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: 212-358-
9169
with a copy to:
Xxxxxxx, Xxxxxxxxx LLP
0 Xxxx Xxxxxx
Xxx Xxxx, XX 00000
Attention: Xxxxxxx X. Xxxxxxxx Facsimile: 212-
889 7577
and to:
Xxxxxxx, Xxxxxxx & Xxxx
000 Xxxxxxxxx Xxxxxx Xxx Xxxx, XX 00000
Attention: Xxxxxx Xxxx Facsimile: 212-
972-0111
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 satisfied. 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):
$
------------------------------
