Note dated as of June 22, 1998,
between McKesson Corp., as lender ("McKesson"), and
Maker and under the instruments executed or delivered
by Maker pursuant thereto in each case as the same
may be amended, supplemented or modified from time to
time; and
(d) All indebtedness for principal or
interest which Maker may from time to time incur in
connection with the refinancing or replacement of the
indebtedness referred to in the preceding clauses
(b) and (c) (which refinancing indebtedness shall
constitute "Senior Debt" for all purposes hereof).
(e) As used in this Note, the term
"subordinate and junior in right" shall mean that no
part of this Note shall have any claim to the assets
of Maker on a parity with or prior to the claim of
the Senior Debt. Without limiting the foregoing, in
the event of any distribution, division or
application, partial or complete, voluntary or
involuntary, by operation of law or otherwise, of
all or any part of the assets of Maker or the
proceeds thereof to the creditors of Maker or
readjustment of the obligations and indebtedness of
Maker, whether by reason of liquidation, bankruptcy,
arrangement, receivership, assignment for the
benefit of creditors or any other action or
proceeding involving the readjustment of all or any
part or the indebtedness evidenced by this Note, or
the application of the assets of Maker to the
payment or liquidation thereof, or upon the
dissolution, liquidation, cessation or other winding
up of Maker's business, or upon the sale of all or
substantially all of Maker's assets, then, and in
any such event (i) Foothill, first in priority,
McKesson, second in priority, and all other holders
of Senior Debt, third in priority, shall be entitled
to receive payment in full of any and all of the
Senior Debt then owing prior to the payment of all or
any part of the indebtedness evidenced by this Note,
and (ii) any payment or distribution of any kind
or character, whether in cash, securities or other
property, which shall be payable or deliverable upon
or with respect to any or all of the indebtedness
evidenced by this Note shall be paid or delivered
directly to Foothill for application on any of the
First Senior Debt, due or not due, until such First
Senior Debt shall have first been full paid and
satisfied, then to McKesson for application on any of
the Second Senior Debt, due or not due, until such
Second Senior Debt shall have first been full paid
and satisfied and then to all other holders of
Senior Debt for application on any of such Senior
Debt, due or not due, until such Senior Debt shall
have been full paid and atisfied. In
order to enable Foothill to enforce its right
hereunder in any of the aforesaid actions or
proceedings, Foothill is hereby irrevocably
authorized and empowered, in its discretion, to make
and present for and on behalf of Payee such proofs
of claim against Maker on account of the
indebtedness evidenced by this Note as Foothill may
deem expedient or proper and to vote such proofs of
claim in any such proceeding and to receive and
collect any and all dividends or other payments or
disbursements made thereon in whatever form the same
may be paid or issued and to apply the same on
account of any of the Senior Debt. Payee irrevocably
authorizes and empowers Foothill to demand, xxx for,
collect and receive each of the aforesaid payments
and distributions and give acquittance therefor and
to file claims and take such other actions, in the
name of Foothill or in the name of Payee or
otherwise, as Foothill may deem necessary or
advisable for the enforcement of this Agreement; and
Payee will execute and deliver to Foothill such
powers of attorney, assignments and other instruments
or documents, including notes (together with such
assignments or endorsements as Foothill shall deem
necessary) as may be requested by Foothill in order
to enable it to enforce any and all claims upon or
with respect to any or all of the indebtedness
evidenced by this Note and to collect and receive
any and all payments and distributions which may be
payable or deliverable at any time upon or with
respect to the indebtedness evidenced by this Note,
all for the benefit of Foothill, first, McKesson,
second, and all other holders of Senior Debt, third.
3. Unless and until, first, the First Senior
Debt, and second, the Second Senior Debt shall have
been paid in full in cash, the holder of this Note
will not take, demand or receive, and Maker will not
make, give or permit, directly or indirectly, by
setoff, redemption, purchase or in any other manner,
any payment or security for the whole or any part of
the principal of or interest on this Note; provided,
however, that Maker may pay any and all principal
hereof and interest accruing hereunder when due
under this Note as in effect on December 17, 1998
(but not any prepayments thereof) so long as no
Specified Event of Default (as defined below) shall
have occurred and be continuing. As used herein,
"Specified Event of Default" means any Event of
Default (as defined in any loan agreement relating to
the Senior Debt) other than an Event of Default
arising solely as a result of Maker's failure to pay
principal or interest under this Note or the
Agreement when due.
4. Should any payment or distribution or
security or the proceeds of any thereof be collected
or received by Payee which is required to be paid,
first, to Foothill, second, to McKesson and third, to
all other holders of Senior Debt under the terms
hereof, Payee will forthwith deliver the same to
Foothill, McKesson or other holders of Senior Debt,
as the case may be, in precisely the form received
(except for the endorsement without recourse or the
assignment without recourse of Payee where necessary)
and, until so delivered, the same shall be held in
trust by Payee as the property of Foothill, McKesson
or other holders of Senior Debt, as the case may be.
5. In the event of any refinancing of all or
any part of the Senior Debt as contemplated in
Section 2(d) above, Payee agrees to enter into any
subordination or intercreditor agreement requested by
the lender providing such refinancing loan, provided
that such subordination is effected pursuant to an
agreement containing such terms as are customarily
employed by such lender in similar transactions.
6. Each holder of Senior Debt, at any time
and from time to time, without the consent of or
notice to Payee, without incurring responsibility to
Payee and without impairing or releasing the
subordination provided herein or the obligations
hereunder of Payee to such holder, may (i) change
the manner, place or terms of payment or extent the
time of payment of, or renew or alter, all or any
of the Senior Debt held thereby, or otherwise amend
or supplement in any manner, or grant any waiver or
release with respect to, Senior Debt held thereby or
any instrument evidencing the same, (ii) sell,
exchange, release, not perfect or otherwise deal with
any property at any time pledged, assigned or
mortgaged to secure or otherwise securing, Senior
Debt held thereby, or amend or grant any waiver or
release with respect to, or consent to any departure
from any guarantee for all or any of the Senior Debt
held thereby, (iii) exercise or refrain from
exercising any rights against Maker and any other
person and (iv) apply any sums from time to time
received to the Senior Debt held thereby.
7. The subordination provisions contained
herein are for the benefit of the holders of the
Senior Debt and may not be rescinded, cancelled,
amended or modified in any way without the prior
written consent thereto of the holders of the Senior
Debt.
8. The provisions hereof shall continue to be
effective or be reinstated, as the case may be, if
at any time any payment of any of the Senior Debt is
rescinded or must otherwise be returned by any holder
of Senior Debt upon the insolvency, bankruptcy or
reorganization of Maker or otherwise, all as though
such payment had not been made.
9. Nothing herein shall impair, as between
Maker and the holder of this Note, the obligation of
Maker, which is unconditional and absolute, to pay
the principal and interest on this Note in accordance
with its terms, nor shall anything herein prevent
the holder of this Note from exercising all remedies
otherwise permitted by applicable law or hereunder
upon default hereunder, subject to Section 3 hereof
and the rights of the holders of the Senior Debt as
herein provided.
10. All or any portion of the unpaid principal
sum and accrued interest on this Note may be prepaid
from time to time without premium or penalty, the
amount of the prepayment to be applied first to
accrued interest and the remainder to unpaid
principal; provided, however, that no such prepayment
shall occur without the prior written consent of the
holders of the Senior Debt.
11. This Note is expressly made subject to the
provisions of Section 9.02(d) of the Merger
Agreement, providing for certain rights of setoff.
12. Notwithstanding anything in this Note to
the contrary, the entire unpaid principal amount of
this Note, together with all accrued but unpaid
interest thereon and other unpaid charges hereunder,
will become immediately all due and payable without
further notice at the option of Payee upon any of the
following: (i) if default shall be made in the due
and punctual performance or observance of any
material nonpayment term, condition or covenant
contained in the Agreement or this Note and such
default continues unremedied for a period of ten
days after written notice to Maker by the Holder;
(ii) if default shall be made in the due and punctual
payment, after applicable cure periods, of in excess
of $50,000.00 under any note, loan agreement,
security agreement or other agreement entered into by
Maker; (iii) if Maker ceases to carry on business on
a regular basis or enters into an agreement to sell
substantially all of its assets or an agreement
whereby it merges into, consolidates with or is
acquired by any other business entity (other than in
connection with the Merger); or (iv) if Maker makes
any assignment for the benefit of its creditors,
makes an election to wind up or dissolve or becomes
unable to pay its debts as they mature, becomes
insolvent or subject to any proceeding under any
bankruptcy, insolvency or debtor's relief law,
including without imitation any bankruptcy
proceeding.
13. If any amount payable to Payee under this
Note is not received by Payee on or before the
Maturity Date, then such amount (the "Delinquent
Amount") will bear interest from and after the
Maturity Date until paid at an annual rate of
interest equal to 18% (the "Default Rate").
14. If any payment on this Note shall become
due on a Saturday, Sunday or a bank or legal holiday
under the laws of the State of New York, such payment
shall be made on the next succeeding business day and
such extension of time shall in such case be
included in computing interest, if any, in
connection with such payment.
15. This Note and the right to payment
provided hereunder may not be sold, transferred or
otherwise disposed of at any time by the holder of
the Note.
16. No delay or omission on the part of the
holder hereof in the exercise of any right or remedy
hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right or
remedy preclude any other or further exercise thereof
or the exercise of any other right or remedy.
17. Upon receipt of evidence reasonably
satisfactory to Maker (an affidavit of the holder of
this Note will be satisfactory) of the ownership and
the loss, theft, destruction or mutilation of this
Note, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably
satisfactory to Maker, or, in the case of any such
mutilation, upon surrender of this Note, Maker will
execute and deliver in lieu of this Note a new Note
of like tenor representing the same rights
represented by and dated the same date of such lost,
stolen, destroyed or mutilated Note.
18. In the event that legal proceedings are
instituted to collect any amount due under this Note,
Maker agrees to pay all costs of collection thereof,
including reasonable attorney's fees, whether or not
suit or action is commenced to enforce payment of
this Note. Presentment for payment, demand, notice
or dishonor and protest and notice of protest and
nonpayment are hereby waived by Maker.
19. This Note shall be governed by and
construed in accordance with the laws of the State
of New York without reference to the conflict of laws
principles applied in such State
20. Any suit, action or proceeding seeking to
enforce any provision of, or based on any matter
arising out of or in connection with this Note or the
transactions contemplated hereby shall be brought in
any federal court located in the Southern District
of the State of New York or any New York state court
sitting in New York City, and each of the parties
hereto hereby consents to the exclusive jurisdiction
of such courts (and of the appropriate appellate
courts therefrom) in any such suit, action or
proceeding and waives any objection to venue laid
therein. Process in any such suit, action or
proceeding may be served on any arty anywhere in the
world, whether within or without the State of New
York. Without limiting the generality of the
foregoing, each party hereto agrees that service of
process upon such party at the address referred to in
Section 5(a)of the Agreement, together with written
notice of such service to such party, shall be deemed
effective service of process upon such party.
21. EACH PARTY HERETO HEREBY WAIVES ALL RIGHTS
TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
INSTITUTED BY EITHER OF THEM AGAINST THE OTHER WHICH
PERTAINS DIRECTLY OR INDIRECTLY TO THIS NOTE, ANY
ALLEGED TORTIOUS CONDUCT BY ANY PARTY, OR IN ANY
WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR
RELATES TO THE RELATIONSHIP AMONG THE PARTIES HERETO.
22. All rights, remedies, and undertakings,
obligations, options, covenants, conditions and
agreements contained in this Note are cumulative and
no one of them will be exclusive of any other. Any
notice to any party concerning this Note will be
delivered as set forth in the Agreement. The Note
may not be changed, modified, amended or terminated
orally.
23. In the event that this Note shall require
the payment of interest in excess of the maximum
amount permissible under applicable law, Maker's
obligations hereunder shall automatically and
retroactively be deemed reduced to the highest
maximum amount permissible under applicable law. In
the event Holder receives as interest an amount that
would exceed such maximum applicable rate, the amount
of any excess interest shall not be applied to the
payment of interest hereunder, but shall
automatically and retroactively be applied to the
reduction of the unpaid principal balance due
hereunder. In the event and to the extent such
excess amount of interest exceeds the outstanding
unpaid principal balance hereunder, any such excess
amount shall be immediately returned to Maker by the
Holder.
24. On the Maturity Date, at the option of
Payee, the principal amount of this Note and all
accrued interest on this Note shall be convertible
into shares of Maker's common stock, par value $.01
per share, subject to and in accordance with the
provisions of the Agreement.
[This space intentionally left blank]
IN WITNESS WHEREOF, Maker has caused this Note
to be executed by its duly authorized officer as of
the date first written above.
"MAKER"
PHARMHOUSE CORP.,
a New York corporation
By:
Exhibit A
[FORM OF CONVERSION NOTICE]
TO: PHARMHOUSE CORP.
The undersigned owner of the attached
Subordinated Convertible Promissory Note (this
"Note") hereby: (i) irrevocably exercises the option
to convert this Note, or the portion hereof below
designated, for shares (the "Conversion Shares") of
the Common Stock of Pharmhouse Corp. (the
"Company") in accordance with the terms hereof
and (ii) directs that such Conversion Shares
deliverable upon the conversion, together with any
check in payment for fractional shares and
interest and the Note representing any unconverted
principal amount hereof, be issued and delivered
to the registered holder hereof unless a different
name has been indicated below. If Conversion Shares
are to be delivered or registered in the name of a
person other than the undersigned, the
undersigned will pay all transfer taxes with
respect thereto, and the Company will not be required
to issue or deliver a certificate for such
Conversion Shares until the undersigned has paid
to the Company the amount of such transfer tax or
has established to the satisfaction of the Company
that such transfer tax has been paid. Capitalized
terms used herein without definition are as
defined in the Note and in the Agreement
referred to therein.
Dated: ------------------------
-------------------- Signature
Fill in for registration of Conversion Shares if to
be delivered, and of the Note if to be reissued,
otherwise than to and in the name of the registered
holder.
-----------------------
Social Security or Other
Taxpayer Identifying
Number
---------------------------
(Name)
---------------------------
(Street Address)
---------------------------
(City, State and Zip Code)
(please print name and address)
Principal Amount to
be Converted (if less than all):
$
------------------------------
