-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B5htA3Bn7uChXvCUyBmtXvIVmLzqd/CeGzePuisFB7Sg6BAl3VqpCV2xmOkhXkJT aotvi3yV1FPd7tQF4gD8DA== 0000950112-95-003152.txt : 19951208 0000950112-95-003152.hdr.sgml : 19951208 ACCESSION NUMBER: 0000950112-95-003152 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19951207 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ECKERD CORP CENTRAL INDEX KEY: 0000031364 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 133302437 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-64409 FILM NUMBER: 95600011 BUSINESS ADDRESS: STREET 1: P O BOX 4689 CITY: CLEARWATER STATE: FL ZIP: 34618 BUSINESS PHONE: 8133996000 MAIL ADDRESS: STREET 1: JACK ECKERD CORPORATION STREET 2: P O BOX 4689 CITY: CLEARWATER STATE: FL ZIP: 34618 FORMER COMPANY: FORMER CONFORMED NAME: ECKERD DRUGS OF FLORIDA INC DATE OF NAME CHANGE: 19700112 S-3/A 1 ECKERD CORPORATION AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 7, 1995 REGISTRATION NO. 33-64409 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------- ECKERD CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 13-3302437 (State or other jurisdiction of (IRS employer incorporation or organization) identification number)
8333 BRYAN DAIRY ROAD LARGO, FLORIDA 34647 (813) 399-6000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ROBERT E. LEWIS, ESQ. VICE PRESIDENT/GENERAL COUNSEL 8333 BRYAN DAIRY ROAD LARGO, FLORIDA 34647 (813) 399-6000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------- COPIES TO: STACY J. KANTER, ESQ. MARK KESSEL, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM SHEARMAN & STERLING 919 THIRD AVENUE 599 LEXINGTON AVENUE NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022 (212) 735-3000 (212) 848-4000
------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this registration statement becomes effective. ------------------- If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(3) REGISTRATION FEE(3)(4) Common Stock ($.01 par value)....... 5,750,000 shares $42.25 $244,375,000 $84,268
(1) Includes 750,000 shares of Common Stock that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee. Pursuant to Rules 457(a) and 457(c) under the Securities Act of 1933, the registration fee applicable to the Common Stock is calculated upon the basis of the average high and low sales prices of the Common Stock as reported on the New York Stock Exchange Composite Tape on November 30, 1995. (3) Of the 5,750,000 shares being registered (i) 2,875,000 shares were registered in connection with the original filing of this registration statement at a proposed maximum aggregate offering price of $122,906,250 and a registration fee of $42,382 and (ii) 2,875,000 additional shares are being registered by this filing at a proposed maximum aggregate offering price of $121,468,750 and a registration fee of $41,886. (4) Includes $42,382 previously paid in connection with this transaction. ------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED DECEMBER 7, 1995 PROSPECTUS - ---------- 5,000,000 SHARES [ECKERD CORPORATION LOGO] COMMON STOCK ------------------- All of the 5,000,000 shares of common stock, par value $.01 per share (the "Common Stock"), of Eckerd Corporation (the "Company") offered hereby (the "Offering") are being sold by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any proceeds from the sale of shares of Common Stock offered hereby. The Common Stock is listed on the New York Stock Exchange ("NYSE") under the trading symbol "ECK." On December 6, 1995, the last reported sale price of the Common Stock on the NYSE was $43 1/4 per share. See "Price Range of Common Stock and Dividend Policy." FOR INFORMATION CONCERNING CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" COMMENCING ON PAGE 8. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROCEEDS TO PRICE TO UNDERWRITING SELLING PUBLIC DISCOUNT(1) STOCKHOLDERS(2) Per Share...................... $ $ $ Total(3)....................... $ $ $
(1) The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) The Company has agreed to pay certain expenses of the Offering estimated at $525,000. (3) The Selling Stockholders have granted the Underwriters a 30-day option to purchase up to an aggregate of 750,000 additional shares of Common Stock, solely to cover over-allotments, if any. If all such additional shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. See "Underwriting." ------------------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York on or about , 1995. ------------------- MERRILL LYNCH & CO. CS FIRST BOSTON MORGAN STANLEY & CO. INCORPORATED RAYMOND JAMES & ASSOCIATES, INC. ------------------- The date of this Prospectus is , 1995. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE [ECKERD CORPORATION LOGO] ["It's right at Eckerd." logo] [MAP OF ECKERD DRUG STORES BY STATE] IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE COMMON STOCK OF THE COMPANY PURSUANT TO EXEMPTIONS FROM RULES 10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements appearing elsewhere in this Prospectus. Unless the context indicates otherwise, all references in this Prospectus to the "Company" include Eckerd Corporation and its subsidiaries. All references to fiscal years shall be determined with respect to the calendar year in which the fiscal year begins. The Company's fiscal year terminates each year on the Saturday nearest to January 31st. Unless the context indicates otherwise, the information contained in this Prospectus assumes that the over-allotment option granted by the Selling Stockholders to the Underwriters has not been exercised. THE COMPANY Eckerd Corporation (the "Company") operates the Eckerd Drug store chain, which is one of the largest drug store chains in the United States. At October 28, 1995, the Eckerd Drug store chain consisted of 1,704 stores in 13 states located primarily in the Sunbelt, including 577 stores in Florida and 474 stores in Texas. The Company's stores are concentrated in 10 of the 12 metropolitan statistical areas in the United States with the largest percentage growth in population from 1980 to 1990, and, according to industry sources, the Company ranks first or second in drug store sales in 12 of the 14 major metropolitan markets in which it operates. The primary focus of Eckerd Drug stores is the sale of prescription and over-the-counter drugs. During fiscal 1994, the Company filled more than 89 million prescriptions, and sales of prescriptions and over-the-counter drugs generated approximately 61.1% of the Company's drug store sales and other operating revenue. During the period from fiscal 1990 through fiscal 1994, the Company's dollar volume of sales of prescription drugs increased at a compound annual growth rate of 12.4% and during the first half of fiscal 1995, the dollar volume of sales of prescription drugs increased by 15.8% as compared to the first half of fiscal 1994. The Company expects that its prescription and over-the-counter drug business will provide significant opportunities for profitable growth primarily as a result of the continued shift to managed health care in the United States and the aging of the American population. The Company believes it is well positioned to take advantage of the growth in managed health care. The Company's extensive store base within its markets, strong third-party payor marketing program, state-of-the-art pharmacy computer systems, and experience and reputation in the industry provide the Company with distinct advantages over independent drug stores, small drug store chains and mass merchandisers in attracting third-party payor sales. In fiscal 1994, sales to third-party payors, such as insurance companies, health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), other managed care providers, government agencies or private employers, represented approximately 64.6% of the Company's total prescription drug sales, as compared to 36.0% in fiscal 1990, and this percentage is expected to continue to increase. The Company also expects to benefit from the aging of the population, as approximately 62% of the Company's drug stores are located in Florida and Texas, two of the top three states in terms of growth in the number of persons over age 65. According to industry studies, persons over age 65 purchase twice as many prescription drugs and 50% more over-the-counter drugs than the national average. In addition to prescription and over-the-counter drugs, the Company also sells a wide variety of name brand and private label nonpharmacy merchandise, including health and beauty aids, greeting cards and other convenience products, such as sundries, tobacco, books, magazines, household products, seasonal merchandise and toys. Over the last several years, the Company has introduced convenience food mart sections in over 550 stores, offering beverages and other convenience food items. The Company plans to add food mart departments to over 350 stores in fiscal 1995. The Company is also a leading source of photo finishing in all of the major markets in which it operates, offering overnight 3 developing in all of its stores and 1-hour Express Photo service in 510 of its locations as of October 28, 1995. The Company is one of the top three vertically integrated retail photo finishers in the United States. The Company believes that photo finishing operations increase store traffic and provide for significant incremental sales of other drug store items. The Company anticipates opening additional Express Photo Centers over the next several years in both new and existing store locations, with a goal of adding approximately 240 new Express Photo Centers by 1999. Customer service and convenience are critical in positioning the Company as an alternative to mass merchandisers, supermarkets and other large format retailing channels. The Company typically provides several conveniently located, modern stores in a community. The Company's stores range in size from 8,200 to 10,800 square feet and are primarily located in high-traffic neighborhood strip centers or free standing locations. The Company's stores are typically open every day of the year except Christmas, with some open until midnight or 24 hours a day. The Company offers a high level of professional pharmacy service such as the "Rx Advisor", a personalized, easy-to-read publication provided to each prescription drug customer which advises the customer of the specific dosages, contraindications and side effects of his or her prescription medicine. Other customer service advantages include comfortable pharmacy waiting areas, free health-related programs and screenings (e.g., blood pressure tests) and drive-through pharmacy windows in most new drug stores. In addition, the Company frequently tests new customer service features. The Company's business strategy is focused upon maintaining a strong pharmacy and health-related business. The Company plans to continue to implement this strategy by: . maintaining a high level of customer service and convenience; . providing competitive prices on its merchandise; . maintaining an aggressive marketing program to third-party payors; . continuing its commitment to control costs; . improving store productivity and profitability by continuing to assess the need to reallocate nonpharmacy shelf space; . expanding and improving the Company's store base; and . continuing to invest in and upgrade information systems. The Company was incorporated in Delaware in 1985 and acquired the former Jack Eckerd Corporation ("Old Eckerd") in 1986 (the "Acquisition"). The Company's principal executive offices are located at 8333 Bryan Dairy Road, Largo, Florida 34647; telephone number (813) 399-6000. RECENT OPERATING RESULTS On November 28, 1995, the Company announced its operating results for the nine-month period ended October 28, 1995. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--Recent Operating Results." 4 THE OFFERING Common Stock Offered by the Selling Stockholders......... 5,000,000 shares Total Common Stock Outstanding.................. 34,950,857 shares (1) NYSE Symbol.................. ECK - ------------ (1) Based on the number of shares outstanding as of October 28, 1995. Does not include employee stock options outstanding to purchase an aggregate of 1,656,199 shares of Common Stock at October 28, 1995, of which options to purchase an aggregate of 302,328 shares of Common Stock were exercisable. In addition, another 1,757,910 shares of Common Stock were reserved for issuance pursuant to the Company's 1993 and 1995 Stock Option and Incentive Plans. 5 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following summary historical financial data for the years and periods presented below have been derived from the Company's consolidated financial statements. The historical financial data for the three fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 have been derived from, and should be read in conjunction with, the Company's audited consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K405 (the "Annual Report") incorporated by reference herein. The historical financial data for the twenty-six week periods ended July 29, 1995 and July 30, 1994 have been derived from, and should be read in conjunction with, the unaudited consolidated financial statements of the Company contained in the Company's Quarterly Report on Form 10-Q for the quarter ended July 29, 1995 (the "10-Q") incorporated by reference herein which, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the interim period financial data. The results for the twenty-six week period ended July 29, 1995 are not necessarily indicative of the results to be expected for the full year. The summary pro forma statement of operations data presented below give effect to the Insta-Care Sale (as defined) and the use of the net proceeds therefrom as if such transaction had occurred as of the beginning of the periods presented and for the fiscal year ended January 28, 1995 also reflect the reversal of the gain on the Insta-Care Sale and the charge for future store closings and should be read in conjunction with "Pro Forma Financial Data." The summary pro forma financial data do not purport to represent what the Company's results of operations would actually have been if the Insta-Care Sale and the use of proceeds therefrom in fact had occurred at the beginning of the period presented, or to project the Company's results of operations for any future period. All information contained in the following tables should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the consolidated financial statements of the Company and related notes incorporated by reference herein.
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED ----------------------- -------------------------------------------------------------- JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2, 1995 1994 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PER SQUARE FOOT DATA) STATEMENT OF OPERATIONS DATA: Sales and other operating revenue(1).......................... $2,358,318 $2,203,085 $4,549,031 $4,190,539 $3,887,027 $3,739,852 $3,456,134 Gross profit(2).................... 533,722 516,721 1,104,890 1,015,164 990,548 1,001,307 928,590 Earnings before interest expense... 91,299 83,108 180,819 157,184 135,383 147,098 111,327 Total interest expense............. 39,949 48,392 93,735 113,215 137,404 143,194 147,309 Earnings (loss) before extraordinary items................. 42,620 32,966 78,331 41,413 (4,885) 977 (35,982) Net earnings (loss) for the period(3)........................... 41,599 32,966 47,808 (2,941) (4,123) 2,657 (35,982) Net earnings (loss) available to common shares(3)................. 41,599 32,966 47,808 (7,865) (14,938) (8,166) (46,848) Earnings (loss) before extraordinary items per common share(4)............................ $ 1.30 $ 1.02 $ 2.41 $ 1.24 $ (0.59) $ (0.38) $ (1.97) Net earnings (loss) per common share(3)(4)......................... 1.27 1.02 1.47 (0.27) (0.56) (0.32) (1.97) Weighted average common shares outstanding......................... 32,855,056 32,235,137 32,431,719 29,392,805 26,573,902 25,677,103 23,793,496 OTHER OPERATING DATA: EBITDA(5).......................... $ 130,860 $ 120,401 $ 258,613 $ 242,844 $ 229,217 $ 248,677 $ 235,687 EBITDA Margin(6)................... 5.5% 5.5% 5.7% 5.8% 5.9% 6.6% 6.8% LIFO charge(7)..................... $ 5,992 $ 4,841 $ 10,750 $ 8,500 $ 15,000 $ 21,000 $ 23,000 Depreciation....................... 23,889 21,515 45,842 50,041 53,753 49,554 47,835 Amortization of intangibles and expenses related to Acquisition and other(8)........................ 15,672 15,778 31,952 35,619 40,081 52,025 77,925 Capital expenditures............... 40,169 21,739 57,246 39,327 51,389 49,410 73,243 DRUG STORE DATA: Drug stores open at end of period.............................. 1,666 1,714 1,735 1,718 1,696 1,675 1,673 Comparable drug store sales growth.............................. 8.8% 8.0% 8.1% 6.1% 3.1% 5.7% 6.9% Average sales per drug store....... $ 1,383 $ 1,252 $ 2,561 $ 2,365 $ 2,222 $ 2,142 $ 2,036 Average sales per selling floor square foot......................... 182 159 325 302 283 272 258 Prescription sales as a percentage of drug store sales and other operating revenue................... 53.3% 50.5% 50.8% 48.3% 45.4% 44.0% 42.6% Prescription and over-the-counter sales as a percentage of drug store sales and other operating revenue............................. 63.7% 60.9% 61.1% 59.0% 55.9% 54.7% 52.8% Third-party prescription sales as a percentage of prescription sales............................... 69.4% 63.2% 64.6% 58.0% 49.6% 43.1% 36.0%
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED JULY 30, 1994 JAN. 28, 1995 ---------------------- ----------------- PRO FORMA STATEMENT OF OPERATIONS DATA:(9)(10) Total interest expense(11)................................................ $ 44,125 $ 86,987 Earnings before extraordinary items....................................... 34,375 80,395 Net earnings for the period............................................... 34,375 49,872 Net earnings available to common shares................................... 34,375 49,872 Earnings before extraordinary items per common share...................... 1.07 2.48 Net earnings per common share............................................. 1.07 1.54 Weighted average common shares outstanding................................ 32,235,137 32,431,719
AS OF JULY 29, 1995 ----------------------------- ACTUAL AS ADJUSTED(12) ---------- --------------- BALANCE SHEET DATA: Working capital..................................................................... $ 335,524 $ 353,484 Total assets........................................................................ 1,344,216 1,406,177 Long-term debt (including current installments)..................................... 790,558 771,600 Stockholders' equity (deficit)...................................................... (80,533) (3,225)
(Footnotes on following page) 6 (Footnotes for preceding page) - ------------ (1) Reflects reclassification of sales to employees in the twenty-six weeks ended July 30, 1994 to conform to fiscal 1995 financial statement presentation. Fiscal 1994, 1993, 1992, 1991 and 1990 have not been reclassified. (2) Gross profit represents sales and other operating revenue less cost of sales, including store occupancy, warehousing and delivery expense. (3) Reflects extraordinary item of $762 in fiscal 1992 and $1,680 in fiscal 1991 relating to the tax effect of utilization of net operating loss carryforwards and extraordinary loss net of taxes of $1,021 in the twenty-six weeks ended July 29, 1995 and $30,523 in fiscal 1994 relating to the early retirement of indebtedness and $44,354 in fiscal 1993 relating to the early retirement of indebtedness and preferred stock. (4) Reflects payment of preferred stock dividends of $4,924 in fiscal 1993, $10,815 in fiscal 1992, $10,823 in fiscal 1991 and $10,866 in fiscal 1990. (5) EBITDA means earnings before interest, taxes, depreciation, amortization of intangibles and expenses related to the Acquisition and other, and, for fiscal 1990, the reversal of the inventory valuation reserve established in fiscal 1986 in connection with the Acquisition. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--General--Impact of Non-Cash and Non-Recurring Charges." The Company believes that EBITDA is an important measure of its operating results because of the significant amount of charges resulting from the Acquisition and other transactions which are non-cash and/or non-recurring. However, EBITDA should not be considered in isolation or as a substitute for net earnings and other statement of operations data prepared in accordance with generally accepted accounting principles as a measure of the Company's profitability or liquidity. (6) EBITDA Margin means EBITDA as a percentage of sales and other operating revenue. (7) LIFO charge for fiscal 1990 is before the reversal of the inventory valuation reserve established in fiscal 1986 in connection with the Acquisition. (8) Includes amortization of assets written up as a result of the Acquisition, including goodwill, and charges due to certain performance-related management compensation programs. (9) The pro forma statement of operations data reflect the Insta-Care Sale and the use of the net proceeds as if such transaction had occurred as of the beginning of the periods presented. See "The Company--The 1994 Transactions--The Insta-Care Sale" and "Pro Forma Financial Data." (10) For the fiscal year ended January 28, 1995, excludes $54,125 from sales and other operating revenue for the gain on the Insta-Care Sale, $4,655 from income taxes for the gain on the Insta-Care Sale and $48,988 from operating and administrative expenses for the charge for future store closings. (11) Pro forma interest expense was computed assuming a rate of 6 1/2% under the Credit Agreement. (12) The as adjusted balance sheet data reflect the use of the net proceeds of approximately $82.3 million from the August Offering (as defined under "The Company--The 1995 Transactions") which was completed on August 2, 1995. Such net proceeds, together with approximately $54.8 million of Revolving Loan (as defined) borrowings under the Credit Agreement (as defined under "Description of Certain Indebtedness--The Credit Agreement") were used to redeem all of the Company's 11 1/8% Subordinated Debentures due 2001 (the "11 1/8% Debentures") and to finance the Florida Acquisition (as defined under "The Company--The 1995 Transactions"). 7 RISK FACTORS Prior to making an investment decision, prospective purchasers of Common Stock should carefully consider all of the information contained in this Prospectus, and, in particular, should evaluate the following risk factors. SUBSTANTIAL INDEBTEDNESS As a result of the Acquisition, the related financing and refinancings thereof, the Company is highly leveraged. At July 29, 1995, the Company had long-term debt (including current maturities) of $790.6 million and a stockholders' deficit of $80.5 million. The Company may incur additional indebtedness in the future, including (i) unused and available borrowing commitments under the Credit Agreement of $198.7 million on July 29, 1995 and (ii) up to an additional $150.0 million aggregate principal amount of debt securities (the "Debt Securities") which are registered pursuant to an effective shelf registration statement, subject in all cases to certain restrictions contained in the Credit Agreement, the Company's 9 1/4% Senior Subordinated Notes due 2004 (the "9 1/4% Notes") and the Company's other debt instruments. See "--Restrictions Imposed by Terms of the Company's Indebtedness." As of November 30, 1995, the Company had borrowed under the Credit Agreement an additional $158.7 million and had $28.0 million of unused and available borrowing commitments thereunder. The ability of the Company to make cash payments to satisfy its substantial indebtedness will depend upon its future operating performance, which is subject to prevailing economic conditions, and to financial, business and other factors beyond the Company's control. Based upon the Company's ability to generate cash flow from operating activities, the available unused portion of the working capital revolving loans under the Credit Agreement and other existing financing sources, the Company believes that it will have the funds necessary to meet the principal and interest payments on its debt as they become due and to operate and expand its businesses. However, there can be no assurance that the Company will be able to do so. If the Company is unable to generate sufficient earnings and cash flow to meet its obligations with respect to its outstanding indebtedness, refinancing of certain of these debt obligations or asset dispositions might be required. In the event debt refinancing is required, there can be no assurance that the Company can effect such refinancing on satisfactory terms or that the refinancing will be permitted by the lenders under the Credit Agreement, by the terms of the 9 1/4% Notes or by the other creditors of the Company. In addition, asset dispositions may be made under circumstances which might not be favorable to realizing the best price for such assets. Moreover, there can be no assurance that assets can be sold promptly enough, or for amounts sufficient to satisfy outstanding debt obligations. The Credit Agreement and the 9 1/4% Notes contain certain restrictions on the Company's ability to sell assets and on the use of proceeds from permitted asset sales. For information regarding restrictions on debt refinancing and asset dispositions, see "Description of Certain Indebtedness." While certain transactions consummated in fiscal 1993 and 1994, such as the IPO (as defined), the issuance of the 9 1/4% Notes and amendments to the Credit Agreement, and certain transactions consummated in fiscal 1995, such as the August Offering and the recent amendment to the Credit Agreement (the "1995 Credit Agreement Amendment"), have improved the Company's financial flexibility, the substantial interest and principal payment requirements on borrowings under the Credit Agreement, the 9 1/4% Notes and the Company's other indebtedness could have important consequences to holders of Common Stock. See "Description of Certain Indebtedness--The Credit Agreement." Such consequences include (i) limiting the Company's ability to effect future financings and otherwise restricting corporate activities, including the Company's ability to respond to market conditions, to provide for capital expenditures or to take advantage of acquisition opportunities and (ii) reducing the funds available to the Company for its operations. The Credit Agreement, the 9 1/4% Notes and certain other financing agreements impose other operating and financial restrictions on the Company, the failure to comply with which may result in an event of default which, if not cured or waived, would have 8 material adverse effect on the Company. See "--Restrictions Imposed by Terms of the Company's Indebtedness." All of the Company's indebtedness under the Credit Agreement is at variable rates of interest, causing the Company to be sensitive to prevailing interest rates. As required by the Credit Agreement, the Company has entered into certain interest rate protection agreements with respect to $200.0 million of its floating rate exposure. Such interest rate protection agreements will remain in full force and effect through August 1996. At November 30, 1995, the Company had $633.0 million of borrowings under the Credit Agreement which are at variable rates of interest. To the extent interest rates rise, the Company's ability to pay principal and interest on borrowings under the Credit Agreement and its other indebtedness could be adversely affected. See "Description of Certain Indebtedness--The Credit Agreement." RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS The terms and conditions of the Credit Agreement and the 9 1/4% Notes Indenture (as defined herein) impose restrictions that affect, among other things, the ability of the Company and its subsidiaries to incur debt, pay dividends, make acquisitions, create liens and make capital expenditures. See "Description of Certain Indebtedness--The Credit Agreement" and "Description of Certain Indebtedness--The 9 1/4% Notes." The Credit Agreement also requires the Company to satisfy certain financial covenants on a quarterly basis. The ability of the Company to comply with such financial covenants can be affected by events beyond the Company's control, and there can be no assurance that the Company will achieve operating results that will comply with such covenants. A breach of any of these covenants could result in a default under the Credit Agreement, the 9 1/4% Notes Indenture and other indebtedness of the Company. In the event of any such default, the lenders under the Credit Agreement could elect to declare all amounts borrowed thereunder, together with accrued interest, to be due and payable. If the Credit Agreement indebtedness or the 9 1/4% Notes were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full such Credit Agreement indebtedness and the other indebtedness of the Company. See "Description of Certain Indebtedness--The Credit Agreement." COMPETITION The Company operates in highly competitive industries. In addition to traditional competition from independent drug stores and other drug store chains, Eckerd Drug stores face competition from mass merchants (including discounters and deep discounters), supermarkets, combination food and drug stores, mail order distributors, hospitals and HMOs and other managed care providers. These other formats have experienced significant growth in their market share of the prescription and over-the-counter drug business. Many of these competitors have greater financial resources than the Company. The Company competes with these competitors primarily on the basis of customer service, convenience and price. See "Business--Business Strategy--Competitive Pricing" and "Business--Business Strategy--Competition." PRESCRIPTION DRUG SALES AND FUTURE REGULATION The Company relies on prescription drug sales for a significant portion of its revenues and profits, and prescription drug sales represent a growing segment of the Company's business. Prescription drug sales accounted for approximately 53.3%, 50.8%, 48.3%, 45.4%, 44.0% and 42.6% of the Company's drug store sales and other operating revenue for the first half of fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, fiscal 1991 and fiscal 1990, respectively. These revenues are affected by changes within the health care industry, including changes in programs providing for reimbursement of the cost of prescription drugs by third-party payors, such as government and private sources, and regulatory changes relating to the approval process for prescription drugs. In recent years, an increasing number of 9 legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. The Company cannot predict whether any federal or state health care reform legislation will eventually be passed, and if so, the impact thereof on the Company's financial position or results of operations. Health care reform, if implemented, could adversely affect the pricing of prescription drugs or the amount of reimbursement from governmental agencies and third-party payors, and consequently could be adverse to the Company. However, to the extent health care reform expands the number of persons receiving health care benefits covering the purchase of prescription drugs, it may also result in increased purchases of such drugs and could thereby have a favorable impact on both the Company and the retail drug industry in general. Nevertheless, there can be no assurance that any future federal or state health care reform legislation will not adversely affect the Company or the retail drug store industry generally. See "Business--Regulation." SALES TO THIRD-PARTY PAYORS A growing percentage of the Company's prescription drug volume has been accounted for by sales to customers who are covered by third-party payment programs. Third-party prescription sales accounted for approximately 69.4%, 64.6%, 58.0%, 49.6%, 43.1% and 36.0% of the Company's prescription sales in the first half of fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, fiscal 1991 and fiscal 1990, respectively. Prescription sales to third-party payors, in terms of both dollar volume and as a percentage of total prescription sales, continued to increase in the first half of fiscal 1995 and the Company expects this trend to continue. Although contracts with third-party payors may increase the volume of prescription sales and gross profits, third-party payors typically negotiate lower prescription prices than those on non third-party prescriptions. Accordingly, there has been downward pressure on gross profit margins on sales of prescription drugs which is expected to continue in future periods. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business--The Drug Store Industry." PRINCIPAL STOCKHOLDERS Upon completion of the Offering, the Merrill Lynch Investors (as defined under "The Company-- General") will own approximately 8.64% of the outstanding shares of Common Stock (approximately 6.50% if the over-allotment option is exercised in full) and the Management Investors (as defined under "The Company--General") will own approximately 3.27% of the outstanding shares of Common Stock. As a result of such stock ownership, if the Merrill Lynch Investors and the Management Investors were to vote together, they will be able to influence significantly the election of the Board of Directors of the Company and the vote on all other matters requiring stockholder approval. In addition, three members of the Board of Directors of the Company serve as representatives of the Merrill Lynch Investors. The Merrill Lynch Investors are affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"). In addition, certain provisions of the Company's Certificate of Incorporation and By-laws could make more difficult non-negotiated acquisitions of the Company. These provisions include a staggered board of directors, limitation on actions by written consent of stockholders and advance notice procedures for nominations of directors and other stockholder proposals. See "Principal and Selling Stockholders" and "Description of Capital Stock--Certificate of Incorporation and By-laws." SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, approximately 34,950,857 shares of Common Stock will be outstanding. All of the 5,000,000 shares of Common Stock being sold in the Offering, together with approximately 22,424,938 shares currently outstanding, will be freely transferable without restriction under the Securities Act unless held by an affiliate of the Company. The remaining outstanding shares of Common Stock held by existing stockholders are "restricted securities" of the Company within the 10 meaning of Rule 144 under the Securities Act and may not be sold unless they are registered under the Securities Act or sold pursuant to an exemption from registration thereunder, including the exemption contained in Rule 144, which contains certain volume and other resale limitations. Pursuant to Rule 144(k), however, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at the time of sale and has not been an affiliate during the three months immediately preceding the sale may sell such shares without regard to such volume and other resale limitations of Rule 144 provided that a period of at least three years has elapsed since the later of the date the securities were acquired from the issuer or from an affiliate of the issuer. The Merrill Lynch Investors, the Management Investors and the other existing stockholders of the Company were granted rights entitling them, under specified circumstances, to cause the Company to register for sale all or part of their shares of Common Stock and to include such shares in any registered public offerings of Common Stock by the Company. The Company has included the shares of Common Stock to be sold by the Selling Stockholders in the Offering pursuant to the exercise by such Selling Stockholders of their demand registration rights under the Registration Rights Agreement (as defined). See "Description of Capital Stock--Registration Rights." Pursuant to the Registration Rights Agreement, each holder of at least 1% of the outstanding shares of Common Stock who is a party thereto (the "1% Holders") has agreed for a period beginning seven days before, and ending 120 days after, the effective date of the Registration Statement of which this Prospectus is a part, not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act, of Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock, subject to certain exceptions, without the prior written consent of the Representatives (as defined herein) of the Underwriters. Approximately 16.06% of the shares of Common Stock outstanding upon consummation of the Offering will be subject to such lock-up agreement. In addition, certain of the Merrill Lynch Investors that are limited partnerships will be distributing an aggregate of approximately 405,641 shares of Common Stock owned by them to their partners that have elected not to receive their pro rata share of the proceeds of the sale of Common Stock by such partnerships (the "Merrill Lynch Distribution"). As a condition to receiving shares of Common Stock in the Merrill Lynch Distribution, such partners have agreed to be bound by the same lock-up provision as the 1% Holders for a period of 120 days after the effective date of the Registration Statement. The Merrill Lynch Distribution is expected to occur as soon as practicable after 120 days from the effective date of the Registration Statement, or on such earlier date consented to by the Representatives of the Underwriters. In addition, each of the Company and the executive officers and directors of the Company will agree, for a period of 90 days after the effective date of the Registration Statement, not to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock, subject to certain exceptions, without the prior written consent of the Representatives of the Underwriters. No prediction can be made as to the effect, if any, that future sales of Common Stock or the availability of Common Stock for future sale will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock (including shares issued upon exercise of employee stock options) in the public market, or the perception that such sales could occur, could adversely affect prevailing market prices of the Common Stock. 11 CAPITALIZATION The following table sets forth the capitalization of the Company as of July 29, 1995 and as adjusted to give effect to the issuance of 2,675,000 shares of Common Stock by the Company in the August Offering and the use of the net proceeds therefrom. The table should be read in conjunction with "Pro Forma Financial Data" and the Company's consolidated financial statements incorporated by reference herein. The Company will not receive any of the proceeds from the sale of the shares of Common Stock in the Offering.
JULY 29, 1995 --------------------------- ACTUAL AS ADJUSTED(1) --------- -------------- (DOLLARS IN THOUSANDS) Total long-term indebtedness (including current installments): Credit Agreement Term Loans................................................... $ 415,280 $415,280 Revolving Loans and Bankers' Acceptances..................... 59,000 113,786 9 1/4% Notes..................................................... 200,000 200,000 11 1/8% Debentures ($78,860 principal amount).................... 73,744 -- Variable rate demand industrial revenue bonds.................... 18,250 18,250 Other (principally notes secured by fixtures and equipment)...... 24,284 24,284 --------- -------------- Total long-term indebtedness (including current installments).................................................... 790,558 771,600 Stockholders' equity (deficit): Common stock................................................... 322 349 Capital in excess of par value................................. 234,636 316,931 Retained deficit............................................... (315,491) (320,505)(2) --------- -------------- Total common stockholders' equity (deficit)................ (80,533) (3,225) --------- -------------- Total capitalization............................................. $ 710,025 $768,375 --------- -------------- --------- --------------
- ------------ (1) Reflects the use of the net proceeds of approximately $82,322 from the August Offering and additional Revolving Loan borrowings of approximately $54,786 to redeem all of the 11 1/8% Debentures on September 5, 1995 and to finance the Florida Acquisition. The Company will not receive any of the proceeds from the sale of the shares of Common Stock in the Offering. (2) Reflects the write-off of original issue discount and deferred debt expense of $6,040 ($5,014 on an after-tax basis) related to the redemption on September 5, 1995 of the 11 1/8% Debentures. 12 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock is traded on the New York Stock Exchange ("NYSE") under the symbol "ECK." The following table sets forth on a per share basis, for the periods indicated, the high and low sales prices of the Common Stock as reported on the NYSE Composite Tape. The Common Stock was not publicly traded, and no dividends were paid on the Common Stock, prior to the IPO on August 5, 1993.
PRICE RANGE ----------------- HIGH LOW --------------- ------------- FISCAL 1993: Third Quarter (from August 6, 1993)...................................... $18 $12 3/4 Fourth Quarter........................................................... 20 3/4 13 3/4 FISCAL 1994: First Quarter............................................................ $24 $18 1/2 Second Quarter........................................................... 25 1/4 18 1/8 Third Quarter............................................................ 31 1/2 23 1/4 Fourth Quarter........................................................... 32 25 3/8 FISCAL 1995: First Quarter............................................................ $30 1/4 $24 1/2 Second Quarter........................................................... 34 5/8 28 3/8 Third Quarter............................................................ 42 32 5/8 Fourth Quarter (through December 6, 1995)................................ 44 1/2 38 1/8
On December 6, 1995, the last sale price as reported on the NYSE was $43.25 per share. The Company has never paid dividends on its Common Stock and does not intend to pay dividends in the foreseeable future. The payment of dividends by the Company is subject to restrictions under certain of its financing agreements, including the Credit Agreement and the 9 1/4% Notes. See "Description of Certain Indebtedness." Any determination to pay cash dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant at that time by the Company's Board of Directors. 13 THE COMPANY GENERAL Merrill Lynch Capital Partners, Inc. ("Merrill Lynch Capital Partners") formed the Company for the purpose of acquiring Old Eckerd in April 1986. Prior to the Acquisition, the Company had no activities other than those connected to the Acquisition. Merrill Lynch Capital Partners formed EDS Holdings Inc. ("EDS") and its wholly owned subsidiary, Eckerd Holdings II, Inc. ("EH II"), to acquire certain additional drug stores in July 1990. EH II owns certain drug stores which were operated by the Company pursuant to a Management Agreement dated as of July 13, 1990, as amended (the "EH II Management Agreement"). On August 12, 1993, the Company completed an initial public offering (the "IPO") in which it issued and sold 5,175,000 shares of Common Stock for $14.00 per share. The stockholders of the Company include (i) certain partnerships affiliated with Merrill Lynch Capital Partners, (ii) certain other affiliates of Merrill Lynch & Co., Inc. ("ML & Co.") ((i) and (ii), collectively, the "Merrill Lynch Investors" or the "Selling Stockholders"), (iii) approximately 25 members of current and former management (the "Management Investors"), (iv) the Company's Employees' Profit Sharing Plan and (v) certain affiliates of the banks which provided part of the financing for the Acquisition and other institutional investors. As of October 28, 1995, the Merrill Lynch Investors owned approximately 8,020,634 shares, or 22.95%, of the Common Stock, and the Management Investors owned approximately 1,143,505 shares, or 3.27%, of the Common Stock. Upon completion of the Offering, the Merrill Lynch Investors will own approximately 8.64% of the outstanding shares of Common Stock (approximately 6.50% if the over-allotment option is exercised in full). The Management Investors are not selling any shares of Common Stock in the Offering. See "Principal and Selling Stockholders." THE 1993 TRANSACTIONS The Refinancing On June 15, 1993, the Company consummated a series of transactions designed to simplify its capital structure, reduce interest expense and dividend costs and provide additional financial flexibility. The Company entered into the Old Credit Agreement (as defined), which provided for (a) a $650.0 million term loan facility consisting of a six-year amortizing Tranche A term loan facility of $500.0 million (the "Tranche A Term Loans") and a seven-year amortizing Tranche B term loan facility of $150.0 million (the "Tranche B Term Loans") and (b) a $300.0 million six-year revolving credit facility (a portion of which was available as a swingline loan facility and as a letter of credit and bankers' acceptance facility). The Company also entered into a sale and leaseback arrangement with Imaging Financial Services, Inc. (the "IFS Sale and Leaseback") relating to approximately $35.0 million of photo processing equipment. In addition, the Company, EDS and EH II amended the EH II Management Agreement to provide for the payment by EH II to the Company of $40.0 million, of which approximately $22.0 million represented payment by EH II of the management fee and interest thereon which was accrued and previously deferred and approximately $18.0 million represented prepayment by EH II of the management fee to be earned by the Company in the future, which prepayment was evidenced by an unsecured promissory note (the "EH II Note"). EH II obtained the funds necessary for such payments from cash generated by its operations and from borrowings of approximately $31.6 million under a new revolving credit and term loan agreement dated as of June 7, 1993 (the "EH II Credit Agreement") (the borrowings under the Old Credit Agreement, the consummation of the IFS Sale and Leaseback, the amendment to the EH II Management Agreement, including Eckerd's obligations under the EH II Note, borrowings under the EH II Credit Agreement, and the application of the proceeds therefrom, are collectively referred to as the "Refinancing"). The net proceeds from the Refinancing were used to pay, prepay or redeem (i) borrowings outstanding under the Company's prior Credit Agreement, dated as of July 13, 1990, as amended, with 14 Morgan Guaranty Trust Company of New York and the other lenders party thereto (the "1990 Credit Agreement"), which consisted of a revolving credit facility and a term loan facility, (ii) the 11.39% Senior Notes due January 31, 1995 of the Company at a prepayment price of 100% of the principal amount thereof plus a make-whole amount, (iii) the 11.75% Senior Notes due April 15, 1995 of the Company at a prepayment price of 105% of the principal amount thereof, (iv) the Senior Secured Floating Rate Notes due April 15, 1997 of the Company at a redemption price of 101% of the principal amount thereof, (v) the 13% Senior Secured Fixed Rate Notes due April 15, 1997 of the Company at a redemption price of 106.6% of the principal amount thereof, (vi) the Company's Discount Subordinated Debentures due May 1, 2006 (the "13% Discount Debentures"), at a redemption price of 100% of the principal amount thereof (except for the $50.0 million aggregate principal amount of 13% Discount Debentures which was subsequently redeemed with the net proceeds from the issuance of the 9 1/4% Notes) and (vii) the Company's 14 1/2% Cumulative Redeemable Preferred Stock (the "14 1/2% Preferred Stock"), at a redemption price of $1,000 per share plus a redemption premium of $48.30 per share. The IPO and Related Transactions On August 12, 1993, the Company consummated the IPO and certain related transactions. Immediately prior to the consummation of the IPO, the stockholders of EDS (which included certain of the Merrill Lynch Investors and certain of the Management Investors) exchanged their shares of EDS common stock for shares of Class A common stock of the Company. EDS was subsequently merged into the Company with EH II becoming a wholly owned subsidiary of the Company, and the EH II Management Agreement was terminated upon consummation of the IPO. In connection with the IPO the Company also amended its Restated Certificate of Incorporation to effect, among other things, (i) the reclassification of its Class A common stock and Class B common stock into Common Stock at certain specified rates, (ii) a 2-for-3 reverse stock split, (iii) the adoption of certain provisions such as a classified board of directors and the prohibition of stockholder action by written consent, which could make non-negotiated acquisitions of the Company more difficult and (iv) the change of the Company's name from "Jack Eckerd Corporation" to "Eckerd Corporation." The Company used approximately $30.0 million of the net proceeds of the IPO to repay all borrowings outstanding under the EH II Credit Agreement and the balance to repay borrowings under the Old Credit Agreement consisting of Tranche A Term Loans of $27.5 million and Tranche B Term Loans of $8.3 million. The 9 1/4% Note Issuance On November 2, 1993, the Company consummated the sale (the "9 1/4% Note Issuance") of $200.0 million aggregate principal amount of the 9 1/4% Notes. The net proceeds from the 9 1/4% Note Issuance were used to redeem (i) the remaining $50.0 million aggregate principal amount of the 13% Discount Debentures and (ii) $145.0 million aggregate principal amount of the 11 1/8% Debentures. The Refinancing, the IPO and the 9 1/4% Note Issuance are collectively referred to herein as the "1993 Transactions." THE 1994 TRANSACTIONS The Vision Group Sale Effective January 30, 1994, the Company sold its operations of Eckerd Optical centers and "Visionworks" retail optical superstores (the "Vision Group Sale"). The Company sold the Vision Group for an amount in cash and notes approximately equal to the book value of the related assets and no gain or loss was recognized by the Company. The net proceeds from the Vision Group Sale were used to reduce outstanding indebtedness under the Credit Agreement. Sales of the Vision Group were $60.7 million in fiscal 1993, accounting for approximately 1.5% of the Company's sales and 2.2% of the Company's earnings before interest, taxes and extraordinary items. 15 The Amendment On August 3, 1994, the Company entered into an amendment (the "Amendment") to its then existing credit agreement (the "Old Credit Agreement" and, as amended and restated pursuant to the Amendment for periods prior to November 29, 1995, and, as amended and restated pursuant to the Amendment and the 1995 Credit Agreement Amendment for periods on or after November 29, 1995, the "Credit Agreement"). The Amendment did not provide any additional proceeds to the Company, but it did provide improved pricing and increased operating flexibility with respect to acquisitions, capital expenditures and lease payments, with future reductions in rates if the Company achieves certain indebtedness levels and performance goals. The Insta-Care Sale On November 15, 1994, the Company consummated the sale of Insta-Care Holdings, Inc. ("Insta-Care") to Pharmacy Corporation of America, a subsidiary of Beverly Enterprises, Inc., for a total consideration of $112.0 million in cash (the "Insta-Care Sale"). Insta-Care provided prescription drugs as well as patient record and consulting services to long-term health care facilities in New England and the Sunbelt. The net proceeds from the Insta-Care Sale, after certain closing adjustments, were approximately $93.3 million. Such net proceeds were used to redeem $50.0 million aggregate principal amount of 11 1/8% Debentures in December 1994 and to repay approximately $43.3 million of Revolving Loan borrowings under the Credit Agreement in November 1994. In fiscal 1994, sales of Insta-Care were approximately $89.0 million and earnings before interest and income taxes were approximately $3.0 million, accounting for approximately 2.0% of the Company's sales and 1.6% of the Company's earnings before interest, taxes and extraordinary items. The Company recognized a gain on the Insta-Care Sale of $49.5 million, net of income taxes of $4.6 million. The Vision Group Sale, the Amendment and the Insta-Care Sale are collectively referred to herein as the "1994 Transactions." THE 1995 TRANSACTIONS The August Offering and Florida Acquisition On August 2, 1995, the Company consummated a public offering of 6,175,500 shares of Common Stock in the aggregate at a public offering price of $32.25 per share (the "August Offering"). Of the shares offered, 2,675,000 shares were sold by the Company and 3,500,500 shares were sold by the Merrill Lynch Investors. The Company used the net proceeds of the August Offering, approximately $82.3 million, and approximately $54.8 million of Revolving Loan borrowings under the Credit Agreement (i) to redeem all of the outstanding 11 1/8% Debentures at a redemption price of 100% of the $78.86 million principal amount thereof and (ii) to finance the acquisition (the "Florida Acquisition") of the assets of 108 drug stores in Florida that were formerly owned and operated by Rite Aid of Florida, Inc. ("Rite Aid"). Pursuant to the Florida Acquisition, the Company acquired 40 Rite Aid leased locations, which are currently being operated as Eckerd Drug stores and the fixtures, inventory and prescription files of an additional 68 Rite Aid locations. The 1995 Credit Agreement Amendment On November 29, 1995, the Company entered into the 1995 Credit Agreement Amendment, pursuant to which (i) the maximum aggregate amount of borrowings available under the Credit Agreement was reduced to $750.0 million (with the amount of the Term Loan facility having been decreased from $406.0 million to $250.0 million and the amount of the Revolving Loan facility having been increased from $350.0 million to $500.0 million), (ii) certain of the financial and restrictive covenants were amended and (iii) the calculation of the interest rate on borrowings was adjusted resulting in a lower interest rate being paid by the Company. 16 SELECTED HISTORICAL FINANCIAL DATA The following selected historical financial data for the years and periods presented below have been derived from the Company's consolidated financial statements. The selected historical financial data for the three fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993 have been derived from, and should be read in conjunction with, the Company's audited consolidated financial statements and related notes contained in the Annual Report incorporated by reference herein. The historical financial data for the twenty-six week periods ended July 29, 1995 and July 30, 1994 have been derived from, and should be read in conjunction with, the unaudited consolidated financial statements of the Company contained in the 10-Q incorporated by reference herein which, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the interim period financial data. The results for the twenty-six week period ended July 29, 1995 are not necessarily indicative of the results to be expected for the full year. All information contained in the following tables should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the consolidated financial statements of the Company and related notes incorporated by reference herein.
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED ----------------------- -------------------------------------------------------------- JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2, 1995 1994 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Sales and other operating revenue(1)........................ $2,358,318 $2,203,085 $4,549,031 $4,190,539 $3,887,027 $3,739,852 $3,456,134 Cost of sales, including store occupancy, warehousing and delivery expense(1)............... 1,824,596 1,686,364 3,444,141 3,175,375 2,896,479 2,738,545 2,527,544 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit(2)..................... 533,722 516,721 1,104,890 1,015,164 990,548 1,001,307 928,590 Operating and administrative expense........................... 442,423 433,613 924,071 857,980 855,165 854,209 817,263 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings before interest expense.... 91,299 83,108 180,819 157,184 135,383 147,098 111,327 Total interest expense.............. 39,949 48,392 93,735 113,215 137,404 143,194 147,309 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before income taxes and extraordinary items........... 51,350 34,716 87,084 43,969 (2,021) 3,904 (35,982) Income tax provision................ 8,730 1,750 8,753 2,556 2,864 2,927 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings (loss) before extraordinary items............................. 42,620 32,966 78,331 41,413 (4,885) 977 (35,982) Extraordinary item--early retirement of debt and preferred stock, net of tax benefit.................... (1,021) -- (30,523) (44,354) -- -- -- Extraordinary item--tax effect of utilization of net operating loss carryforward...................... -- -- -- -- 762 1,680 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) for the period(3)......................... $ 41,599 $ 32,966 $ 47,808 $ (2,941) $ (4,123) $ 2,657 $ (35,982) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net earnings (loss) available to common shares(3).................. $ 41,599 $ 32,966 $ 47,808 $ (7,865) $ (14,938) $ (8,166) $ (46,848) Earnings (loss) before extraordinary items per common share(4)......... $ 1.30 $ 1.02 $ 2.41 $ 1.24 $ (0.59) $ (0.38) $ (1.97) Net earnings (loss) per common share(3)(4)....................... 1.27 1.02 1.47 (0.27) (0.56) (0.32) (1.97) Weighted average common shares outstanding....................... 32,855,056 32,235,137 32,431,719 29,392,805 26,573,902 25,677,103 23,793,496 OTHER OPERATING DATA: EBITDA(5)........................... $ 130,860 $ 120,401 $ 258,613 $ 242,844 $ 229,217 $ 248,677 $ 235,687 EBITDA Margin(6).................... 5.5% 5.5% 5.7% 5.8% 5.9% 6.6% 6.8% LIFO charge(7)...................... $ 5,992 $ 4,841 $ 10,750 $ 8,500 $ 15,000 $ 21,000 $ 23,000 Depreciation........................ 23,889 21,515 45,842 50,041 53,753 49,554 47,835 Amortization of intangibles and expenses related to Acquisition and other(8)...................... 15,672 15,778 31,952 35,619 40,081 52,025 77,925 Capital expenditures................ 40,169 21,739 57,246 39,327 51,389 49,410 73,243
17
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED ----------------------- -------------------------------------------------------------- JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2, 1995 1994 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) DRUG STORE DATA: Drug Stores open at end of period... 1,666 1,714 1,735 1,718 1,696 1,675 1,673 Comparable drug store sales growth............................... 8.8% 8.0% 8.1% 6.1% 3.1% 5.7% 6.9% Average sales per drug store........ $ 1,383 $ 1,252 $ 2,561 $ 2,365 $ 2,222 $ 2,142 $ 2,036 Average sales per selling floor square foot.......................... 182 159 325 302 283 272 258 Prescription sales as a percentage of drug store sales and other operating revenue.................... 53.3% 50.5% 50.8% 48.3% 45.4% 44.0% 42.6% Prescription and over-the-counter sales as a percentage of drug store sales and other operating revenue.............................. 63.7% 60.9% 61.1% 59.0% 55.9% 54.7% 52.8% Third-party prescription sales as a percentage of prescription sales................................ 69.4% 63.2% 64.6% 58.0% 49.6% 43.1% 36.0%
AS OF ------------------------------------------------------------------------------------------ JULY 29, 1995 --------------------------- ACTUAL AS ADJUSTED(9) JAN. 28, 1995 JAN. 29, 1994 JAN. 30, 1993 FEB. 1, 1992 ---------- -------------- ------------- ------------- ------------- ------------ BALANCE SHEET DATA: Working capital................. $ 335,524 $ 353,484 $ 280,289 $ 306,588 $ 367,027 $ 328,617 Total assets.................... 1,344,216 1,406,177 1,342,347 1,420,137 1,418,922 1,412,249 Long-term debt (including current installments)......... 790,558 771,600 787,013 954,891 1,048,222 1,023,106 Preferred stock................. -- -- -- -- 75,000 75,000 Stockholders' equity (deficit)........................ (80,533) (3,225) (122,742) (179,022) (243,291) (228,353) FEB. 2, 1991 ------------ BALANCE SHEET DATA: Working capital................. $ 347,775 Total assets.................... 1,443,167 Long-term debt (including current installments)......... 1,084,088 Preferred stock................. 75,000 Stockholders' equity (deficit)........................ (220,187)
- ------------ (1) Reflects reclassification of sales to employees in the twenty-six weeks ended July 30, 1994 to conform to fiscal 1995 financial statement presentation. Fiscal 1994, 1993, 1992, 1991 and 1990 have not been reclassified. (2) Gross profit represents sales and other operating revenue less cost of sales, including store occupancy, warehousing and delivery expense. (3) Reflects extraordinary item of $762 in fiscal 1992 and $1,680 in fiscal 1991 relating to the tax effect of utilization of net operating loss carryforwards and extraordinary loss net of taxes of $1,021 in the twenty-six weeks ended July 29, 1995 and $30,523 in fiscal 1994 relating to the early retirement of indebtedness and $44,354 in fiscal 1993 relating to the early retirement of indebtedness and preferred stock. (4) Reflects payment of preferred stock dividends of $4,924 in fiscal 1993, $10,815 in fiscal 1992, $10,823 in fiscal 1991 and $10,866 in fiscal 1990. (5) EBITDA means earnings before interest, taxes, depreciation, amortization of intangibles and expenses related to the Acquisition and other, and, for fiscal 1990, the reversal of the inventory valuation reserve established in fiscal 1986 in connection with the Acquisition. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--General--Impact of Non-Cash and Non-Recurring Charges." The Company believes that EBITDA is an important measure of its operating results because of the significant amount of charges resulting from the Acquisition and other transactions which are non-cash and/or non-recurring. However, EBITDA should not be considered in isolation or as a substitute for net earnings and other statement of operations data prepared in accordance with generally accepted accounting principles as a measure of the Company's profitability or liquidity. (6) EBITDA Margin means EBITDA as a percentage of sales and other operating revenue. (7) LIFO charge for fiscal 1990 is before the reversal of the inventory valuation reserve established in fiscal 1986 in connection with the Acquisition. (8) Includes amortization of assets written up as a result of the Acquisition, including goodwill, and charges due to certain performance-related management compensation programs. (9) The as adjusted balance sheet data reflect the use of the net proceeds of approximately $82.3 million from the August Offering, which was completed on August 2, 1995. Such net proceeds, together with approximately $54.8 million of Revolving Loan borrowings under the Credit Agreement, were used to redeem all of the 11 1/8% Debentures and to finance the Florida Acquisition. 18 PRO FORMA FINANCIAL DATA The following unaudited pro forma financial data of the Company are based on the historical consolidated financial statements of the Company contained in the Annual Report and 10-Q incorporated by reference herein, adjusted to give effect to the Insta-Care Sale and the use of the net proceeds therefrom. The unaudited pro forma statement of operations data for the fiscal year ended January 28, 1995 and the twenty-six weeks ended July 29, 1995 give effect to the Insta-Care Sale and the use of the net proceeds therefrom as if such transactions had occurred as of the beginning of the periods presented and for the fiscal year ended January 28, 1995 also reflect the reversal of the gain on the Insta-Care Sale and the charge for future store closings. The adjustments relating to the Insta-Care Sale and the future store closings are described in the accompanying footnotes. The pro forma adjustments are based upon available information and certain assumptions that management of the Company believes are reasonable. The pro forma financial data do not purport to represent what the Company's results of operations would actually have been if the Insta-Care Sale and the use of proceeds therefrom in fact had occurred at the beginning of the period presented, or to project the Company's results of operations for any future period. The pro forma financial data should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the historical consolidated financial statements of the Company and related notes incorporated by reference herein.
TWENTY-SIX WEEKS ENDED TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED JANUARY JULY 29, 1995 JULY 30, 1994 28, 1995 -------------- ------------------------------------------- --------------------------- ACTUAL ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS -------------- ---------- ----------- ---------- ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Sales and other operating revenue...... $2,358,318 $2,203,085(1) $ (55,711)(2) $2,147,374 $4,549,031(1) $ (88,663)(2) (54,125)(3) -------------- ---------- ----------- ---------- ---------- ----------- Costs and expenses: Cost of sales, including store occupancy, warehousing and delivery expense..... 1,824,596 1,686,364(1) (37,305)(2) 1,649,059 3,444,141(1) (58,766)(2) Operating and administrative expenses............. 442,423 433,613 (15,608)(2) 418,005 924,071 (25,830)(2) (48,988)(4) -------------- ---------- ----------- ---------- ---------- ----------- Earnings before interest expense................ 91,299 83,108 (2,798) 80,310 180,819 (9,204) Interest expense: Interest expense, net.. 38,881 45,001 (4,049)(5) 40,952 87,838 (6,347)(5) Amortization of original issue discount and deferred debt expense......... 1,068 3,391 (218)(6) 3,173 5,897 (401)(6) -------------- ---------- ----------- ---------- ---------- ----------- Total interest expense.............. 39,949 48,392 (4,267) 44,125 93,735 (6,748) -------------- ---------- ----------- ---------- ---------- ----------- Earnings (loss) before income taxes and extraordinary item..... 51,350 34,716 1,469 36,185 87,084 (2,456) Income tax provision..... 8,730 1,750 60 1,810 8,753 135 (4,655)(7) -------------- ---------- ----------- ---------- ---------- ----------- Earnings (loss) before extraordinary item..... 42,620 32,966 1,409 34,375 78,331 2,064 Extraordinary item--early retirement of debt and preferred stock........ (1,021) -- -- -- (30,523) -- -------------- ---------- ----------- ---------- ---------- ----------- Net earnings (loss) for the period............. $ 41,599 $ 32,966 $ 1,409 $ 34,375 $ 47,808 $ 2,064 -------------- ---------- ----------- ---------- ---------- ----------- -------------- ---------- ----------- ---------- ---------- ----------- Net earnings (loss) available to common shares................. $ 41,599 $ 32,966 -- $ 34,375 $ 47,808 -- Earnings (loss) before extraordinary items per common share........... 1.30 1.02 -- 1.07 2.41 -- Net earnings (loss) per common share........... 1.27 1.02 -- 1.07 1.47 -- Weighted average common shares outstanding..... 32,855 32,235 -- 32,235 32,432 --
PRO FORMA ---------- STATEMENT OF OPERATIONS DATA: Sales and other operating revenue...... $4,406,243 ---------- Costs and expenses: Cost of sales, including store occupancy, warehousing and delivery expense..... 3,385,375 Operating and administrative expenses............. 849,253 ---------- Earnings before interest expense................ 171,615 Interest expense: Interest expense, net.. 81,491 Amortization of original issue discount and deferred debt expense......... 5,496 ---------- Total interest expense.............. 86,987 ---------- Earnings (loss) before income taxes and extraordinary item..... 84,628 Income tax provision..... 4,233 ---------- Earnings (loss) before extraordinary item........ 80,395 Extraordinary item--early retirement of debt and preferred stock........ (30,523) ---------- Net earnings (loss) for the period............. $ 49,872 ---------- ---------- Net earnings (loss) available to common shares............... $ 49,872 Earnings (loss) before extraordinary items per common share......... 2.48 Net earnings (loss) per common share........... 1.54 Weighted average common shares outstanding........ 32,432 (Footnotes on following page) 19 (Footnotes for preceding page) - ------------ (1) Reflects an additional $18,355 for the twenty-six weeks ended July 30, 1994 in connection with the reclassification of sales to employees to conform to fiscal 1995 financial statement presentation. Fiscal 1994 has not been reclassified. (2) Reflects exclusion of Insta-Care operations. (3) Reflects reversal of $54,125 gain on the Insta-Care Sale. (4) Reflects reversal of $48,988 charge for future store closings. See "Management's Discussion and Analysis of Results of Operations and Financial Condition." (5) Reflects the redemption of $50,000 aggregate principal amount of 11 1/8% Debentures and repayment of Revolving Loan borrowings under the Credit Agreement of $43,300 from the net proceeds from the Insta-Care Sale, net of income taxes of $4,655 paid from the gain on the Insta-Care Sale and the corresponding reduction in interest expense. (6) Reflects the reversal of original issue discount and deferred debt expenses related to the redemption of $50,000 of 11 1/8% Debentures. (7) Reflects reversal of $4,655 of income taxes related to the gain on the Insta-Care Sale. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL The Company's primary source of revenues is the operation of Eckerd Drug stores, including Eckerd Express Photo centers. Until they were sold effective January 30, 1994 and November 15, 1994, respectively, the Company also derived revenues from the operations of Vision Group and Insta-Care, which together represented approximately 4.0% of the Company's sales and other operating revenue in fiscal 1993. See "The Company--The 1994 Transactions." The following discussion is based upon the Company's consolidated financial statements. Impact of Non-Cash and Non-Recurring Charges As a result of the Acquisition, the Company incurred a significant amount of charges which are non-cash and/or non-recurring. Therefore, the Company believes that earnings before interest and taxes after adding back such non-cash and non-recurring Acquisition related charges (together with other non-cash charges unrelated to the Acquisition) is an important measure of its operating results. The following table sets forth the Company's operating results excluding such non-cash and non-recurring charges.
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED ------------------- ---------------------------------------------------- JULY 29, JULY 30, JAN. 28, JAN. 29, JAN. 30, FEB. 1, FEB. 2, 1995 1994 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS) Earnings before interest, taxes and extraordinary items................... $ 91,299 $ 83,108 $180,819 $157,184 $135,383 $147,098 $111,327 Depreciation............................ 23,889 21,515 45,842 50,041 53,753 49,554 47,835 Amortization of asset write-ups, including goodwill.................... 15,672 15,778 31,952 35,055 38,593 46,255 56,800 Charges due to performance related programs.............................. -- -- -- -- 1,075 4,196 20,252 Reversal of inventory valuation reserve............................... -- -- -- -- -- -- (1,400) Other amortization...................... -- -- -- 564 413 1,574 873 -------- -------- -------- -------- -------- -------- -------- EBITDA.................................. $130,860 $120,401 $258,613 $242,844 $229,217 $248,677 $235,687 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Depreciation includes normal depreciation of the Company's plant and equipment over the useful lives of such assets. Other amortization includes the write-off of certain deferred pre-opening costs for the Company's Visionworks Stores, which were sold pursuant to the Vision Group Sale. The non-cash and non-recurring Acquisition related charges are discussed in more detail below. Amortization of Asset Write-ups, Including Goodwill. As a result of the Acquisition, the Company wrote up the carrying value of its assets by approximately $707.5 million as of April 30, 1986 in accordance with the purchase price method of accounting. The write-up was allocated to favorable lease interests ($504.3 million), prescription files ($107.0 million), inventories ($61.7 million) and the excess 21 of cost over net assets acquired, or goodwill ($34.5 million). Since April 30, 1986, these assets have been amortized or written off as follows: FISCAL YEAR AMOUNT - -------------------------------------------------------- ------------- (IN MILLIONS) 1986.................................................. $ 108.4 1987.................................................. 143.1 1988.................................................. 50.8 1989.................................................. 46.1 1990.................................................. 56.8 1991.................................................. 46.3 1992.................................................. 38.6 1993.................................................. 35.1 1994.................................................. 32.0 ------------- $ 557.2 ------------- ------------- Most of such amortization is fully tax deductible. Amortization is expected to be approximately $34.0 million in fiscal 1995. Tax Net Operating Loss Carryforwards As of January 28, 1995, the Company estimates that it had NOL carryforwards of approximately $218.0 million for U.S. federal income tax purposes. These NOL carryforwards may be utilized to reduce the Company's federal income tax obligations in future periods and, if not so utilized, will expire in fiscal years 2002 to 2008. See the discussion of the Company's tax NOL carryforwards in "--Tax Net Operating Loss Carryforwards" below. In addition, the Company may be subject to the federal alternative minimum tax ("AMT"), which is equal to 20% of the Company's "alternative minimum taxable income" ("AMTI"), i.e., its regular taxable income adjusted for certain preference items. As the Company generally may utilize its NOL carryforwards (as adjusted for AMT purposes) to offset up to 90% of its AMTI, the Company generally will be subject to the AMT at an effective rate of approximately 2% of its AMTI. After the Company utilizes all of its NOL carryforwards, its effective tax rate will increase. Any AMT paid may be used as a credit against the Company's regular federal income tax liability in future taxable years. Cost Reduction Program In May 1992, the Company implemented a cost reduction program which, during the three fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993, has eliminated operating expenses of over $80.0 million. The Company continues to actively evaluate and pursue additional cost savings which can be obtained without affecting the Company's customer service, quality or sales growth potential. There can be no assurance, however, that any additional cost reductions will be realized. See "Business--Business Strategy--Cost Reduction Program." Competitive Pricing In May 1992, the Company commenced a program in certain selected markets involving lowering prices on prescription drugs sold to non third-party customers in order to enhance its market share and long term competitive position. Such program was implemented in all of the Company's markets by November 1992. Prescription sales to non third-party customers represented 35.4% of the Company's fiscal 1994 prescription sales and 30.6% in the first half of fiscal 1995. Although the program has resulted in lower gross margins, as expected, the Company believes that it has also had the intended effect of stimulating additional business. There can be no assurance, however, that additional sales increases will be realized from the competitive pricing program. 22 The Company believes that its reduced prescription prices, together with the overall value provided by the high level of customer service and convenience offered by its drug stores, have enabled the Company to more aggressively compete with other drug stores and have enhanced its competitive position with other shopping formats. See "Business--Business Strategy--Competitive Pricing." Extraordinary Items and Non-Recurring Adjustments The Company's financial results for fiscal 1994 reflect extraordinary items in connection with the Amendment, as well as the early repayment of debt with a portion of the net proceeds from the Insta-Care Sale, of $28.0 million ($26.6 million on an after-tax basis) and $4.1 million ($3.9 million on an after-tax basis), respectively, which consisted of the write-off of deferred debt expenses and original issue discount ("OID"). In addition, the fiscal 1994 financial results also include non-recurring adjustments of $49.5 million (net of income taxes of $4.6 million) for the gain on the Insta-Care Sale and $49.0 million for the charge for future store closings. The Company's financial results for the first half of fiscal 1995 reflect an extraordinary item in connection with the early repayment of debt which reflects the write-off of OID and deferred debt expense of $1.31 million ($1.02 million on an after-tax basis) for the second quarter of fiscal 1995 related to the redemption on May 12, 1995 of 11 1/8% Debentures. For the third quarter of fiscal 1995, the Company's financial results will reflect an extraordinary item in connection with the early repayment of debt which reflects the write-off of OID and deferred debt expense of $5.96 million ($5.01 million on an after-tax basis) related to the redemption of the balance of the 11 1/8% Debentures with a portion of the net proceeds from the August Offering and the Revolving Loan borrowings. The Company also expects that the financial results for the fourth quarter of fiscal 1995 will reflect an extraordinary item in connection with the 1995 Credit Agreement Amendment of approximately $3.8 million. RECENT OPERATING RESULTS On November 28, 1995, the Company announced its operating results for the nine-month period ended October 28, 1995. The Company announced that earnings before extraordinary items were $48.2 million and sales were $3.5 billion for the nine-month period ended October 28, 1995, compared to $35.5 million and $3.2 billion, respectively, for the comparable period of fiscal 1994. Improved sales and operations and lower interest costs, partially offset by a higher tax rate, contributed to the results. Comparable drug store sales (stores open for one year or more, excluding relocated stores opened less than one year) increased 9.2% for the nine-month period ended October 28, 1995. For the nine-month period ended October 28, 1995, pharmacy sales and non-pharmacy sales increased 16.7% and 3.9%, respectively, over the comparable period of fiscal 1994. Operating profit for the nine-month period ended October 28, 1995 increased to $116.8 million from $102.8 million for the comparable period of fiscal 1994. The LIFO inventory charge for the nine-month period ended October 28, 1995 increased to $9.8 million from $7.4 million for the comparable period of fiscal 1994. During the quarter ended October 28, 1995, the Company recorded an extraordinary non-cash charge of $5.0 million, net of taxes. See "--General--Extraordinary Items and Non-Recurring Adjustments." The foregoing results for the comparable nine-month period of fiscal 1994 have been adjusted to give pro forma effect to the Insta-Care Sale and the use of proceeds therefrom and reflect the reclassification of sales to employees to conform to fiscal 1995 financial statement presentation. 23 RESULTS OF OPERATIONS The following table sets forth certain condensed consolidated statements of operations data of the Company in dollars and as a percentage of sales and other operating revenue for the periods indicated. The data for the twenty-six weeks ended July 29, 1995 and for fiscal 1992 are presented on a historical basis, the data for the twenty-six weeks ended July 30, 1994 and for fiscal 1994 are presented on an adjusted basis and the data for fiscal 1993 are presented on both an adjusted basis and a historical basis. The data for the twenty-six weeks ended July 30, 1994 are adjusted to give pro forma effect to the Insta-Care Sale and the use of proceeds therefrom and reflect the reclassification of sales to employees to conform to fiscal 1995 financial statement presentation. The fiscal 1994 data are adjusted to exclude a pre-tax gain of $54.1 million (before income taxes of $4.6 million) from the Insta-Care Sale and also to exclude a reserve of $49.0 million for future store closings. The fiscal 1993 adjusted data exclude the operations of Vision Group for the full fiscal year because it was sold effective January 30, 1994, and exclude the operations of Insta-Care from November 16, 1993 through January 29, 1994 because it was sold effective November 15, 1994.
TWENTY-SIX WEEKS ENDED FISCAL YEAR ENDED ------------------------------------- --------------------------------------------------------- JULY 29, JULY 30, JANUARY 28, JANUARY 29, JANUARY 29, 1995 1994 1995 1994 1994 ----------------- ----------------- ----------------- ----------------- ----------------- HISTORICAL ADJUSTED ADJUSTED ADJUSTED HISTORICAL (DOLLARS IN THOUSANDS) $ % $ % $ % $ % $ % --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Sales and other operating revenue....... 2,358,318 100.0 2,147,374 100.0 4,494,906 100.0 4,108,683 100.0 4,190,539 100.0 Cost of sales and related expenses........ 1,824,596 77.4 1,649,059 76.8 3,444,141 76.6 3,123,899 76.0 3,175,375 75.8 Gross profit............ 533,722 22.6 498,315 23.2 1,050,765 23.4 984,784 24.0 1,015,164 24.2 Operating and administrative expenses................ 442,423 18.8 418,005 19.5 875,083 19.5 829,654 20.2 857,980 20.5 Operating and administrative expenses, excluding amortization of asset write-ups resulting from the acquisition and related expenses... 426,751 18.1 402,393 18.7 843,131 18.8 794,267 19.3 822,361 19.6 Earnings before interest and taxes............... 91,299 3.9 80,310 3.7 175,682 3.9 155,130 3.8 157,184 3.8 Total interest expense................. 39,949 1.7 44,125 2.1 93,735 2.1 113,215 2.8 113,215 2.7 Earnings (loss) before income taxes and extraordinary item...... 51,350 2.2 36,185 1.7 81,947 1.8 41,915 1.0 43,969 1.0 Net earnings (loss)..... 41,599 1.8 34,375 1.6 47,326 1.1 (4,995) (.1) (2,941) (.1) --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- EBITDA.................. 130,860 5.5 116,680 5.4 253,476 5.6 237,512 5.8 242,844 5.8 JANUARY 30, 1993 ----------------- HISTORICAL $ % --------- ----- Sales and other operating revenue....... 3,887,027 100.0 Cost of sales and related expenses........ 2,896,479 74.5 Gross profit............ 990,548 25.5 Operating and administrative expenses................ 855,165 22.0 Operating and administrative expenses, excluding amortization of asset write-ups resulting from the acquisition and related expenses... 816,159 21.0 Earnings before interest and taxes............... 135,383 3.5 Total interest expense................. 137,404 3.5 Earnings (loss) before income taxes and extraordinary item...... (2,021) (.1) Net earnings (loss)..... (4,123) (.1) --------- ----- --------- ----- EBITDA.................. 229,217 5.9
The following management's discussion and analysis is based on the historical and as adjusted statements of operation data set forth in the above table. Twenty-Six Weeks Ended July 29, 1995 (historical) compared with Twenty-Six Weeks Ended July 30, 1994 (adjusted) The Company's sales and other operating revenue for the first half of fiscal 1995 were $2,358.3 million, a 9.8% increase over the first half of fiscal 1994. Comparable drug store sales (stores open for one year or more, excluding relocated stores opened less than one year) increased 8.8% for the first half of fiscal 1995, compared to an 8.0% increase for the first half of fiscal 1994. Sales benefited from significant increases in prescription sales as well as by increases in front end sales from strong Valentine and Easter selling seasons in the first quarter and from a change in the promotional calendar in the second quarter of fiscal 1995. Prescription sales for the first half of fiscal 1995 were $1,256.9 million, a 15.8% increase over the first half of fiscal 1994. In addition, front end sales increased to $1,096.8 million, a 3.7% increase over the first half of fiscal 1994. Front end sales in the first half of fiscal 1995 were positively affected primarily by increased sales of non-prescription items in the health, greeting card, convenience food and photofinishing categories. 24 Prescription sales as a percentage of drug store sales and other operating revenue was approximately 53.3% for the first half of fiscal 1995 as compared with approximately 50.5% for the first half of fiscal 1994. The growth in prescription sales for the first half was primarily the result of increased third-party prescription sales and the Company's competitive cash pricing strategy. These strong sales were aided by a more severe cough, cold and flu season in the first quarter of fiscal 1995 compared to the first quarter of fiscal 1994. Third-party prescription sales increased to approximately 69.4% of the Company's prescription sales for the first half of fiscal 1995 from approximately 63.2% in the first half of fiscal 1994. The Company expects prescription sales to third-party payors, in terms of both dollar volume and as a percentage of total prescription sales, to continue to increase in fiscal 1995 and for the foreseeable future. Third-party payors typically negotiate lower prescription prices than those on non third-party prescriptions, resulting in decreasing gross profit margins on the Company's prescription sales. However, contracts with third-party payors generally increase the volume of prescription sales and gross profit dollars. See "Business--The Drug Store Industry." Cost of sales and related expenses for the first half of fiscal 1995 were $1,824.6 million, a 10.6% increase over the first half of fiscal 1994. As a percentage of sales, cost of sales and related expenses were 77.4% compared to 76.8% for the first half of fiscal 1995 and 1994, respectively. The increase in cost of sales and related expenses as a percentage of sales resulted primarily from the continued increase in third-party prescription sales with typically lower gross profit margins than non third-party prescription sales. The LIFO charge was $6.0 million compared to $4.8 million for the first half of fiscal 1995 and 1994, respectively. Operating and administrative expenses for the first half of fiscal 1995 were $442.4 million, a 5.8% increase over the first half of fiscal 1994. As a percentage of sales, operating and administrative expenses decreased to 18.8% for the first half of fiscal 1995 from 19.5% for the first half of fiscal 1994. The decrease in operating and administrative expenses as a percentage of sales resulted primarily from operating efficiencies related to higher sales, and cost controls which helped produce lower costs as a percentage of sales in such expense categories as payroll and insurance. Non-cash tax deductible amortization of intangibles included in operating and administrative expenses for the first half of fiscal 1995 and the first half of 1994 were $15.7 million and $15.6 million, respectively, an increase of 0.4%. As a result of the above, earnings before interest expense and taxes and extraordinary item increased 13.7% to $91.3 million, or 3.9% of sales, as compared to 3.7 % of sales for the same period of the prior year. Total interest expense was $39.9 million for the first half of fiscal 1995, a decrease of 9.5% from the first half of fiscal 1994. The decrease was due primarily to lower average borrowings in the first half of fiscal 1995 compared to the first half of fiscal 1994. The average interest rate on borrowings in the first half of fiscal 1995 and the first half of 1994 was substantially the same. Income taxes for the first half of fiscal 1995 and the first half of 1994 were $8.7 million and $1.8 million, respectively. The effective income tax rate of 17% in the first half of fiscal 1995 was higher than in the first half of fiscal 1994 (5%). During the second quarter of fiscal 1995, income taxes were adjusted to reflect the estimated 17% annual income tax rate. Income taxes include alternative minimum and state income taxes for the Company and reflect the utilization of net operating loss carryforwards. As a result of the foregoing factors, the Company had net earnings before extraordinary items for the first half of fiscal 1995 of $42.6 million, compared to $34.4 million for the first half of fiscal 1994, an increase of $8.2 million or 24.0%. Fiscal Year 1994 (adjusted) compared with Fiscal Year 1993 (adjusted) The Company's sales and other operating revenue for fiscal 1994 were $4.5 billion, a 9.4% increase over fiscal 1993. Comparable drug store sales (stores open for one year or more) increased 8.1% during 25 fiscal 1994 compared to a 6.1% increase in fiscal 1993. Sales benefited from significant increases in drug store prescription sales and increases in front end sales. For fiscal 1994, prescription sales were $2.2 billion, a 15.2% increase over fiscal 1993. In addition, drug store front end sales increased to $2.2 billion, a 4.2% increase over fiscal 1993. Prescription sales as a percentage of drug store sales and other operating revenue was 50.8% for fiscal 1994 compared with 48.3% for fiscal 1993. The growth in prescription sales was primarily the result of increased third-party prescription sales and the Company's competitive cash pricing strategy. These sales were strong despite a lower incidence of cough and cold/flu virus during the first and fourth quarters of fiscal 1994 compared to fiscal 1993. Third-party prescription sales represented 64.6% and 58.0% of the Company's prescription sales in fiscal 1994 and 1993, respectively. Cost of sales and related expenses in fiscal 1994 were $3.4 billion, a 10.2% increase over fiscal 1993. As a percentage of sales, cost of sales and related expenses were 76.6% and 76.0% for fiscal 1994 and 1993, respectively. The increase in cost of sales and related expenses as a percentage of sales resulted primarily from the continued increase in third-party prescription sales with typically lower gross profit margins than non third-party prescription sales. The LIFO charge was $10.8 million in fiscal 1994 compared to $8.5 million in fiscal 1993. Operating and administrative expenses in fiscal 1994 were $875.1 million, a 5.5% increase over fiscal 1993. As a percentage of sales, operating and administrative expenses were reduced to 19.5% for fiscal 1994 from 20.2% for fiscal 1993. The decrease in operating and administrative expenses in fiscal 1994 as a percentage of sales resulted primarily from the economies of scale related to the higher sales, and cost controls which helped produce lower costs as a percentage of sales in such expense categories as payroll, insurance and supplies. Additionally, non-cash tax deductible amortization of intangibles included in operating and administrative expenses for fiscal 1994 and 1993 were $31.9 million and $35.4 million, respectively, a decrease of 9.9%. In the fourth quarter of fiscal 1994, the Company decided to accelerate the closing of approximately 90 geographically dispersed, under-performing stores over the following twelve to eighteen months, and established a $49.0 million reserve for future store closings. These closings are in addition to the relatively small number of stores the Company closes in the normal course of business. The $49.0 million reserve includes approximately $27.0 million for lease settlements and obligations, approximately $4.0 million for severance and other expenses directly related to the store closings, and approximately $18.0 million for the write-off of impaired assets which include inventory liquidation and the write-off of intangible and fixed assets. As a result of the above, earnings before interest expense and income taxes increased 13.2% to $175.7 million, or 3.9% of sales, as compared to 3.8% of sales for the same period of the prior year. Total interest expense was $93.7 million in fiscal 1994, a decrease of 17.2% from fiscal 1993. The decrease was due primarily to the lower cost of debt to the Company resulting from the 1993 Transactions and the Amendment which provided improved pricing. In addition, the decrease in interest expense was due to lower average borrowings in fiscal 1994, due primarily to repayments of borrowings from net proceeds from the sale of Vision Group and Insta-Care operations, partially offset by the numerous marketplace interest rate increases during fiscal 1994. Amortization of original issue discount and deferred debt expenses decreased to $5.9 million in fiscal 1994 from $7.2 million in fiscal 1993 resulting from the refinancing and early retirement of certain debt issues in fiscal 1994 and 1993. Income tax expense was $4.1 million and $2.6 million in fiscal 1994 and 1993, respectively. Income tax expense in both fiscal years represents alternative minimum tax and state income taxes for the Company, and reflects the utilization of net operating loss carryforwards. 26 As a result of the foregoing factors, the Company had earnings on an adjusted basis before extraordinary items of $77.8 million in fiscal 1994 compared to $39.4 million in fiscal 1993, an increase of $38.4 million or 97.5% and net income of $47.3 million in fiscal 1994 compared to a net loss of $5.0 million in fiscal 1993, a $52.3 million increase. The Company had extraordinary items of $30.5 million (net of tax benefit of $1.6 million) and $44.4 million (net of tax benefit of $0.9 million) in fiscal 1994 and 1993, respectively. The extraordinary item in fiscal 1994 is primarily from the write-off of deferred costs related to the Amendment of the Credit Agreement, as well as from the early retirement of $50.0 million of the 11 1/8% Debentures. The extraordinary item in fiscal 1993 is primarily from the write-off of deferred costs from the early retirement of a portion of the 11 1/8% Debentures, all of the 13% Discount Debentures and the redemption of the 14 1/2% Preferred Stock. Fiscal Year 1993 (historical) compared with Fiscal Year 1992 (historical) The Company's competitive pricing and cost reduction programs were both largely reflected in fiscal 1993. The Company's sales and other operating revenue for fiscal 1993 were $4.191 billion, a 7.8% increase over fiscal 1992. Comparable drug store sales increased 6.1% during fiscal 1993 compared to a 3.1% increase in fiscal 1992. The increase in sales and other operating revenue was due primarily to a $245 million increase in sales of prescription drugs. Prescription sales as a percentage of drug store sales and other operating revenue was approximately 48.3% for fiscal 1993 as compared with approximately 45.4% for fiscal 1992. The growth in prescription sales was primarily the result of increased third-party prescription sales, the Company's competitive pricing program and a high incidence of cough and cold/flu virus during the first and fourth quarters of fiscal 1993. Third-party prescription sales represented approximately 58.0% and 49.6% of the Company's prescription sales in fiscal 1993 and 1992, respectively. The increase in comparable drug store sales was due primarily to the increase in sales of prescription drugs resulting from sales related to new third-party prescription plan contracts, the Company's competitive pricing program, and a high incidence of cough and cold/flu virus during the first and fourth quarters of fiscal 1993. In addition, comparable drug store sales growth was positively affected by increased sales of non-prescription items in the health and beauty, greeting card, convenience food and photofinishing categories resulting from increased marketing emphasis and shelf space for these categories, as well as increased sales of over-the-counter drugs because of the high incidence of cough and cold/flu virus during the first and fourth quarters of fiscal 1993. Total sales growth was positively affected by the growth in comparable drug store sales, as well as the inclusion of 34 drug stores acquired during the second half of fiscal 1992 and 19 drug stores acquired in the fourth quarter of fiscal 1993. Cost of sales and related expenses in fiscal 1993 were $3.175 billion, a 9.6% increase over fiscal 1992. As a percentage of sales, cost of sales and related expenses were 75.8% and 74.5% for fiscal 1993 and 1992, respectively. The competitive pricing strategy for non third-party prescription sales and the continued increase in third-party prescription sales, which typically have lower gross profit margins than non third-party prescription sales, partially offset by a lower LIFO charge of $8.5 million ($15.0 million in fiscal 1992), were the primary reasons for the increase in cost of sales and related expenses as a percentage of sales in fiscal 1993. Operating and administrative expenses in fiscal 1993 were $858.0 million, a 0.3% increase over fiscal 1992. As a percentage of sales, operating and administrative expenses were reduced to 20.5% in fiscal 1993 from 22.0% for fiscal 1992 as a result of the higher sales in fiscal 1993 and lower costs as a percentage of sales in such expense categories as payroll, advertising, insurance and supplies as a result of the cost reduction program initiated in the second half of fiscal 1992. The implementation of the cost reduction program eliminated operating expenses of approximately $70.0 million in fiscal 1993, and the 27 Company estimates that $10.0 million of such savings was recognized in fiscal 1992. Non-cash, tax deductible amortization of intangibles included in operating and administrative expenses in fiscal 1993 and 1992 were $35.6 million and $39.0 million, respectively, a decrease of 8.7%. As a result of the above, earnings before interest expense and income taxes increased 16.1% to $157.2 million, or 3.8% of sales, as compared to 3.5% of sales for the same period of the prior year. Total interest expense was $113.2 million in fiscal 1993, a decrease of 17.6% from fiscal 1992. The decrease was due primarily to lower interest rates in the marketplace and lower cost of debt for the Company after the Refinancing and the 9 1/4% Note Issuance and the consummation of the IPO on August 12, 1993. The income tax provision for fiscal 1993 and 1992 was $2.6 million and $2.9 million, respectively. The income tax provision for fiscal 1993 and 1992 represents alternative minimum tax and state income taxes. As a result of the foregoing factors, the Company had earnings before extraordinary items in fiscal 1993 of $41.4 million, compared with a loss of $4.9 million in fiscal 1992, and a net loss in fiscal 1993 of $2.9 million compared with a net loss of $4.1 million in fiscal 1992. The Company had an extraordinary item of $44.4 million (net of an income tax benefit of $0.9 million) in fiscal 1993, which was recognized as a result of the early retirement of existing indebtedness and the redemption of the Company's 14 1/2% Preferred Stock in connection with the Refinancing, the IPO and the 9 1/4% Note Issuance. In fiscal 1992, the Company had an extraordinary item of $0.8 million which represented the tax effect of the utilization of the Company's net operating loss carryforward. 28 Quarterly Results and Seasonality The Company's sales and profits are higher during peak holiday periods and from Christmas through Easter in selected geographic areas. Sales of health-related products peak during seasonal outbreaks of cough and cold/flu virus, typically during the winter and spring. Accordingly, sales and profits are typically highest in the fourth quarter followed by the first quarter. The following table sets forth certain unaudited quarterly operating data for each of fiscal 1994 and 1993 and for the first and second quarters of fiscal 1995. The data presented include all adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the data shown:
(IN THOUSANDS) FISCAL 1995 ------------------------- FIRST SECOND QUARTER QUARTER ---------- ---------- Sales and other operating revenue... $1,219,594 $1,138,724 Gross profit........................ 280,106 253,616 Net earnings (loss)................. 30,544 11,055 EBITDA.............................. 79,052 51,808 FISCAL 1994 ------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ---------- ---------- ----------- ---------- ---------- Sales and other operating revenue... $1,126,806(1) $1,057,924(1) $ 1,061,704(1) $1,302,597 $4,549,031 Gross profit........................ 270,112 246,609 239,523 348,646 1,104,890 Net earnings (loss)................. 26,945 6,021 (26,015) 40,857 47,808 EBITDA.............................. 70,544 49,795 44,147 94,127 258,613 FISCAL 1993 ------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ---------- ---------- ----------- ---------- ---------- Sales and other operating revenue... $1,055,152 $ 981,195 $ 972,675 $1,181,517 $4,190,539 Gross profit........................ 261,823 238,523 227,769 287,049 1,015,164 Net earnings (loss)................. 17,820 (30,868) (11,558) 21,665 (2,941) EBITDA.............................. 74,433 52,005 34,725 81,681 242,844
- ------------ (1) Does not reflect reclassification of sales to employees to conform to fiscal 1995 financial statement presentation. As reclassified, sales and other operating revenue for the first, second and third quarters would equal $1,136,195, $1,066,890, and $1,071,036, respectively. LIQUIDITY AND CAPITAL RESOURCES At November 30, 1995, the Company had outstanding approximately $250.0 million of Term Loans and $383.0 million of Revolving Loans under the Credit Agreement and had $28.0 million available for Revolving Loan borrowings under the Credit Agreement (which is net of $89.0 million of letters of credit). Pursuant to the Credit Agreement, the Company is required to make scheduled payments of the outstanding principal amount of Term Loans in the amount of $50.0 million per fiscal year over the next five fiscal years. Prepayments made pursuant to the Credit Agreement are applied pro rata among the remaining scheduled principal payments. The term of the Credit Agreement expires on November 29, 2000. At July 29, 1995, the Company had excess availability under the revolving loan facility portion of the Credit Agreement and accordingly was not required to treat the required amortization repayments as current. See "Description of Certain Indebtedness--The Credit Agreement." On July 29, 1995 the Company had working capital of $335.5 million and a current ratio of 1.7 to 1 compared to $280.3 million and 1.5 to 1 at January 28, 1995. Cash flow provided by operating activities increased $57.1 million to $62.0 million for the first half of fiscal 1995 compared to $4.9 million for the first half of fiscal 1994. This increase was due to higher earnings for the first half of fiscal 1995 compared to the first half of fiscal 1994 and primarily due to the higher than normal cash payments to merchandise vendors in the first quarter of fiscal 1994, resulting in the reduction of accounts payable from an abnormally high balance at January 29, 1994 primarily from the timing of vendor payment due dates. This increase was offset partially by an increase in receivables from third-party prescription sales in fiscal 1995. 29 Net cash from investing activities for the first half of fiscal 1995 and 1994 used $37.4 million and provided $3.8 million, respectively. Uses of cash were principally for capital expenditures of $40.2 million and $21.7 million for fiscal 1995 and 1994, respectively, for point-of-sale product scanning equipment, additions to the Company's drug stores, and Express Photo units, relocation of drug stores and improvements to existing stores. In addition, in fiscal 1994, additions to property, plant and equipment were for the installation of satellite communication equipment. In the first quarter of fiscal 1994, a source of cash to the Company from investing activities was provided by a partial payment for the sale of the Vision Group operations. Capital improvements for fiscal 1995, including those to be acquired under a deferred payment arrangement and through operating leases, which total $54.2 million for the first half of fiscal 1995, are expected to total approximately $119.0 million on an annual basis. Funds for the cash capital expenditures are expected to come from cash flow from operating activities and available borrowings, if necessary. Financing activities for the first half of fiscal 1995 used $23.8 million. Uses of cash were primarily for the reduction of $26.5 million of bank debit balances. Funds provided by $18.9 million of borrowings under the Credit Agreement were primarily used to redeem $16.6 million aggregate principal amount of 11 1/8% Debentures ($15.5 million accreted value) on May 12, 1995. Financing activities for the first half of fiscal 1994 used $11.2 million primarily for the reduction of $28.3 million of bank debit balances. Funds were provided by $19.3 million of borrowings under the Credit Agreement. On August 2, 1995, the Company completed the August Offering of 6,175,500 shares of Common Stock in the aggregate at a public offering price of $32.25 per share. Of the shares offered, 2,675,000 shares were sold by the Company and 3,500,500 shares were sold by the Merrill Lynch Investors. The net proceeds to the Company after the underwriting discount of $1.27 per share and other expenses related to the August Offering was approximately $82.3 million in the aggregate. On September 5, 1995, the Company redeemed the remaining $78.9 million aggregate principal amount of 11 1/8% Debentures ($73.8 million accreted value). The Company anticipates that the combination of amortization of intangibles and interest on debt will have a negative impact upon future earnings and, to a lesser degree, cash flow from operating activities. The Company does not believe, however, that the impact of such planned amortization and interest expense upon earnings indicates a present or future impairment of liquidity. Based upon the Company's ability to generate cash flow from operating activities, the available unused portion of the revolving loan facility portion under the Credit Agreement and other existing sources, the Company believes that it will have the funds necessary to meet the principal and interest payments on its debt as they become due and to operate and expand its business. The payment of dividends and other distributions by the Company is subject to restrictions under certain of the financing agreements to which the Company is a party, including the Credit Agreement and the 9 1/4% Notes. See "Description of Certain Indebtedness." The Company does not intend to pay dividends on its Common Stock in the foreseeable future. The Company adopted SFAS 109, "Accounting for Income Taxes" in the first quarter of fiscal 1993. The adoption of SFAS 109 had no material effect on the Company's results of operations. In December 1990, the Financial Accounting Standards Board issued SFAS No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions." The implementation of SFAS No. 106 will not have any effect on the Company's results of operations because none of the Company's employee welfare and benefit plans provides for postretirement benefits. TAX NET OPERATING LOSS CARRYFORWARDS While the Company estimates that it had approximately $218 million of NOL carryforwards for U.S. federal income tax purposes as of January 28, 1995, it also expects that a substantial portion of such NOL carryforwards will be utilized to offset taxable income already generated during its current taxable year. The remaining NOL carryforwards would expire in fiscal years 2002 to 2008 if not previously utilized. Although the Company expects that the Offering will cause an "ownership change" within the meaning of Section 382 of the Internal Revenue Code of 1986, which would cause an annual limitation on the utilization of its remaining NOL carryforwards, the Company does not anticipate that, taking into account the current market value of the Common Stock, such a limitation would have a material effect on its U.S. federal income tax liability. 30 BUSINESS The Company operates the Eckerd Drug store chain, which is one of the largest drug store chains in the United States. At October 28, 1995, the Eckerd Drug store chain consisted of 1,704 stores in 13 states located primarily in the Sunbelt, including 577 stores in Florida and 474 stores in Texas. The Company's stores are concentrated in 10 of the 12 metropolitan statistical areas in the United States with the largest percentage growth in population from 1980 to 1990, and, according to industry sources, the Company ranks first or second in drug store sales in 12 of the 14 major metropolitan markets in which it operates. THE DRUG STORE INDUSTRY Prescription and over-the-counter medications have traditionally been sold by independent drug stores as well as conventional drug store chains, such as Eckerd Drug stores, and purchased by consumers with cash or credit cards. According to Drug Store News, drug store sales in 1994 increased 6.3% from 1993 to approximately $82.9 billion, 72% of which was represented by conventional drug store chains, such as Eckerd Drug stores. Drug store prescription sales increased 9.2% from 1993 to approximately $41.5 billion in 1994, which represented 50% of total drug store sales and approximately 66.7% of total retail prescription sales. The remaining retail prescription sales were represented by mail order ($7.1 billion), mass merchandisers ($7.0 billion) and food/drug combo stores ($6.6 billion). The drug store industry has recently undergone significant changes as a result of the following important trends: (i) the increase in third-party payments for prescription drugs, (ii) the consolidation within the drug store industry, (iii) the aging of the United States population and (iv) the increase in competition from non-traditional retailers of prescription and over-the-counter drugs. During the last several years, a growing percentage of prescription drug volume throughout the industry has been accounted for by sales to customers who are covered by third-party payment programs ("third-party sales"). According to IMS-America, in 1994, third-party sales represented approximately 55.3% of total prescription drug sales in the United States, more than three times what it had been in 1986. In a typical third-party sale, the drug store has a contract with a third-party payor, such as an insurance company, HMO, PPO, other managed care provider, government agency or private employer, which agrees to pay for part or all of a customer's eligible prescription purchases. Although these third-party sales contracts often provide a high volume of prescription sales, such sales typically generate lower gross margins than non third-party sales due principally to the highly competitive nature of this business and recent efforts by third-party payors to contain costs. Larger drug store chains, such as Eckerd Drug stores, are better able to service the growing third-party segment than independent drug stores and smaller chains as a result of the larger chains' more sophisticated technology systems, larger number of stores and greater penetration within their markets. As a result of the economies of scale from which larger drug store chains benefit as well as the third-party payment trend, the number of independent drug stores and smaller drug store chains has decreased as many of such retailers have been acquired by larger drug store chains. This trend is expected to continue because larger chains are better positioned to handle the increased third-party sales, purchase inventory on more advantageous terms and achieve other economies of scale with respect to their marketing, advertising, distribution and other expenditures. The Company believes that the number of independent drug stores and smaller drug store chains remaining in operation may provide significant acquisition opportunities for larger drug store chains, such as the Company. Strong demographic trends have also contributed to changes in the drug store industry, as the group of persons over age 50 is the fastest growing segment of the United States population. This trend has had, and is expected to continue to have, a marked effect on the pharmacy business in the United States because consumer prescription and over-the-counter drug usage generally increases with age. In 1991, persons over age 50 represented approximately 26% of the population, although they consumed 31 approximately 67% of all prescription drugs sold in the United States. This segment is projected to increase to 29% of the population by the year 2000. The average per capita prescription usage in the United States is approximately 6.5 prescriptions per year, which increases to approximately 7.9, 10.5 and 13.0 prescriptions filled per year for persons ages 50-59, 60-69 and over 70, respectively. The Company's markets have large concentrations of, and are continuing to experience significant growth in, the number of persons over age 65. In 1994, drug store chains and independent drug stores represented approximately 37.3% and 29.4%, respectively, of all retail prescription sales in the United States. In response to a number of factors, including the aging of the United States population, mass merchants (including discounters and deep discounters), supermarkets, combination food and drug stores, mail order distributors, hospitals, HMOs and other managed care providers have entered the prescription industry. Supermarkets, including combination food and drug stores, and mass merchants each represented approximately 11% of all prescription sales in the United States in 1994. Although the Company currently faces increased competition from these retailers, industry studies show that consumers in the over 65 age group tend to make purchases at traditional drug stores, such as Eckerd Drug stores, and maintain strong store loyalty. ECKERD DRUG STORES In 1992, the Company celebrated the 40th anniversary of the opening of the first Eckerd Drug store. The Company has grown to its present size and developed its leading position in the industry through both internal expansion and acquisitions. As of October 28, 1995, the Company operated the number of Eckerd Drug stores and Eckerd Express Photo centers indicated below in each of the following states: DRUG STORES ECKERD WITH ECKERD DRUG EXPRESS PHOTO STORES CENTERS ------ ------------- Florida............................................... 577 243 Texas................................................. 474 137 North Carolina........................................ 176 46 Georgia............................................... 157 47 Louisiana............................................. 96 19 South Carolina........................................ 75 13 New Jersey............................................ 36 1 Tennessee............................................. 33 1 Mississippi........................................... 26 -- Oklahoma.............................................. 26 -- Alabama............................................... 16 3 Delaware.............................................. 11 -- Maryland.............................................. 1 -- ------ --- Total........................................... 1,704 510 ====== === Over the past five years, the Company has implemented several initiatives designed to increase the size and improve the quality and operating performance of the Company's store base. Among such initiatives is the opening and acquisition of new stores, the closure, divestiture or relocation of underperforming stores and an extensive remodeling program. Since the beginning of fiscal 1990, more than 300 Eckerd Drug stores have been opened or acquired within the Company's existing markets, more than 200 under-performing stores have been closed or divested, and more than 50% of the Company's remaining stores have been remodeled. In addition, the Company has opened more than 300 Express Photo centers. The Company has also increased the degree to which merchandise is tailored to 32 specific markets, instituted a chainwide shrinkage reduction program and made a significant investment in its management information systems. As a result of, among other things, these actions, aggregate sales have increased from $3.46 billion in fiscal 1990 to $4.55 billion in fiscal 1994. In fiscal 1994, the Company opened or acquired 39 drug stores, relocated 16 drug stores and closed 22 drug stores. In addition, in the fourth quarter of fiscal 1994, the Company decided to accelerate the closing of approximately 90 geographically dispersed, under-performing stores during the period from fiscal 1995 through mid-1996, and established a $49.0 million reserve for future store closings. As of October 28, 1995, the Company had closed 68 of such stores. These closings are in addition to the relatively small number of stores the Company closes in the normal course of business. See "--Business Strategy--Store Base Strategy." Pursuant to the Florida Acquisition, the Company acquired 40 Rite Aid leased locations, which are being operated as Eckerd Drug stores, and the fixtures, inventory and prescription files of an additional 68 Rite Aid locations. As a result of the Florida Acquisition, the Company intends to close approximately 6 Eckerd Drug stores. The following table summarizes the number of Eckerd Drug stores operated by the Company and the sales on an aggregate and per store basis for the last five years.
TWENTY-SIX WEEKS ENDED FISCAL YEARS JULY 29, -------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 ---------------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Number of Ekerd Drug stores at beginning of period.......... 1,735 1,718 1,696 1,675 1,673 1,630 Stores opened or acquired........... 15 39 52 50 22 139(1) Stores sold or closed............. (84) (22) (30) (29) (20) (96)(2) ---------------- ---------- ---------- ---------- ---------- ---------- Number of Eckerd Drug stores at end of period.............. 1,666 1,735 1,718 1,696 1,675 1,673 ---------------- ---------- ---------- ---------- ---------- ---------- ---------------- ---------- ---------- ---------- ---------- ---------- Number with Express Photo centers...... 503 481 413 378 321 258 Sales of Eckerd Drug stores............. $2,353,697 $4,396,440 $4,014,094 $3,722,523 $3,594,037 $3,330,062 Average annual sales per Eckerd Drug store............... N/A $ 2,561 $ 2,365 $ 2,222 $ 2,142 $ 2,036
- ------------ (1) Includes 96 stores acquired by, and managed on behalf of, EH II (two of which were closed in fiscal year 1991). Excludes 127 stores acquired by EH II that were liquidated or sold. (2) Includes 14 Eckerd Drug stores closed as of a result of the acquisition of drug stores by EH II. BUSINESS STRATEGY The Company's business strategy is focused on maintaining a strong pharmacy and health-related business because of management's belief regarding the growth prospects of this business. The Company will continue to implement this strategy by: . maintaining a high level of customer service and convenience; . providing competitive prices on its merchandise, including prices on prescription drugs to non third-party customers in order to enhance its market share and long-term competitive position; 33 . maintaining an aggressive marketing program to third-party payors, such as insurance companies, HMOs, PPOs, other managed care providers, government agencies and private employers; . continuing its commitment to control costs; . improving store productivity and profitability by reallocating nonpharmacy shelf space to certain products, such as health and beauty aids and greeting cards, and adding food marts, all of which have higher sales and gross profit growth potential than other products and which the Company believes increase customer traffic; . expanding the number of stores primarily within the Company's existing market areas, both through internal expansion and acquisitions and improving the Company's store base by relocating and renovating certain stores and closing under-performing stores; and . continuing to invest in information systems to improve customer service, reduce operating costs, provide information needed to support management decisions and enhance the Company's competitive position with third-party payors. Customer Service and Convenience The Company believes that customer service and convenience are critical in positioning itself as the alternative to mass merchandisers, supermarkets and other large format retailing channels. The Company will continue to emphasize service and convenience through pharmacy support services, store location and design, merchandising programs and operating hours geared to the needs of the particular market. The Company offers a high level of professional pharmacy service, which the Company believes provides added value to its customers. The Company provides the "Rx Advisor," a personalized easy-to-read publication, to each prescription drug customer, which advises the customer of the specific dosages, contraindications and side effects of his or her prescription medicine. The Company will continue to remodel and reset its stores to provide modern, well-identified stores, which are easily accessible to customers and will seek to open new stores in easily accessible high traffic locations. The Company also tailors its merchandising to provide the product mix and selection to best serve the customers of each particular store, including beach, tourist, business and other target groups. The Company typically provides several conveniently located, modern stores in a community. The Company's stores range in size from 8,200 to 10,800 square feet and are located primarily in neighborhood strip centers or free standing locations. Such stores are typically open every day of the year except Christmas, with some open until midnight or 24 hours a day. Other customer service advantages include comfortable pharmacy waiting areas, free health-related programs, screenings (e.g., blood pressure tests) and drive-through pharmacy windows in most new drug stores. In addition, the Company is continually testing new customer service features. Competitive Pricing While the Company believes that it competes primarily on the basis of customer service and convenience, price is also an important factor. The Company's policy is to price its prescription drug products more competitively than most other traditional drug stores in its markets. The Company believes that this policy has enhanced its competitive position with drug stores and other shopping formats. See "Risk Factors--Competition" and "Management's Discussion and Analysis of Results of Operations and Financial Condition--General--Competitive Pricing." 34 Marketing to Third-Party Payors The Company believes that the number and concentration of Eckerd Drug stores within existing markets, the Company's experience and reputation in the drug store industry and its computerized pharmacy system gives the Company advantages when compared to independent drug stores, small drug store chains and mass merchandisers in competing for the increasing amount of third-party sales. Third-party prescription sales, which are an integral part of the Company's drug store business, accounted for approximately 69.4%, 64.6%, 58.0%, 49.6%, 43.1% and 36.0% of the Company's prescription sales in the first half of fiscal 1995, fiscal 1994, fiscal 1993, fiscal 1992, fiscal 1991 and fiscal 1990, respectively. The Company currently has contracts with approximately 500 third-party payors, 45 of which designate the Company as the exclusive provider of pharmacy services. The third-party payor contracts provide for direct billing to the third-party payor rather than the customer. The Company believes that these third-party sales contracts provide the opportunity for increased volume of prescription sales; however, such sales have lower gross margins than non third-party prescription sales. See "Risk Factors--Prescription Drug Sales and Future Regulation." The Company intends to continue to market itself aggressively with all types of third-party payors, including insurance companies, HMOs, PPOs, other managed care providers, government agencies and private employers. The Company has devoted substantial resources to this marketing effort over the last five fiscal years. For example, Eckerd Health Services, a joint venture formed by the Company, is developing and offering pharmacy benefit management services to third-party payors. Eckerd Health Services provides its expertise in, among other things, data analysis and healthcare services, to third-party payors and presents such third-party payors with operational cost savings opportunities. The Company also provides mail order delivery of its prescription drugs to third-party payors. In addition, the Company's computer systems provide on-line adjudication, which permits the Company and the third-party payor to determine electronically, at the time of sale, eligibility of the customer, coverage of the prescription and pricing and co-payment requirement, if any, and automatically bills the respective plan. On-line adjudication reduces losses from rejected claims and eliminates a portion of the Company's paperwork for billing and collection of receivables and costs associated therewith. The Company believes that such systems are essential to service the increasing volume of third-party sales. During the past five years, the Company has reduced the average number of days that receivables from third-party sales were outstanding from 48 days at the end of fiscal 1990 to 21 days during fiscal 1994 while increasing third-party sales by 187% during the same period. Cost Controls The Company's continued commitment to control costs and maintain its competitive position in the marketplace focuses on decreasing expenses without decreasing the level of services provided in its stores. Store staffing remains at historical levels in order to maintain a high level of customer service. The Company continues to actively evaluate and pursue additional cost savings which can be obtained without affecting the Company's customer service, quality or sales growth potential. There can be no assurance, however, that any additional cost reductions will be realized. See "Management's Discussion and Analysis of Results of Operations and Financial Condition--General--Cost Reduction Program." Improved Productivity and Profitability of Nonpharmacy Merchandise The Company is continually seeking to improve store productivity and profitability by monitoring and adjusting the mix and selection of its nonpharmacy merchandise categories and items within each category to emphasize merchandise that has higher sales and gross profit growth potential. Among the over 27,000 nonpharmacy SKUs (as defined herein) typically offered in one of the Company's stores, the Company concentrates on products that it considers especially appropriate for a health-focused convenience-based drug store and which the Company believes will increase customer traffic. Although these categories may shift over time based upon consumer needs and other trends, the Company is 35 currently emphasizing health and beauty aids, greeting cards and the photo finishing business. To implement its reorganization of nonpharmacy merchandise, the Company reallocated nonpharmacy shelf space within all of its stores, resulting in, among other things, substantially increased store space devoted to greeting cards, increased emphasis on health and beauty aids, and the introduction of convenience food mart sections in over 550 selected locations, with plans to add 350 in fiscal 1995. In addition, store configurations have been altered to promote increased store traffic and more closely conform to customer preferences, as indicated in market studies conducted by the Company, including tailoring of specific stores offerings to specific markets where appropriate. Store Base Strategy The Company intends to continue to increase the size and improve the quality and operating performance of its store base through (i) internal expansion and acquisitions of smaller drug store chains and independent drug stores, (ii) relocation and renovation of existing stores and (iii) closing under-performing stores. The Company intends to continue to expand its business through both internal expansion and acquisitions of smaller drug store chains and independent drug stores. Although the Company currently plans to expand Eckerd Drug stores within the Company's existing markets, the Company also considers strategic acquisitions in other markets. In addition to its store acquisition program, the Company pursues the acquisition of prescription files from other pharmacies in the Company's existing markets. Once acquired, the prescription files are transferred to an existing Eckerd Drug store, increasing the prescription sales volume in that store. In determining the areas in which to open or acquire drug stores, the Company evaluates a number of demographic considerations, including the size, growth pattern and per capita income of the population, as well as the competitive environment and the accessibility of a proposed site to the customer and to the Company's warehouse and distribution facilities. The Company also continually reviews these factors and the performance of individual stores in determining whether to close or relocate certain stores. The Company's goal is to open at least 40 new drug stores in fiscal 1995 and 50 new drug stores per year thereafter through fiscal 1999 (excluding acquisitions and relocations). The cash costs associated with opening a drug store are estimated to be approximately $490,000, which includes initial cash inventory costs of approximately $260,000. The Company intends to use cash flow from operations to finance the cash costs of this growth, although borrowings may also be available to finance such growth. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-- Liquidity and Capital Resources." In fiscal 1995, the Company plans to relocate approximately 40 of its existing stores, mainly from strip shopping centers to new free-standing locations, and thereafter expects that the number of stores to be relocated per year will be increased. In addition, the Company plans to completely remodel 80 of its stores and to perform minor renovations on 400 of its other stores in fiscal 1995. The cash costs associated with a relocation or complete renovation of an existing store are estimated to be approximately $170,000 and $150,000, respectively (not including approximately $35,000 related to the costs of installing scanning and satellite communications equipment, if necessary). The Company also expects to close approximately 10-20 under-performing drug stores per year in fiscal 1995 and thereafter through fiscal 1999 in order to improve the quality of the Company's store base. As a result of the Company's decision in the fourth quarter of fiscal 1994 to accelerate the closing of approximately 90 under-performing stores, the number of stores to be closed may decrease in the future. In addition, the Company currently intends to continue to expand its one-hour photo finishing business, with a goal of adding approximately 240 new Express Photo centers by 1999. The Company 36 believes that its long standing reputation for high quality photo finishing programs and its advertising and marketing programs which emphasize the Company's experience and reinforce its image as a quality photo finisher have enabled the Company to develop and expand its Express Photo center operations. The Company believes that its photo finishing operations provide further opportunities for growth in its drug store business due to both the direct contribution to sales from photo finishing and the significant additional store traffic from such operations, which is important in generating sales of other products. The Company selects locations for Express Photo centers based upon the demographics of the market and intends to concentrate Express Photo center expansion by market to enable the Company to benefit from advertising and other operating synergies. The costs associated with opening each Eckerd Express Photo center are estimated to be approximately $100,000 and are expected to be largely financed through operating leases or arrangements such as the IFS Sale and Leaseback. Information and Technology The Company intends to continue to invest in information systems to improve customer service, reduce operating costs, provide information needed to support management decisions and enhance the Company's competitive position with third-party payors. The Company's Comp-U-Care System, installed in each pharmacy location, provides support for the pharmacy and assists pharmacists in their prescription processing activities, which in turn enhances the pharmacy's ability to service customers. The system's daily transfer of information between headquarters and each of the in-store pharmacy terminals allows central monitoring of prescription sales activity by store and item, centralized billing of third-party sales and daily updates to the stores' data files. The Comp-U-Care System performs on-line adjudication of customer and claim eligibility and reimbursement for the majority of the third-party payment plans in which the Company participates. Because on-line adjudication reduces losses from rejected claims and eliminates a portion of the Company's paperwork for billing and collection of receivables and costs associated therewith, the Company believes that it is essential to servicing the increasing volume of third-party sales. See "-- Business Strategy--Marketing to Third-Party Payors." The Company is in the process of implementing a four-year pharmacy systems enhancement plan designed to provide additional support to pharmacists, meet the increasing complexity of third-party programs and enhance the Company's competitive position through advanced technology. As part of this plan, the Company is currently developing its advanced Comp-U-Care 2000 System, which began to be introduced in Eckerd Drug stores in the second half of fiscal 1995 and is scheduled to be completely implemented by the summer of 1996. The Comp-U-Care 2000 System will improve speed and productivity in the pharmacy, decrease customer wait time and enhance functionality, including expanded drug utilization reviews. The Company expects that the Comp-U-Care 2000 system will permit the transfer of information, such as prescription files, directly from one drug store to another thereby further improving customer service by enabling customers to fill and refill prescriptions at any Eckerd Drug store. During fiscal 1994, the Company installed a satellite communications network, enhanced the point-of-sale reporting system and upgraded the merchandise buying system. The Company believes that the satellite communications system will facilitate implementation of its pharmacy systems enhancement plan. As of October 28, 1995 the Company had point-of-sale product scanning equipment in approximately 1,100 stores, which stores represent approximately 75% of the Company's total front-end sales. The Company has a goal of implementing scanning throughout the chain by the fall of 1996. Scanning is a system which inputs point-of-sale information by reading the universal product code of merchandise sold with either a hand held or slot scanner to capture information on each specific item of product, including variations in size and color (a stock-keeping unit or "SKU"), sales data and pricing information. The Company has developed computer systems that use the information generated from scanning to analyze sales, gross profit, inventory levels and direct product profitability by category, department and operating region and, in certain instances, SKU. Such information identifies early 37 trends in sales by SKU, gross profit performance and inventory position and is also a source for measuring inventory shrinkage performances. The Company has been expanding scanning to its higher volume stores in order to maximize benefits and recover the related expenses more efficiently. Scanning systems will provide more and better merchant and store level information to facilitate inventory management, automatic re-ordering, product sales and gross profit analysis and inventory shrinkage control. The Company believes that broader use of scanning throughout the chain will improve customer service by decreasing customer check-out time and improving adherence to advertised sale or promotional prices. The Company believes the direct benefits of scanning will be sufficient to offset the related expense. The Company is expanding its use of electronic data interchange ("EDI") systems with certain of its major suppliers. EDI allows for the paperless ordering of products with immediate confirmation from the vendor on price, delivery terms and amount of goods ordered. The Company is also experimenting with automatic replenishment buying in connection with its warehouse and distribution systems, which includes the computer generation of purchase orders for certain vendors. The Company installed the merchandise receiving component of its new warehouse management system in the Atlanta, Georgia distribution facility and expects the entire system to be installed in Atlanta by the spring of 1996 and in all of its distribution facilities by the end of fiscal 1996. These systems should also allow the Company to reduce lead time on orders and improve cash flow by reducing the amount of inventory required to be kept on hand. EDI will be expanded as the Company expands its scanning system. In 1993, the Company and Integrated Systems Solutions Corporation ("ISSC"), a wholly-owned subsidiary of IBM, entered into a Systems Operations Service Agreement pursuant to which the Company and ISSC are developing a state of the art information systems operation to include pharmacy and point-of-sale systems for the Company's drug stores. Under the agreement, ISSC manages the Company's entire information systems operation and is responsible for providing technology services to the Company, which results in, among other things, improved productivity and significant hardware savings to the Company. ISSC is in the process of implementing scanning, the Comp-U-Care 2000 System, and the warehouse management system. The Systems Operations Services Agreement has a 10-year term, and the total payments to be made by the Company thereunder are currently expected to be approximately $440.0 million over such term. The Company believes that this arrangement has and will continue to enable the Company to further improve customer service, replace the Company's existing systems, reduce operating costs and capital expenditures for hardware, obtain information needed to support management decisions on an improved basis and increase the Company's focus on its core business. The Company is also developing or purchasing software with applications in the human resources area, which would more accurately monitor personnel performance and attendance and assist management in making personnel scheduling decisions in an effort to increase productivity and reduce operating costs. In addition, the Company is purchasing or developing software to expand the merchandise and store information data base systems to enable the Company to more efficiently manage its business and to start the initial roll out of the warehouse management system to provide improved control and management of inventory and personnel. The implementation of such software began in fiscal 1995 and is expected to be completed in fiscal 1996. PRODUCTS AND SERVICES Pharmacy The primary focus of Eckerd Drug stores is the sale of prescription and over-the-counter drugs. During fiscal 1994, the Company filled more than 89 million prescriptions, and sales of prescription and over-the-counter drugs generated approximately 61.1% of the Company's drug store sales and other operating revenue. During the period from fiscal 1990 through fiscal 1994, the Company's dollar volume 38 of sales of prescription drugs increased at a compound annual growth rate of 12.4% and during the first half of fiscal 1995, the dollar volume of sales of prescription drugs increased by 15.8% as compared to the first half of fiscal 1994. The Company seeks to position pharmacists as health-care professionals who build relationships with their customers. Over the years, marketing and advertising campaigns have been focused on reinforcing the professionalism of the Company's pharmacists and positioning them as a key factor to high quality pharmacy service. The Company has also instituted several health-related programs such as health screenings, education and outreach programs, and customer relationship programs. The Company provides the "Rx Advisor," a personalized easy-to-read publication, to each prescription drug customer, which advises the customer of the specific dosages, contraindications and side effects of his or her prescription medicine. Eckerd Drug store pharmacy departments are modern, clean and clearly identified by attractive signs. The pharmacy areas in many of the Company's newer and remodeled stores provide a consultation area and a waiting area with comfortable seating, informational brochures and free blood pressure testing. The pharmacy areas are designed to be conducive to customer service and counseling by the pharmacists. See "--Business Strategy--Customer Service and Convenience." The Company believes that it is well positioned to take advantage of certain demographic trends, including the aging of the United States population. The Company's stores are concentrated in 10 of the 12 metropolitan statistical areas in the United States with the largest percentage growth in population from 1980 to 1990. In addition, approximately 62% of the Company's drug stores are located in Florida and Texas, two of the top three states experiencing the greatest influx of persons over age 65. According to industry studies, persons over age 65 purchase twice as many prescription drugs and 50% more over-the-counter drugs than the national average. The Company also believes that it is capable of meeting the needs of the increasing volume of third-party prescription sales and is aggressively marketing itself to third-party payors. See "Risk Factors--Prescription Drug Sales and Future Regulation" and "-- Business Strategy--Marketing to Third-Party Payors." The Company believes that new prescription drugs and drug therapies provide an opportunity for increased demand for prescription drugs. In addition, the Food and Drug Administration is approving an increasing number of prescription products for sale over the counter. Prescription drugs which are approved for over-the-counter distribution have historically shown significantly increased sales. Nonpharmacy Merchandise Eckerd Drug stores sell a wide variety of nonpharmacy merchandise, including over-the-counter drugs, health and beauty aids, greeting cards and numerous other convenience products. Eckerd-brand products, which are attractively priced and provide higher margins than similar national brand products, represent a growing segment of products offered by Eckerd Drug stores. Sales of private label products accounted for $198.7 million of the Company's sales in fiscal 1994. Health. Eckerd Drug stores offer a broad assortment of popular national brands as well as private label over-the-counter drugs and other products related to dental care, foot care, vitamins and nutritional supplements, feminine hygiene, family planning and baby care. Eckerd Drug stores provide a helpful environment in which consumers can obtain product information from professional pharmacists, knowledgeable sales associates and store managers or from literature available throughout the store. Beauty. Eckerd Drug stores offer an assortment of popular brand name cosmetics, fragrances and other beauty products. Management believes that Eckerd Drug stores provide the customer with a convenient format in which to purchase the lines of beauty products offered in its stores. Skin care products are an increasingly important component of the beauty category due to the aging population and growing concern about the effects of the environment on the skin. 39 Greeting Cards. The greeting card department in Eckerd Drug stores offers a wide selection of contemporary and traditional cards, gift wrap, bows and novelties. The Company believes that the locations of its stores together with the wide selection offered by Eckerd Drug stores enable customers to satisfy their card and gift needs more conveniently than at traditional card stores. The Company has recently increased the space devoted to its greeting card department because of the profitability of such merchandise and because the Company believes that the demand for such merchandise will increase traffic in its stores. Convenience Products. This merchandise category consists of an assortment of items, including candy, food, tobacco products, books and magazines, household products, seasonal merchandise and toys. These items are carefully positioned to provide optimum convenience to the customer with easy access in the front part of the store. The Company also seeks to serve its customers' needs by specifically tailoring items in this category to meet the needs of its customers in specific store locations, including the introduction of a food mart section offering convenience food items such as staple grocery shelf items, staple and chilled beverages, snack foods and specialty items, in approximately 550 locations. For example, souvenirs and select summer products are offered in beach and tourist locations while convenience food is stressed in urban areas and malls. The Company plans to add food mart sections to an additional 350 stores in fiscal 1995. Photo Finishing Another significant focus of Eckerd Drug stores is photo finishing. The Company offers overnight photo finishing services in all Eckerd Drug stores and operates Eckerd Express Photo centers, which are one-hour photo processing mini-labs, in 510 Eckerd Drug stores as of October 28, 1995. Sales from photo finishing accounted for approximately 4.9% of the Company's drug store sales in fiscal 1994 and were the second largest component of drug store profit. The Company believes that its photo finishing operations provide further opportunities for growth in its drug store business because of the direct contribution to sales from photo finishing and the significant additional store traffic from such operations, which is important in generating sales of other products. Photo finishing generates store traffic because it generally requires two trips to a store--one visit to drop off the roll of film and one visit to pick up the developed pictures. The Company is among the top three vertically integrated retail photo finishers in the United States and the Company believes that it is a leading source of photo finishing in all of the major markets in which it operates. The Company processed over 28 million rolls of film in fiscal 1994 in its own photo labs and has several well known branded processing programs, including System 2(R) (two prints for the price of one), Ultralab 35(R) (larger size, higher quality prints) and Express Print 60(R) (one-hour processing). The Company believes that its branded processing programs, which emphasize quality and service, have helped position the Company as a leader in photo finishing. The Company currently intends to continue to expand its one-hour photo finishing business, with a goal of adding approximately 240 new Express Photo centers by 1999. The Company's photo departments also offer camera and photo accessories, small electronics, batteries and audio and video tapes. The entire photo department, including photo finishing, represented approximately 9.2% of the Company's total drug store sales in fiscal 1994. STORE OPERATIONS Eckerd Drug stores are located and designed to maximize customer service and convenience and are situated in areas of high customer traffic, typically in neighborhood shopping centers with strong supermarket co-tenants or in strategically located free-standing stores. Eckerd Drug stores are designed to facilitate customer movement and feature well-stocked shelves, clearly identified aisles and well-lit interiors to maximize product visibility. Pharmacy departments are generally located near the back of the store to maximize customer exposure to the store. The stores are equipped with modern fixtures and 40 equipment and most of them range in size from 8,200 to 10,800 square feet. About 85% of the floor space is selling area, with the remainder used for storeroom and office space. To enhance productivity per square foot and maintain consistent merchandising, the Company utilizes centrally prepared formats for the display and stocking of products in the Company's stores, while continuing to allow some flexibility to store managers to modify the merchandise assortment based upon the Company's program of tailoring merchandise offerings to the markets in which the stores operate. The typical Eckerd Drug store is open every day of the year except Christmas, with store hours geared to the needs of the specific markets. A select number of strategically located stores stay open until midnight or 24 hours a day. Eckerd Drug stores are currently grouped under six operating regions located in or near Orlando and Deerfield Beach, Florida; Atlanta, Georgia; Charlotte, North Carolina; and Dallas and Houston, Texas. Each operating region is headed by a vice president who supervises the various districts comprising the region. Within each district, there are managers who are responsible for the drug stores in their districts and regularly visit their stores to assure quality of service and merchandising. District pharmacy managers supervise the pharmacy operations in the drug stores. Each drug store is individually supervised by a manager who receives training in the Company's merchandise offerings, customer service and management strategy. The Company has implemented various initiatives designed to reduce shrinkage expense, which was approximately 2.9% for fiscal 1994 compared to an industry-wide average (calculated using the same accounting method as the Company) of approximately 2.8% during the same time period. These initiatives include training and awareness programs, tailored audit programs for district managers, hiring of internal auditors and loss prevention specialists, and computerized exception reporting for, among other things, customer refunds, voids and cash overages and shortages from daily register check-outs. PURCHASING AND DISTRIBUTION Merchandising, buying and supplier payments are generally centralized at Company headquarters to assure consistency of marketing approach and efficiency in supplier relations. The Company has implemented an enhanced electronic buying system to improve inventory management and gross profit by enabling the Company to take better advantage of quantity discounts and forward buying opportunities, which the Company believes will lower the average cost of inventory. Additionally, it is anticipated that this buying system and its improved forecasting ability will improve service levels to the stores and will reduce average inventory required in the Company's distribution centers. Approximately 85% of store merchandise is purchased centrally and distributed, principally by Company-operated trucks, through the Company's five centrally located distribution facilities located in or near Orlando, Florida; Atlanta, Georgia; Charlotte, North Carolina; and Dallas and Houston, Texas. The remainder of store merchandise, some of which is purchased at the store level, is distributed directly to the stores. ADVERTISING AND MARKETING A combination of newspaper advertising and TV and radio spot commercials is carried on throughout the year to promote sales. During the fiscal year ended January 28, 1995, these advertising expenses totaled approximately 0.5% of the Company's sales. The Company's concentration of stores within its markets enables it to achieve economies of scale in its advertising and marketing expenditures and also enables the Company to negotiate favorable rates for advertising time and print production. From the time of the Acquisition through fiscal 1994, the Company reduced its advertising expense as a 41 percentage of sales by more than 70%. In addition, the Company has derived additional cost savings through a rationalization of its advertising expenditures. As part of the cost reduction program, certain advertising expenditures related to the Company's overall corporate image were reduced in favor of advertising efforts such as newspaper circulars. This change in advertising strategy has resulted in increased financial support from the Company's vendors and a more direct impact on sales. The Company believes that its current level of advertising expenditures is appropriate to support its existing marketing strategies. The Company's communications and marketing programs are based upon an ongoing commitment to consumer research. Through regular telephone surveys in all major markets, exit interviews in its stores, and studies of various consumer groups, the Company is able to monitor changes in customer attitudes and shopping habits and adjust its marketing strategies accordingly. COMPETITION The Company's retail drug stores operate in a highly competitive industry. The Company's drug stores compete primarily on the basis of customer service, convenience of location and store design, price and product mix and selection. In addition to traditional competition from independent drug stores and other drug store chains, the Company faces competition from mass merchants (including discounters and deep discounters), supermarkets, combination food and drug stores, mail order distributors, hospitals and HMOs. These other formats have experienced significant growth in their market share of the prescription and over-the-counter drug business. Many of the Company's competitors have greater financial resources than the Company. See "Risk Factors--Competition" and "--The Drug Store Industry." The Company's Express Photo centers compete with a variety of photo processors including other mini-labs, retail stores and photo specialty stores, primarily on the basis of quality of processing, quality and speed of service and value. REGULATION All of the Company's pharmacists and its stores are required to be licensed by the appropriate state boards of pharmacy. The Company's drug stores and its distribution centers are also registered with the Federal Drug Enforcement Administration. Most of the stores sell beer and wine and are subject to various state and local liquor licensing requirements. By virtue of these license and registration requirements, the Company is obligated to observe certain rules and regulations, and a violation of such rules and regulations could result in a suspension or revocation of the licenses or registrations. The Company has a number of third-party payor contracts pursuant to which the Company is a provider of prescription drugs. "Freedom of choice" state statutes, pursuant to which all pharmacies would be entitled to be a provider under such a contract, have been enacted in certain states, including Alabama, Georgia, New Jersey, North Carolina, Louisiana, South Carolina, Tennessee and Texas, and may be enacted in others. Although such statutes may adversely affect certain of the Company's third-party contracts, they may also provide the Company with opportunities regarding additional third-party contracts. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. The Company cannot predict whether any federal or state health care reform legislation will eventually be passed, and if so, the impact thereof on the Company's financial position or results of operations. Health care reform, if implemented, could adversely affect the pricing of prescription drugs or the amount of reimbursement from governmental agencies and third-party payors, and consequently could be adverse to the Company. However, to the extent health care reform 42 expands the number of persons receiving health care benefits covering the purchase of prescription drugs, it may also result in increased purchases of such drugs and could thereby have a favorable impact on both the Company and the retail drug industry in general. Nevertheless, there can be no assurance that any future federal or state health care reform legislation will not adversely affect the Company or the retail drug store industry generally. In 1990, Congress enacted the Omnibus Budget Reconciliation Act of 1990 ("OBRA 1990"), which includes a requirement that states implement pharmaceutical drug use review programs for Medicaid beneficiaries receiving covered out-patient prescription drugs. The OBRA 1990 legislation states that pharmacists must offer to discuss with each Medicaid patient "common, severe side or adverse effects or interactions and therapeutic contraindications that may be encountered, including their avoidance and the action required if they occur." In order to ensure reimbursement of out-patient prescription drugs under Medicaid, states were required, pursuant to the OBRA 1990 legislation, to implement drug use review programs by January 1, 1993. In all states where the Company operates (except South Carolina), the State Pharmacy Practices Acts have expanded the OBRA requirements to include all patients receiving prescriptions in a retail setting. Pharmacists now have a duty to warn the purchaser of a prescription drug if the warning could reduce or negate the adverse effects of the use of such drug. In 1993, the state of Florida enacted health care legislation that is applicable to state employees, small businesses with fewer than 50 employees and Medicaid recipients. The legislation, which began to be implemented in 1994, created 11 health care purchasing cooperatives, which will accept bids from health care providers to provide goods and services to the cooperatives' members. The Company expects to provide prescription drugs to the cooperatives through its existing managed health care clients. However, the Company is unable to predict whether its efforts will be successful or whether the Florida legislation will have an adverse impact on the Company's financial position or results of operations. EMPLOYEES As of October 28, 1995, the Company had approximately 45,000 employees, of which 23,300 were full-time employees. The Company believes that overall employee relations are good. None of the Company's employees are represented by unions. PATENTS, TRADEMARKS AND TRADENAMES No patent, trademark, license, franchise or concession is considered to be of material importance to the business of the Company other than the trade names under which the Company operates its retail businesses, including the Eckerd name. The Company also holds servicemarks for its photo finishing products, private label products and information systems. PROPERTIES The Company conducts substantially all of its retail businesses from stores located in leased premises. Substantially all of these leases will expire within the next twenty-five years. In the normal course of business, however, it is expected that leases will be renewed or replaced by leases on other properties. Most of the Company's store leases provide for a fixed minimum rental together with a percentage rental based on sales. 43 The material office and distribution center properties owned or leased by the Company at October 28, 1995 are as follows: APPROXIMATE OWNED OR LOCATION SQUARE FEET LEASED - ------------------------------------------------- ----------- -------- Largo, Florida................................... 488,000 Owned(1) Charlotte, North Carolina........................ 587,000 Owned Garland, Texas................................... 270,000 Owned Conroe, Texas.................................... 345,000 Owned Orlando, Florida................................. 587,000 Leased(2) Newnan, Georgia.................................. 244,000 Owned(3) Hammond, Louisiana............................... 185,000 Owned(3)(4) - ------------ (1) Includes the Company headquarters. (2) In January 1993, the Company assumed a lease for an office and distribution facility of approximately 587,000 square feet (lease expires 2005). (3) Construction was financed pursuant to revenue bond issues. Because these properties are currently leased subject to nominal purchase options with development authorities which the Company anticipates it will exercise, they are listed as owned by the Company. (4) The Company closed the Hammond distribution center and subleased the former Hammond, Louisiana office and distribution center. Such sublease will be terminated in April 1996. The Company is marketing the Hammond property for sale. The Company considers that all property owned or leased is well maintained and in good condition. LEGAL PROCEEDINGS In the ordinary course of its business, the Company and its subsidiaries are parties to various legal actions which the Company believes are routine in nature and incidental to the operation of the business of the Company and its subsidiaries. The Company believes that the outcome of the proceedings to which the Company and its subsidiaries currently are parties will not have a material adverse effect upon its operations or financial condition. 44 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The name, age and office or principal occupation of the executive officers and directors of the Company and certain information relating to their business experience are set forth below:
NAME AGE POSITION ---- --- -------- Stewart Turley..................... 61 Director, Chairman of the Board and Chief Executive Officer Francis A. Newman.................. 47 Director, President and Chief Operating Officer John W. Boyle...................... 66 Director Dr. James T. Doluisio.............. 60 Director Donald F. Dunn..................... 70 Director Albert J. Fitzgibbons, III......... 50 Director Margaret H. Jordan................. 52 Director Lewis W. Lehr...................... 74 Director Alexis P. Michas................... 37 Director Rupinder S. Sidhu.................. 39 Director James M. Santo..................... 54 Executive Vice President/Administration and Secretary Samuel G. Wright................... 45 Executive Vice President/Chief Financial Officer Kenneth L. Flynn................... 50 Senior Vice President/Store Operations Edward W. Kelly.................... 50 Senior Vice President/Merchandising Richard R. Powis................... 47 Senior Vice President/Pharmacy Martin W. Gladysz.................. 43 Vice President/Treasurer Robert E. Lewis.................... 35 Vice President/General Counsel and Assistant Secretary Thomas M. Nash..................... 47 Vice President/Real Estate N. John Simmons, Jr................ 40 Vice President/Controller
The Company has announced that Mr. Turley will relinquish his position as Chief Executive Officer at the end of fiscal 1995 while continuing in his role as Chairman of the Board. Upon the recommendation of Mr. Turley, the Board of Directors is expected to appoint Mr. Newman, currently the President and Chief Operating Officer, to the position of Chief Executive Officer at its February 1996 meeting. Mr. Turley is Chairman of the Board and Chief Executive Officer of the Company, positions he has held since 1986. He served as President of the Company from 1986 until July 1993. He joined Old Eckerd in 1966 and has served as Senior Vice President (1971-1974) and President and Chief Executive Officer (1974-1975) prior to being elected to Chairman of the Board, President and Chief Executive Officer. He is also a director of Barnett Banks, Inc., Sprint Corporation and Springs Industries, Inc. Mr. Newman is President, Chief Operating Officer and a Director of the Company, positions he has held since July 6, 1993. Prior to joining the Company, Mr. Newman served as President, Chief Executive Officer and a director of F&M Distributors, Inc. ("F&M"), a drug store chain, since 1986. F&M filed bankruptcy under Chapter 11 of the United States Bankruptcy Code in December 1994. Prior to joining F&M, he was the Executive Vice President of Household Merchandising, a retail firm, from 1984 to 1985 and the Senior Vice President of Merchandising for F.W. Woolworth, a retail firm, from 1980 to 1984. Mr. Newman is also a director of FabriCenters of America, a retail firm. Mr. Boyle retired as Vice Chairman of the Board and Chief Financial Officer of the Company on December 31, 1994, positions he had held since February 1993. He served as a consultant to the Company during the month of January 1995. Prior to being Vice Chairman, he was Senior Vice 45 President/Finance and Administration of the Company, a position he held for more than five years. He joined Old Eckerd as Senior Vice President/Finance and Administration in 1983. Prior to joining Old Eckerd, Mr. Boyle served as Vice Chairman of the Board (1978-1980) and, thereafter, as Chairman of the Board (1980-1983) of May Department Store Co., St. Louis, Missouri. He was a director of Old Eckerd between 1983 and 1986. Dr. Doluisio has been Dean of the College of Pharmacy, University of Texas, Austin, Texas since 1973. Dr. Doluisio has served as chairman of the American Pharmaceutical Association, the American Association of College of Pharmacy Council of Deans, the American Association for the Advancement of Science and as a trustee of the United States Pharmacopeia. He is also a director of COR Therapeutics, Inc. Mr. Dunn is retired Chairman of the Board and Chief Executive Officer of Maas Brothers/Jordan Marsh, a division of Allied Stores Corporation, New York, New York. In his 39-year career with Allied Stores, starting as an executive trainee, Mr. Dunn held numerous management positions including that of executive group manager of Allied Stores for Jordan Marsh and Maas Brothers in Florida, Cain-Sloan in Tennessee and Joske's in Texas. Mr. Dunn is also a director of Tech Data Corporation and Younkers, Inc. Mr. Fitzgibbons has been a director of Merrill Lynch Capital Partners since 1988. He has been a director of Stonington Partners, Inc. ("Stonington Partners") since August 1993; a Partner of Stonington Partners since November 1993; a partner of Merrill Lynch Capital Partners from 1993 to July 1994; an Executive Vice President of Merrill Lynch Capital Partners from 1988 to 1993; a Senior Vice President of Merrill Lynch Capital Partners from 1987 to 1988; a Managing Director of the Investment Banking Division of ML & Co. from 1978 to July 1994; and Vice President of Merrill Lynch from 1974 to 1988. He is also a director of Borg-Warner Security Corporation, Borg-Warner Automotive, Inc., Dictaphone Corporation and United Artists Theatre Circuit, Inc. Ms. Jordan has been Vice President--Health Care and Employee Services of Southern California Edison Company since 1992. Prior thereto, she worked for Kaiser Foundation Health Plan of Texas, Inc. for more than the preceding five years, most recently as Vice President and Regional Manager of Texas. Ms. Jordan also serves as a director of Epitope, Inc. Mr. Lehr is former Chairman of the Board of 3M Company, St. Paul, Minnesota. In his 39-year career with 3M Company, starting as an engineer, Mr. Lehr held numerous management positions and from 1980 to March 1986, when he retired, was Chairman of the Board and Chief Executive Officer. He also serves as a director of Peregrine Semiconductor Corporation and various IDS Funds. Mr. Michas has been a director of Merrill Lynch Capital Partners since 1989. He has been a Partner of Stonington Partners since November 1993; a director of Stonington Partners since August 1993; a partner of Merrill Lynch Capital Partners from 1993 to July 1994; a Senior Vice President of Merrill Lynch Capital Partners from 1989 to 1993; a Vice President of Merrill Lynch Capital Partners from 1987 to 1989; a Managing Director of the Investment Banking Division of ML & Co. from 1991 to July 1994; a Director of the Investment Banking Division of ML & Co. from 1990 to 1991; and a Vice President of the Investment Banking Division of ML & Co. from 1987 to 1989. He is also a director of Borg-Warner Security Corporation, Borg-Warner Automotive, Inc., Blue Bird Corporation, Dictaphone Corporation, Pathmark Stores, Inc. and Supermarkets General Holding Corporation. Mr. Sidhu has been a director of Merrill Lynch Capital Partners since 1988. He has been a Special Limited Partner of Stonington Partners since August 1993; a partner of Merrill Lynch Capital Partners from 1993 to July 1994; a Senior Vice President of Merrill Lynch Capital Partners from 1987 to July 1994; a Vice President of Merrill Lynch Capital Partners from 1985 to 1987; a Managing Director of the Investment Banking Division of ML & Co. from 1989 to 1993; and a Director of the Investment 46 Banking Division of ML & Co. from 1987 to 1989. He is also a director of Clinton Mills, Inc., First-USA, Inc., and Wherehouse Entertainment, Inc. Mr. Santo was appointed Executive Vice President/Administration in May, 1995. Prior thereto he was appointed Senior Vice President/Administration in February 1993 and was also Vice President/Legal Affairs of the Company, a position he had held for more than the five years prior to 1993. In addition, Mr. Santo was appointed Secretary of the Company effective January 1, 1992. Mr. Wright was appointed Executive Vice President/Chief Financial Officer of the Company in May 1995. Prior thereto he was appointed Senior Vice President/Chief Financial Officer in February 1995 and was also Senior Vice President/Finance from February 1993 until February 1995 and Vice President and Controller of the Company from September 1988 until February 1993. Mr. Wright became Vice President of the Company in June 1986. In addition, Mr. Wright had served as Vice President of Finance of Eckerd Drug Company, formerly Old Eckerd's principal subsidiary ("Eckerd Drug Company"), since May 1985. Mr. Flynn was appointed Senior Vice President/Store Operations of the Company in December 1994. Prior to joining the Company, he was Executive Vice President with the Thrifty/Payless drug chain in Portland, Oregon from August 1993. Prior to joining Thrifty/Payless in August 1993, Mr. Flynn was employed by Lucky Stores, Inc. for over 30 years, most recently as Senior Vice President/Store Operations. Mr. Kelly was appointed Senior Vice President/Merchandising in February 1993. Prior thereto he had served as Vice President of Merchandising of Eckerd Drug Company for more than the preceding five years. Mr. Powis was appointed Senior Vice President/Pharmacy in April 1995. Prior to joining the Company, he was Senior Vice President Pharmacy Services for the American Association of Retired Persons ("AARP") from September 1994. Prior to joining AARP, Mr. Powis was employed for over 19 years by Hooks SupeRx, Inc., most recently as Senior Vice President Pharmacy Services. Mr. Gladysz was appointed Vice President/Treasurer of the Company in May 1994. Prior to joining the Company, Mr. Gladysz was Executive Vice President/Treasurer for Fortune Bancorp, a Florida banking organization, a position he held for more than the five years prior to 1994. Mr. Lewis was appointed Vice President/General Counsel and Assistant Secretary of the Company in August 1994. He was a shareholder in the law firm of Shackleford, Farrior, Stallings & Evans, P.A. in Tampa, Florida, from January 1992 to August 1994 and was an associate at that firm for more than five years prior thereto. Mr. Nash has been Vice President/Real Estate of the Company since August 1995. Prior to joining the Company, he served as Vice President--Real Estate at Checker's Drive-In Restaurants, Inc. from 1993 until 1995 and at Morrison Restaurants, Inc. from 1990 until 1993. Mr. Simmons was appointed Vice President/Controller of the Company in August 1995. Prior to joining the Company, Mr. Simmons served as Vice President of Finance and Chief Financial Officer of Checkers Drive-In Restaurants, Inc. from January 1993 until August 1995. Prior thereto, he was a Partner at KPMG Peat Marwick for more than the preceding five years. Messrs. Turley, Boyle, Doluisio, Dunn, Fitzgibbons and Lehr have been directors of the Company since May 1986. Mr. Sidhu became a director of the Company in April 1988, Mr. Michas became a director of the Company in April 1990, Mr. Newman became a director in July 1993 and Ms. Jordan became a director in September 1995. 47 The Board of Directors of the Company is divided into three classes serving staggered three-year terms. The terms of office of Messrs. Fitzgibbons, Turley and Lehr will expire on the date of the annual meeting of stockholders of the Company (the "Annual Meeting") in 1996, the terms of office of Messrs. Boyle, Doluisio and Sidhu will expire on the date of the Annual Meeting in 1997 and the terms of office of Messrs. Michas, Dunn and Newman and Ms. Jordan will expire on the date of the Annual Meeting in 1998. Effective February 4, 1996, the annual fee payable to members of the Board of Directors who are not employees of the Company for their services as members of the Board will be increased from $18,000 to $24,000. Messrs. Doluisio, Dunn and Lehr serve as members of the Audit Committee, Messrs. Fitzgibbons, Dunn and Lehr serve as members of the Executive Compensation and Stock Option Committee, and Messrs. Turley, Dunn and Fitzgibbons serve as members of the Executive Committee, of the Board of Directors of the Company. Messrs. Fitzgibbons, Sidhu and Michas are employees of Stonington Partners and serve on the Board of Directors of the Company as representatives of the Merrill Lynch Investors. In August 1993, Messrs. Fitzgibbons, Sidhu and Michas, together with other colleagues from Merrill Lynch Capital Partners, founded Stonington Partners. In July 1994, Messrs. Fitzgibbons, Sidhu and Michas left the employment of Merrill Lynch, although each has continued as a director of Merrill Lynch Capital Partners and the other companies in which certain affiliates of Merrill Lynch have equity investments and for which they were serving as a director in July 1994 (such other companies, the "Merrill Lynch Affiliates"). In this connection, each of Messrs. Fitzgibbons, Sidhu and Michas entered into a consulting agreement with Merrill Lynch Capital Partners which provides, among other things, for his continued availability to serve on the Board of Directors of the Company and the respective boards of directors of the Merrill Lynch Affiliates for which he was serving as a director in July 1994 until requested to resign by Merrill Lynch Capital Partners, and for his compensation (directly or indirectly) by Merrill Lynch Capital Partners for serving in such director capacities and for other consulting services. Officers of the Company serve at the discretion of the Board of Directors. Officers are elected for a one-year term by the Board of Directors at its annual meeting. There is no family relationship between any of the aforementioned officers or directors of the Company. 48 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of October 28, 1995 by (i) each of the directors of the Company, (ii) each of the named executive officers of the Company, (iii) each person known by the Company to be the beneficial owner of approximately five percent or more of the outstanding Common Stock, (iv) all of the Company's directors and executive officers as a group and (v) by each Selling Stockholder. Unless otherwise indicated, the Company believes that the beneficial owner has sole voting and investment power over such shares. The table does not reflect the Merrill Lynch Distribution or the possible sale of additional shares by the Merrill Lynch Investors if the Underwriters' over-allotment option is exercised in full.
OWNERSHIP PRIOR TO OWNERSHIP AFTER THE OFFERING THE OFFERING -------------------------- -------------------------- SHARES OF SHARES SHARES OF COMMON STOCK PERCENTAGE TO BE SOLD COMMON STOCK PERCENTAGE ------------ ---------- ---------- ------------ ---------- Merrill Lynch Investors (1)........................ 8,020,634 22.95 5,000,000 3,020,634(2) 8.64(2) Stewart Turley(3).......... 480,723 1.37 -- 480,723 1.37 Francis A. Newman (4)...... 103,350 * -- 103,350 * John W. Boyle (5).......... 164,505 * -- 164,505 * Dr. James T. Doluisio (6)........................ 6,937 * -- 6,937 * Donald F. Dunn............. 13,217 * -- 13,217 * Albert J. Fitzgibbons, III (7)........................ 4,717 * -- 4,717 * Lewis W. Lehr (8).......... 9,017 * -- 9,017 * Alexis P. Michas (7)....... 4,675 * -- 4,675 * Rupinder S. Sidhu (7)...... 53,530 * -- 53,530 * Robert L. Myers (9)........ 45,133 * -- 45,133 * James M Santo (10)......... 63,053 * -- 63,053 * Samuel G. Wright (11)...... 62,754 * -- 62,754 * All directors and executive officers as a group (20) persons (12)(13)........... 1,069,224 3.04 -- 1,069,224 3.04
- ------------ * Less than one percent (1) As of October 28, 1995 shares of Common Stock beneficially owned by the Merrill Lynch Investors were owned of record as follows: 516,748 shares by Merrill Lynch Capital Corporation, 5,318,821 shares by Merrill Lynch Capital Appreciation Partnership No. II, L.P., 135,311 shares by ML Offshore LBO Partnership No. II, 140,178 shares by ML Employees LBO Partnership No. I, L.P., 47,974 shares by Merrill Lynch KECALP L.P. 1986, 821,549 shares by Merrill Lynch Capital Appreciation Partnership No. B-IX, L.P., 481,223 shares by ML Offshore LBO Partnership No. B-IX, 13,029 shares by MLCP Associates L.P. No. II., 72,604 shares by Merrill Lynch KECALP L.P. 1989, 447,968 shares by ML IBK Positions, Inc., and 25,229 shares by Merchant Banking L.P. No. IV. The address for the Merrill Lynch Investors and each of the aforementioned record holders is c/o Merrill Lynch & Co., Inc., Merrill Lynch World Headquarters, South Tower, New York, New York 10080-6123. (2) After the Merrill Lynch Distribution, the Merrill Lynch Investors will beneficially own approximately 2,614,993 shares of Common Stock, which would represent approximately 7.48% of the shares of Common Stock outstanding after the Offering. (3) Total does not reflect the 43,595 shares of Common Stock transferred by Mr. Turley to certain family members. Mr. Turley disclaims beneficial ownership of such shares. Total includes 16,000 shares transferred by Mr. Turley to The Stewart Turley Foundation, Inc. Mr. Turley disclaims (Footnotes continued on following page) 49 (Footnotes continued from preceding page) beneficial ownership of such shares. Total includes options covering 44,421 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (4) Total includes options covering 100,000 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. Mr. Newman has advised the Company that prior to the end of fiscal 1996 he expects to exercise options and dispose of shares of Common Stock, as a result of which he would receive net proceeds of up to $1.0 million. (5) Total does not reflect 125,393 shares of Common Stock transferred to certain irrevocable trusts established by Mr. Boyle. Mr. Boyle disclaims beneficial ownership of such shares. Total includes options covering 40,800 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (6) Total includes options covering 3,334 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (7) Messrs. Fitzgibbons, Michas and Sidhu are directors of the Company and Merrill Lynch Capital Partners. Until July 1994 they were officers of Merrill Lynch Capital Partners and employees of ML & Co. Each disclaims beneficial ownership of shares of Common Stock beneficially owned by the Merrill Lynch Investors. The business address for Messrs. Fitzgibbons, Michas and Sidhu is c/o Stonington Partners, 767 Fifth Avenue, 48th Floor, New York, NY 10153. (8) Total includes options covering 3,334 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (9) Mr. Myers resigned as Senior Vice President/Pharmacy of the Company on May 26, 1995. (10) Total includes options covering 9,100 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (11) Total includes options covering 9,100 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. (12) The total number of all directors and executive officers as a group includes Robert L. Myers, the former Senior Vice President/Pharmacy, who resigned from his position on May 26, 1995. (13) Total includes options covering 216,589 shares of Common Stock which are exercisable as of October 28, 1995 or within 60 days thereafter. 50 DESCRIPTION OF CERTAIN INDEBTEDNESS The following summaries of the principal terms of certain outstanding indebtedness of the Company do not purport to be complete and are subject to the detailed provisions of, and qualified in their entirety by reference to, the respective financing agreements, copies of which have been filed or incorporated by reference as exhibits to the Registration Statement of which this Prospectus is a part and to which exhibits reference is hereby made. Whenever particular provisions of such documents are referred to, such provisions are incorporated by reference as a part of the statements made, and the statements are qualified in their entirety by such reference. THE CREDIT AGREEMENT The Company is party to the Credit Agreement dated as of June 14, 1993 as amended and restated as of November 29, 1995 (the "Credit Agreement") with the financial institutions party thereto (the "Lenders"), Chemical Bank, a New York banking corporation ("Chemical Bank"), NationsBank of Florida, N.A., a national banking association ("NationsBank"), as managing agents for the Lenders (in such capacity, each a "Managing Agent") and as swingline lenders (in such capacity, each a "Swingline Lender"), and Chemical Bank as administrative agent for the Lenders, the Swingline Lenders and the fronting banks with respect to letters of credit ("Letters of Credit") and bankers' acceptances ("Bankers' Acceptances") issued in connection with the Credit Agreement and NationsBank as documentation agent for the Lenders, the Swingline Lenders and the Fronting Banks (the "Documentation Agent"). The Lenders extended credit (i) on a term basis in an aggregate principal amount not to exceed $250.0 million (the "Term Loans") and (ii) on a revolving basis at any time and from time to time prior to November 29, 2000, in an aggregate principal amount outstanding not in excess of $500.0 million (the "Revolving Loans") of which up to (a) $30.0 million of such amount is available as swingline loans (the "Swingline Loans") and (b) $155.0 million of such amount is available as Letters of Credit and Bankers' Acceptances. At November 30, 1995, the Company had approximately $250.0 million outstanding under the Term Loans and $383.0 million outstanding under the Revolving Loans and had unused and available borrowing commitments under the Revolving Loans of $28.0 million (which is net of $89.0 million of letters of credit). The term of the Credit Agreement expires on November 29, 2000. The Company uses the proceeds of Revolving Loan borrowings from time to time for general corporate purposes of the Company and its subsidiaries. The proceeds of Swingline Loans are also used for general corporate purposes of the Company and its subsidiaries. Letters of Credit and Bankers' Acceptances are used to support obligations of the Company and its subsidiaries incurred in the ordinary course of business. The obligations of the Company under the Credit Agreement are unconditionally guaranteed by each of the active subsidiaries of the Company (each, a "Guarantor"). In addition, the Company has pledged the capital stock of the Guarantors, and all borrowings under the Credit Agreement are secured by a first priority lien on all accounts, accounts receivable, equipment, inventory, proceeds, intellectual property, and certain other property of the Company and first priority mortgages on two distribution centers of the Company located in Texas and the Company's headquarters located in Florida. The Term Loans and the Revolving Loans bear interest at a rate per annum equal to, at the Company's option, (i) the Alternate Base Rate ("ABR") (defined in the Credit Agreement as the highest of (a) the prime rate, (b) the federal funds effective rate plus 1/2 of 1%, and (c) the base CD rate plus 1%) or (ii) the Adjusted LIBO rate ("LIBOR") (defined in the Credit Agreement as the product of (a) LIBOR in effect for the applicable interest period and (b) statutory reserves) plus, in the case of LIBOR a spread (the "LIBOR Spread") determined by reference to the ratio of earnings before interest, taxes, depreciation and amortization to Interest Expense (the "Ratio"). If the Ratio is (a) less than 3.5 ("Level I Ratio"), the LIBOR Spread will be 75 basis points per annum, (b) equal to or greater 51 than 3.5 but less than 4.5, ("Level II Ratio"), the LIBOR Spread will be 62.5 basis points per annum or (c) equal to or greater than 4.5 ("Level III Ratio"), the LIBOR Spread will be 50 basis points per annum; provided, however, that the LIBOR Spread cannot be less than 62.5 basis points per annum prior to receipt by the Lenders of the Company's financial statements for the fiscal quarter ending October 1996 (the "October 1996 Financial Statements"); provided, further, that if, after the receipt of the October 1996 Financial Statements, the Ratio is greater than or equal to 4.5, no default or event of default has occurred and is continuing and the Credit Agreement has received both a Baa3 or better rating from Moody's Investors Service, Inc. and a BBB- or better rating from Standard & Poors Ratings Service, the LIBOR Spread will be 37.5 basis points per annum. Interest is computed on the basis of actual number of days elapsed over a 360-day year except when the rate is determined by reference to the prime rate, in which case it is computed on the basis of actual number of days elapsed over a 365- or 366-day year. The Swingline Loans bear interest at the rate applicable to ABR Revolving Loans. Interest on ABR borrowings are payable quarterly. Interest on LIBOR borrowings are payable at the end of the relevant interest period (one, two, three or six-month periods, except that with respect to six-month periods, interest shall be payable every three months). The Company pays the Lenders a commitment fee on the undrawn amount of the revolving facilities determined by reference to the Ratio. If the Company has achieved a (x) Level I Ratio, the commitment fee is 31.25 basis points per annum, (y) if the Company achieves a Level II Ratio, the commitment fee is 25 basis points per annum or (z) if the Company achieves a Level III Ratio, the commitment fee is 18.75 basis points per annum; provided, however, that the commitment fee cannot be less than 25 basis points per annum until delivery to the Lenders of the October 1996 Financial Statements. The Company also pays Letter of Credit fees and Bankers' Acceptance fees, and has paid commitment and other fees to the Managing Agents and the Lenders. Principal of the Term Loans will be amortized according to a schedule which requires amounts outstanding under the Term Loan facility to be reduced by $50.0 million per fiscal year, payable in $10.0 million installments in each of the first three quarters and $20.0 million in the fourth quarter. The Company is required to prepay borrowings under the Credit Agreement with, among others, in any fiscal year, (i) the excess of the aggregate net proceeds of dispositions of assets of the Company and its subsidiaries over $10.0 million and (ii) the net proceeds of any incurrence of debt (other than indebtedness permitted under the Credit Agreement). Mandatory prepayments are to be applied (i) first, pro rata against remaining scheduled installments of principal due in respect of Term Loans and (ii) second, to prepay Swingline Loans and then other Revolving Loans. The Company has the right to prepay any borrowings under the Credit Agreement in whole or in part at any time. Optional prepayments of Term Loans are to be applied (i) first, in the order of maturity of the scheduled installments of principal due on the repayment dates occurring during the twelve-month period beginning on the date of such prepayment and (ii) second, pro rata against the remaining scheduled installments of principal due in respect of Term Loans. The Credit Agreement contains various restrictive covenants prohibiting the Company and its subsidiaries from (subject to certain exceptions), (i) incurring or permitting to exist any indebtedness, other than, among other things, (a) certain indebtedness specified existing on the date the Company restated the Credit Agreement, (b) indebtedness that consists of purchase money indebtedness or capital lease obligations and is either (x) incurred by the Company in the ordinary course of business to finance capital expenditures or (y) exists with respect to an acquired entity if such indebtedness exists at the time of acquisition; provided, that indebtedness described in (x) must be incurred within 90 days after the making of the capital expenditure financed thereby, (c) certain deferred purchase price obligations in an amount not to exceed $10.0 million, (d) reimbursement obligations in limited amounts, (e) certain intercompany indebtedness, (f) indebtedness in respect of interest rate protection agreements, (g) the 9 1/4% Notes, (h) subordinated indebtedness incurred solely to redeem outstanding 52 subordinated indebtedness in whole at an interest rate more favorable than that in effect under the subordinated indebtedness being refinanced and on terms no less favorable to the Company than those in effect under the subordinated indebtedness being refinanced, (i) other subordinated indebtedness, provided no material term of such subordinated indebtedness is more favorable to the lenders of such indebtedness than the terms applicable under the 9 1/4% Notes, such subordinated indebtedness is unsecured and not guaranteed and such subordinated indebtedness has a maturity greater than or equal to the maturity of the Credit Agreement; and (j) obligations of the Company and certain subsidiaries under various stock or option purchase agreements; (ii) incurring or permitting to exist any liens, other than, among other things, (a) certain specified liens existing on the date the Company restated the Credit Agreement, (b) liens existing on property or assets prior to the acquisition thereof by the Company, (c) purchase money security interests in real property, improvements thereto or equipment, and (d) liens on consigned goods; (iii) entering into sale and leaseback transactions other than those specified in the Credit Agreement; (iv) making investments, loans or advances in excess of $7.0 million in the aggregate at any time outstanding, other than, among others, the acquisitions of entities engaged in one or more lines of business substantially similar to those engaged in on the date the Credit Agreement was restated, not to exceed $50.0 million in cash in any instance or $100.0 million in any fiscal year; (v) merger, consolidation, sale or other disposal of all or any substantial part of any asset or any capital stock of a subsidiary, or acquisitions (including leases) of all or any substantial part of the assets of any entity, except for, among other things, (a) the sale of inventory in the ordinary course of business, (b) the sale of accounts receivable on an ongoing basis; provided that the purchaser of such receivables may at no time invest more than $125.0 million, (c) the sale or other disposal of certain specified real estate, and (d) the sale of an aggregate of $35.0 million of assets, provided that sales not exceed $10.0 million in any twelve-month period; (vi) declaring or paying dividends or distributions, except for, among other things, purchases or redemptions of stock in connection with certain existing management subscription agreements; (vii) engaging in any transaction with any affiliate other than, subject to limited exceptions, on arms-length terms; (viii) engaging in business activities not reasonably related to their current business activities; (ix) subject to limited exceptions, prepaying or redeeming indebtedness; (x) amending, waiving, modifying or terminating certain documents, including, among others, their respective charter documents and the terms of material indebtedness of the Company, unless such amendment, waiver, modification or termination is not adverse to the Lenders; and (xi) maintaining a bank account with a financial institution other than a Lender, except as expressly specified. The Credit Agreement requires the Company to satisfy certain financial covenants, including, among other things, on a quarterly basis, with respect to the four immediately preceding quarters: (i) a ratio of funded debt to earnings before interest, taxes, depreciation and amortization; (ii) interest coverage ratio; and (iii) fixed charge coverage ratio. "Events of Default" under the Credit Agreement include (i) default in the payment when due of any principal payable on the loans under the Credit Agreement; (ii) default in the payment of any interest, fees or other amounts payable under the Credit Agreement for a period of three business days; (iii) the failure to comply with certain other covenants, conditions or agreements contained in the Credit Agreement; (iv) the failure to comply with any covenant, condition or agreement contained in the Credit Agreement related loan documents for a period of 15 days; (v) the failure to pay any principal or interest due in respect to any indebtedness in a principal amount in excess of $3.0 million (after giving effect to any applicable grace period); (vi) the commencement of a bankruptcy, insolvency, receivership or similar action by or against the Company or any subsidiary; (vii) one or more judgments in an aggregate amount in excess of $250,000 (to the extent not covered by insurance) rendered against the Company or any subsidiary which shall remain undischarged for a period of 10 consecutive days; (viii) certain events under the Employee Retirement Income Security Act of 1975; and (ix) a change in control ("Change in Control") which shall occur, if, among other things, (a) any person or group other than Merrill Lynch Capital Partners and its affiliates shall own shares representing more than 30% of the ordinary voting power of the Company, and (b) certain specified changes in the composition of the board of directors of the Company occur. 53 THE 9 1/4% NOTES The 9 1/4% Notes are senior subordinated obligations of the Company, subordinated in right of payment to all existing and future senior debt of the Company. The 9 1/4% Notes are redeemable at the option of the Company, in whole or in part, at specified redemption prices, and upon a Change in Control. The 9 1/4% Notes bear interest at 9 1/4% per annum and mature on February 15, 2004. The indenture pursuant to which the 9 1/4% Notes were issued (the "9 1/4% Notes Indenture") contains certain covenants that, among other things, restrict (i) the incurrence of additional indebtedness by the Company and its Restricted Subsidiaries (as defined in the 9 1/4% Notes Indenture), (ii) the payment of dividends on, and redemptions of, capital stock of the Company and the making of other restricted payments, (iii) the incurrence of restrictions on the ability of Restricted Subsidiaries to pay dividends or other payments to the Company, (iv) the incurrence of liens, (v) transactions with affiliates, (vi) the use of proceeds from the disposition of certain assets of the Company or the sale of the stock of Restricted Subsidiaries, (vii) the issuance of certain guarantees and pledges by Restricted Subsidiaries, (viii) the issuance and sale of capital stock by Restricted Subsidiaries, (ix) the incurrence of other senior subordinated indebtedness and (x) the ability of the Company to engage in certain mergers or consolidations or to transfer all or substantially all of its assets to another person. Upon a Change in Control, (i) the Company will have the option to redeem the 9 1/4% Notes and (ii) subject to certain conditions, the Company will be required to make an offer to purchase each holder's 9 1/4% Notes at 101% of the principal amount thereof plus accrued interest to the date of redemption. In addition, the Company will, under certain circumstances, be obligated to make an offer to purchase 9 1/4% Notes in the event of Asset Sales (as defined in the 9 1/4% Notes Indenture). The Credit Agreement, however, prohibits the Company from optionally redeeming the 9 1/4% Notes. THE INDUSTRIAL DEVELOPMENT REVENUE BONDS The Company has issued and outstanding $18.25 million in Variable Rate Demand Industrial Development Revenue Refunding Bonds including $8.25 million due March 1, 2009 and $10.0 million due May 1, 2013. The variable rate demand industrial development revenue refunding bonds currently have an interest rate which is a daily rate established by J.P. Morgan Securities, Inc. and is indicative of current bid-side yields of high grade tax-exempt securities. At the Company's option, and under certain conditions, the interest rate may be changed to a monthly rate or a fixed rate. The bonds are secured by the related buildings, leases and letters of credit and are guaranteed obligations of the Company. The reimbursement agreement relating to the letters of credit incorporates the restrictive covenants and limitations of the Credit Agreement. THE IFS SALE AND LEASEBACK On June 15, 1993, the Company entered into the IFS Sale and Leaseback, which is an agreement for a sale and leaseback of certain assets related to its photo processing business. The Company has sold certain photo processing equipment to Imaging Financial Services, Inc., a Delaware corporation, for approximately $35.0 million, and entered into a five-year lease with respect to such equipment. At the end of the five years, the Company may renew the agreement or terminate the lease and return the equipment. 54 DESCRIPTION OF CAPITAL STOCK The following summary is subject to the detailed provisions of, and is qualified in its entirety by reference to, the Company's Restated Certificate of Incorporation and Restated By-laws, copies of which have been incorporated by reference as exhibits to the Registration Statement of which this Prospectus is a part. The authorized capital stock of the Company consists of 100 million shares of Common Stock and 20 million shares of preferred stock, par value $.01 per share. COMMON STOCK The Company's authorized common stock consists of 100 million shares of Common Stock, par value $.01 per share (of which 3,518,728 shares are Non-Voting Common Stock (Series I), par value $.01 per share). As of October 28, 1995, there were 34,950,857 shares of Common Stock outstanding and employee stock options outstanding to purchase an aggregate of 1,656,199 shares of Common Stock (of which options to purchase an aggregate of 302,328 shares of Common Stock were exercisable). In addition, another 1,757,910 shares of Common Stock were reserved for issuance pursuant to the Company's 1993 and 1995 Stock Option and Incentive Plans. Subject to certain conditions, shares of Common Stock held by any Regulated Banking Stockholder (as defined in the Restated Certificate of Incorporation) may be converted into the same number of shares of Non-Voting Common Stock and shares of Non-Voting Common Stock held by any holder may be converted into the same number of shares of Common Stock. Voting Rights Each share of Common Stock entitles the holder thereof to one vote in elections of directors and all other matters submitted to a vote of stockholders. The Common Stock does not have cumulative voting rights, which means that holders of a majority of the outstanding Common Stock voting for the election of directors can elect all directors then being elected. Each share of Non-Voting Common Stock does not entitle the holder thereof to any vote on matters on which the holders of Common Stock are entitled to vote, except on any amendment, repeal or modification of any provision of the Company's Restated Certificate of Incorporation which adversely affect the rights of the holders of Non-Voting Common Stock or as otherwise required by law. Dividends Subject to the rights of any preferred stock which may be issued by the Board of Directors, each share of Common Stock and Non-Voting Common Stock has an equal and ratable right to receive dividends to be paid from the Company's assets legally available therefor when, as and if declared by the Board of Directors. The terms of the Company's outstanding indebtedness restrict the declaration and payment of dividends on the Common Stock. Liquidation In the event of the dissolution, liquidation or winding up of the Company, the holders of Common Stock and Non-Voting Common Stock are entitled to share equally and ratably in the assets available for distribution after payments are made to the Company's creditors and to the holders of any preferred stock of the Company that may be outstanding at the time. Other The holders of shares of Common Stock and Non-Voting Common Stock have no preemptive, subscription, redemption or conversion rights and are not liable for further call or assessment. All of the outstanding shares of Common Stock are fully paid and nonassessable. 55 Registrar and Transfer Agent Mellon Securities Trust Company acts as Registrar and Transfer Agent for the Common Stock. PREFERRED STOCK The Company's Restated Certificate of Incorporation provides that the Company may issue up to 20 million shares of preferred stock and the Board of Directors of the Company is authorized, without further stockholder action, to divide any or all shares of authorized preferred stock into series and to fix and determine the designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereon, of any series so established, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. As of the date of this Prospectus, the Board of Directors of the Company has not authorized any series of preferred stock and there are no plans, agreements or understandings for the issuance of any shares of preferred stock. CERTIFICATE OF INCORPORATION AND BY-LAWS Certain provisions of the Company's Restated Certificate of Incorporation and Restated By-laws could make more difficult non-negotiated acquisitions of the Company. The Board of Directors believes that these provisions will help to assure the continuity and stability of the Board of Directors and the business strategies and policies of the Company as determined by the Board of Directors. These provisions could have the effect, however, of discouraging a third party from making a tender offer or otherwise attempting to obtain control of the Company even though such an attempt might be beneficial to the Company and its stockholders. Pursuant to the Company's Restated Certificate of Incorporation, the Board of Directors of the Company is divided into three classes serving staggered three-year terms. Directors can be removed from office only for cause and only by the affirmative vote of the holders of a majority of the then-outstanding shares of capital stock entitled to vote generally in an election of directors. Vacancies on the Board of Directors may be filled only by the remaining directors and not by the stockholders. The Restated Certificate of Incorporation also provides that any action required or permitted to be taken by the stockholders of the Company may be effected only at an annual or special meeting of stockholders, and prohibits stockholder action by written consent in lieu of a meeting. The Company's Restated By-laws provide that special meetings of stockholders may be called only by the chairman, the president or the secretary of the Company and must be called by any such officer at the request in writing of the Board of Directors. Stockholders may call a special meeting if the holders of not less than 50% of all votes entitled to be cast at a special meeting send a written demand to the Company's Secretary. The Restated By-laws establish an advance notice procedure for the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors as well as for other stockholder proposals to be considered at annual meetings of stockholders. In general, notice of intent to nominate a director or raise business at such meetings must be received by the Company not less than 60 nor more than 90 days prior to the anniversary of the previous year's annual meeting, and must contain certain specified information concerning the person to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. The foregoing summary is qualified in its entirety by the provisions of the Company's Restated Certificate of Incorporation and Restated By-laws, copies of which have been incorporated by reference as exhibits to the Registration Statement of which this Prospectus constitutes a part. 56 LIMITATIONS ON DIRECTORS' LIABILITY The Company's Restated Certificate of Incorporation provides that, to the fullest extent permitted by the General Corporation Law of the State of Delaware (the "DGCL"), directors of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. Section 102(7) of the DGCL, however, states that such a provision may not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, relating to unlawful dividends, distributions or the repurchase or redemption of stock or (iv) for any transaction from which the director derives an improper personal benefit. The Company's Restated By-laws provide that the Company shall indemnify and hold harmless, to the fullest extent permitted by the DGCL, any person against expenses (including attorney's fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred in connection with any threatened, pending or completed legal proceedings in which such person is involved by reason of the fact that he is or was a director, officer, employee or agent of the Company (or serving in any such capacity with another business organization at the request of the Company) if he acted in good faith and in a manner that he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, if he had no reasonable cause to believe that his conduct was unlawful. If the legal proceeding, however, is by or in the right of the Company, such director, officer, employee or agent may not be indemnified in respect of any claim, issue or matter as to which he shall have been adjudged to be liable to the Company unless a court determines otherwise. The Company has entered into agreements to indemnify its directors and officers in addition to the indemnification provided for in the Restated Certificate of Incorporation. These agreements, among other things, indemnify the Company's directors and officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in the right of the Company, on account of services as a director or officer of the Company or as a director or officer of any subsidiary of the Company, or as a director or officer of any other company or enterprise to which the person provides services at the request of the Company. REGISTRATION RIGHTS Pursuant to a registration rights agreement, as amended, among the Company, the Merrill Lynch Investors, the Management Investors and the other stockholders of the Company who held shares immediately prior to the IPO (the "Registration Rights Agreement"), holders of at least 25% of the Common Stock have the right to demand registration under the Securities Act of their shares of Common Stock. Subject to certain exceptions, the Company will be required, at its expense, to register such shares and to include in the registration on request all other shares owned by parties to the Registration Rights Agreement (or their permitted transferees) who notify the Company of their request. In addition, in the event the Company proposes to register any of its equity securities under the Securities Act, each party to the Registration Rights Agreement (or its permitted transferee) has the incidental right, subject to certain exceptions, to have the shares of the Common Stock then owned by it included in such registration. The Company has agreed that, in the event of any registration of securities owned by a party to the Registration Rights Agreement (or permitted transferee) in accordance with the provisions thereof, it will indemnify such person, and certain related persons, against liabilities incurred in connection with such registration, including liabilities arising under the Securities Act. The Company and the Eckerd Corporation Profit Sharing Plan have also entered into a demand registration rights agreement with terms similar to those contained in the Registration Rights Agreement (except that such registration rights agreement does not provide for incidental registration rights). 57 The registration rights of the existing stockholders are subject to certain limitations intended to prevent undue interference with the Company's ability to distribute securities, including, without limitation, the provisions that (i) demand registration rights may not be exercised within six months after the effective date of the Company's most recent registration statement (other than registration on Form S-4 or S-8) and (ii) the 1% Holders will not offer for public sale any shares owned by them during the seven days before or 120 days after the effective date of any registration statement filed pursuant to the Registration Rights Agreement. The Company has included the shares of Common Stock to be sold by the Selling Stockholders in the Offering pursuant to the exercise by such Selling Stockholders of their demand registration rights under the Registration Rights Agreement. 58 UNDERWRITING Subject to the terms and conditions set forth in the Purchase Agreement (the "Purchase Agreement") among the Company, the Selling Stockholders and each of the underwriters named below (the "Underwriters"), the Selling Stockholders severally have agreed to sell to each of the Underwriters, and each of the Underwriters severally has agreed to purchase from the Selling Stockholders, the number of shares of Common Stock set forth opposite its name below. NUMBER OF UNDERWRITERS SHARES --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated................................................. CS First Boston Corporation.................................. Morgan Stanley & Co. Incorporated............................ Raymond James & Associates, Inc.............................. --------- Total........................................................ 5,000,000 --------- --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), CS First Boston Corporation, Morgan Stanley & Co. Incorporated and Raymond James & Associates, Inc. are acting as representatives (the "Representatives") of the several Underwriters. In the Purchase Agreement, the several Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock offered hereby if any of such shares are purchased. Under certain circumstances, the commitments of the non-defaulting Underwriters may be increased. The Underwriters have advised the Company that they propose initially to offer the shares to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share to certain other dealers. After the Offering, the public offering price, concession and discount may be changed. The Selling Stockholders have granted the Underwriters an option, exercisable for 30 days after the date of this Prospectus, to purchase up to an aggregate of an additional 750,000 shares to cover over-allotments, if any, at the public offering price set forth on the cover page hereof, less the underwriting discount. The Underwriters may exercise such option only to cover over-allotments, if any, made on the sale of the shares offered hereby. To the extent that the Underwriters exercise such option, each Underwriter will be obligated, subject to certain conditions, to purchase the number of shares proportionate to such Underwriter's initial amount reflected in the foregoing table. For information regarding the ownership by the Merrill Lynch Investors of Common Stock and the representation of affiliates of ML & Co. on the Board of Directors of the Company, see "Management" and "Principal and Selling Stockholders." The Common Stock is listed on the NYSE under the symbol "ECK." Because the Company is an affiliate of Merrill Lynch, one of the Underwriters, the Offering is being conducted in accordance with the applicable provisions of Schedule E to the By-Laws of the National Association of Securities Dealers, Inc. In accordance with Schedule E, no NASD member participating in the distribution is permitted to confirm sales to accounts over which it exercises discretionary authority without prior specific written consent. In addition, under the rules of the NYSE, Merrill Lynch is precluded from 59 issuing research reports that make recommendations with respect to the Common Stock for so long as the Company is an affiliate of Merrill Lynch. Pursuant to the Registration Rights Agreement, each 1% Holder has agreed, for a period beginning seven days before, and ending 120 days after, the effective date of the Registration Statement of which this Prospectus is a part, not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act, of Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock, subject to certain exceptions, without the prior written consent of the Representatives of the Underwriters. See "Risk Factors--Shares Eligible for Future Sale." Approximately 16.06% of the shares of Common Stock outstanding upon consummation of the Offering will be subject to such lock-up agreements. In addition, certain of the Merrill Lynch Investors that are limited partnerships will be distributing an aggregate of approximately 405,641 shares of Common Stock pursuant to the Merrill Lynch Distribution. As a condition to receiving shares of Common Stock in the Merrill Lynch Distribution, such partners have agreed to be bound by the same lock-up provision as the 1% Holders for a period of 120 days after the effective date of the Registration Statement. The Merrill Lynch Distribution is expected to occur as soon as practicable after 120 days from the effective date of the Registration Statement, or on such earlier date consented to by the Representatives of the Underwriters. In addition, each of the Company and the executive officers and directors of the Company will agree, for a period of 90 days after the effective date of the Registration Statement, not to sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, or any rights or warrants to acquire Common Stock, subject to certain exceptions, without the prior written consent of the Representatives of the Underwriters. The Company and the Selling Stockholders have agreed to indemnify the Underwriters and their controlling persons against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended, and to contribute to payments the Underwriters may be required to make in respect thereof. Merrill Lynch, an affiliate of the Merrill Lynch Investors, acted as one of the representatives of the underwriters in both the Secondary Offering and the August Offering and received underwriting commissions and related fees of approximately $809,200 and approximately $3.0 million, respectively. In addition, Merrill Lynch received fees of approximately $1.4 million in connection with the financial advisory services rendered to the Company in connection with the Insta-Care Sale. In addition to Merrill Lynch, certain of the Underwriters acted as representatives of the Underwriters in both the Secondary Offering and the August Offering and, from time to time, perform investment banking and other financial services for the Company. LEGAL MATTERS Certain legal matters with respect to the Common Stock will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom, New York, New York and Robert E. Lewis, Esq., Vice President/General Counsel of the Company. Certain legal matters will be passed upon for the Underwriters by Shearman & Sterling, New York, New York. Certain partners of Skadden, Arps, Slate, Meagher & Flom are investors in the Company. Skadden, Arps, Slate, Meagher & Flom and Shearman & Sterling occasionally act as counsel to ML & Co. and its affiliates, including the Merrill Lynch Investors, and Skadden, Arps, Slate, Meagher & Flom occasionally acts as counsel to the other Underwriters. 60 EXPERTS The consolidated financial statements and schedules of the Company and subsidiaries as of January 28, 1995 and January 29, 1994, and for the years ended January 28, 1995, January 29, 1994 and January 30, 1993, included in the Company's Annual Report on Form 10-K405 for the period ended January 28, 1995 and incorporated herein by reference, have been incorporated by reference in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, included or incorporated by reference herein, and upon the authority of that firm as experts in accounting and auditing. With respect to the unaudited interim financial information of Eckerd Corporation and subsidiaries for the thirteen week periods ended April 29, 1995 and April 30, 1994 and the thirteen and twenty-six week periods ended July 29, 1995 and July 30, 1994, incorporated by reference herein, the independent certified public accountants have reported that they applied limited procedures in accordance with professional standards for a review of such information. However, their separate reports included in the Eckerd Corporation and subsidiaries' quarterly reports on Form 10-Q for each of the quarters ended April 29, 1995 and July 29, 1995, and incorporated by reference herein, state that they did not audit and they do not express an opinion on that interim financial information. Accordingly, the degree of reliance on their reports on such information should be restricted in light of the limited nature of the review procedures applied. The accountants are not subject to the liability provisions of section 11 of the Securities Act for their report on the unaudited interim financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by the accountants within the meaning of sections 7 and 11 of the Securities Act. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information filed by the Company with the Commission, may be inspected at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and should also be available for inspection and copying at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048; and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Additionally, such reports and other information concerning the Company are available for inspection at the offices of the New York Stock Exchange located at 20 Broad Street, New York, New York 10005, on which the Common Stock and the 9 1/4% Notes are listed. This Prospectus constitutes a part of a Registration Statement on Form S-3 filed by the Company with the Commission under the Securities Act. This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement and to the exhibits relating thereto for further information with respect to the Company and the Common Stock offered hereby. Any statements contained herein concerning the provisions of any document are not necessarily complete, and, in each instance, reference is made to such copy filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. The Registration Statement and the exhibits thereto may be inspected without charge at the office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies thereof may be obtained from the Commission at prescribed rates. 61 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents filed by the Company with the Commission (File No. 1-4844) pursuant to the Exchange Act, are incorporated herein by reference and made a part hereof: 1. The Company's Annual Report on Form 10-K405 for the fiscal year ended January 28, 1995. 2. The Company's Quarterly Report on Form 10-Q for the quarter ended April 29, 1995. 3. The Company's Quarterly Report on Form 10-Q for the quarter ended July 29, 1995. 4. The Company's Current Report on Form 8-K dated November 28, 1995. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering of the shares of Common Stock offered hereby shall be deemed to be incorporated in this Prospectus by reference and to be a part hereof from the date of filing of such documents. The Company will provide without charge to each person to whom a copy of this Prospectus is delivered, on the written or oral request of any such person, a copy of any and all of the documents incorporated herein by reference (other than exhibits unless such exhibits are specifically incorporated herein by reference). Requests for such copies should be directed to the Treasurer, Eckerd Corporation, 8333 Bryan Dairy Road, Largo, Florida 34647 or by telephone at (813) 399-6000. Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. 62 - --------------------------------- --------------------------------- - --------------------------------- --------------------------------- NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE 5,000,000 SHARES CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING [ECKERD CORPORATION LOGO] BEEN AUTHORIZED BY THE COMPANY OR THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE COMMON STOCK OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY ------------------- CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS NOT BEEN ANY CHANGE PROSPECTUS IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE ------------------- COMPANY SINCE THE DATE HEREOF. ------------------- TABLE OF CONTENTS PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 8 Capitalization........................ 12 Price Range of Common Stock and Dividend Policy..................... 13 The Company........................... 14 Selected Historical Financial Data.... 17 Pro Forma Financial Data.............. 19 MERRILL LYNCH & CO. Management's Discussion and Analysis of Results of Operations and CS FIRST BOSTON Financial Condition................. 21 Business.............................. 31 MORGAN STANLEY & CO. INCORPORATED Management............................ 45 Principal and Selling Stockholders.... 49 RAYMOND JAMES & ASSOCIATES, INC. Description of Certain Indebtedness... 51 Description of Capital Stock.......... 55 Underwriting.......................... 59 Legal Matters......................... 60 Experts............................... 61 , 1995 Available Information................. 61 Incorporation of Certain Information by Reference........................ 62 - -------------------------------------------- --------------------------- - -------------------------------------------- --------------------------- APPENDIX OF OMITTED GRAPHIC MATERIAL A. Graphic Material on Page 2 of Prospectus: 1. "Eckerd" logo 2. "It's right at Eckerd." logo 3. Map of number of Eckerd Drug stores by state as listed under the caption "Business--Eckerd Drug Stores" in the Prospectus B. Photographs on Inside Back Cover Page of Prospectus: 1. Product counter inside Eckerd Drug store 2. Eckerd Drug store exterior 3. "It's right at Eckerd." logo PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses expected to be incurred in connection with the distribution of the securities being registered, other than the underwriting discounts and commissions. All of the amounts shown are estimates except for the Securities and Exchange Commission and National Association of Securities Dealers, Inc. filing fees. Securities and Exchange Commission filing fee................. $ 84,268 National Association of Securities Dealers, Inc. filing fee... 24,938 Blue sky fees and expenses (including counsel fees)........... 16,500 Costs of printing and engraving............................... 55,000 Legal fees and expenses....................................... 300,000 Accounting fees and expenses.................................. 20,000 Miscellaneous................................................. 24,294 -------- Total......................................................... $525,000 -------- -------- ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for payments of unlawful dividends or unlawful stock repurchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant's Restated Certificate of Incorporation contains such a provision. Under Article VIII of the Registrant's Restated By-Laws as currently in effect, as well as under Article SEVENTH of the Registrant's Restated Certificate of Incorporation, each person who is or was a director or officer of the Registrant, or who serves or served any other enterprise or organization at the request of the Registrant, shall be indemnified by the Registrant to the full extent permitted by the Delaware General Corporation Law. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify any person who, by reason of the fact that such person is or was a director or officer of such corporation, is made (or threatened to be made) a party to an action other than one brought by or on behalf of the corporation, against reasonable expenses (including attorneys' fees), judgments, fines and settlement payments, if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of such corporation and, in criminal actions, in addition, had no reasonable cause to believe his conduct was unlawful. In the case of actions on behalf of the corporation, indemnification may extend only to reasonable expenses (including attorneys' fees) and only if such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, provided that no such indemnification is permitted in respect of any claim as to which such person is adjudged liable to such corporation except to the extent that a court otherwise provides. To the extent that such person has been successful in defending any action (even one on behalf of the corporation), he is entitled to indemnification for reasonable expenses (including attorneys' fees). The indemnification provided for by the Delaware General Corporation Law is not exclusive of any other rights of indemnification, and a corporation may maintain insurance against liabilities for which indemnification is not expressly provided by the Delaware General Corporation Law. The Registrant II-1 has entered into agreements to indemnify its directors and officers in addition to the indemnification provided for in the Restated Certificate of Incorporation. These agreements, among other things, indemnify the Registrant's directors and officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in the right of the Registrant, on account of services as a director or officer of the Registrant or as a director or officer of any subsidiary of the Registrant, or as a director or officer of any other company or enterprise to which the person provides services at the request of the Registrant. The Registrant maintains a liability insurance policy providing coverage for its directors and officers in an amount up to an aggregate limit of $10,000,000 per policy year. The designees of the Merrill Lynch Investors who serve on the Company's board of directors also have certain rights to indemnification by ML & Co. and the Merrill Lynch Investors for liabilities incurred in connection with actions taken by them in their capacity as directors of the Company. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits: 1.1 --Form of Purchase Agreement among the Registrant, the Selling Stockholders and the Underwriters.* 3.1(i) --Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1(i) to the Registration Statement on Form S-3 of the Registrant (No. 33-50223)).* 3.1(ii) --Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2(ii) to the Registration Statement on Form S-3 of the Registrant (No. 33-50223)).* 4.1 --Form of certificate for the Registrant's Common Stock, par value $.01 per share (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-2 of the Registrant (No. 33-64906)).* 4.2 --Credit Agreement dated as of June 14, 1993, as amended and restated as of August 3, 1994 (the "Credit Agreement") among the Registrant, the financial institutions party thereto, Chemical Bank, NationsBank of Florida, N.A., as managing agents for the Lenders and as swingline lenders and Chemical Bank as administrative agent for the lenders, the swingline lenders and the fronting banks (incorporated by reference to Exhibit 10.1 of the Form 10-Q of the Registrant dated July 30, 1994 (File No. 1-4844)).* 4.3 --Indenture dated as of November 1, 1993 between the Registrant and State Street Bank and Trust Company of Connecticut, National Association, as Trustee (incorporated by reference to Exhibits 4.01 and 4.02 of the Form 8-K of the Registrant dated October 26, 1993 (File No. 1-4844)).* 4.4 --Amendment Agreement dated as of November 29, 1995 to the Credit Agreement. 5.1 --Opinion and consent of Robert E. Lewis, Esq. 15.1 --Letter of KPMG Peat Marwick LLP dated December 6, 1995 re Unaudited Interim Financial Information. 23.1 --Consent of KPMG Peat Marwick LLP dated December 6, 1995. 23.2 --Consent of Robert E. Lewis, Esq. as to the validity of the Common Stock being registered (included in Exhibit 5.1 hereto). 24.1 --Power of Attorney.*
- ------------ * Previously filed. II-2 ITEM 17. UNDERTAKINGS 1. The undersigned Registrant hereby undertakes that: (a) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (b) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 2. The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 3. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Largo, State of Florida on December 7, 1995. ECKERD CORPORATION By: /s/ SAMUEL G. WRIGHT ............................... Samuel G. Wright Executive Vice President/Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed below by the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE - ----------------------------------- ----------------------------------- ----------------- /s/ STEWART TURLEY Chairman of the Board and Chief December 7, 1995 ................................... Executive Officer Stewart Turley /s/ FRANCIS A. NEWMAN President, Chief Operating Officer December 7, 1995 ................................... and Director Francis A. Newman * Director December 7, 1995 ................................... John W. Boyle /s/ SAMUEL G. WRIGHT Executive Vice President/Chief December 7, 1995 ................................... Financial Officer Samuel G. Wright * Director December 7, 1995 ................................... James T. Doluisio * Director December 7, 1995 ................................... Donald F. Dunn * Director December 7, 1995 ................................... Albert J. Fitzgibbons, III * Director December 7, 1995 ................................... Margaret H. Jordan
II-4 * Director December 7, 1995 ................................... Lewis W. Lehr * Director December 7, 1995 ................................... Rupinder S. Sidhu * Director December 7, 1995 ................................... Alexis P. Michas
*By /s/ ROBERT E. LEWIS ............................... Robert E. Lewis Attorney-in-Fact II-5 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 1.1 --Form of Purchase Agreement among the Registrant, the Selling Stockholders and the Underwriters.* 3.1(i) --Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1(i) to the Registration Statement on Form S-3 of the Registrant (No. 33-50223)).* 3.1(ii) --Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2(ii) to the Registration Statement on Form S-3 of the Registrant (No. 33-50223)).* 4.1 --Form of certificate for the Registrant's Common Stock, par value $.01 per share (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-2 of the Registrant (No. 33-64906)).* 4.2 --Credit Agreement dated as of June 14, 1993, as amended and restated as of August 3, 1994 (the "Credit Agreement") among the Registrant, the financial institutions party thereto, Chemical Bank, NationsBank of Florida, N.A., as managing agents for the Lenders and as swingline lenders and Chemical Bank as administrative agent for the Lenders, the swingline lenders and the fronting banks (incorporated by reference to Exhibit 10.1 of the Form 10-Q of the Registrant dated July 30, 1994 (File No. 1-4844)).* 4.3 --Indenture dated as of November 1, 1993 between Registrant and State Street and Trust Company of Connecticut, National Association, as Trustee (incorporated by reference to Exhibits 4.01 and 4.02 of the Form 8-K of the Registrant dated October 26, 1993 (File No. 1-4844)).* 4.4 --Amendment Agreement dated as of November 29, 1995 to the Credit Agreement. 5.1 --Opinion and consent of Robert E. Lewis, Esq. 15.1 --Letter of KPMG Peat Marwick LLP dated December 6, 1995 re Unaudited Interim Financial Information. 23.1 --Consent of KPMG Peat Marwick LLP dated December 6, 1995. 23.2 --Consent of Robert E. Lewis, Esq. as to the validity of the Common Stock being registered (included in Exhibit 5.1 hereto). 24.1 --Power of Attorney.*
- ------------ * Previously filed. EX-4.4 2 Exhibit 4.4 Conformed Copy AMENDMENT AGREEMENT dated as of November 29, 1995, among ECKERD CORPORATION, a Delaware corporation, as borrower (the "Borrower"); the lenders listed on the signature pages hereto under the captions "Assigning Lenders" (the "Assigning Lenders"), "Continuing Lenders" (the "Continuing Lenders") and "Assignee Lenders" (the "Assignee Lenders", and, together with the Continuing Lenders, the "Lenders"); CHEMICAL BANK, a New York banking corporation ("Chemical Bank"), and NATIONSBANK OF FLORIDA, N.A., a national banking association ("NationsBank"), as managing agents for the Lenders (in such capacity, each a "Managing Agent") and as swingline lenders (in such capacity, each a "Swingline Lender"); NationsBank, as documentation agent (in such capacity, the "Documentation Agent") for the Lenders, the Swingline Lenders and the Fronting Banks; and Chemical Bank, as administrative agent and collateral agent (in such respective capacities, the "Administrative Agent" and the "Collateral Agent") for the Lenders, the Swingline Lenders and the Fronting Banks (as defined below). A. The Borrower, the Assigning Lenders, the Continuing Lenders, the Managing Agents, the Swingline Lenders and the Administrative Agent are parties to the Credit Agreement dated as of June 14, 1993, as amended and restated as of August 3, 1994, as amended (the "Credit Agreement"). B. The Assigning Lenders and certain Continuing Lenders wish to assign all or a portion of their interests in (a) the outstanding Loans and (b) the outstanding Letters of Credit and Bankers' Acceptances under the Credit Agreement to the Assignee Lenders and certain other Continuing Lenders, and the Assignee Lenders and Continuing Lenders are willing to accept such assignments. C. The Borrower has requested, and the other parties hereto have agreed, upon the terms and subject to the conditions set forth or referred to herein, that the Credit Agreement be amended and restated (the "Restatement") upon the effectiveness of the assignments referred to in paragraph B above (a) to decrease the credit facilities thereunder to an aggregate amount of $750,000,000 and (b) to give effect to certain other changes. D. Accordingly, in consideration of the mutual agreements herein contained and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. Defined Terms. Capitalized terms used and not defined herein shall have the meanings assigned to such terms in the Credit Agreement dated as of June 14, 1993, as amended and restated as of November 29, 1995, attached as Exhibit A hereto (the "Restated Credit Agreement"). SECTION 2. Restatement Closing. The transactions provided for in Sections 3, 4 and 6 hereof shall be consummated at a closing to be held on the Restatement Date (as defined in the Restated Credit Agreement) at the offices of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, N.Y., or at such other time and place as the parties shall agree. The Borrower shall give written notice proposing a date as the Restatement Date at least two Business Days prior thereto to the Administrative Agent, which shall send copies to the Assigning Lenders, Continuing Lenders and Assignee Lenders, at their addresses for notices set forth in the Credit Agreement, in the case of the Assigning Lenders, and the Restated Credit Agreement, in the case of the Lenders. The Borrower shall also provide the notice that would be required 2 pursuant to Section 2.03 of the Restated Credit Agreement if the same were then effective for Loans to be made on the Restatement Date. SECTION 3. Assignment. (a) On and as of the Restatement Date, subject to the conditions set forth in Section 7 hereof, each of the Assigning Lenders, Continuing Lenders and Assignee Lenders shall sell, assign and transfer or purchase, as the case may be, such interests in (i) the Revolving Credit Commitments (as defined in the Credit Agreement), (ii) the outstanding Revolving Loans (as defined in the Credit Agreement), (iii) the outstanding Term Loans (as defined in the Credit Agreement) and (iv) participations in the Existing Standby Letters of Credit, Existing Trade Letters of Credit, Existing Clean Bankers' Acceptances and Existing Trade Bankers' Acceptances, in each case as shall be necessary in order that, after giving effect to all such assignments and purchases, the Revolving Credit Commitments, the Revolving Loans, the Term Loans and the participations in Existing Standby Letters of Credit, Existing Trade Letters of Credit, Existing Clean Bankers' Acceptances and Existing Trade Bankers' Acceptances will be held by the Continuing Lenders and Assignee Lenders ratably in accordance with their (i) Revolving Credit Commitments (with respect to assigned and purchased Revolving Credit Commitments, Revolving Loans and participations in Existing Standby Letters of Credit, Existing Trade Letters of Credit, Existing Clean Bankers' Acceptances and Existing Trade Bankers' Acceptances) and (ii) Term Loan Commitments (with respect to assigned and purchased Term Loans), in each case as set forth in Schedule 2.01 to the Restated Credit Agreement. Each Lender purchasing interests of any type under this Section 3 shall be deemed to have purchased such interests from each Assigning Lender and Continuing Lender selling interests of such type ratably in accordance with the amounts of such interests sold by them. The assignments and purchases provided for in this Section 3 shall be without recourse, warranty or representation, except that each assigning Lender shall be deemed to have represented that it is the legal and beneficial owner of the interests assigned by it and that such interests are free and clear of any adverse claim arising by reason of any action (or failure to take action) on the part of such assigning Lender, and the purchase price for each such assignment and purchase shall equal the principal amount of the Loans purchased. Concurrently with the effectiveness of the assignments and purchases provided for above, (x) the Assigning Lenders shall cease to be parties to the Credit Agreement and shall be released from all further obligations thereunder and shall have no further rights to or interest in any of the collateral subject to the Liens created under the Security Documents (as defined in the Credit Agreement) or to be created under the Security Documents and (y) any outstanding Notes payable to a Assigning Lender shall cease to evidence such Lender's Loans and shall be deemed cancelled by agreement hereby; provided, however, that the Assigning Lenders shall continue to be entitled to the benefits of Sections 2.14, 2.16, 2.20 and 10.05 of the Credit Agreement as in effect immediately prior to the Restatement Date. (b) On the Restatement Date, (i) each Assignee Lender and each Continuing Lender that is purchasing interests in the Revolving Commitments and the outstanding Loans pursuant to paragraph (a) above shall pay the purchase price for the interests purchased by it pursuant to such paragraph (a) by wire transfer of immediately available funds to the Administrative Agent in New York, New York, not later than 12:00 noon, New York City time, and (ii) the Administrative Agent shall distribute to each Assigning Lender and each Continuing Lender that is assigning interests in outstanding Loans pursuant to paragraph (a) above, out of the amounts received by the Administrative Agent from each Assignee Lender and Continuing Lender pursuant to clause (i) of this paragraph (b), the purchase price for the interests assigned by it pursuant to such paragraph (a) by wire transfer of immediately available funds not later than 3:00 p.m., New York City time. (c) Each of the parties hereto hereby consents to the assignments and purchases provided for in paragraphs (a) and (b) above and agrees that (i) each Assignee Lender and each Continuing Lender that is purchasing interests in the Revolving Credit Commitments and the outstanding Loans pursuant to 3 paragraph (a) above are assignees of the Assigning Lenders and certain Continuing Lenders permitted under Section 10.04 of the Credit Agreement and (ii) each Assignee Lender and each Continuing Lender shall have all the rights and obligations of a Lender under the Restated Credit Agreement with respect to the interests purchased by it pursuant to such paragraphs. The Borrower further agrees that if any Lender shall default in the payment of any amount due from it under paragraph (b) above, the Borrower shall promptly pay the defaulted amount to the Administrative Agent (for distribution in accordance with paragraph (b) above) by wire transfer of immediately available funds, together with interest on such amount at the Alternate Base Rate from and including the Restatement Date to but excluding the date of payment. Upon any such payment by the Borrower and the corresponding payment by the Administrative Agent pursuant to paragraph (b) immediately above, (i) the Borrower shall be subrogated to all rights of the assigning Lender against the defaulting Lender and (ii) the Borrower shall have the right, at the defaulting Lender's expense and upon notice to the defaulting Lender and to the Administrative Agent, to transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 10.04 of the Restated Credit Agreement), on behalf of such defaulting Lender, all such defaulting Lender's interests, rights and obligations under the Restated Credit Agreement to another financial institution that shall assume such interests, rights and obligations, without any further act by such defaulting Lender being required in connection therewith, provided that (A) no such assignment shall conflict with any law, rule or regulation or order of any Governmental Authority, (B) the assignee shall pay to the defaulting Lender, in immediately available funds on the date of such assignment, the outstanding principal of and interest accrued to the date of payment on the Loans made or deemed made by such defaulting Lender under the Restated Credit Agreement, if any, and all other amounts accrued for such defaulting Lender's account or owed to it under the Restated Credit Agreement and (C) if the defaulting Lender shall not have reimbursed the Borrower for the defaulted amount paid by the Borrower pursuant to paragraph (b) above, the assignee shall pay to the Borrower, in immediately available funds on the date of such assignment, the amount of and interest accrued to but excluding the dates of payment on, such defaulted amount. SECTION 4. Amendment and Restatement of the Credit Agreement. (a) The Borrower, the Assignee Lenders, the Continuing Lenders, the Managing Agents, the Fronting Banks, the Administrative Agent, the Swingline Lenders, the Documentation Agent and the Collateral Agent agree that the Credit Agreement (including all Schedules thereto but excluding Exhibits, which remain unchanged) is hereby amended and restated, effective as of the Restatement Date, to read in its entirety as set forth in Exhibit A hereto. As used in the Restated Credit Agreement, the terms "Agreement", "this Agreement", "herein", "hereinafter", "hereto", "hereof" and words of similar import shall, unless the context otherwise requires, mean the Credit Agreement as amended and restated by this Amendment Agreement. (b) On the Restatement Date, upon the effectiveness of the Restatement, (i) each Revolving Loan outstanding under the Credit Agreement shall be deemed to be a Revolving Loan under the Restated Credit Agreement, (ii) each Swingline Loan outstanding under the Credit Agreement shall be deemed to be a Swingline Loan under the Restated Credit Agreement, (iii) each Term Loan outstanding under the Credit Agreement shall be deemed to be a Term Loan under the Restated Credit Agreement, (iv) each Existing Standby Letter of Credit shall be deemed to be a Standby Letter of Credit issued under the Restated Credit Agreement, (v) each Existing Trade Letter of Credit shall be deemed to be a Trade Letter of Credit issued under the Restated Credit Agreement, (vi) each Existing Clean Bankers' Acceptance shall be deemed to be a Clean Bankers' Acceptance issued under the Restated Credit Agreement and (vii) each Existing Trade Bankers' Acceptance shall be deemed to be a Trade Bankers' Acceptance issued under the Restated Credit Agreement, and the Revolving Credit Commitments, Term Loan Commitments and LC/BA Commitment shall be adjusted accordingly. 4 (c) On the Restatement Date, upon the effectiveness of the Restatement and subject to the terms and conditions thereof, the Assignee Lenders and the Continuing Lenders shall undertake the transactions provided for in Sections 3, 4 and 6 hereof in accordance with Section 2 hereof. (d) Schedule I hereto sets forth the principal amount and type of each Loan held by each Lender on the Restatement Date, after giving effect to the transactions contemplated by Sections 3 and 4 above. SECTION 5. Representations and Warranties. The Borrower hereby makes to each of the other parties hereto, on the date hereof and on the Restatement Date, each of the representations and warranties contained in Article IV of the Restated Credit Agreement, and each of such representations and warranties is hereby incorporated by reference herein. SECTION 6. Fees; Interest. (a) On the Restatement Date, simultaneously with the making of the assignments provided for in Section 3, the Borrower shall pay in immediately available funds (i) to the Administrative Agent, for the accounts of the Assigning Lenders and Continuing Lenders, the fees payable pursuant to subsection 2.05 of the Credit Agreement that have accrued for the period from the last date such fees were paid to but excluding the Restatement Date and (ii) for the account of the Administrative Agent and the Lenders entitled thereto, the Fees referred to in 5.02(f) of the Restated Credit Agreement. The fees described in this Section 6 shall be payable in immediately available funds. Once paid, such fees shall not be refundable under any circumstances. (b) On the Restatement Date, simultaneously with the making of the assignments provided for in Section 3, (i) the Borrower shall pay in immediately available funds to the Administrative Agent, for the accounts of the Assigning Lenders and the Continuing Lenders, all unpaid interest accrued to but excluding the Restatement Date on the Revolving Loans, the Swingline Loans and Term Loans (as defined in the Credit Agreement) of each such Lender and (ii) the Administrative Agent shall distribute to each Assigning Lender and each Continuing Lender the amounts received by the Administrative Agent from the Borrower pursuant to clause (i) of this paragraph (b) by wire transfer of immediately available funds not later than 3:00 p.m., New York City time. SECTION 7. Conditions. The obligation of each Continuing Lender and each Assignee Lender to purchase the assignments provided for in Section 3 hereof, and the obligation of each Lender to make the Loans to be made by it on the Restatement Date shall be conditioned upon the Lenders' receipt of a certificate, dated the Restatement Date and signed by a Financial Officer of the Borrower, confirming compliance with the conditions precedent set forth in Section 5.02 and in paragraphs (b) and (c) of Section 5.01 of the Restated Credit Agreement. SECTION 8. Expenses. The Borrower agrees to pay the reasonable fees, disbursements and other charges of counsel to the Managing Agents, the Administrative Agent and the Collateral Agent (including local counsel), incurred in connection with the preparation of this Amendment Agreement, the Restated Credit Agreement and the other documents contemplated hereby or thereby (whether or not the transactions hereby or thereby contemplated shall be consummated). The provisions of this Section 8 shall survive and remain operative and in full force and effect regardless of whether or not the transactions contemplated hereby are consummated. SECTION 9. Applicable Law. THIS AMENDMENT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 5 SECTION 10. No Novation. Neither this Amendment Agreement nor the execution, delivery or effectiveness of the Restated Credit Agreement shall extinguish the obligations for the payment of money outstanding under the Credit Agreement or discharge or release the Lien or priority of any security agreement, any pledge agreement or any other security therefor. Nothing herein contained shall be construed as a substitution or novation of the Obligations outstanding under the Credit Agreement or instruments securing the same, which shall remain in full force and effect, except as modified hereby or by instruments executed concurrently herewith. Nothing expressed or implied in this Amendment Agreement, the Restated Credit Agreement or any other document contemplated hereby or thereby shall be construed as a release or other discharge of the Borrower under the Credit Agreement or any Guarantor under the Guarantee Agreement or any Security Document (as such terms are defined in the Credit Agreement) from any of its obligations and liabilities thereunder. Each of the Credit Agreement and the Security Documents shall remain in full force and effect, until and except as modified hereby or in connection herewith. Notwithstanding any provision of this Amendment Agreement or the Restated Credit Agreement, the provisions of Section 10.05 of the Credit Agreement, including all defined terms used therein, will continue to be effective as to all matters arising out of or in any way related to facts or events existing or occurring prior to the Restatement Date. SECTION 11. Notices. All notices hereunder shall be given in accordance with the provisions of Section 10.01 of the Restated Credit Agreement and in the case of the Assigning Lenders to the addresses referred to in subsection 10.01 of the Credit Agreement. SECTION 12. Counterparts. This Amendment Agreement may be executed in two or more counterparts, each of which when taken together shall constitute but one contract, and shall become effective as provided in Section 14 hereof. SECTION 13. Headings. The headings of this Amendment Agreement are for convenience of reference only, are not part of this Amendment Agreement and are not to be taken into consideration in interpreting this Amendment Agreement. SECTION 14. Effectiveness; Amendment. This Amendment Agreement shall become effective when copies hereof that, when taken together, bear the signatures of each of the parties hereto shall have been received by the Administrative Agent and by the Borrower. The Restatement Date shall not occur until all the conditions precedent set forth in Section 7 have been met. This Amendment Agreement may not be amended nor may any provision hereof be waived except pursuant to a writing signed by each of the parties hereto. SECTION 15. Survival. Without limiting the provisions of Section 8 hereof, the representations and warranties in Section 5 hereof and the provisions of Section 6 hereof shall survive and remain operative and in full force and effect notwithstanding the consummation of the transactions to be consummated on the Restatement Date and the effectiveness or termination of the Restated Credit Agreement. 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment Agreement to be duly executed by their duly authorized officers, all as of the date and year first above written. ECKERD CORPORATION, by /s/ Martin W. Gladysz ------------------------------------ Name: Martin W. Gladysz Title: Vice President-Treasurer CHEMICAL BANK, individually and as Administrative Agent, Collateral Agent, Managing Agent and Swingline Lender, by /s/ Neil H. Boylan --------------------------------------- Name: Neil H. Boylan Title: Vice President NATIONSBANK OF FLORIDA, N.A., individually and as Managing Agent and Swingline Lender, by /s/ Miles C. Dearden -------------------------------------- Name: Miles C. Dearden Title: Vice President Assigning Lenders: ------------------ BANK OF IRELAND, by /s/ Roger M. Burns -------------------------------------- Name: Roger M. Burns Title: Vice President BANK OF SCOTLAND, by /s/ Elizabeth Wilson -------------------------------------- Name: Elizabeth Wilson Title: Vice President and Branch Manager 7 BANK POLSKA OPIEKI, by /s/ Hussein B. El-Tawil ------------------------------------- Name: Hussein B. El-Tawil Title: Vice President BANKERS TRUST, by /s/ Rosemary F. Dunne ------------------------------------- Name: Rosemary F. Dunne Title: Vice President FIRST AMERICAN BANK, by /s/ Russell S. Rogers ------------------------------------------ Name: Russell S. Rogers Title: Vice President GENERAL ELECTRIC CAPITAL CORPORATION, by /s/ Elaine L. Moore --------------------------------------- Name: Elaine L. Moore Title: Senior Vice President as Duly Authorized GIROCREDIT BANK, by /s/ Richard F. Stone ---------------------------------------- Name: Richard F. Stone Title: First Vice President IMPERIAL BANK by /s/ Ray Vadalma ---------------------------------------- Name: Ray Vadalma Title: Senior Vice President 8 MCI CAPITAL INC., by /s/ Tatsuya Kuroyanagi ------------------------------------- Name: Tatsuya Kuroyanagi Title: Executive Vice President NATIONAL CITY BANK, by /s/ Diego Tobon ----------------------------------------- Name: Diego Tobon Title: Vice President PEARL STREET, L.P., by /s/ John E. Urban ------------------------------------------ Name: John E. Urban Title: Authorized Signer PROSPECT STREET SENIOR PORTFOLIO, L.P., by PROSPECT STREET SENIOR LOAN CORP., as Managing General Partner, by /s/ Dana E. Erikson ------------------------------ Name: Dana E. Erikson Title: Vice President RESTRUCTURED OBLIGATIONS BACKED BY SENIOR ASSETS B.V., by its Managing Director ABN TRUSTCOMPANY (NEDERLAND) B.V., by /s/ R. G. M. Verhoef -------------------------------------- Name: R. G. M. Verhoef Title: Proxyholder by /s/ P. H. A. van Hooijdonk ---------------------------------- Name: P. H. A. van Hooijdonk Title: Proxyholder 9 SHAWMUT NATIONAL BANK OF CONNECTICUT, N.A., by /s/ Anne E. Dorsey ---------------------------------------- Name: Anne E. Dorsey Title: Director STICHTING RESTRUCTURED OBLIGATIONS BACKED BY SENIOR ASSETS 2 (ROSA 2), by its Managing Director ABN TRUSTCOMPANY (NEDERLAND) B.V., by /s/ R. G. M. Verhoef -------------------------------------- Name: R. G. M. Verhoef Title: Proxyholder by /s/ P. H. A. van Hooijdonk ---------------------------------- Name: P. H. A. van Hooijdonk Title: Proxyholder UNITED BANK OF KUWAIT, by /s/ Kam Tugnait --------------------------------------- Name: Kam Tugnait Title: Credit Administration Officer by /s/ M. Chambers --------------------------------------- Name: M. Chambers Title: Credit Administration Officer VAN KAMPEN AMERICAN CAPITAL, PRIME RATE INCOME TRUST, by /s/ Kathleen A. Zarn ------------------------------------- Name: Kathleen A Zarn Title: Vice President 10 VIA BANQUE, by ---------------------------------------- Name: Title: Continuing Lenders: ------------------- ABN AMRO BANK N.V., by /s/ David Suttles ----------------------------------------- Name: David Suttles Title: Group Vice President by /s/ Michiel van Cranenburgh --------------------------------- Name: Michiel van Cranenburgh Title: Assistant Vice President THE BANK OF TOKYO TRUST COMPANY, by /s/ Adane Dessie ---------------------------------------- Name: Adane Dessie Title: Vice President BANQUE FRANCAISE DU COMMERCE EXTERIEUR, by /s/ Iain A. Whyte -------------------------------------- Name: Iain A. Whyte Title: Assistant Vice President by /s/ Mark A. Harrington ---------------------------------- Name: Mark A. Harrington Title: Vice President & Regional Manager BANQUE PARIBAS, BANQUE PARIBAS, by by /s/ Ann C. Pifer /s/ Duane P. Helkowski -------------------------- ---------------------------------- Name: Ann C. Pifer Name: Duane P. Helkowski Title: Vice President Title: Assistant Vice Presdient 11 COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE, by /s/ Brian O'Leary --------------------------------------- Name: Brian O'Leary Title: Vice President by /s/ Marcus Edward -------------------------------------- Name: Marcus Edward Title: Vice President CREDIT LYONNAIS CAYMAN ISLAND BRANCH, by /s/ David M. Cawrse ------------------------------------- Name: David M. Cawrse Title: Authorized Signature FIRST INTERSTATE BANK OF TEXAS N.A., by /s/ Valerie B. Carlson -------------------------------------- Name: Valerie B. Carlson Title: Vice President THE FIRST NATIONAL BANK OF BOSTON, by /s/ William C. Purinton ------------------------------------ Name: William C. Purinton Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO, by /s/ Ted Wozniak -------------------------------------- Name: Ted Wozniak Title: Managing Director FLEET BANK OF MASSACHUSETTS, N.A., by /s/ Thomas J. Bullard -------------------------------------- Name: Thomas J. Bullard Title: Vice President 12 THE FUJI BANK, LIMITED, by /s/ Katsunori Nozawa ------------------------------------- Name: Katsunori Nozawa Title: Vice President & Manager HIBERNIA NATIONAL BANK, by /s/ Troy J. Villafarra ---------------------------------------- Name: Troy J. Villafarra Title: Vice President THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, NEW YORK BRANCH, by /s/ John J. Sullivan ----------------------------------------- Name: John J. Sullivan Title: Joint General Manager MELLON BANK, N.A., by /s/ Deborah K. Breslof ------------------------------------ Name: Deborah K. Breslof Title: Vice President THE MITSUBISHI BANK, LIMITED, by /s/ Frank H. Madden ----------------------------------- Name: Frank H. Madden Title: MITSUBISHI TRUST AND BANKING CORPORATION, by /s/ Patricia Loret de Mola ---------------------------------- Name: Patricia Loret de Mola Title: Senior Vice President 13 NATIONAL CANADA FINANCE CORP., by /s/ Michael S. Bloomenfeld -------------------------------- Name: Michael S. Bloomenfeld Title: Vice President NATWEST BANK N.A., by /s/ Pauline McHugh ----------------------------------- Name: Pauline McHugh Title: Vice President THE NIPPON CREDIT BANK, LTD., by /s/ Yasuhide Yahiro ------------------------------------ Name: Yasuhide Yahiro Title: Assistant Vice President THE SAKURA BANK, LIMITED, by /s/ Hiroyasu Imanishi ------------------------------------ Name: Hiroyasu Imanishi Title: V.P. & Senior Manager SOCIETE GENERALE, by /s/ Ralph Saheb ---------------------------------------- Name: Ralph Saheb Title: Vice President UNION BANK OF FINLAND LTD. GRAND CAYMAN BRANCH, by /s/ Frank Maffei ----------------------------------------- Name: Frank Maffei Title: Assistant Vice President by /s/ Andrew Carstensen ------------------------------------- Name: Andrew Carstensen Title: Vice President 14 UNION BANK OF SWITZERLAND, UNION BANK OF SWITZERLAND, NEW YORK BRANCH, NEW YORK BRANCH, by by /s/ Robert W. Casey, Jr. /s/ Laurent J. Chaix ----------------------------- ---------------------------- Name: Robert W. Casey, Jr. Name: Laurent J. Chaix Title: Vice President Title: Vice President UNITED STATES NATIONAL BANK OF OREGON, by /s/ Stephen Mitchell --------------------------------------- Name: Stephen Mitchell Title: Vice President WELLS FARGO BANK, N.A., by /s/ Peter W. Clark --------------------------------------- Name: Peter W. Clark Title: Assistant Vice President THE YASUDA TRUST & BANKING COMPANY, LIMITED, NEW YORK BRANCH, by /s/ Makoto Tagawa ------------------------------------- Name: Makoto Tagawa Title: Deputy General Manager Assignee Lenders: ----------------- THE BANK OF NEW YORK, by /s/ Paula M. DiPonzio ------------------------------------- Name: Paula M. DiPonzio Title: Vice President THE BANK OF NOVA SCOTIA, by /s/ Frank F. Sandler ---------------------------------------- Name: Frank F. Sandler Title: Relationship Manager 15 COOPERATIEVE CENTRALE RAIFFEISEN- BOERENLEENBANK B. A., "RABOBANK NEDERLAND", NEW YORK BRANCH, by /s/ Betty H. Mills ----------------------------------------- Name: Betty H. Mills Title: Vice President by /s/ Ian Reece ------------------------------------------- Name: Ian Reece Title: Vice President & Manager FIRST UNION NATIONAL BANK OF FLORIDA, by /s/ Ralph L. Kelly --------------------------------------- Name: Ralph L. Kelly Title: Vice President KREDIETBANK N.V., KREDIETBANK N.V., by by /s/ Robert Snauffer /s/ Tod R. Angus ------------------------ ---------------------------------- Name: Robert Snauffer Name: Tod R. Angus Title: Vice President Title: Vice President PNC BANK, KENTUCKY, INC., by /s/ Mark Wheeler --------------------------------------- Name: Mark Wheeler Title: Senior Vice President THE SUMITOMO BANK, LIMITED, ATLANTA AGENCY, by /s/ Hiroyuki Ueda --------------------------------------- Name: Hiroyuki Ueda Title: Joint General Manager 16 SUNTRUST BANK, TAMPA BAY, by /s/ Brigitta A. Lawton -------------------------------------- Name: Brigitta A. Lawton Title: Vice President THE TOKAI BANK, LIMITED, ATLANTA AGENCY, by /s/ Nobuo Minamikawa ---------------------------------- Name: Nobuo Minamikawa Title: Deputy General Manager ================================================================================ - -------------------------------------------------------------------------------- Exhibit A $750,000,000 CREDIT AGREEMENT Dated as of November 29, 1995, among ECKERD CORPORATION, THE LENDERS NAMED HEREIN, CHEMICAL BANK and NATIONSBANK OF FLORIDA, N.A., as Managing Agents and Swingline Lenders, CHEMICAL BANK, as Administrative Agent, and NATIONSBANK OF FLORIDA, N.A., as Documentation Agent. ================================================================================ - -------------------------------------------------------------------------------- TABLE OF CONTENTS ARTICLE I Page ---- Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.01. Defined Terms . . . . . . . . . . 1 SECTION 1.02. Terms Generally . . . . . . . . . . 22 ARTICLE II The Credits . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 2.01 Commitments . . . . . . . . . . . . 22 SECTION 2.02. Loans . . . . . . . . . . . . . . . 22 SECTION 2.03. Notice of Borrowings . . . . . . . 25 SECTION 2.04. Notes; Repayment of Loans . . . . . 25 SECTION 2.05. Fees . . . . . . . . . . . . . . . 25 SECTION 2.06. Interest on Loans . . . . . . . . . 26 SECTION 2.07. Default Interest . . . . . . . . . 27 SECTION 2.08. Alternate Rate of Interest . . . . 27 SECTION 2.09. Termination, Reduction and Extension of Commitments . . . . 27 SECTION 2.10. Conversion and Continuation of Term Borrowings . . . . . . . . . 28 SECTION 2.11. Repayment of Term Borrowings . . . 29 SECTION 2.12. Optional Prepayments . . . . . . . 30 SECTION 2.13. Mandatory Prepayments . . . . . . . 30 SECTION 2.14. Reserve Requirements; Change in Circumstances; Increased Costs . 32 SECTION 2.15. Change in Legality . . . . . . . . 34 SECTION 2.16. Indemnity . . . . . . . . . . . . . 34 SECTION 2.17. Pro Rata Treatment . . . . . . . . 35 SECTION 2.18. Sharing of Setoffs . . . . . . . . 36 SECTION 2.19. Payments . . . . . . . . . . . . . 36 SECTION 2.20. Taxes . . . . . . . . . . . . . . . 37 SECTION 2.21. Assignment of Commitments under Certain Circumstances . . . . . . 40 SECTION 2.22. Swingline Loans . . . . . . . . . . 40 ARTICLE III LETTERS OF CREDIT; BANKERS' ACCEPTANCES . . . . . . . . . . 41 SECTION 3.01 Issuance of Letters of Credit . . . 41 SECTION 3.02 Origination of Bankers' Acceptances . . . . . . . . . . . 42 SECTION 3.03. Participations; Unconditional Obligations . . . . . . . . . . . 44 SECTION 3.04. LC/BA Fee . . . . . . . . . . . . . 44 SECTION 3.05. Agreement To Repay LC Disbursements and BA Disbursements . . . . . . 45 SECTION 3.06. Letter of Credit Operations . . . . 46 SECTION 3.07. Cash Collaterization . . . . . . . 46 SECTION 3.08. Termination of LC/BA Commitment . . 47 SECTION 3.09. Fronting Bank Fees . . . . . . . . 47 SECTION 3.10. Resignation or Removal of a Fronting Bank . . . . . . . . . . 47 ARTICLE IV REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . 48 SECTION 4.01 Organization; Powers . . . . . . . 48 SECTION 4.02. Authorization . . . . . . . . . . . 48 SECTION 4.03. Enforceability . . . . . . . . . . 48 SECTION 4.04. Governmental Approvals . . . . . . 49 SECTION 4.05. Financial Statements . . . . . . . 49 SECTION 4.06. No Material Adverse Change . . . . 49 SECTION 4.07. Title to Properties; Possession Under Leases . . . . . . . . . . 49 SECTION 4.08. Subsidiaries . . . . . . . . . . . 49 SECTION 4.09. Litigation; Compliance with Laws . 49 SECTION 4.10. Agreements . . . . . . . . . . . . 50 SECTION 4.11. Federal Reserve Regulations . . . . 50 SECTION 4.12. Investment Company Act; Public Utility Holding Company Act . . . 50 SECTION 4.13. Use of Proceeds . . . . . . . . . . 50 SECTION 4.14. Tax Returns . . . . . . . . . . . . 50 SECTION 4.15. No Material Misstatements . . . . . 50 SECTION 4.16. Employee Benefit Plans . . . . . . 51 SECTION 4.17. Environmental and Safety Matters . 51 SECTION 4.18. Solvency . . . . . . . . . . . . . 51 SECTION 4.19. Labor Agreements . . . . . . . . . 52 SECTION 4.20. Security Documents . . . . . . . . 52 SECTION 4.21. Labor Matters . . . . . . . . . . . 53 SECTION 4.22. Location of Real Property; Location of Leased Premises . . . . . . . 53 ARTICLE V CONDITIONS OF LENDING AND ISSUANCE OF LETTERS OF CREDIT . . 53 SECTION 5.01. All Credit Events . . . . . . . . . 53 SECTION 5.02. First Borrowing . . . . . . . . . . 54 ARTICLE VI AFFIRMATIVE COVENANTS . . . . . . 57 3 Page ---- SECTION 6.01. Existence; Businesses and Properties . . . . . . . . . . . 57 SECTION 6.02. Insurance . . . . . . . . . . . . . 57 SECTION 6.03. Obligations and Taxes . . . . . . . 58 SECTION 6.04. Financial Statements, Reports, etc. 58 SECTION 6.05. Litigation and each Other Notices . 60 SECTION 6.06. ERISA . . . . . . . . . . . . . . . 60 SECTION 6.07. Maintaining Records; Access to Properties and Inspections . . . 61 SECTION 6.08. Use of Proceeds . . . . . . . . . . 61 SECTION 6.09. Fiscal Year . . . . . . . . . . . . 61 SECTION 6.10. Further Assurances . . . . . . . . 61 SECTION 6.11. Material Contracts . . . . . . . . 62 SECTION 6.12. Compliance with Law . . . . . . . 62 ARTICLE VII NEGATVIE COVENANTS . . . . . . . . . . . . . . . . . . . . . 64 SECTION 7.01. Indebtedness . . . . . . . . . . . 63 SECTION 7.02. Liens . . . . . . . . . . . . . . . 64 SECTION 7.03. Sale and Leaseback Transactions . . 66 SECTION 7.04. Investments, Loans and Advances . . 66 SECTION 7.05. Mergers, Consolidations, Sales of Assets and Acquisitions . . . . . 67 SECTION 7.06. Dividends and Distributions . . . . 68 SECTION 7.07. Transactions with Affiliates . . . 69 SECTION 7.08. Business of Borrower and Subsidiaries . . . . . . . . . . 69 SECTION 7.09. Limitations on Debt Prepayments . . 69 SECTION 7.10. Amendment of Certain Documents . . 70 SECTION 7.11. Funded Debt to EBITDA . . . . . . . 71 SECTION 7.12. Interest Coverage Ratio . . . . . . 71 SECTION 7.13. Fixed Charge Coverage Ratio . . . . 73 SECTION 7.14. Bank Accounts . . . . . . . . . . . 73 ARTICLE VIII EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . 72 ARTICLE IX THE ADMINISTRATIVE AGENT, THE MANAGING AGENTS AND THE FRONTING BANKS . . . . . . . . . . . . . . . . . . . . . 75 ARTICLE X MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . 77 4 Page ---- SECTION 10.01. Notices . . . . . . . . . . . . . 77 SECTION 10.02. Survival of Agreement . . . . . . . 78 SECTION 10.03. Binding Effect . . . . . . . . . . 79 SECTION 10.04. Successors and Assigns . . . . . . 79 SECTION 10.05. Expenses; Indemnity. . . . . . . . 82 SECTION 10.06. Right of Setoff . . . . . . . . . . 83 SECTION 10.07. Applicable Law . . . . . . . . . . 83 SECTION 10.08. Waivers; Amendment . . . . . . . . 83 SECTION 10.09. Interest Rate Limitation . . . . . 84 SECTION 10.10. Entire Agreement . . . . . . . . . 84 SECTION 10.11. Waiver of Jury Trial . . . . . . . 85 SECTION 10.12. Severability . . . . . . . . . . . 85 SECTION 10.13. Counterparts . . . . . . . . . . . 85 SECTION 10.14. Headings . . . . . . . . . . . . . 85 SECTION 10.15. Confidentiality . . . . . . . . . . 85 SECTION 10.16. Jurisdiction; Consent to Service of Process . . . . . . . . . . . 86 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 86 EXHIBITS - -------- Exhibit A-1 Form of Revolving Credit Note Exhibit A-2 Form of Tranche A Term Note Exhibit A-3 Form of Tranche B Term Note Exhibit A-4 Form of Swingline Note Exhibit B Form of Assignment and Acceptance Exhibit C Administrative Questionnaire Exhibit D Form of Borrowing Base Certificate Exhibit E Form of Guarantee Agreement Exhibit F Form of Indemnity, Subrogation and Contribution Agreement Exhibit G Form of Pledge Agreement Exhibit H Form of Security Agreement Exhibit I Form of Mortgage Exhibit J Form of Trademark Security Agreement Exhibit K Form of Bankers' Acceptance Request Exhibit L Form of Revolving Credit Extension Notice Exhibit M-1 Form of Opinion of Robert Lewis, Esq. Exhibit M-2 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom Exhibit M-3 Form of Opinion of Local Counsel SCHEDULES - --------- Schedule 1.01(a) Existing Letters of Credit and Bankers' Acceptances Schedule 1.01(b) Mortgaged Properties Schedule 1.01(c) Photolab Business Sale Locations Schedule 2.01 Commitments and Lender Addresses 5 Page ---- Schedule 2.06(c) ABR Spread Schedule 2.06(d) LIBOR Spread Schedule 4.08 Subsidiaries Schedule 4.09 Litigation Schedule 4.17 Environmental Matters Schedule 4.19 Labor Agreements Schedule 4.20(b) UCC Filing Offices Schedule 4.20(c) Mortgage Filing Offices Schedule 4.20(d) Trademark Filing Offices Schedule 4.20(e) Location of Bank Accounts Schedule 4.22(a) Owned Real Property Schedule 4.22(b) Leased Real Property Schedule 6.10(c) Local Counsel Listing Schedule 7.01 Indebtedness Schedule 7.02(a) Liens on Property Schedule 7.02(n) Subleased Properties Schedule 7.04 Investments Schedule 7.07 Permitted Affiliate Transactions EXECUTION COPY CREDIT AGREEMENT dated as of June 14, 1993, as amended and restated as of November 29, 1995, among ECKERD CORPORATION, a Delaware corporation, as borrower (the "Borrower"); the financial institutions party hereto (the "Lenders"); CHEMICAL BANK, a New York banking corporation ("Chemical Bank"), and NATIONSBANK OF FLORIDA, N.A., a national banking association ("NationsBank"), as managing agents for the Lenders (in such capacity, each a "Managing Agent") and as swingline lenders (in such capacity, each a "Swingline Lender"); Chemical Bank, as administrative agent (in such capacity, the "Administrative Agent") for the Lenders, the Swingline Lenders and the Fronting Banks (as defined below); and NationsBank, as documentation agent (the "Documentation Agent") for the Lenders, the Swingline Lenders and the Fronting Banks. The Borrower has requested (a) the Lenders and the Swingline Lenders to extend credit in order to enable the Borrower, on the terms and subject to the conditions of this Agreement, to borrow (i) on a term basis, Term Loans (such term and each other capitalized term used herein but not defined herein having the meanings given to such terms in Article I) in an aggregate principal amount not to exceed $250,000,000, (ii) on a revolving basis, at any time and from time to time prior to the Revolving Credit Maturity Date, an aggregate principal amount at any time outstanding not in excess of the excess of (A) $500,000,000 over (B) the sum of (I) the aggregate principal amount of the Swingline Loans outstanding at such time and (II) the LC/BA Exposure at such time and (iii) on a revolving basis, at any time and from time to time prior to the Revolving Credit Maturity Date, Swingline Loans in an aggregate principal amount at any time outstanding not to exceed $30,000,000 and (b) on the terms and subject to the conditions of this Agreement, the Fronting Banks to issue Letters of Credit and originate Bankers' Acceptances in an aggregate face amount at any time outstanding not in excess of $155,000,000. On the Restatement Date, (a) (i) Term Borrowings and (ii) Revolving Credit Borrowings not in excess of $[ ] shall be used solely to continue or convert all outstanding term loans and (b) the proceeds of any additional Revolving Credit Borrowings shall be used solely to continue or convert all outstanding revolving loans. The proceeds of Revolving Credit Borrowings following the Restatement Date will be used for the general corporate purposes of the Borrower and the Subsidiaries. The proceeds of the Swingline Loans will also be used for the general corporate purposes of the Borrower and the Subsidiaries. Letters of Credit and Bankers' Acceptances will be used to support obligations of the Borrower and the Subsidiaries incurred in the ordinary course of business of the Borrower and the Subsidiaries. Accordingly, the Borrower, the Lenders, the Managing Agents, the Administrative Agent, the Primary Fronting Bank, the Documentation Agent and the Swingline Lenders agree as follows: ARTICLE I Definitions SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans. 2 "ABR Loan" shall mean any ABR Term Loan or ABR Revolving Loan. "ABR Revolving Loan" shall mean any Revolving Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "ABR Term Loan" shall mean any Term Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Acquired Entity" shall mean, with respect to any Acquisition, (a) the Person to be purchased or otherwise acquired in such Acquisition or (b) the assets to be purchased, leased or otherwise acquired in such Acquisition, as applicable. "Acquisition" shall mean (a) any purchase or other acquisition, in one transaction or a series of related transactions, of all the common stock of any Person or (b) any purchase, lease or other acquisition, in one transaction or a series of related transactions, of all or part of the assets of any Person; provided, however, that the term "Acquisition" shall not include the purchase or acquisition of, or any expenditure towards the purchase or acquisition of, (i) inventory acquired in the ordinary course of business for resale to customers or (ii) (A) prescription files so long as the aggregate amount expended in any fiscal year to acquire prescription files does not exceed $5,000,000, (B) inventory acquired for resale to customers or (C) Capital Expenditures unless, in the case of clause (ii), such purchase, acquisition or expenditure is made in connection with the acquisition of (x) all the common stock of any on-going business, (y) all or substantially all the assets of any on-going business or (z) all or substantially all the assets of one or more drugstores. "Acquisition-Related Sale" shall mean the sale, transfer or other disposition by the Borrower or any of its Subsidiaries, not in the ordinary course of business, of inventory, equipment, vehicles or other assets or properties (a) acquired in an Acquisition consummated not earlier than six months prior to such sale, transfer or other disposition and (b) the reason for the liquidation of which is that such assets are not reasonably necessary for, or related to, the business conducted by the Borrower. "Adjusted LIBO Rate" shall mean, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the product of (a) the LIBO Rate in effect for such Interest Period and (b) Statutory Reserves. For purposes hereof, the term "LIBO Rate" shall mean the average of the respective rates per annum at which dollar deposits approximately equal in principal amount to each Reference Lender's portion of such Eur- odollar Borrowing and for a maturity comparable to such Interest Period are offered to the principal London office of such Reference Lender in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Administrative Fees" shall have the meaning assigned to such term in Section 2.05(b). "Administrative Questionnaire" shall mean an Administrative Questionnaire in the form of Exhibit C. "Affiliate" shall mean, when used with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified. 3 "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof, the term "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as being effective. The term "Base CD Rate" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) Statutory Reserves and (b) the Assessment Rate. The term "Three-Month Secondary CD Rate" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day) or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "Applicable Percentage" of any Participating Lender shall mean the percentage of the aggregate Revolving Credit Commitments represented by such Participating Lender's Revolving Credit Commitment. "Applicable Rate Percentage" shall mean on any date, with respect to the Commitment Fee or LIBOR Spread, as the case may be, the lowest applicable percentage set forth in the table below based upon the Interest Coverage Ratio for the four-fiscal-quarter period ending on the last day of the immediately preceding fiscal quarter for which the certificate referred to in the next succeeding paragraph has been received by the Administrative Agent, as set forth in the following table; provided, however, that the Applicable Rate Percentages in respect of the Commitment Fee and the LIBOR Spread for the period from and including the Restatement Date to but excluding the date of receipt by the Lenders of the Borrower's financial statements for the fiscal quarter ending November 2, 1996, shall not be less than the Applicable Rate Percentages specified for Level II in the table below: 4 COMMITMENT FEE/LIBOR SPREAD (Basis Points Per Annum) Interest Coverage Ratio Commitment Fee LIBOR Spread ----------------------- -------------- ------------ - -------------------------------------------------------------------------------- Level I ------- Less than 3.50:1 31.25 75.00 - -------------------------------------------------------------------------------- Level II -------- Less than 4.50:1 but greater than or equal to 3.50:1 25.00 62.50 - -------------------------------------------------------------------------------- Level III --------- Greater than or equal to 4.50:1 18.75 50.00 ================================================================================ For purposes of the foregoing, (a) any change in the Applicable Rate Percentages based on the Interest Coverage Ratio shall be effective for all purposes on and after the date of receipt by the Administrative Agent of the certificate described in Section 6.04(c) for the most recently ended fiscal quarter and (b) notwithstanding the foregoing provision of clause (a), no reduction in the above Applicable Rate Percentages shall be effective if any Event of Default or Default shall exist and be continuing. Any change in the LIBOR Spread due to a change in the applicable Level shall apply to all Eurodollar Loans made on or after the commencement of the period commencing on the effective date of such change in applicable Level and ending on the date immediately preceding the effective date of the next such change in applicable Level. Notwithstanding the foregoing, (a) at any time during which the Borrower has failed to deliver the certificate described in Section 6.04(c) in accordance with the provisions thereof, (i) the LIBOR Spread shall be deemed to be that of Level I with respect to Eurodollar Loans made on and after the date on which the failure to deliver such certificate occurred until such date as the Administrative Agent shall receive such certificate in accordance with the provisions of Section 6.04(c), which change in the LIBOR Spread shall become effective with respect to Eurodollar Loans made on and after the date on which such certificate was received, and (ii) the Commitment Fee shall be deemed to be that of Level I until such time as the Administrative Agent shall receive such certificate in accordance with the provisions of Section 6.04(c) and (b) if at any time from and after the date of receipt by the Administrative Agent of the certificate described in Section 6.04(c) for the fiscal quarter ended November 2, 1996, (i) no Default or Event of Default has occurred and is continuing, (ii) the Interest Coverage Ratio is greater than or equal to 4.50:1 and (iii) the Facilities are rated both (A) Baa3 or better in the case of Moody's and (B) BBB- or better in the case of S&P, the LIBOR Spread shall be 37.50 basis points per annum. "Assessment Rate" shall mean for any date the annual rate (rounded upwards, if necessary, to the next 1/100 of 1%) most recently estimated by the Administrative Agent as the then-current net annual assessment rate that will be employed in determining amounts payable by the Administrative Agent to the Federal Deposit Insurance Corporation (or any successor) for insurance by such Corporation (or such successor) of time deposits made in dollars at the Administrative Agent's domestic offices. 5 "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Administrative Agent, in the form of Exhibit B or such other form as shall be approved by the Administrative Agent. "BA Disbursement" shall mean, with respect to any Bankers' Acceptance, any payment of the face amount of such Bankers' Acceptance made by the Primary Fronting Bank to the holder thereof upon the maturity thereof. "BA Discount Rate" shall mean, with respect to any Bankers' Acceptance, the current quoted discount rate for bankers' acceptances of the Primary Fronting Bank on the date of the origination of such Bankers' Acceptance for bankers' acceptances in an amount substantially equal to the face amount of such Bankers' Acceptance and having the same maturity as such Bankers' Acceptance. "BA Documents" shall mean, with respect to any Bankers' Acceptance, such documents and agreements as the Primary Fronting Bank may reasonably require in connection with the creation of such Bankers' Acceptance. "BA Exposure" shall mean, at any time, the sum of (a) the maximum aggregate amount that is, or at any time thereafter may become, payable by the Primary Fronting Bank under all Bankers' Acceptances then outstanding and (b) the aggregate amount of BA Disbursements for which the Primary Fronting Bank or the Lenders, as the case may be, have not been reimbursed by the Borrower at such time. "Bankers' Acceptance" shall mean a bill of exchange or draft denominated in dollars (a) drawn (i) in the case of a Clean Bankers' Acceptance, by the Borrower, (ii) in the case of a Trade Banker's Acceptance, in the name of the beneficiary of the related Trade Letter of Credit and (iii) in each case, in the ordinary course of the Borrower's business and accepted by the Primary Fronting Bank on the Primary Fronting Bank's form of draft in effect from time to time, (b) in the case of a Clean Bankers' Acceptance, for a face amount of $1,000,000 or any integral multiple of $250,000 in excess thereof and (c) for a term (i) in the case of a Clean Bankers' Acceptance, of not less than 30 days or more than 120 days and (ii) in the case of a Trade Bankers' Acceptance, of not less than 20 or more than 120 days. "Bankers' Acceptance Request" shall mean a request made pursuant to Section 3.02 in the form of Exhibit K. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. "Borrowing" shall mean a group of Loans of a single Type made by the Lenders on a single date and as to which a single Interest Period is in effect. "Business Day" shall mean any day (other than a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in New York City; provided, however, that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Expenditures" shall mean, for any period, the sum of all amounts that would, in accordance with GAAP, be included as additions to property, plant and equipment and other capital expenditures on a con- solidated statement of cash flows for the Borrower and the Subsidiaries during such period (including the amount of assets leased under any Capital Lease Obligation). Notwithstanding the foregoing, the term "Capital Expenditures" shall not include capital expenditures in respect of the reinvestment 6 of insurance proceeds and condemnation proceeds received by the Borrower or any Subsidiary in connection with the disposition of the Borrower's or such Subsidiary's assets or properties in the nature of a casualty or condemnation, if (as contemplated in the definition of the term "Prepayment Event") such reinvestment (including, in the case of insurance proceeds, reinvestment in the form of restoration or replacement of damaged property) shall have resulted in the event giving rise to the receipt of such amounts not being considered a "Prepayment Event" as contemplated in the definition of such term. "Capital Lease Obligations" of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. A "Change in Control" shall be deemed to have occurred if (a) any Person or group (within the meaning of Rule 13d-5 of the Securities and Exchange Commission as in effect on the date hereof) other than Merrill Lynch Capital Partners, Inc., a Delaware corporation, and its Affiliates shall own directly or indirectly, beneficially or of record, shares representing more than 30% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; (b) a change in the membership of the board of directors of the Borrower shall occur at any time during any twelve-month period such that, following such change, at least 30% of the members of the board of directors were not members of the board of directors at the beginning of such twelve-month period (but only if the election of such new members of the board of directors was not approved by a majority of the directors who were either sitting at the beginning of such twelve-month period or elected to the board of directors during such twelve-month period with the approval of a majority of the directors who were sitting at the beginning of such twelve- month period); or (c) any Person or group other than Merrill Lynch Capital Partners, Inc. and its Affiliates shall otherwise directly or indirectly Control the Borrower. "Change in Liquidity From Receivables Programs" shall mean, for any period, the net change from the first day of such period to the last day of such period in accounts receivable of the Borrower resulting from the sale of such accounts receivable by the Borrower and receipt by the Borrower of the cash proceeds of such sale pursuant to Permitted Receivables Purchase Agreements, calculated in accordance with GAAP applied on a basis consistent with the Borrower's audited consolidated financial statements for the fiscal year ended January 28, 1995. "Clean Bankers' Acceptance" shall mean (a) each Bankers' Acceptance that is not a Trade Bankers' Acceptance and (b) each Existing Clean Bankers' Acceptance; each Clean Bankers' Acceptance (other than an Existing Clean Bankers' Acceptance) shall be originated by the Primary Fronting Bank in accordance with Section 3.02(c). "Code" shall mean the Internal Revenue Code of 1986, or any successor statute thereto, as the same may be amended from time to time. "Collateral" shall mean all the "Collateral" as defined in any Security Document and shall also include the Lockbox Collateral and the Mortgaged Properties. "Collateral Agent" shall mean Chemical Bank, as Collateral Agent under the Security Documents, the Guarantee Agreement and the Indemnity, Subrogation and Contribution Agreement. 7 "Commitment" shall mean, with respect to each Lender, such Lender's Term Loan Commitment and Revolving Credit Commitment. "Commitment Fee" shall have the meaning assigned to such term in Section 2.05(a). "Common Stock" shall mean the Voting Common Stock and the Non-Voting Common Stock. "Confidential Information Memorandum" shall mean the Confidential Information Memorandum of the Borrower dated October 1995. "Consideration" shall mean, with respect to any Acquisition, the aggregate consideration to be paid by the Borrower or any Subsidiary in connection with such Acquisition, including (a) any Indebtedness assumed or incurred by the Borrower or any Subsidiary in connection with such Acquisition and (b) any shares of the Borrower's capital stock or other equity securities, or any obligations convertible into or exchangeable for (or giving any Person a right, option or warrant to acquire) such securities or such convertible or exchangeable obligations, in each case issued by the Borrower in connection with such Acquisition. "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms "Controlling" and "Controlled" shall have meanings correlative thereto. "Credit Event" shall have the meaning assigned to such term in Article V. "Default" shall mean any event or condition that upon notice, lapse of time or both would constitute an Event of Default. "Default Rate" shall have the meaning assigned to such term in Section 2.07. "dollars" or "$" shall mean lawful money of the United States. "EBITDA" with respect to any Person for any period shall mean (a) the sum of (i) Net Income of such Person for such period, (ii) all Federal, state, local and foreign taxes deducted in determining such Net Income, (iii) interest expense deducted in determining such Net Income and (iv) depreciation, amortization and other noncash charges deducted in determining such Net Income, less (b) any noncash income included in determining such Net Income. "Equipment Agency Arrangements" shall mean arrangements between the Borrower and one or more equipment lessors (the "Equipment Lessors") pursuant to which (a) the Borrower, acting as the Equipment Lessor's agent or otherwise, orders and/or pays for equipment to be used in the Borrower's business, (b) the Equipment Lessor reimburses the Borrower for any such payment and (c) the Equipment Lessor leases such equipment to the Borrower. "Equipment Lessor" shall have the meaning assigned to such term in the definition of the term "Equipment Agency Arrangements". 8 "Equity Issuance" shall mean any issuance or sale by the Borrower of any shares of its capital stock or other equity securities, or any obligations convertible into or exchangeable for (or giving any Person a right, option or warrant to acquire) such securities or such convertible or exchangeable obligations, other than (a) sales or issuances of Common Stock to management or key employees of the Borrower or any of its Subsidiaries under any employee stock option or stock purchase plan or any employee or executive bonus plan in existence from time to time, not to exceed in the aggregate $10,000,000 in any fiscal year or (b) issuances or sales of any securities by any Subsidiary to a Subsidiary that is a Guarantor or to the Borrower or by the Borrower to any Subsidiary that is a Guarantor. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, or any successor statute, as the same may be amended from time to time. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that is a member of a group of which the Borrower is a member and which is treated as a single employer under Section 414 of the Code. "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar Loans. "Eurodollar Loan" shall mean any Eurodollar Term Loan or Eurodollar Revolving Loan. "Eurodollar Revolving Loan" shall mean any Revolving Loan bearing interest at a rate determined by reference to the Adjusted LIBO Rate in accordance with the provisions of Article II. "Eurodollar Term Loan" shall mean any Term Loan bearing interest at a rate determined by reference to the Adjusted LIBO Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning assigned to such term in Article VIII. "Existing Clean Bankers' Acceptance" shall mean each bill of exchange or draft denominated in dollars that (a) was drawn by the Borrower in the ordinary course of the Borrower's business, (b) was accepted by NationsBank, (c) is outstanding on the Restatement Date and (d) is listed in part I of Schedule 1.01(a). "Existing Standby Letter of Credit" shall mean each standby letter of credit that (a) was issued by NationsBank for the account of the Borrower, (b) is outstanding on the Restatement Date and (c) is listed in part II of Schedule 1.01(a). "Existing Trade Bankers' Acceptance" shall mean each bill of exchange or draft denominated in dollars that (a) was drawn by the beneficiary of a related commercial documentary letter of credit in the ordinary course of the Borrower's business, (b) was accepted by NationsBank, (c) is outstanding on the Restatement Date and (d) is listed in part III of Schedule 1.01(a). "Existing Trade Letter of Credit" shall mean each commercial documentary letter of credit that (a) was issued by NationsBank for the account of the Borrower, (b) is outstanding on the Restatement Date and (c) is listed in part IV of Schedule 1.01(a). "Facilities" shall mean, collectively, the Term Facility and the Revolving Facility. 9 "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fees" shall mean the Administrative Fees, the Commitment Fees, the LC/BA Fees, the fees specified in Section 2.05(c) and the fees specified in Section 3.09. "Financial Officer" of any corporation shall mean the chief financial officer, principal accounting officer, Treasurer or Controller of such corporation. "Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of (a) EBITDA of the Borrower and the Subsidiaries, determined on a consolidated basis in accordance with GAAP, for such period plus Lease Expense (but only to the extent of the amount of such Lease Expense that was deducted in calculating such EBITDA) for such period less Capital Expenditures for such period to (b) the sum of (i) Interest Expense for such period, (ii) cash income taxes paid by the Borrower and the Subsidiaries on a consolidated basis during such period, (iii) Lease Expense for such period, (iv) the Term Loan Repayment Amounts scheduled to be paid during such period and (v) scheduled payments during such period of the principal of permitted Indebtedness of the Borrower and the Subsidiaries other than the Loans. "Fronting Banks" shall mean (a) with respect to Letters of Credit (other than IRB Letters of Credit) and Bankers' Acceptances, the Primary Fronting Bank, and (b) with respect to IRB Letters of Credit, the IRB Fronting Bank. "Funded Debt" shall mean all Indebtedness of the Borrower and the Subsidiaries, determined on a consolidated basis in accordance with GAAP, excluding Indebtedness described in clause (i) of the definition of such term. "Funded Debt to EBITDA Ratio" shall mean, with respect to any fiscal period, the ratio of (a) Funded Debt on the last day of such period to (b) EBITDA of the Borrower and the Subsidiaries, determined on a consolidated basis in accordance with GAAP, for such period. "Funding I Lease" shall mean (a) the sale and master operating leaseback of 72 store premises pursuant to the Lease Agreement dated as of January 15, 1987, as amended to the date hereof, among JEC Funding, Inc., as lessor, and the Borrower as lessee, and (b) the documents related thereto. "Funding II Lease" shall mean (a) the capital lease of store premises pursuant to the Lease Agreement dated as of March 31, 1989, among JEC Facilities Funding II, Inc., as lessor, and the Borrower, as lessee, and (b) the documents related thereto. "GAAP" shall mean generally accepted accounting principles in the United States. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Guarantee" of or by any Person shall mean any obligation, contingent or otherwise (whether or not denominated as a guarantee), of such person guaranteeing any Indebtedness of any other person (the 10 "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit, in either case in the ordinary course of business. "Guarantee Agreement" shall mean the Guarantee Agreement dated as of June 14, 1993, as amended and restated as of August 3, 1994, and as such agreement may be further amended or modified from time to time, among the Guarantors and the Collateral Agent. "Guarantor" shall mean each Subsidiary that shall be one of the initial parties to the Guarantee Agreement and any other Person that shall become a Guarantor pursuant to Section 6.10 or clause (q) of Article VIII. "Hammond Sale" shall mean the sale, assignment, transfer or other disposition, in whatever form, by the Borrower or any of its Subsidiaries, of their interest in the distribution facility located in Hammond, Louisiana, and the associated repayment or redemption of the industrial revenue bonds used to finance the construction of such facility. "IFS Sale and Leaseback" shall mean the sale and leaseback transaction consummated by the Borrower on June 15, 1993, whereby the Borrower sold certain photographic processing equipment to Imaging Financial Services, Inc., a Delaware corporation, and entered into a lease in respect of such equipment. "Inactive Subsidiary" shall mean any subsidiary of the Borrower that (a) has assets with a total market value not in excess of $1,000 and (b) has not conducted any business or other operations during the prior 12- month period. "Indebtedness" of any Person shall mean, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind other than deposits or advances in the ordinary course of business, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to assets purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services (excluding trade accounts payable and accrued expenses arising in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed by such Person, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations of such Person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements and (j) all obligations of such Person as an account party to reimburse any bank or any other Person in respect of letters of credit or bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any partnership in which such Person is a general partner. 11 "Indemnity, Subrogation and Contribution Agreement" shall mean the Indemnity, Subrogation and Contribution Agreement dated as of June 14, 1993, as amended and restated as of August 3, 1994, and as such agreement may be further amended or modified from time to time, among the Guarantors and the Collateral Agent. "Institutional Investors" shall mean the Institutional Investors that purchased class A stock and cumulative redeemable preferred stock pursuant to the Investor Stock Subscription Agreements. "Interest Coverage Ratio" shall mean, for any period, the ratio of (a) EBITDA of the Borrower and the Subsidiaries, determined on a consolidated basis in accordance with GAAP, for such period to (b) Interest Expense for such period. "Interest Expense" shall mean, for any period, the gross interest expense of the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, excluding any fees and expenses payable or amortized during such period by the Borrower in connec- tion with the Transactions. For purposes of the foregoing, gross interest expense shall be determined after giving effect to any net payments made or received by the Borrower with respect to Rate Protection Agreements. "Interest Payment Date" shall mean (a) with respect to any Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part, (b) with respect to any Swingline Loan, the last day of the Interest Period applicable to such Swingline Loan and (c) with respect to any Eurodollar Borrowing with an Interest Period of more than three months' duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months' duration been applicable to such Borrowing and, in addition, the date of any refinancing or conversion of such Borrowing with or to a Borrowing of a different Type, provided that upon any conversion of an ABR Borrowing to a Eurodollar Borrowing on a day other than the last day of the Interest Period with respect to such ABR Borrowing, the Interest Payment Date for such ABR Borrowing shall be the last day of such Interest Period. "Interest Period" shall mean (a) as to any Eurodollar Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the Borrower may elect, (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the earliest of (i) the next succeeding March 31, June 30, September 30 or December 31, (ii) the Revolving Credit Maturity Date or the Term Loan Maturity Date, as applicable, and (iii) the date such Borrowing is converted to a Borrowing of a different Type in accordance with Section 2.10 or repaid or prepaid in accordance with Section 2.11, 2.12 or 2.13, and (c) as to any Swingline Loan, the period commencing on the date such Swingline Loan is made or on the last day of the immediately preceding Interest Period applicable to such Swingline Loan, as the case may be, and ending on the earliest of (i) the next succeeding March 31, June 30, September 30 or December 31, (ii) the Revolving Credit Maturity Date and (iii) any date on which the Swingline Lenders require the Lenders to purchase all or any portion of such Swingline Loan pursuant to Section 2.22(c); provided, however, that, if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. 12 "Investor Stock Subscription Agreements" shall mean (a) the Subscription Agreement dated as of April 30, 1986, among the Borrower, the financial institutions identified therein, the Merrill Lynch Affiliate Investors and the Institutional Investors and (b) the Subscription Agreement dated as of April 30, 1986, between the Borrower and Morgan Capital Corporation, as such Subscription Agreements may from time to time be amended or modified in accordance with Section 7.10. "IRB Fronting Bank" shall mean any Lender designated as such by written notice to the Administrative Agent from the Borrower, which designation shall be effective upon receipt by the Managing Agents of an instrument, in form and substance satisfactory to the Managing Agents, whereby such Lender assumes the obligations of the IRB Fronting Bank hereunder. "IRB Letter of Credit" shall mean any Standby Letter of Credit issued by the IRB Fronting Bank in accordance with (a) Section 5.4 of the Lease Agreement dated as of November 1, 1986, between The Industrial Development Board of the City of Hammond, Inc. and the Borrower or (b) Section 5.4 of the Lease Agreement dated as of December 1, 1986, between Development Authority of Coweta County and the Borrower, and any extensions and replacements thereof, as such Standby Letter of Credit may from time to time be amended, supplemented or modified. "LC/BA Commitment" shall mean at any time an amount equal to the lesser of (a) $155,000,000, as the same may be reduced from time to time pursuant to Section 3.08, and (b) the Revolving Credit Commitment at such time. The LC/BA Commitment shall automatically and permanently terminate on the LC/BA Maturity Date. "LC/BA Exposure" shall mean, at any time of determination, the sum of (a) the Trade LC Exposure, (b) the Standby LC Exposure and (c) the BA Exposure at such time. "LC/BA Fee" shall have the meaning given such term in Section 3.04. "LC/BA Maturity Date" shall mean the fifth Business Day prior to the Revolving Credit Maturity Date. "LC Disbursement" shall mean any payment or disbursement made by a Fronting Bank under or pursuant to a Letter of Credit. "Lease Expense" shall mean, for any period, with respect to any operating leases of the Borrower and the Subsidiaries, all amounts paid or accrued during such period under such operating leases (whether or not constituting rental expense) by the Borrower and the Subsidiaries on a consolidated basis. "Leasehold Mortgage" shall mean any Mortgage that is a leasehold mortgage. "Letter of Credit Application" shall mean a commercial or standby letter of credit application, as applicable, in the relevant Fronting Bank's customary form, as such form may be modified from time to time by such Fronting Bank. "Letters of Credit" shall mean Trade Letters of Credit and Standby Letters of Credit. "LIBOR Spread" shall have the meaning specified in the definition of the term "Applicable Rate Percentage". 13 "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, assignments for security (whether collateral or otherwise), hypothecation, encumbrance, lease, sublease, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Life Care" shall mean Life Care Medical Products, Inc., a Florida corporation. "Life Care Sale" shall mean either the sale, assignment, transfer or other disposition of the Borrower's interest in, or the liquidation, dissolution and/or winding up of, Life Care; provided, however, that no such transaction shall be deemed to constitute a "Life Care Sale" if, at any time after the Restatement Date and prior to the consummation of such transaction, the Borrower or any Subsidiary shall have transferred any assets to Life Care other than in the ordinary course of business. "Loan Documents" shall mean this Agreement, the Notes, the Letters of Credit, the Bankers' Acceptances, the BA Documents, the Security Documents, the Guarantee Agreement and the Indemnity, Subrogation and Contribution Agreement. "Loans" shall mean the Revolving Loans and the Term Loans. "Lockbox Agreements" shall mean any lockbox agreements among the Borrower, the Collateral Agent and a Sub-Agent (as defined in each Lockbox Agreement), substantially in the form of Annex 1 to the Security Agreement. "Lockbox Collateral" shall have the meaning assigned to such term in each of the Lockbox Agreements. "Management Investors" shall mean the officers of the Borrower who purchased Class A Stock and Class B Stock pursuant to the Management Subscription Agreement. "Management Subscription Agreement" shall mean, collectively, (a) the Management Subscription Agreement dated as of April 30, 1986, (b) the Management Subscription Agreement dated as of June 30, 1987, and (c) the Management Subscription Agreement dated as of November 1, 1987, in each case, among the Borrower and the Management Investors and pursuant to which the Management Investors purchased Class A Stock and Class B Stock, as such agreements may from time to time be amended or modified in accordance with Section 7.10. "Margin Stock" shall have the meaning given such term under Regulation U. "Material Adverse Effect" shall mean (a) a materially adverse effect on the business, assets, operations, prospects or condition, financial or otherwise, or the material agreements of the Borrower and the Subsidiaries, taken as a whole, (b) material impairment of the ability of the Borrower or any Subsidiary to perform any of its obligations under any Loan Document to which it is or will be a party or (c) material impairment of the rights of or benefits available to the Administrative Agent, the Fronting Banks, the Collateral Agent or the Lenders under any Loan Document. "Merrill Lynch Affiliate Investors" shall mean the Affiliates of Merrill Lynch & Co., Inc. on April 30, 1986, who purchased class A stock and cumulative redeemable preferred stock pursuant to the Investor Stock Subscription Agreements. 14 "Mortgaged Properties" shall mean the owned real properties of the Borrower specified on Schedule 1.01(b). "Moody's" shall mean Moody's Investors Service, Inc. "Mortgages" shall mean the mortgages, deeds of trust, leasehold mortgages, assignments of leases and rents (including the Assignments of Leases and Rents), modifications and other security documents relating to the Mortgaged Properties delivered to the Collateral Agent or pursuant to the provisions of this Agreement, each (except in the case of any Leasehold Mortgage) substantially in the form of Exhibit I. "Multiemployer Plan" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code) is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Net Income" with respect to any Person for any period shall mean the aggregate net income (or net deficit) of such Person and its subsidiaries determined on a consolidated basis for such period, which shall be equal to gross revenues for such Person and its subsidiaries determined on a consolidated basis during such period less the aggregate for such Person and its subsidiaries determined on a consolidated basis during such period of, without duplication, (a) cost of goods sold, (b) interest expense, (c) operating expenses, (d) selling, general and administrative expenses, (e) taxes, (f) depreciation, depletion and amortization of properties and (g) any other items that are treated as expense under GAAP, all computed in accordance with GAAP; provided, however, that the term "Net Income" shall exclude (i) gains and losses from the sale of assets other than in the ordinary course of business and (ii) any write-up in the value of any asset. "Net Proceeds" shall mean, with respect to any Prepayment Event or any Equity Issuance, (a) the gross proceeds (including, if applicable, insur- ance proceeds, condemnation awards and payments from time to time in respect of installment obligations) received by or on behalf of the Borrower or any of its Subsidiaries in respect of such Prepayment Event or such Equity Issuance, less (b) the sum of (i) in the case of a Prepayment Event under clause (a) or (b) of the definition thereof, the amount, if any, of all taxes (other than income taxes) payable by the Borrower or any of its Subsidiaries in connection with such Prepayment Event and the Borrower's good-faith best estimate of the amount of all income taxes payable in connection with such Prepayment Event (to the extent that such amount shall have been set aside for the purpose of paying such income taxes), (ii) in the case of a Prepayment Event under clause (a) of the definition thereof, (A) the amount of any reasonable reserve established in accordance with GAAP against any liabilities associated with the assets sold or disposed of and retained by the Borrower or any of its Subsidiaries, provided that the amount of any subsequent reduction of such reserve (other than in connection with a payment in respect of any such liability) shall be deemed to be Net Proceeds of a Prepayment Event occurring on the date of such reduction, and (B) the amount applied to repay any Indebtedness (other than the Loans and the Swingline Loans) to the extent such Indebtedness is required by its terms to be repaid as a result of such Prepayment Event and (iii) reasonable and customary fees, commissions and expenses and other costs paid by the Borrower or any of its Subsidiaries in connection with such Prepayment Event or Equity Issuance (other than those payable to the Borrower or any subsidiary of the Borrower), in each case only to the extent not already deducted in arriving at the amount referred to in clause (a) above. "9-1/4% Senior Subordinated Note Indenture" shall mean the Senior Subordinated Note Indenture dated as of November 1, 1993, between the Borrower and State Street Bank and Trust Company of 15 Connecticut, National Association , as trustee, as such Senior Subordinated Note Indenture may from time to time be amended or modified in accordance with Section 7.10. "9-1/4% Senior Subordinated Notes" shall mean the 9-1/4% Senior Subordinated Notes of the Borrower, as such 9-1/4% Senior Subordinated Notes may from time to time be amended or modified in accordance with Section 7.10. "Non-Voting Common Stock" shall mean the Borrower's Non-Voting Common Stock (Series I), par value $.01 per share. "Notes" shall mean the Term Notes, the Revolving Credit Notes and the Swingline Notes. "Obligations" shall mean all obligations defined as "Obligations" in the Guarantee Agreement and the Security Documents. "Outstanding Bankers' Acceptances" shall mean at any time the Bankers' Acceptances outstanding at such time. "Outstanding Clean Bankers' Acceptances" shall mean at any time the Clean Bankers' Acceptances outstanding at such time. "Outstanding Letters of Credit" shall mean at any time the Letters of Credit outstanding at such time. "Outstanding Standby Letters of Credit" shall mean at any time the Standby Letters of Credit outstanding at such time. "Outstanding Trade Bankers' Acceptances" shall mean at any time the Trade Bankers' Acceptances outstanding at such time. "Outstanding Trade Letters of Credit" shall mean at any time the Trade Letters of Credit outstanding at such time. "Participating Lender" shall mean at any time any Lender with a Revolving Credit Commitment at such time. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Perfection Certificate" shall mean the Perfection Certificate, substantially in the form of Annex 2 to the Security Agreement, prepared by the Borrower. "Permitted Acquisition" shall mean (a) any Acquisition by the Borrower or any of its Subsidiaries of any Acquired Entity engaged in one or more lines of business substantially similar to those in which the Borrower or any Subsidiary is principally engaged as of the Restatement Date, so long as (i) the cash Consideration to be paid by the Borrower or any Subsidiary in connection with such Acquisition does not exceed $50,000,000 and (ii) the sum of (A) the Consideration to be paid by the Borrower or any Subsidiary in connection with such Acquisition and (B) the aggregate Consideration paid by the Borrower or any Subsidiary in connection with all prior Permitted Acquisitions that were consummated in the fiscal year in 16 which such Acquisition will occur does not exceed $100,000,000 and (b) the Acquisition of issued shares in ETB, Inc., a Texas corporation, not already owned by the Borrower or its Subsidiares, provided that the Consideration to be paid by the Borrower or any Subsidiary in connection with such Acquisition does not exceed $25,000 and (c) the Acquisition of issued shares in Life Care Medical Products, Inc. not already owned by the Borrower, provided that the cash Consideration to be paid by the Borrower in connection with such Acquisition does not exceed $20,000 and such Acquisition was made in contemplation of a subsequent Life Care Sale. "Permitted Investments" shall mean: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within six months from the date of acquisition thereof by the Borrower or any Subsidiary; (b) without limiting the provisions of paragraph (d) below, investments in commercial paper maturing within six months from the date of acquisition thereof by the Borrower or any Subsidiary and having, at such date of acquisition, a credit rating of A1 from S&P or P1 from Moody's; (c) investments in certificates of deposit, bankers' acceptances and time deposits maturing within six months from the date of acquisition thereof by the Borrower or any Subsidiary issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, (i) any domestic office of either Managing Agent or (ii) any domestic office of any other commercial bank of recognized standing organized under the laws of the United States of America or any state thereof which is rated (or the senior debt securities of the holding company of such commercial bank are rated) in one of the three highest grades by S&P or Moody's, or another nationally recognized rating agency if neither of such two named rating agencies shall rate such bank; (d) investments in commercial paper maturing within six months from the date of acquisition thereof by the Borrower or any Subsidiary and issued by (i) the holding company of either Managing Agent or (ii) the holding company of any other commercial bank of recognized standing organized under the laws of the United States of America or any state thereof that has commercial paper rated in one of the three highest grades by S&P or Moody's, or another nationally recognized rating agency if neither of such two named rating agencies shall rate such bank; (e) repurchase agreements maturing within six months from the date of acquisition thereof by the Borrower or a Subsidiary with (i) any Lender (of Affiliate thereof), (ii) any bank or trust company referred to in paragraph (c) or (d) above or (iii) Broadway National Bank, in each case, for, and fully collateralized by a perfected security interest in, underlying securities of the type referred to in paragraph (a) above, provided that, in the case of any such repurchase agreements with Broadway National Bank, the aggregate amount of the repurchase obligations thereunder shall not at any time exceed $2,000,000. (f) investments in Merrill Lynch Institutional Fund, Merrill Lynch Government Fund, Merrill Lynch Treasury Fund, Merrill Lynch Institutional Tax-Exempt Fund, American Express Daily Dividends Fund and American Express Government and Agencies Fund. 17 (g) other investment instruments approved in writing by the Required Lenders and offered by financial institutions that have a combined capital and surplus and undivided profits of not less than $250,000,000. "Permitted Receivables Purchase Agreements" shall mean, collectively, (a) the Receivables Purchase Agreement dated as of January 26, 1995, as amended as of March 31, 1995, and as the expiration date thereof may be extended from time to time, between the Borrower and Three Rivers Funding Corporation, a Delaware corporation, providing for the transfer to Three Rivers Funding Corporation of an undivided interest in a pool of Third Party Receivables, (b) any agreement providing for the transfer by the Borrower of Third Party Receivables that is entered into with the prior written consent of the Required Lenders and (c) any other agreements providing for the transfer by the Borrower of Third Party Receivables in a transaction that the Borrower believes to be a true sale transaction (based on the opinion of Borrower's counsel), on terms determined by the Borrower in good faith to be no less favorable to the Borrower and the Lenders than the receivables purchase agreement described in clause (a) above, in each case if and to the extent permitted by Section 7.05(e). "Person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Photolab Business Sale" shall mean the sale, assignment, transfer, lease, sub-lease or any other disposition, in any form whatsoever, of the Borrower's main photographic film processing business and related assets (including the equipment leased pursuant to the IFS Sale and Leaseback) as set forth on Schedule 1.01(c). "Plan" shall mean any pension plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code that is maintained for employees of the Borrower or any ERISA Affiliate. "Pledge Agreement" shall mean the Pledge Agreement dated as of June 14, 1993, as amended and restated as of August 3, 1994, and as such agreement may be further amended or modified from time to time, among the Borrower, the Guarantors and the Collateral Agent. "Prepayment Account" shall have the meaning assigned to such term in Section 2.13(f). "Prepayment Event" shall mean (a) any sale, transfer or other disposition of any business units, assets or other properties of the Borrower or any of its Subsidiaries (including dispositions in the nature of casualties (to the extent covered by insurance) or condemnations), (b) any sale and leaseback of any asset or the mortgaging of any real property other than pursuant to a Mortgage (or a modification thereof) by the Borrower or any of its Subsidiaries or (c) the issuance or incurrence by the Borrower or any of its Subsidiaries of any Indebtedness (other than any indebtedness that the Borrower or any Subsidiary is permitted to incur pursuant to Section 7.01 (other than Section 7.01(k)), or the issuance or sale by the Borrower or any of its Subsidiaries of any debt securities or any obligations convertible into or exchangeable for, or giving any person or entity any right, option or warrant to acquire from the Borrower or any of its Subsidiaries any Indebtedness (other than any indebtedness that the Borrower or any Subsidiary is permitted to incur pursuant to Section 7.01 (other than Section 7.01(k)), or any such debt securities or 18 any such convertible or exchangeable obligations. Notwithstanding the fore- going, the term "Prepayment Event" shall not include: (i) sales, transfers and other dispositions of business units, assets and other properties on commercially reasonable terms permitted pursuant to Section 7.05(a) with Net Proceeds not exceeding in the aggregate $10,000,000 in any fiscal year, provided that at any time when the Net Proceeds of any such sale, transfer and other disposi- tion, together with the aggregate Net Proceeds of all other such sales, transfers and other dispositions during the same fiscal year, shall exceed $10,000,000 in any fiscal year, a "Prepayment Event" shall be deemed to have occurred, and the resultant prepayment in connection with such Prepayment Event shall equal the amount by which the aggregate Net Proceeds of such sales, transfers and dispositions exceeds $10,000,000; (ii) sales of inventory, used or surplus equipment, vehicles and other assets in the ordinary course of business and Acquisition- Related Sales; (iii) the receipt of insurance or condemnation proceeds in respect of the loss, damage, destruction or taking of any asset of the Borrower or any such Subsidiary, provided that (A) the aggregate amount of insurance or condemnation proceeds received by the Borrower and the Subsidiaries in connection with the event that resulted in the loss, damage, destruction or taking of such asset are less than $5,000,000, (B) such proceeds are reinvested in equipment, vehicles or other assets (other than inventory that does not replace lost, damaged, destroyed or taken inventory) used in the Borrower's princi- pal lines of business within 180 days after the receipt thereof, (C) if such proceeds are equal to or exceed $1,000,000, the Borrower, pending such reinvestment, promptly applies such proceeds towards the payment of Swingline Loans or Revolving Loans or deposits such pro- ceeds so received and unreinvested in a cash collateral account established with the Collateral Agent for the benefit of the Secured Parties and (D) at the time such proceeds are received by the Borrower or any of its Subsidiaries, no Default or Event of Default shall have occurred and be continuing; (iv) the Life Care Sale, the Hammond Sale or the Photolab Business Sale; provided, however, that to the extent that the Borrower receives Net Proceeds in cash in excess of $35,000,000 in respect of the Photolab Business Sale, a "Prepayment Event" shall be deemed to have occurred and the resultant prepayment in connection with such Prepayment Event shall equal 50% of the amount by which such cash Net Proceeds exceed $35,000,000. (v) sales, transfers or other dispositions to Equipment Lessors of equipment purchased by the Borrower, as agent for such Equipment Lessor, pursuant to Equipment Agency Arrangements. "Primary Fronting Bank" shall mean NationsBank. "Rate Protection Agreements" shall mean interest rate cap agreements, interest rate swap agreements and other agreements or arrangements entered into by the Borrower to provide protection to the Borrower against fluctuations in interest rates. "Receivables Subsidiary" means any bankruptcy-remote subsidiary of the Borrower created for the purpose of purchasing accounts receivable from the Borrower and the Subsidiaries pursuant to a Permitted Receivables Purchase Agreement. 19 "Reference Lenders" shall mean the principal London offices of the Managing Agents and, as long as it is a Lender, Union Bank of Switzerland. "Register" shall have the meaning given such term in Section 10.04(d). "Regulation G" shall mean Regulation G of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation U" shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Reportable Event" shall mean any reportable event as defined in Section 4043(b) of ERISA or the regulations issued thereunder with respect to a Plan (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code). "Required Lenders" shall mean, at any time, Lenders holding Loans, a share of the used LC/BA Commitments and unused Commitments representing greater than 50% of the sum of (a) the aggregate principal amount of the Loans at such time, (b) the LC/BA Exposure at such time and (c) the aggregate unused Commitments at such time. "Responsible Officer" of any corporation shall mean any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obliga- tions of such corporation in respect of this Agreement. "Restatement Date" shall mean the date of the execution of this Agreement. "Revolving Credit Borrowing" shall mean a Borrowing comprised of Revolving Loans. "Revolving Credit Commitment" shall mean, with respect to each Lender, the commitment of such Lender to make Revolving Loans hereunder as set forth in clause (b) of Section 2.01, as the same may be reduced from time to time pursuant to Section 2.09. "Revolving Credit Maturity Date" shall mean November 29, 2000. "Revolving Credit Note" shall mean a promissory note of the Borrower, substantially in the form of Exhibit A-1, evidencing Revolving Loans. "Revolving Credit Utilization" shall mean, at any time of determination, the sum of (a) the aggregate principal amount of Revolving Loans outstanding at such time, (b) the aggregate principal amount of Swingline Loans outstanding at such time and (c) the LC/BA Exposure at such time. "Revolving Facility" shall mean the aggregate of the Lenders' Revolving Credit Commitments. 20 "Revolving Loans" shall mean the revolving loans made by the Lenders to the Borrower pursuant to clause (b) of Section 2.01. Each Revolving Loan shall be a Eurodollar Revolving Loan or an ABR Revolving Loan. "Secured Parties" shall have the meaning assigned to such term in the Security Agreement. "Security Agreement" shall mean the Security Agreement dated as of June 14, 1993, as amended and restated as of August 3, 1994, and as such agreement may be further amended or modified from time to time, among the Borrower, the Guarantors and the Collateral Agent. "Security Documents" shall mean the Mortgages (including the Assignment of Leases and Rents (as defined in each Mortgage) and any lease- hold mortgage), the Security Agreement, the Pledge Agreement, the Lockbox Agreements, the Trademark Security Agreement and each of the security agreements, mortgages and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Section 6.10. "S&P" shall mean Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "Standby LC Exposure" shall mean, at any time of determination, the sum of (a) the aggregate undrawn amount of all Standby Letters of Credit outstanding at such time and (b) the aggregate amount that has been drawn under any Standby Letters of Credit but for which the Fronting Banks or the Lenders, as the case may be, have not been reimbursed by the Borrower at such time. "Standby Letter of Credit" shall mean (a) each irrevocable letter of credit issued pursuant to Section 3.01(a) under which a Fronting Bank agrees to make payments for the account of the Borrower, on behalf of the Borrower, in respect of obligations of the Borrower incurred pursuant to contracts made or performances undertaken or to be undertaken or like matters relating to contracts to which the Borrower is or proposes to become a party in the ordinary course of the Borrower's business and (b) each Existing Standby Letter of Credit. "Statutory Reserves" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum applicable reserve per- centages, including any marginal, special, emergency or supplemental reserves (expressed as a decimal) established by the Board and any other banking authority to which the Administrative Agent is subject (a) with respect to the Base CD Rate (as such term is used in the definition of the term "Alternate Base Rate") for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months and (b) with respect to the Adjusted LIBO Rate, for Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to Regulation D of the Board. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Stockholders' Agreement" shall mean the Stockholders' Agreement dated as of April 30, 1986, among the Borrower, the Management Investors, the Institutional Investors and the Merrill Lynch Affiliate Investors, as such Stockholders' Agreement may be amended or modified from time to time in accordance with Section 7.10. 21 "Subordinated Indebtedness" shall mean, collectively, the 9-1/4% Senior Subordinated Notes and any Indebtedness incurred pursuant to Section 7.01(j) or 7.01(k). "subsidiary" shall mean, with respect to any Person (herein referred to as the "parent"), any corporation, partnership, association or other business entity (a) of which securities or other ownership interests repre- senting more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held or (b) that is, at the time any determination is made, otherwise Controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" shall mean any subsidiary of the Borrower other than an Inactive Subsidiary. "Swingline Commitment Percentage" shall mean (a) in the case of Chemical Bank in its capacity as a Swingline Lender, 50% and (b) in the case of NationsBank in its capacity as a Swingline Lender, 50%. "Swingline Loans" shall mean the swingline loans made by the Swingline Lenders pursuant to Section 2.22. "Swingline Note" shall mean a promissory note of the Borrower, substantially in the form of Exhibit A-3, evidencing the Swingline Loans. "Term Borrowing" shall mean a Borrowing comprised of Term Loans. "Term Facility" shall mean the aggregate amount of the Lenders' Term Loan Commitments. "Term Loan Commitment" shall mean, with respect to each Lender, the commitment of such Lender to make Term Loans hereunder as set forth in clause (a) of Section 2.01, as the same may be reduced from time to time pursuant to Section 2.09. "Term Loan Maturity Date" shall mean November 29, 2000. "Term Loan Repayment Amounts" shall have the meaning set forth in Section 2.11(a)(i). "Term Loan Repayment Date" shall have the meaning set forth in Section 2.11(a)(i). "Term Loans" shall mean the term loans made by the Lenders to the Borrower pursuant to clause (a) of Section 2.01. Each Term Loan shall be either a Eurodollar Term Loan or an ABR Term Loan. "Term Note" shall mean a promissory note of the Borrower substantially in the form of Exhibit A-2, evidencing Term Loans. "Third Party Receivables" shall mean the Accounts (as defined in the Security Agreement) owing to the Borrower arising from the sale by the Borrower of goods or services in the ordinary course of the pharmaceutical business of the Borrower and with respect to which the obligor is a Person other than the Person to whom such goods or services were sold. 22 "Trade BA Exposure" shall mean, at any time, the sum of (a) the maximum aggregate amount that is, or at any time thereafter may become, payable by the Fronting Bank under all Trade Bankers' Acceptances then outstanding and (b) the aggregate amount of BA Disbursements in respect of Trade Bankers' Acceptances for which the Primary Fronting Bank or the Lenders, as the case may be, have not been reimbursed by the Borrower at such time. "Trade Bankers' Acceptance" shall mean (a) a Bankers' Acceptance originated by the Primary Fronting Bank upon the presentation to the Primary Fronting Bank of a time draft for payment under a Trade Letter of Credit by a beneficiary thereof and (b) each Existing Trade Bankers' Acceptance; each origination of a Trade Bankers' Acceptance (other than an Existing Trade Bankers' Acceptance) shall be in accordance with Section 3.02(e). "Trade LC Exposure" shall mean, at any time of determination, the sum of (a) the aggregate undrawn amount of all Trade Letters of Credit outstanding at such time and (b) the aggregate amount that has been drawn under any Trade Letters of Credit but for which the Primary Fronting Bank or the Lenders, as the case may be, have not been reimbursed by the Borrower at such time. "Trade Letter of Credit" shall mean (a) each commercial documentary letter of credit issued by the Primary Fronting Bank for the account of the Borrower pursuant to Section 3.01(a) for the purchase of goods in the ordinary course of business and (b) each Existing Trade Letter of Credit. "Trademark Security Agreement" shall mean the Trademark Security Agreement dated as of June 14, 1993, as amended and restated as of August 3, 1994, and as such agreement may be further amended or modified from time to time, among the Borrower, the Guarantors and the Collateral Agent. "Transactions" shall have the meaning assigned to such term in Section 4.02. "Type", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term "Rate" shall include the Adjusted LIBO Rate and the Alternate Base Rate. "Voting Common Stock" shall mean the Borrowers' Common Stock, par value $.01 per share. "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed to be references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made and all financial statements required to be delivered here- under shall be prepared in accordance with GAAP as in effect from time to time, applied on a basis consistent with the application used in the financial statements referred to in Section 4.05; provided, however, that, for purposes of determining compliance with any covenant set forth in Article VII, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance 23 with GAAP as in effect on the date of this Agreement applied on a basis consistent with the application used in the financial statements referred to in Section 4.05. ARTICLE II The Credits SECTION 2.01. Commitments. On the terms and subject to the conditions and relying upon the representations and warranties herein set forth: (a) each Lender having a Term Loan Commitment agrees severally and not jointly that it has made Term Loans to the Borrower in the aggregate principal amount of its Term Loan Commitment, in each case as set forth opposite such Lender's name on Schedule 2.01, and (b) each Lender having a Revolving Credit Commitment agrees severally and not jointly to make Revolving Loans to the Borrower, at any time and from time to time on or after the Restatement Date and prior to the earlier of the Revolving Credit Maturity Date and the termination of the Revolving Credit Commitment of such Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding not to exceed (after giving effect to all Revolving Credit Loans repaid, and all reimbursements of LC Disbursements and BA Disbursements made, concurrently with the making of any Revolving Credit Loans) an amount equal to the difference between (i) the Revolving Credit Commitment set forth opposite such Lender's name on Schedule 2.01, as the same may be reduced from time to time pursuant to Section 2.09, and (ii) such Lender's Applicable Percentage of the sum of (A) the aggregate principal amount of Swingline Loans outstanding at such time and (B) the LC/BA Exposure at such time. Within the limits set forth in the preceding sentence, the Borrower may borrow, pay or prepay and reborrow Revolving Loans on or after the Restatement Date and prior to the Revolving Credit Maturity Date, on the terms and subject to the conditions and limitations set forth herein. Amounts paid or prepaid in respect of Term Loans may not be reborrowed. SECTION 2.02. Loans. (a) Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Term Loan Commitments or Revolving Credit Commit- ments, as the case may be; provided, however, that the failure of any Lender to make any Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Each Revolving Credit Borrowing shall be in an aggregate principal amount that is an integral multiple of $1,000,000 and not less than $5,000,000 (or an aggregate principal amount equal to the remaining balance of the Revolving Credit Commitments). (b) Each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans, as the Borrower may request pursuant to Section 2.03. Each Lender may at its option fulfill its Commitment with respect to any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan, provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement and the applicable Note. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing that, if made, would result in an aggregate of more than six separate Eurodollar Loans of any Lender being outstanding hereunder at any one time. For purposes of the foregoing, Loans having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Loans. 24 (c) Subject to paragraph (e) below, each Lender shall make a Loan in the amount of its pro rata portion, as determined under Section 2.17, of each Borrowing hereunder on the proposed date thereof by wire transfer of immediately available funds to the Administrative Agent in New York, New York, not later than 12:00 noon, New York City time, and the Administrative Agent shall by 3:00 p.m., New York City time, credit the amounts so received to the general deposit account of the Borrower or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with this paragraph (c) and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Effective Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request any Revolving Credit Borrowing if the Interest Period requested with respect thereto would end after the Revolving Credit Maturity Date. (e) The Borrower may refinance all or any part of any Revolving Credit Borrowing with a Revolving Credit Borrowing of the same or a different Type, subject to the conditions and limitations set forth in this Agree- ment. Any Revolving Credit Borrowing or part thereof so refinanced shall be deemed to be repaid or prepaid in accordance with Section 2.04 or 2.12, as applicable, with the proceeds of a new Revolving Credit Borrowing, and the proceeds of the new Revolving Credit Borrowing, to the extent they do not exceed the principal amount of the Revolving Credit Borrowing being refinanced, shall not be paid by the Lenders to the Administrative Agent or by the Administrative Agent to the Borrower pursuant to paragraph (c) above. (f) If a Fronting Bank has not received from the Borrower the payment required by Section 3.05(a) within two hours after the Borrower shall have received notice from such Fronting Bank that payment of a draft presented under any Letter of Credit will be made or, if the Borrower shall have received such notice later than 10:00 a.m., New York City time, on any Business Day, not later than 10:00 a.m., New York City time, on the immediately following Business Day, as provided in Section 3.05(a), such Fronting Bank will promptly notify the Administrative Agent of the LC Disbursement and the Administrative Agent will promptly notify each Participating Lender of such LC Disbursement and its Applicable Percentage thereof. Each Participating Lender will pay to the Administrative Agent not later than 4:00 p.m., New York City time, on such date (or, if the Participating Lenders shall have received such notice later than 2:00 p.m., New York City time, on such date, not later than 10:00 a.m., New York City time, on the immediately following Business Day) an amount equal to such Participating Lender's Applicable Percentage of such LC Disbursement (it being understood that such amount shall constitute an ABR Revolving Loan of such Participating Lender), and the Administrative Agent will promptly pay such amount to such Fronting Bank. The Administrative Agent will promptly remit to each Participating Lender its Applicable Percentage of any amounts 25 subsequently received by the Administrative Agent from the Borrower in respect of such LC Disbursement. If any Lender shall not have made its Applicable Percentage of such LC Disbursement available to such Fronting Bank as provided above, such Lender agrees to pay interest on such amount, for each day from and including the date such amount is required to be paid in accordance with this subsection to but excluding the date an amount equal to such amount is paid to the Administrative Agent for prompt payment to such Fronting Bank at, for the first such day, the Federal Funds Effective Rate, and for each day thereafter, the Alternate Base Rate. (g) If the Primary Fronting Bank has not received from the Borrower the payment required by Section 3.05(b) by 1:00 p.m., New York City time, on the stated maturity date of any Bankers' Acceptance (or if such stated maturity date falls on a day that is not a Business Day, on the next succeeding Business Day), as provided in Section 3.05(b), the Primary Fronting Bank will promptly notify the Administrative Agent of the BA Disbursement and the Administrative Agent will promptly notify each Participating Lender of such BA Disbursement and its Applicable Percentage. Each Participating Lender will pay to the Administrative Agent not later than 4:00 p.m., New York City time, on such date (or, if the Participating Lenders shall have received such notice later than 2:00 p.m., New York City time, on such date, not later than 10:00 a.m., New York City time, on the immediately following Business Day) an amount equal to such Participating Lender's Applicable Percentage of such BA Disbursement (it being understood that such amount shall constitute an ABR Revolving Loan of such Participating Lender), and the Administrative Agent will promptly pay such amount to the Primary Fronting Bank. The Administrative Agent will promptly remit to each Participating Lender its Applicable Percentage of any amounts subsequently received by the Administrative Agent from the Borrower in respect of such BA Disbursement. If any Lender shall not have made its Applicable Percentage of such BA Disbursement available to the Primary Fronting Bank as provided above, such Lender agrees to pay interest on such amount, for each day from and including the date such amount is required to be paid in accordance with this subsection to but excluding the date an amount equal to such amount is paid to the Administrative Agent for prompt payment to the Primary Fronting Bank at, for the first such day, the Federal Funds Effective Rate, and for each day thereafter, the Alternate Base Rate. (h) Notwithstanding any other provision of this Agreement, all Borrowings made on the Restatement Date and during the period ending 30 days thereafter shall be made as (i) Eurodollar Borrowings with Interest Periods of one month's duration or (ii) ABR Borrowings. SECTION 2.03. Notice of Borrowings. The Borrower shall give the Administrative Agent written or telecopy notice (or telephone notice promptly confirmed in writing or by telecopy) (a) in the case of a Euro- dollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before a proposed borrowing and (b) in the case of an ABR Borrowing, not later than 12:00 noon, New York City time, one Business Day before a proposed borrowing. Such notice shall be irrevocable and shall in each case refer to this Agreement and specify (a) whether the Borrowing then being requested is to be a Term Borrowing or a Revolving Credit Borrowing, and whether such Borrowing is to be a Eurodollar Borrowing or an ABR Borrowing; (b) the date of such Borrowing (which shall be a Business Day) and the amount thereof; and (c) if such Borrowing is to be a Euro- dollar Borrowing, the Interest Period with respect thereto. If no election as to the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. If the Borrower shall not have given notice in accordance with this Section 2.03 of its election to refinance a Revolving Credit Borrowing prior to the end of the Interest Period in effect for such Borrowing (unless such Borrowing is repaid at the end of such Interest Period), then the Borrower shall be deemed to have given notice of an election to refinance 26 such Borrowing with an ABR Borrowing. The Administrative Agent shall promptly advise the Lenders of any notice given pursuant to this Section 2.03 and of each Lender's portion of the requested Borrowing. SECTION 2.04. Notes; Repayment of Loans. The Revolving Loans made by each Lender having a Revolving Credit Commitment, the Term Loans made by each Lender having a Term Loan Commitment and the Swingline Loans made by the Swingline Lenders, shall be evidenced by a Revolving Credit Note, a Term Note and a Swingline Note, respectively, duly executed on behalf of the Borrower, dated the Restatement Date, in substantially the form attached hereto as Exhibits A-1, A-2 and A-3, respectively, with the blanks appropriately filled, (a) payable in the case of each Lender to the order of such Lender or registered assigns in a principal amount equal to (i) the Revolving Credit Commitment of such Lender, in the case of its Revolving Credit Note or (ii) the Term Loan Commitment of such Lender, in the case of its Term Note, and (b) payable in the case of each Swingline Lender to the order of such Swingline Lender in the principal amount of such Swingline Lender's Swingline Commitment Percentage of $30,000,000, in the case of its Swingline Note. The outstanding principal balance of each Loan or Swingline Loan, as evidenced by such a Note, shall be payable (a) in the case of a Revolving Loan or Swingline Loan, on the last day of the Interest Period applicable to such Loan and on the Revolving Credit Maturity Date and (b) in the case of a Term Loan, as provided in Section 2.11(a)(i). Each Note shall bear interest from and including the Restatement Date on the outstanding principal balance thereof as set forth in Section 2.06. Each Lender and each Swingline Lender shall, and each hereby is, authorized by the Borrower to, endorse on the schedule attached to each Note delivered to it (or on a continuation of such schedule attached to such Note and made a part thereof), or otherwise to record in its internal records, an appro- priate notation evidencing the date and amount of each Loan from such Lender, or Swingline Loan from such Swingline Lender, each payment and pre- payment of principal of any such Loan or Swingline Loan, each payment of interest on any such Loan or Swingline Loan and the other information provided for on such schedule; provided, however, that the failure of any Lender or either Swingline Lender to make such a notation or any error therein shall not affect the obligation of the Borrower to repay the Loans made by such Lender, or the Swingline Loans made by such Swingline Lender, in accordance with the terms of this Agreement and the applicable Notes. SECTION 2.05. Fees. (a) The Borrower agrees to pay to each Lender, through the Administrative Agent, on the Restatement Date and on the second Business Day following the last day of March, June, September and December in each year and on each date on which any of the Commitments of such Lender shall expire or be terminated as provided herein, a commitment fee (a "Commitment Fee") at a rate per annum equal to the Applicable Rate Percentage from time to time in effect on the average daily unused amount of the Commitments of such Lender during the preceding quarter (or other period commencing with the Restatement Date, as applicable, or ending with the date on which any of such Commitments of such Lender shall expire or be terminated). The Commitment Fee due to each Lender shall commence to accrue from and including the Restatement Date and shall cease to accrue on, but excluding, the date on which such Commitments of such Lender shall expire or be terminated as provided herein. For purposes of calculating Commitment Fees, any portion of the Revolving Credit Commitments unavailable due to (i) outstanding Swingline Loans shall be deemed to be unused amounts of the Commitments and (ii) the face amount of outstanding Letters of Credit and Bankers' Acceptances shall be deemed to be used amounts. All Commitment Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. (b) The Borrower agrees to pay to the Administrative Agent, for its own account, administration fees (the "Administrative Fees") at the time and in the amounts agreed upon in the fee 27 letter agreement dated April 5, 1993, between the Borrower and the Managing Agents, as modified by the fee letter agreement dated October 31, 1995, between the Borrower and the Managing Agents. (c) The Borrower agrees to pay to the Administrative Agent, for payment to the Managing Agents and the other Lenders (to the extent applicable), on the Restatement Date the fees specified in the fee letter agreement dated October 31, 1995, between the Borrower and the Managing Agents, and the Administrative Agent shall pay to each Lender on the Restatement Date that portion of such fees as is owing to such Lender. (d) The Borrower agrees to pay to each Fronting Bank, for its own account, the fees specified in Section 3.09. (e) All Fees (other than the fees payable to the Fronting Banks under Section 3.09) shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders. Once paid, none of the Fees shall be refundable under any circumstances (other than corrections of error in payment). SECTION 2.06. Interest on Loans. (a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when the Alternate Base Rate is determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate. Swingline Loans shall bear interest at the rate applicable to ABR Loans. (b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the LIBOR Spread in effect on the first day of such Interest Period. (c) Interest on each Loan and each Swingline Loan shall be payable on the Interest Payment Dates applicable to such Loan or Swingline Loan, as the case may be, except as otherwise provided in this Agreement. The LIBOR Spread for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be presumptively correct absent manifest error. SECTION 2.07. Default Interest. If the Borrower shall default in the payment of the principal of or interest on any Loan or Swingline Loan or any other amount becoming due hereunder or under any Security Document, by acceleration or otherwise, the Borrower shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (the "Default Rate") (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to (a) in the case of any ABR Loan, any Swingline Loan or any other amount, the rate that would be applicable under Section 2.06 to a Term Loan that is an ABR Loan, plus 2% per annum, and (b) in the case of any Eurodollar Loan, the rate that would be applicable under Section 2.06 to a Term Loan that is a Eurodollar Loan, plus 2% per annum. SECTION 2.08. Alternate Rate of Interest. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Administrative Agent shall have determined that dollar deposits in the principal amounts of the Loans 28 comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to at least 20% of the Lenders of making or maintaining their Eurodollar Loans during such Interest Period, or that reasonable means do not exist for ascertaining the Adjusted LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give written or telecopy notice of such determination to the Borrower and the Lenders. In the event of any such determination, any request by the Borrower for a Eurodollar Borrowing pursuant to Section 2.03 or 2.10 shall, until the Administrative Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist (which the Administrative Agent shall be required promptly to do upon such circumstances ceasing to exist), be deemed to be a request for an ABR Borrowing. Each determination by the Administrative Agent hereunder shall be conclusive absent manifest error. SECTION 2.09. Termination, Reduction and Extension of Commitments. (a) The Term Loan Commitments shall be automatically terminated at 5:00 p.m., New York City time, on the Restatement Date. The Revolving Credit Commitments and the LC/BA Commitment shall be automatically terminated at 5:00 p.m., New York City time, on the Revolving Credit Maturity Date and the LC/BA Maturity Date, respectively. (b) Upon at least three Business Days' prior irrevocable written or telecopy notice to the Administrative Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitments; provided, however, that (i) each partial reduction of the Commitments shall be in an integral multiple of $1,000,000 and in a minimum principal amount of $5,000,000 and (ii) the Borrower shall not be permitted to terminate or reduce the Revolving Credit Commitments if, as the result of such termination or reduction, (A) the LC/BA Commitment would exceed the aggregate remaining Revolving Credit Commitments or (B) the Revolving Credit Utilization would exceed the aggregate remaining Revolving Credit Commitments. The LC/BA Commitment may be voluntarily terminated or reduced by the Borrower as provided in Section 3.08. (c) The Revolving Credit Commitments shall be permanently reduced by the amount of any mandatory prepayments applied to Swingline Loans or Revolving Credit Borrowings pursuant to clause (ii) of Section 2.13(c). (d) Each reduction in the Commitments hereunder shall be made ratably among the applicable Lenders in accordance with their respective applicable Commitments. The Borrower shall pay to the Administrative Agent for the account of the applicable Lenders, on the date of each termination or reduction, the Commitment Fees on the amount of the Commitments so termi- nated or reduced accrued to, but excluding, the date of such termination or reduction. (e) Nothing in this Section 2.09 shall prejudice any rights that the Borrower may have against any Lender that fails to lend as required hereunder prior to the date of termination of any Commitment. SECTION 2.10. Conversion and Continuation of Term Borrowings. The Borrower shall have the right at any time upon prior irrevocable notice to the Administrative Agent (i) not later than 12:00 noon, New York City time, one Business Day prior to conversion, to convert any Eurodollar Term Borrowing into an ABR Term Borrowing, (ii) not later than 11:00 a.m., New York City time, three Business Days prior to conversion or continuation, to convert any ABR Term Borrowing into a Eurodollar Term Borrowing or to continue any Eurodollar Term Borrowing as a Eurodollar Term Borrowing for an additional Interest Period and (iii) not later than 11:00 a.m., New York City time, 29 three Business Days prior to conversion, to convert the Interest Period with respect to any Eurodollar Term Borrowing to another permissible Interest Period, subject in each case to the following: (a) each conversion or continuation shall be made pro rata among the Lenders in accordance with the respective principal amounts of the Loans comprising the converted or continued Term Borrowing; (b) if less than all the outstanding principal amount of any Term Borrowing shall be converted or continued, the aggregate principal amount of such Term Borrowing converted or continued shall be an integral multiple of $1,000,000 and not less than $5,000,000; (c) each conversion shall be effected by each Lender by applying the proceeds of the new Term Loan of such Lender resulting from such conversion to the Term Loan (or portion thereof) of such Lender being converted, and accrued interest on a Term Loan (or portion thereof) being converted shall be paid by the Borrower at the time of conversion; (d) if any Eurodollar Term Borrowing is converted at a time other than the end of the Interest Period applicable thereto, the Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.16; (e) any portion of a Term Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Eurodollar Term Borrowing; (f) any portion of a Eurodollar Term Borrowing that cannot be converted into or continued as a Eurodollar Term Borrowing by reason of subparagraph (e) above shall be automatically converted at the end of the Interest Period in effect for such Borrowing into an ABR Term Borrowing; and (g) no Interest Period may be selected for any Eurodollar Term Borrowing that would end later than a Term Loan Repayment Date occurring on or after the first day of such Interest Period if, after giving effect to such selection, the aggregate outstanding amount of (i) the Eurodollar Term Borrowings with Interest Periods ending on or prior to such Term Loan Repayment Date and (ii) ABR Term Borrowings would not be at least equal to the principal amount of Term Borrowings to be paid on such Term Loan Repayment Date. Each notice pursuant to this Section 2.10 shall be irrevocable and shall refer to this Agreement and specify (i) the identity and amount of the Term Borrowing that the Borrower requests be converted or continued, (ii) whether such Term Borrowing is to be converted to or continued as a Eurodollar Term Borrowing or an ABR Term Borrowing, (iii) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (iv) if such Term Borrowing is to be converted to or continued as a Eurodollar Term Borrowing, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurodollar Term Borrowing, the Borrower shall be deemed to have selected an Interest Period of one month's duration. The Administrative Agent shall advise the other Lenders of any notice given pursuant to this Section 2.10 and of each Lender's portion of any converted or continued Term Borrowing. If the Borrower shall not have given notice in accordance with this Section 2.10 to continue any Term Borrowing into a subsequent Interest Period (and shall not otherwise have given notice in accordance with this Section 2.10 to convert such Term Borrowing), such Term Borrowing shall, at the end of the Interest Period 30 applicable thereto (unless repaid pursuant to the terms hereof), automatically be continued into a new Interest Period as an ABR Term Borrowing. SECTION 2.11. Repayment of Term Borrowings. (a) (i) The Borrower shall pay to the Administrative Agent, for the account of the Lenders, on the Business Day next succeeding the dates set forth below (each such date being a "Term Loan Repayment Date"), a principal amount of the Term Loans (such amount, as adjusted from time to time pursuant to Sections 2.12(b) and 2.13(h), being called the "Term Loan Repayment Amount") equal to the amount set forth below for such date, together in each case with accrued and unpaid interest on the principal amount to be paid to but excluding the date of such payment: Date Amount ---- ------ February 3, 1996 20,000,000 May 4, 1996 10,000,000 August 3, 1996 10,000,000 November 2, 1996 10,000,000 February 1, 1997 20,000,000 May 3, 1997 10,000,000 August 2, 1997 10,000,000 November 1, 1997 10,000,000 January 31, 1998 20,000,000 May 2, 1998 10,000,000 August 1, 1998 10,000,000 October 31, 1998 10,000,000 January 30, 1999 20,000,000 May 1, 1999 10,000,000 July 31, 1999 10,000,000 October 30, 1999 10,000,000 January 29, 2000 20,000,000 April 29, 2000 10,000,000 July 29, 2000 10,000,000 Term Loan Maturity Date 10,000,000 On each Term Loan Repayment Date, the Administrative Agent shall apply the Term Loan Repayment Amount paid to the Administrative Agent to pay the Term Loans. (b) To the extent not previously paid, all Term Loans shall be due and payable on the Term Loan Maturity Date, together with accrued and unpaid interest on the principal amount to be paid to but excluding the date of payment. (c) All repayments pursuant to this Section 2.11 shall be subject to Section 2.16, but shall otherwise be without premium or penalty. SECTION 2.12. Optional Prepayments. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, upon written or telecopy notice (or telephone notice promptly confirmed by written or telecopy notice) delivered to the Administrative Agent (i) at least three Business Days prior to the date designated for such prepayment, in the case of any prepayment of a Eurodollar Borrowing, or (ii) by 11:00 a.m., New York City time, on the date 31 designated for such prepayment in the case of any prepayment of an ABR Borrowing; provided, however, that each partial payment shall be in an amount that is an integral multiple of $1,000,000 and not less than $10,000,000. (b) Optional prepayments of Term Loans made by the Borrower pursuant to paragraph (a) above shall (i) first, be applied in the order of maturity against the scheduled installments of principal of Term Loans due on Term Loan Repayment Dates occurring during the twelve-month period commencing on the date of such prepayment and (ii) second, be applied pro rata against the remaining scheduled installments of principal due in respect of Term Loans under Section 2.11(a)(i). (c) Each notice of prepayment shall specify the amount to be prepaid, the prepayment date, whether the related prepayment relates to a Revolving Credit Borrowing or a Term Borrowing and the principal amount of each Revolving Credit Borrowing (or portion thereof) to be prepaid or of each Term Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such obligations by the amount specified therein on the date specified therein. All prepayments under this Section 2.12 shall be accompanied by accrued interest on the principal amount being prepaid to but excluding the date of the payment. (d) No optional prepayment of Term Loans made by the Borrower pursuant to this Section 2.12 shall reduce the Borrower's obligation to make mandatory prepayments pursuant to paragraph (b) of Section 2.13. SECTION 2.13. Mandatory Prepayments. (a) On the date of any termination or reduction of the Revolving Credit Commitments pursuant to Section 2.09, the Borrower shall pay or prepay so much of the then- outstanding Swingline Loans and the then-outstanding Revolving Credit Bor- rowings as shall be necessary in order that (i) the aggregate principal amount of the Swingline Loans and Revolving Loans outstanding at such time will not exceed (ii) the aggregate Revolving Credit Commitments (after giving effect to such termination or reduction and after giving effect to each deemed reduction to the Revolving Credit Commitments in connection with the making of a Swingline Loan) less the aggregate LC/BA Exposure at such time. (b) In the event and on each occasion that a Prepayment Event occurs, the Borrower shall substantially simultaneously with (and in any event not later than the Business Day next following) the occurrence of such Pre- payment Event, apply an amount equal to 100% of the Net Proceeds therefrom to prepay outstanding Loans and Swingline Loans in accordance with Sec- tion 2.13(c). (c) Mandatory prepayments of outstanding obligations under this Agreement made by the Borrower pursuant to paragraph (b) above (i) first, shall be applied pro rata against the remaining scheduled installments of principal due in respect of Term Loans under Section 2.11(a)(i) and (ii) second, shall be applied to prepay Swingline Loans and then Revolving Credit Borrowings. (d) During (i) the period commencing on the Restatement Date and ending on the first anniversary thereof and (ii) each 12-month period thereafter, the Borrower shall repay Revolving Loans and Swingline Loans in an amount necessary to cause the aggregate principal amount of outstanding Revolving Loans and Swingline Loans to be less than or equal to $300,000,000 for a period of 30 consecutive days. (e) The Borrower shall deliver to the Administrative Agent, (i) at the time of each prepayment required under paragraph (b) of this Section 2.13, a certificate signed by a Financial Officer of the Bor- 32 rower setting forth in reasonable detail the calculation of the amount of such prepayment and (ii) at least three Business Days prior to the time of each prepayment required under this Section 2.13 (if known at such time), a notice of such prepayment. Each required notice of prepayment shall specify the prepayment date, the Type of each Loan being prepaid and the principal amount of each Loan or Swingline Loan (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Loans by the amount stated therein on the date stated therein. All prepayments of Borrowings and Swingline Loans under this Section 2.13 shall be subject to Section 2.16, but shall otherwise be without premium or penalty. All pre- payments of Borrowings and Swingline Loans under this Section 2.13 shall be accompanied by accrued interest on the principal amount being prepaid to but excluding the date of payment. (f) Net Proceeds and such other amounts to be applied pursuant to this Section 2.13 to the prepayment of Term Loans and Revolving Credit Loans shall be applied, as applicable, first to reduce outstanding ABR Term Loans and ABR Revolving Credit Loans. Any amounts remaining after each such application shall, at the option of the Borrower, be applied to prepay Eurodollar Term Loans or Eurodollar Revolving Credit Loans, as the case may be, immediately and/or shall be deposited in the Prepayment Account (as defined below). The Administrative Agent shall apply any cash deposited in the Prepayment Account (i) allocable to Term Loans to prepay Eurodollar Term Loans and (ii) allocable to Revolving Credit Loans to prepay Euro- dollar Revolving Credit Loans, in each case on the last day of their respective Interest Periods (or, at the direction of the Borrower, on any earlier date) until all outstanding Term Loans or Revolving Credit Loans, as the case may be, have been prepaid or until all the allocable cash on deposit with respect to such Loans has been exhausted. For purposes of this Agreement, the term "Prepayment Account" shall mean an account established by the Borrower with the Administrative Agent and over which the Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal for application in accordance with this paragraph (h). The Administrative Agent will, at the request of the Borrower, invest amounts on deposit in the Prepayment Account in Permitted Investments maturing prior to the last day of the applicable Interest Periods of the Eurodollar Term Borrowings or Eurodollar Revolving Credit Borrowings to be prepaid, as the case may be; provided, however, that (i) the Administrative Agent shall not be required to make any investment that, in its sole judgment, would require or cause the Administrative Agent to be in, or would result in any, violation of any law, statute, rule or regulation and (ii) the Administrative Agent shall have no obligation to invest amounts on deposit in the Prepayment Account if a Default or Event of Default shall have occurred and be continuing. The Borrower shall indem- nify the Administrative Agent for any losses relating to the investments so that the amount available to prepay Eurodollar Borrowings on the last day of the applicable Interest Periods is not less than the amount that would have been available had no investments been made pursuant thereto. Other than any interest earned on such investments, the Prepayment Account shall not bear interest. Interest or profits, if any, on such investments shall be deposited in the Prepayment Account and reinvested as specified above. If the maturity of the Loans has been accelerated pursuant to Article VIII, the Administrative Agent may, in its sole discretion, apply all amounts on deposit in the Prepayment Account to satisfy any of the Obligations. The Borrower hereby grants to the Administrative Agent, for its benefit and the benefit of the Fronting Banks, the Swingline Lenders and the Lenders, to secure the Obligations a security interest in the Prepayment Account. SECTION 2.14. Reserve Requirements; Change in Circumstances; Increased Costs. (a) Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender or either Swingline Lender or Fronting Bank of the 33 principal of or interest on any Eurodollar Loan made by such Lender or any Letter of Credit or Bankers' Acceptance reimbursement obligations, Fees or other amounts payable hereunder (other than changes in respect of income and franchise taxes imposed on such Lender, Swingline Lender or Fronting Bank by the jurisdiction in which such Lender, Swingline Lender or Fronting Bank is organized or has its principal office or by any political subdivision or taxing authority thereof or therein), or shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by such Lender, Swingline Lender or Fronting Bank (except any such reserve requirement that is reflected in the Adjusted LIBO Rate or in the Alternate Base Rate) or shall impose on such Lender, Swingline Lender or Fronting Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or to reduce the amount of any sum received or receivable by such Lender, Swingline Lender or Fronting Bank hereunder or under the Notes (whether of principal, interest or other- wise) by an amount deemed by such Lender, Swingline Lender or Fronting Bank to be material, then the Borrower will pay to such Lender, Swingline Lender or Fronting Bank following receipt of a certificate of such Lender, Swingline Lender or Fronting Bank to such effect in accordance with Section 2.14(d) such additional amount or amounts as will compensate such Lender, Swingline Lender or Fronting Bank on an after-tax basis for such additional costs incurred or reduction suffered. (b) If any Lender or either Swingline Lender or Fronting Bank shall have determined that the applicability of any law, rule, regulation, agreement or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Prac- tices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption after the date hereof of any other law, rule, regulation, agreement or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or either Swingline Lender or Fronting Bank or any Lender's or either Swingline Lender's or Fronting Bank's holding company with any request or directive regarding capital adequacy issued under any law, rule, regulation or guideline (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's, Swingline Lender's or Fronting Bank's capital or on the capital of such Lender's, Swingline Lender's or Fronting Bank's holding company, if any, as a consequence of this Agreement or the Loans made by such Lender, the Swingline Loans made by such Swingline Lender or the Letters of Credit or the Bankers' Acceptances issued by such Fronting Bank pursuant hereto to a level below that which such Lender, Swingline Lender or Fronting Bank or such Lender's, Swingline Lender's or Fronting Bank's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's, Swingline Lender's or Fronting Bank's policies and the policies of such Lender's, Swingline Lender's or Fronting Bank's holding company with respect to capital adequacy) by an amount deemed by such Lender, Swingline Lender or Fronting Bank to be material, then from time to time the Borrower shall pay to such Lender, Swingline Lender or Fronting Bank following receipt of a certificate of such Lender, Swingline Lender or Fronting Bank to such effect in accordance with Section 2.14(d) such additional amount or amounts as will compensate such Lender, Swingline Lender or Fronting Bank or such Lender's, such Swingline Lender's or Fronting Bank's holding company on an after-tax basis for any such reduction suffered. Notwithstanding any other provision in this paragraph (b), none of any Lender, either Swingline Lender or either Fronting Bank shall be entitled to demand compensation pursuant to this paragraph (b) if it shall not be the general practice of such Lender, Swingline Lender or Fronting Bank, as applicable, to demand such compensa- tion in similar circumstances under comparable provisions of other comparable credit agreements. 34 (c) The Borrower agrees that, in the event that any Bankers' Acceptance originated (or to be originated) shall not, in the reasonable opinion of the Managing Agents, meet all requirements for "eligible" bankers' acceptances (as determined in accordance with paragraph 7 of Section 13 of the Federal Reserve Act (12 U.S.C. Sec.372)), the Borrower shall, upon demand by the Managing Agents, pay to the Administrative Agent for the account of the Participating Lenders such additional amount or amounts sufficient to compensate the Participating Lenders for any increased costs resulting therefrom (including costs resulting from any reserve requirement, premium liability to the Federal Deposit Insurance Corporation or a higher discount rate). (d) A certificate of each Lender, Swingline Lender or Fronting Bank setting forth such amount or amounts as shall be necessary to compensate such Lender, Swingline Lender or Fronting Bank or its holding company as specified in paragraph (a), (b) or (c) above, as the case may be, and setting forth in reasonable detail an explanation of the basis of requesting such compensation in accordance with paragraph (a), (b) or (c) above, including calculations in reasonable detail, shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay each Lender, Swingline Lender or Fronting Bank the amount shown as due on any such certificate delivered by it within 10 days after its receipt of the same. (e) Failure on the part of any Lender or either Swingline Lender or Fronting Bank to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Lender's, Swingline Lender's or Fronting Bank's right to demand compensation with respect to such period or any other period, except that none of any Lender, either Swingline Lender or Fronting Bank shall be entitled to compensation under this Section 2.14 for any costs incurred or reduction suffered with respect to any date unless such Lender, Swingline Lender or Fronting Bank, as applicable, shall have notified the Borrower that it will demand compensation for such costs or reductions under paragraph (d) above, not more than six months after the later of (i) such date and (ii) the date on which such Lender, Swingline Lender or Fronting Bank, as applicable, shall have become aware of such costs or reductions. The protection of this Section 2.14 shall be available to each Lender, Swingline Lender or Fronting Bank regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition that shall have occurred or been imposed. (f) Each Lender, Fronting Bank and Swingline Lender will, at the request of the Borrower, designate a different lending office if such designation (i) will avoid the need for, or minimize the amount of, any compensation to which such Lender is entitled pursuant to this Section 2.14 and (ii) will not, in the sole judgment of such Lender, be otherwise disadvantageous to such Lender. (g) Without prejudice to the survival of any other provision of this Agreement, the provisions of this Section 2.14 shall survive any termination of this Agreement. SECTION 2.15. Change in Legality. (a) Notwithstanding any other provision herein, if after the date hereof any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrower and to the Administrative Agent, such Lender may: (i) declare that Eurodollar Loans will not thereafter be made by such Lender hereunder, whereupon any request by the Borrower for a Eurodollar Borrowing shall, as to such 35 Lender only, be deemed a request for an ABR Loan unless such declaration shall be subsequently withdrawn; and (ii) require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under subparagraph (i) or (ii) above, all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. (b) For purposes of this Section 2.15, a notice to the Borrower by any Lender shall be effective as to each Eurodollar Loan, if lawful, on the last day of the Interest Period currently applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrower. SECTION 2.16. Indemnity. The Borrower shall indemnify each Lender against any loss or expense that such Lender may sustain or incur as a consequence of (a) any failure by the Borrower to fulfill on the date of any Borrowing hereunder the applicable conditions set forth in Article V, (b) any failure by the Borrower to borrow or to refinance, convert or continue any Loan hereunder after irrevocable notice of such borrowing, refinancing, conversion or continuation has been given pursuant to Section 2.03 or 2.10, (c) any payment, prepayment or conversion of a Euro- dollar Loan required by any other provision of this Agreement or otherwise (other than pursuant to Section 2.15) made or deemed made on a date other than the last day of the Interest Period applicable thereto, (d) any default in payment or prepayment of the principal amount of any Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, whether by scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise) or (e) the occurrence of any Event of Default, including, in each such case, any loss or reasonable expense sustained or incurred or to be sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Loan or any part thereof as a Eurodollar Loan. Such loss or reasonable expense shall be equal to the sum of (a) such Lender's actual costs and expenses incurred (other than any lost profits) in connection with, or by reason of, any of the foregoing events and (b) an amount equal to the excess, if any, as reasonably determined by such Lender of (i) its cost of obtaining the funds for the Loan being paid, prepaid, converted or not borrowed, converted or continued (assumed to be the Adjusted LIBO Rate applicable thereto) for the period from and including the date of such payment, prepayment, conversion or failure to borrow, convert or continue to but excluding the last day of the Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the Interest Period for such Loan that would have commenced on the date of such failure) over (ii) the amount of interest (as reasonably determined by such Lender) that would be realized by such Lender in reemploying the funds so paid, prepaid, converted or not borrowed, converted or continued for such period or Interest Period, as the case may be. A certificate of any Lender setting forth any amount or amounts, including calculations in reasonable detail, that such Lender is entitled to receive pursuant to this Section 2.16 shall be delivered to the Borrower and shall be conclusive absent manifest error. Without prejudice to the survival of any other provision of this Agreement, the provisions of this Section 2.16 shall survive any termination of this Agreement. SECTION 2.17. Pro Rata Treatment. (a) Except as required under Section 2.15, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the 36 Loans, each payment of the Commitment Fees, each payment of the LC/BA Fees, each reduction of the Term Loan Commitments or the Revolving Credit Commitments and each refinancing of any Borrowing with, conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with their respective applicable Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Loans). Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing, computed in accordance with Section 2.01, to the next higher or lower whole dollar amount. (b) Notwithstanding any other provisions of this Agreement and the Security Documents, if at any time the Administrative Agent (or the Collateral Agent) receives any amounts under the Mortgage in respect of the Mortgaged Property located in Florida (which Mortgage omits as a secured obligation the Revolving Loans and all other amounts due in respect thereof), then such amounts shall not be applied to the payment of outstanding obligations in respect of the Revolving Loans. It is the intent of the Lenders, however, that each of the Lenders shall share in the aggregate proceeds of the Collateral on a pro rata basis as provided in paragraph (a) above. Accordingly, if the proceeds in respect of the above- described Florida Mortgage are not allocated to outstanding obligations in respect of the Revolving Loans due to their omission as secured obligations under such Mortgage, the Administrative Agent shall, to the extent it deems necessary, allocate and reallocate the proceeds of the other Collateral to ensure that each Lender receives its pro rata share of the proceeds of all the Collateral. If after giving effect to the allocations described in the preceding sentence any Lender shall have received less than its pro rata share of the aggregate proceeds of all the Collateral due to the exclusion of the Revolving Loans as secured obligations under the above-described Florida Mortgage, each Lender that received more than its pro rata share of the aggregate proceeds of all the Collateral agrees to deliver to the Administrative Agent, for reallocation to the Lenders that received less than their pro rata share of the proceeds of all the Collateral, the excess of the aggregate amount received by such Lender in respect of the proceeds of all the Collateral over the amount that would otherwise have been such Lender's pro rata share of the proceeds of all the Collateral had such Mortgage included the Revolving Loans as a secured obligation. SECTION 2.18. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans or LC/BA Exposure as a result of which the unpaid principal portion of its Loans or its LC/BA Exposure shall be proportionately less than the unpaid principal portion of the Loans of any other Lender or any other Lender's LC/BA Exposure, such Lender shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans of such other Lender or the LC/BA Exposure of such other Lender, so that the aggregate unpaid principal amount of the Loans, LC/BA Exposure and participations in Loans and LC/BA Exposure held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans and LC/BA Exposure then outstanding as the principal amount of such Lender's Loans and LC/BA Exposure prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Loans and LC/BA Exposure outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that, if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.18 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments 37 shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in a Loan or LC/BA Exposure deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower to such Lender by reason thereof as fully as if such Lender had made a Loan directly to the Borrower in the amount of such participation. SECTION 2.19. Payments. (a) Except as provided in Sections 2.05(d) and 3.05(a) and (b), the Borrower shall make each payment (including principal of or interest on any Loan or Swingline Loan or any Fees or other amounts) hereunder and under any other Loan Document not later than 12:00 noon, New York City time, on the date when due in dollars. Each such payment (other than (i) the payments specified in Sections 3.05(a) and (b) and Section 3.09, which shall be paid directly to the applicable Fronting Bank and (ii) principal of and interest on Swingline Loans, which shall be paid directly to the Swingline Lenders) shall be made to the Administrative Agent at its office at 270 Park Avenue, New York, New York. Payments made directly to the Fronting Banks shall be made to such account of the applicable Fronting Bank as such Fronting Bank shall specify by notice to the Borrower. Payments made directly to the Swingline Lenders shall be made to the applicable Swingline Lender in the manner specified in such Swingline Lender's Swingline Note. Any payments received by the Administrative Agent, either Fronting Bank or either Swingline Lender after the specified time for receipt of such payment shall be deemed to have been received on the next Business Day. The Administrative Agent shall distribute to the applicable Lenders all payments received by the Administrative Agent for their respective accounts, promptly following receipt thereof. (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.20. Taxes. (a) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.19, free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding taxes imposed on the net income of the Administrative Agent, either Fronting Bank or Swingline Lender or any Lender (or any transferee or assignee thereof, including a participation holder (any such entity being called a "Transferee")) and franchise taxes imposed on the Administrative Agent, either Fronting Bank or Swingline Lender or any Lender (or Transferee) by the United States or any jurisdiction under the laws of which the Administrative Agent, such Fronting Bank, such Swingline Lender or any such Lender (or Transferee) is organized or has its principal office or lending office or any political subdivision or taxing authority thereof or therein (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If any Taxes are required to be deducted from or in respect of any sum payable hereunder to any Lender (or any Transferee), the Administrative Agent or either Swingline Lender or Fronting Bank, (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.20) such Lender (or Transferee), the Administrative Agent or such Swingline Lender or Fronting Bank (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law; provided, however, that no Transferee of any Lender shall be entitled to receive any greater payment under 38 this paragraph (a) than such Lender would have been entitled to receive with respect to the rights assigned, participated or otherwise transferred unless (x) such assignment, participation or transfer shall have been made at a time when the circumstances (including a Change of Law as defined in paragraph 2.20(f) below) giving rise to such greater payment did not exist or had not yet occurred or (y) such assignment, participation or transfer shall have been at the request of the Borrower. (b) In addition, the Borrower agrees to pay any current or future stamp, intangible or documentary taxes or any other excise or property taxes, charges or similar levies (including, without limitation, mortgage recording taxes and similar fees) that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, any Assignment and Acceptance entered into at the request of the Borrower or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) The Borrower will indemnify each Lender (or Transferee), the Administrative Agent and each Swingline Lender and Fronting Bank for the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes on amounts payable under this Section 2.20) paid by such Lender (or Transferee), the Administrative Agent or such Swingline Lender or Fronting Bank, as the case may be, and any liability (including penalties, interest and reasonable expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant taxing authority or other Governmental Authority; provided, however, that the Borrower shall not indemnify any Lender (or Transferee), the Administrative Agent or either Swingline Lender or Fronting Bank for Taxes, penalties, additions to tax, interest and expenses arising as a result of its own wilful misconduct or gross negligence. Such indemnifi- cation shall be made within 30 days after the date any Lender (or Transferee), the Administrative Agent, either Swingline Lender or Fronting Bank, as the case may be, makes written demand therefor and provides the Borrower with either a copy of any assessment thereof from the relevant taxing authority (deleting any confidential information contained therein) or proof of payment of a tax for which the Borrower is liable hereunder. If a Lender (or Transferee), the Administrative Agent or a Swingline Lender or a Fronting Bank shall become aware that it is entitled to receive a refund (including interest and penalties, if any) in respect of Taxes or Other Taxes as to which it has been indemnified by the Borrower pursuant to this Section 2.20, it shall promptly notify in writing the Borrower of the availability of such refund (including interest and penalties, if any) and shall, within 30 days after receipt of a request by the Borrower, apply for such refund at the Borrower's expense. If any Lender (or Transferee), the Administrative Agent or either Swingline Lender or Fronting Bank receives a refund (including interest and penalties, if any) in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrower pursuant to this Section 2.20, it shall promptly notify the Borrower of such refund and shall, within 15 days of receipt, repay such refund (to the extent of amounts that have been paid by the Borrower under this Section 2.20 with respect to such refund and not previously reimbursed) to the Borrower, net of all reasonable out-of-pocket expenses of such Lender, the Administrative Agent or such Swingline Lender or Fronting Bank and without any interest (other than the interest, if any, included in such refund), provided that the Borrower, upon the request of such Lender (or Transferee), the Administrative Agent or such Swingline Lender or Fronting Bank, agrees to return such refund (plus penalties, interest or other charges) to such Lender (or Transferee), the Administrative Agent or such Swingline Lender or Fronting Bank in the event such Lender (or Transferee), the Administrative Agent, such Swingline Lender or Fronting Bank is required to repay such refund. The Borrower shall return such refund within 30 days after such Lender (or Transferee), the Administrative Agent or such Swingline Lender or Fronting Bank provides the Borrower with a copy of the notice or assessment from the relevant taxing authority (deleting any confidential information contained therein) requiring repayment of such refund. Nothing contained in this paragraph (c) shall require any Lender (or Transferee), the Administrative Agent or either Swingline 39 Lender or Fronting Bank to make available any of its tax returns (or any other information relating to its taxes that it deems to be confidential). (d) Within 30 days after the date of any payment of Taxes or Other Taxes withheld by the Borrower in respect of any payment to any Lender (or Transferee), the Administrative Agent or either Swingline Lender or Fronting Bank, the Borrower will furnish to the Administrative Agent, at its address referred to in Section 10.01, the original or a certified copy of a receipt evidencing payment thereof or other evidence reasonably satisfactory to such Lender (or Transferee), the Administrative Agent or such Swingline Lender or Fronting Bank, as the case may be. (e) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.20 shall survive the payment in full of the principal of and interest on all Loans made under any Loan Document until the expiration of the relevant statute of limitations. (f) Each of the Administrative Agent, the Fronting Banks, the Swingline Lenders and any Lender (or Transferee) that is not incorporated or otherwise formed under the laws of the United States of America or a state thereof (a "Non-U.S. Person") agrees that, on or prior to the Restatement Date or, if later, the date it becomes a Lender (or Transferee), the Administrative Agent, a Fronting Bank or a Swingline Lender hereunder, it will deliver to each of the Borrower and the Administrative Agent one duly completed copy of United States Internal Revenue Service Form 1001 or 4224, or, in the case of Lenders (or Transferee) exempt from United States Federal withholding tax pursuant to Sections 871(h) or 881(c) of the Code, Form W-8, or any successor applicable form (a "Form 1001, 4224 or W-8"), as the case may be, certifying in each case that such Lender (or Transferee), the Administrative Agent or such Fronting Bank or Swingline Lender is entitled to receive payments hereunder payable to it without deduction or withholding of any United States Federal income taxes, or subject to a reduced rate thereof. Each of the Administrative Agent, either Fronting Bank or Swingline Lender or any Lender (or Transferee) that delivers to the Borrower and the Administrative Agent a Form 1001, 4224 or W-8 pursuant to the immediately preceding sentence further undertakes to deliver to the Borrower and the Administrative Agent further copies of such Form 1001, 4224 or W-8, as the case may be, or other manner of certification reasonably satisfactory to the Borrower on or before the date that any such form or certification expires or becomes obsolete or of the occurrence of any event requiring a change in the most recent form or certification previously delivered by it to the Borrower or the Administrative Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrower or the Administrative Agent, certifying that such Administrative Agent, Fronting Bank, Swingline Lender or Lender (or Transferee), as the case may be, is entitled to receive payments hereunder without deduction or withholding of any United States Federal income taxes, or subject to a reduced rate thereof. If at any time there has occurred, on or prior to the date on which any delivery of such Form 1001, 4224 or W-8, as the case may be, would otherwise be required, any change in law, rule, regulation, treaty, convention or directive, or any change in the interpretation or application of any thereof ("Change of Law"), that renders all such forms inapplicable or which would prevent such Administrative Agent, Fronting Bank, Swingline Lender or Lender (or Transferee), as the case may be, from duly completing and delivering any such form or certification with respect to it, such Administrative Agent, Fronting Bank, Swingline Lender or Lender (or Transferee), as the case may be, shall advise the Borrower that it shall be subject to withholding of United States Federal income tax at the full statutory rate. A Non-U.S. Person shall be required to furnish a Form 1001, 4224 or W-8 only if it is entitled to claim an exemption from or a reduced rate of withholding. Each of the Administrative Agent, the Fronting Banks, the Swingline Lenders and any Lender that is a Non-U.S. Person and that is a party hereto as of the Restatement Date hereby represents and warrants that, as of the Restatement Date, payments made to it hereunder are 40 exempt from withholding of United States Federal income taxes (i) because such payments are effectively connected with a United States trade or business conducted by such Non-U.S. Person; (ii) pursuant to the terms of an income tax treaty between the United States and such Non-U.S. Person's country of residence; or (iii) because such payments are portfolio interest exempt pursuant to Sections 871(h) or 881(c) of the Code. Notwithstanding any provision of paragraph (a) above to the contrary, the Borrower shall not have any obligation to pay any Taxes or Other Taxes or to indemnify any Lender (or Transferee), the Administrative Agent, or either Swingline Lender or Fronting Bank for such Taxes or Other Taxes pursuant to Section 2.20 to the extent that such Taxes or Other Taxes result from (i) the failure of any Lender (or Transferee), the Administrative Agent, or either Fronting Bank or Swingline Bank to comply with its obligations pursuant to this paragraph (f) or (ii) any representation made on Form 1001, 4224 or W-8 or successor applicable form or certification by the Lender (or Transferee), the Administrative Agent, the Fronting Bank, or the Swingline Bank incurring such Taxes or Other Taxes proving to have been incorrect, false or misleading in any material respect when so made or deemed to be made. (g) Any of the Administrative Agent, a Fronting Bank, a Swingline Lender or any Lender (or Transferee) claiming any additional amounts payable pursuant to this Section 2.20 shall use reasonable efforts (consistent with legal and regulatory restrictions) (including reasonable efforts to change the jurisdiction of its applicable lending office) to avoid the need for or reduce the amount of any such additional amounts that may thereafter accrue, provided that such efforts would not, in the sole determination of such Lender (or Transferee), Administrative Agent, Fronting Bank or Swingline Lender, as the case may be, be otherwise disadvantageous to such Lender (or Transferee), the Administrative Agent or such Fronting Bank or Swingline Lender. (h) In the event any Lender (or Transferee) changes its applicable lending office as provided in Section 2.14(f), such Lender (or Transferee) shall not be entitled to receive any greater payment under this Section 2.20 than such Lender (or Transferee) would have been entitled to receive had such change not occurred, unless (i) such greater payment arises as a result of a Change in Law occurring after the date of such change in applicable lending office or (ii) such change in applicable lending office shall have been made at the request of the Borrower. SECTION 2.21. Assignment of Commitments under Certain Circumstances. In the event that any Lender shall have delivered a notice or certificate pursuant to Section 2.14, or the Borrower shall be required to make additional payments to any Lender under Section 2.20 (or would be required to make such additional payments with respect to the interest payment that would be made on the next succeeding Interest Payment Date), the Borrower shall have the right, but not the obligation, at its own expense, upon notice to such Lender and the Managing Agents, to replace such Lender with an assignee (in accordance with and subject to the restrictions contained in Section 10.04(b)), and such Lender hereby agrees to transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 10.04(b)) all its interests, rights and obligations under this Agreement to such assignee; provided, however, that (a) no such assignment shall conflict with any law or any rule, regulation or order of any Governmental Authority, (b) such assignee shall pay to the affected Lender in immediately available funds on the date of such assignment the principal of the Loans made by such Lender hereunder and (c) the Borrower shall pay to the affected Lender in immediately available funds on the date of such assignment the interest accrued to the date of payment on the Loans made by such Lender hereunder and all other amounts accrued for such Lender's account or owed to it hereunder. SECTION 2.22. Swingline Loans. (a) On the terms and subject to the conditions and relying upon the representations and warranties herein set forth, each Swingline Lender agrees severally and not 41 jointly, at any time and from time to time from and including the Restatement Date to but excluding the earlier of the Revolving Credit Maturity Date and the termination of the Revolving Credit Commitments, in accordance with the terms hereof, to make Swingline Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed such Swingline Lender's Swingline Commitment Percentage of the lesser of (i) $30,000,000 and (ii) the difference between (A) the aggregate Revolving Credit Commitments, as the same may have been reduced from time to time pursuant to Section 2.09, at such time and (B) the sum of (I) the aggregate principal amount of Revolving Loans outstanding at such time and (II) the LC/BA Exposure at such time. Each Swingline Loan will be made by the Swingline Lenders ratably in accordance with their respective Swingline Commitment Percentages (it being understood that neither Swingline Lender shall be responsible for the failure of the other Swingline Lender to make any Swingline Loan required to be made by such other Swingline Lender). Each Swingline Loan shall be in a principal amount that is an integral multiple of $500,000. Each Swingline Lender shall make its portion of each Swingline Loan available to the Borrower by means of a credit to the general deposit account of the Borrower with such Swingline Lender by 3:00 p.m. on the date such Swingline Loan is requested to be made pursuant to paragraph (b) below. Within the limits set forth in the first sentence of this paragraph, the Borrower may borrow, pay or prepay and reborrow Swingline Loans on or after the Restatement Date and prior to the Revolving Credit Maturity Date on the terms and subject to the conditions and limitations set forth herein. (b) The Borrower shall give the Administrative Agent telephonic, written or telecopy notice (in the case of telephonic notice, such notice shall be promptly confirmed by telecopy) not later than 12:00 noon, New York City time, on the day of a proposed borrowing. Such notice shall be delivered on a Business Day, shall be irrevocable and shall refer to this Agreement and shall specify the requested date (which shall be a Business Day) and amount of such Swingline Loan. The Administrative Agent shall promptly advise the Swingline Lenders of any notice received from the Borrower pursuant to this paragraph (b). (c) The Swingline Lenders may by written or telecopy notice given to the Administrative Agent not later than 10:00 a.m., New York City time, on any Business Day require the Lenders to purchase all or any portion of the Swingline loans outstanding. Such notice shall specify the aggregate amount of Swingline Loans to be purchased and the Administrative Agent shall promptly upon receipt of such notice give notice to each Lender, specifying in such notice to each Lender such Lender's pro rata percentage (based on the percentage that such Lender's Revolving Credit Commitment bears to the aggregate amount of the Revolving Credit Commitments on the date of such notice) of such Swingline Loan or Swingline Loans. Each Lender shall pay to the Administrative Agent, not later than 2:00 p.m., New York City time, on the date of such notice, such Lender's pro rata percentage (determined as aforesaid) of the principal amount of such Swingline Loan or Swingline Loans. Each such payment shall for all purposes hereunder be deemed to be an ABR Revolving Loan (it being understood that (i) each Lender's obligation to make such payment is absolute and unconditional and shall not be affected by any event or circumstance whatsoever, including the occurrence of any Default or Event of Default hereunder or the failure of any condition precedent set forth in Article V to be satisfied, and (ii) each such payment shall be made without any offset, abatement, with- holding or reduction whatsoever). The Administrative Agent shall promptly advise the Borrower of any notice received from the Swingline Lenders pursuant to this paragraph (c). (d) The Borrower may prepay any Swingline Loan in whole or in part at any time without premium or penalty, provided that the Borrower shall have given the Administrative Agent written or telecopy notice (or telephone notice promptly confirmed in writing or by telecopy) of such prepayment not later than 11:30 a.m., New York City time, on the Business Day designated by the Borrower for 42 such prepayment. Each payment of principal of or interest on or any other amount in respect of Swingline Loans shall be allocated, as between the Swingline Lenders, pro rata in accordance with their respective Swingline Commitment Percentages. ARTICLE III Letters of Credit; Bankers' Acceptances SECTION 3.01. Issuance of Letters of Credit. (a) Each Fronting Bank agrees, upon the receipt of an appropriately completed and properly authorized Letter of Credit Application of such Fronting Bank, in a form and containing terms and conditions that are reasonably acceptable to such Fronting Bank and consistent with the terms hereof, and on the terms and subject to the conditions hereinafter set forth, to issue Letters of Credit for the account of the Borrower, at any time and from time to time on and after the Restatement Date until the earlier of (i) the LC/BA Maturity Date and (ii) the termination of the LC/BA Commitment in accordance with the terms hereof; provided, however, that (A) the IRB Fronting Bank shall not issue any Letter of Credit other than an IRB Letter of Credit and (B) any Letter of Credit shall be issued only if, and each request by the Borrower for the issuance of any Letter of Credit shall be deemed a representation and warranty of the Borrower that, immediately following the issuance of any such Letter of Credit, (I) the LC/BA Exposure at such time shall not exceed the LC/BA Commitment in effect at such time, (II) the Revolving Credit Utilization at such time shall not exceed the aggregate Revolving Credit Commitments at such time, (III) the Standby LC Exposure at such time shall not exceed $105,000,000 and (IV) the sum of (x) the Trade LC Exposure at such time and (y) the BA Exposure at such time shall not exceed $50,000,000. (b) No Letter of Credit shall be issued with a stated expiration date later than the earlier of (i) the close of business on the LC/BA Maturity Date and (ii) the close of business on the date that is (x) 270 days after the date of issuance of such Letter of Credit, in the case of a Trade Letter of Credit, (y) 12 months after the date of issuance of such Letter of Credit, in the case of a Standby Letter of Credit (other than an IRB Letter of Credit) and (z) 12 months and five days after the date of issuance of such Letter of Credit, in the case of an IRB Letter of Credit. Each Letter of Credit shall provide for payments of drawings in dollars. (c) Each Trade Letter of Credit shall, among other things, provide for the payment of sight drafts when presented for honor thereunder, or of time drafts with a maturity date occurring not later than the earlier of (i) 120 days after the presentation thereof and (ii) the LC/BA Maturity Date, in each case in accordance with the terms thereof and when accompanied by the required documents or when such documents are presented to the Fronting Bank. (d) Each Standby Letter of Credit may, in the absolute discretion of the Fronting Bank that issued such Standby Letter of Credit, include a provision whereby such Standby Letter of Credit shall be renewed automatically for additional consecutive periods of 12 months or less (but not beyond the LC/BA Maturity Date) unless such Fronting Bank notifies the beneficiary thereof at least 60 days prior to the then-applicable expiry date that such Standby Letter of Credit will not be renewed. (e) The Borrower may request the extension or renewal of a Standby Letter of Credit that is not automatically renewed in accordance with the terms contained therein by giving written notice to the Fronting Bank that issued such Standby Letter of Credit at least three Business Days prior to the then-current expiry date of such Standby Letter of Credit (provided that such Fronting Bank may 43 accommodate requests on shorter notice in its sole discretion). If no Default or Event of Default has occurred and is continuing, such Fronting Bank shall promptly issue such extension or renewal; provided, however, that such Fronting Bank shall have no obligation to extend or renew any Standby Letter of Credit (i) for a period in excess of 12 months or (ii) to an expiry date beyond the LC/BA Maturity Date. (f) Each request for the issuance of a Letter of Credit shall be made on reasonable prior electronic, written or facsimile authenticated Letter of Credit Application from the Borrower to a Fronting Bank specifying whether such Letter of Credit is to be a Trade Letter of Credit or a Standby Letter of Credit (and if such Letter of Credit is to be a Standby Letter of Credit, the date on which such Standby Letter of Credit is to be issued), the date on which such Letter of Credit is to expire, the amount of such Letter of Credit, the name and address of the beneficiary of such Letter of Credit and such other information as may be necessary or desirable to complete such Letter of Credit. The Primary Fronting Bank will provide the Administrative Agent on the first Business Day of each week (or on a more frequent basis if reasonably requested by the Administrative Agent) a statement setting forth the aggregate face amount of the Outstanding Standby Letters of Credit issued by it and the aggregate face amount of the Outstanding Trade Letters of Credit for each day since the end of the period covered by the prior such statement, together with such other information regarding the Outstanding Letters of Credit as may be reasonably requested by the Administrative Agent. SECTION 3.02. Origination of Bankers' Acceptances. (a) The Primary Fronting Bank agrees, on the terms and subject to the conditions set forth herein and in any BA Document, to originate Clean Bankers' Acceptances, in a form reasonably acceptable to the Managing Agents and the Primary Fronting Bank, appropriately completed, at any time and from time to time on and after the Restatement Date until the earlier of (i) the 30th day preceding the LC/BA Maturity Date and (ii) the termination of the LC/BA Commitment in accordance with the terms hereof; provided, however, that any Clean Bankers' Acceptance shall be originated by the Primary Fronting Bank only if, and each request by the Borrower for the origination of any Clean Bankers' Acceptance shall be deemed a representation and warranty of the Borrower that, immediately following the origination of such Clean Bankers' Acceptance, (A) the LC/BA Exposure at such time shall not exceed the LC/BA Commitment in effect at such time, (B) the Revolving Credit Utilization at such time shall not exceed the aggregate Revolving Credit Commitments at such time, (C) the BA Exposure (exclusive of BA Exposure attributable to outstanding Trade Bankers' Acceptances) at such time shall not exceed $25,000,000 and (D) the sum of (I) the Trade LC Exposure at such time and (II) the BA Exposure at such time shall not exceed $50,000,000. (b) No Bankers' Acceptance shall be originated with a stated maturity date later than the earlier of (i) the close of business on the LC/BA Maturity Date and (ii) the close of business on the date that is 120 days after the origination of such Bankers' Acceptance. Each Banker's Acceptance shall comply with any related BA Documents and shall be executed on behalf of the Borrower, in the case of a Clean Bankers' Acceptance, or the beneficiary of a Trade Letter of Credit, in the case of a Trade Bankers' Acceptance, and presented to the Primary Fronting Bank pursuant to such procedures as are provided for in any such BA Documents or otherwise provided or required by the Primary Fronting Bank. The stated maturity date of each Clean Bankers' Acceptance shall be a Business Day. Notwithstanding any other provision of this Agreement to the contrary, (i) the Primary Fronting Bank shall not be obligated to originate any Clean Bankers' Acceptance (A) that is not "eligible" pursuant to paragraph 7 of Section 13 of the Federal Reserve Act (12 U.S.C. Sec.372), as in effect from time to time, (B) if the origination thereof would cause the Primary Fronting Bank to exceed the maximum amount of outstanding bankers' acceptances permitted by applicable law or (C) if, in the reasonable opinion of the Fronting Bank, 44 general conditions in the public market for re-discounting bankers' acceptances render it economically disadvantageous to do so. (c) To request a Clean Bankers' Acceptance, the Borrower shall hand deliver, telex or telecopy to the Primary Fronting Bank a duly completed Bankers' Acceptance Request not later than 10:00 a.m., New York City time, on the requested date of the origination of such Clean Bankers' Acceptance, which Bankers' Acceptance Request shall be accompanied by such documents as are specified therein and in any related BA Documents. The Primary Fronting Bank will provide the Administrative Agent on the first Business Day of each week (or on a more frequent basis if reasonably requested by the Administrative Agent) a statement setting forth the aggregate face amount of the Outstanding Clean Bankers' Acceptances and the aggregate face amount of the Outstanding Trade Bankers' Acceptances for each day since the end of the period covered by the prior such statement, together with such other information regarding the Outstanding Bankers' Acceptances as may be reasonably requested by the Administrative Agent. (d) Upon the origination by the Primary Fronting Bank of a Clean Bankers' Acceptance, the Primary Fronting Bank shall discount such Clean Bankers' Acceptance by deducting from the face amount thereof a discount equal to the sum of (i) the BA Discount Rate then in effect and (ii) an origination fee in an amount equal to 3/16 of 1% per annum (computed on the basis of the actual number of days until payment under such Clean Bankers' Acceptance is due over a year of 360 days) on the face amount of such Clean Bankers' Acceptance, and the Primary Fronting Bank shall make the net amount available in immediately available funds to the Borrower. The Primary Fronting Bank shall retain for its account from the amount so deducted the origination fee referred in clause (ii) above. The Primary Fronting Bank may retain or re-discount, at its election, any Clean Bankers' Acceptance and the amount received by the Primary Fronting Bank upon payment thereof at maturity or the amounts received upon re- discounting shall be solely for the account of the Primary Fronting Bank. (e) Promptly after it shall have ascertained that any time draft and any accompanying documents presented under a Trade Letter of Credit appear to be in conformity with the terms and conditions of such Trade Letter of Credit, the Primary Fronting Bank shall accept such draft and thereby originate a Trade Bankers' Acceptance. The Primary Fronting Bank may discount any Trade Bankers' Acceptance at the request of the holder thereof and the amount received by the Primary Fronting Bank upon discounting shall be solely for the account of the Primary Fronting Bank. SECTION 3.03. Participations; Unconditional Obligations. (a) By the issuance of a Letter of Credit or the origination of a Bankers' Acceptance and without any further action on the part of the Fronting Bank that issued such Letter of Credit or originated such Bankers' Acceptance or the Participating Lenders in respect thereof, such Fronting Bank hereby grants to each Participating Lender, and each Participating Lender hereby agrees to acquire from such Fronting Bank, a participation in such Letter of Credit or Bankers' Acceptance, as the case may be, equal to such Participating Lender's Applicable Percentage of the face amount of such Letter of Credit or Bankers' Acceptance, as the case may be, effective upon the issuance of such Letter of Credit or Bankers' Acceptance. In consideration and in furtherance of the foregoing, each Participating Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, on behalf of the applicable Fronting Bank, in accordance with Section 2.02(f), in the case of participations in Letters of Credit, and Section 2.02(g), in the case of participations in Bankers' Acceptances, such Participating Lender's Applicable Percentage of each LC Disbursement or BA Disbursement, as the case may be, made by such Fronting Bank; provided, however, that the Participating Lenders shall not be obligated to make any such payment to such Fronting Bank with respect to any wrongful payment or disbursement made under any Letter of Credit 45 or any Bankers' Acceptance as a result of the gross negligence or wilful misconduct of such Fronting Bank. (b) Each Participating Lender acknowledges and agrees that its obligation to acquire participations pursuant to paragraph (a) above in respect of Letters of Credit and Bankers' Acceptances is absolute and unconditional and shall not be affected by any circumstance whatsoever, including the occurrence and continuance of an Event of Default or Default hereunder, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. SECTION 3.04. LC/BA Fee. The Borrower agrees to pay to the Administrative Agent for the account of the Participating Lenders for each calendar quarter (or shorter period commencing with the date hereof or ending with the first date on which the LC/BA Commitment shall have expired or been terminated and there shall be no Outstanding Letters of Credit or Outstanding Bankers' Acceptances) a fee (the "LC/BA Fee") on the average daily amount of the aggregate Outstanding Letters of Credit and Outstanding Bankers' Acceptances during such quarter or shorter period at a rate per annum equal to (a) in the case of Standby Letters of Credit, the weighted average LIBOR Spread applicable to Eurodollar Revolving Loans during such period and (b) in the case of Trade Letters of Credit and Outstanding Bankers' Acceptances, the weighted average LIBOR Spread applicable to Eurodollar Revolving Loans during such period minus 3/16 of 1%. The LC/BA Fee shall be computed on the basis of the actual number of days elapsed over a year of 360 days. The Administrative Agent agrees to disburse to each Participating Lender its pro rata portion of such LC/BA Fee promptly upon receipt. The LC/BA Fee shall be paid in arrears on the last Business Day of March, June, September and December of each year and on the LC/BA Maturity Date (or the first date on which the LC/BA Commitment shall have expired or been terminated and there shall be no Outstanding Letters of Credit or Outstanding Bankers' Acceptances, if earlier), commencing on the first such date following the Restatement Date. Once paid, the LC/BA Fee shall not be refundable in any circumstances (other than corrections of error in payment). SECTION 3.05. Agreement To Repay LC Disbursements and BA Disbursements. (a) If either Fronting Bank shall pay any draft presented under a Letter of Credit, the Borrower shall pay to such Fronting Bank an amount equal to the amount of such draft not later than two hours after the Borrower shall have received notice from such Fronting Bank that payment of such draft will be made or, if the Borrower shall have received such notice later than 10:00 a.m., New York City time, on any Business Day, not later than 10:00 a.m., New York City time, on the immediately following Business Day. In the event that after the payment of any such amount to such Fronting Bank, such Fronting Bank shall not pay, and shall no longer be obligated to pay, such amount in respect of such draft, such Fronting Bank shall return to the Borrower any such unpaid amount, together with interest thereon accrued at the Federal Funds Effective Rate then in effect from and including the date such amount was paid by the Borrower to such Fronting Bank to but excluding the date such amount was repaid by such Fronting Bank to the Borrower. (b) On the stated maturity date of each Bankers' Acceptance (or if such stated maturity date falls on a day that is not a Business Day, on the next succeeding Business Day), the Borrower shall pay to the Primary Fronting Bank, not later than 1:00 p.m., New York City time, an amount equal to the face amount of such Bankers' Acceptance. In the event that, after the payment to the Primary Fronting Bank of any such amount referred to above, the Primary Fronting Bank shall not pay, and shall no longer be obligated to pay, such amount in respect of such Bankers' Acceptance, the Primary Fronting Bank shall return to the Borrower any such unpaid amount, together with interest thereon accrued at the Federal Funds Effective Rate then in effect from and including the date such amount was paid by the 46 Borrower to the Primary Fronting Bank to but excluding the date such amount was repaid by the Primary Fronting Bank to the Borrower. (c) The Borrower's obligation to repay the Fronting Banks for LC Disbursements and BA Disbursements made by the Fronting Banks under the Outstanding Letters of Credit and the Outstanding Bankers' Acceptances, respectively, shall be absolute, unconditional and irrevocable under any and all circumstances and irrespective of: (i) any lack of validity or enforceability of any Letter of Credit or Bankers' Acceptance; (ii) the existence of any claim, setoff, defense or other right that the Borrower or any other person may at any time have against the beneficiary under any Letter of Credit, the holder of any Bankers' Acceptance, either Fronting Bank, the Administrative Agent, any Lender or any other Person (other than the defense of payment in accordance with the terms of this Agreement or a defense based on the gross negligence or wilful misconduct of a Fronting Bank) or any other person in connection with this Agreement or any other agreement or transaction; (iii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect, provided that payment by a Fronting Bank under such Letter of Credit against presentation of such draft or document shall not have constituted gross negligence or wilful misconduct of such Fronting Bank; (iv) payment by a Fronting Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, provided that such payment shall not have constituted gross negligence or wilful misconduct of such Fronting Bank; and (v) any other circumstance or event whatsoever, whether or not similar to any of the foregoing, provided that such other circumstance or event shall not have been the result of gross negligence or wilful misconduct of a Fronting Bank. It is understood that in making any payment under a Letter of Credit (i) a Fronting Bank's exclusive reliance on the documents presented to it under such Letter of Credit as to any and all matters set forth therein, including reliance on the amount of any draft presented under such Letter of Credit, whether or not the amount due to the beneficiary equals the amount of such draft and whether or not any document presented pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its face appears to be in order, and whether or not any other statement or any other document presented pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to be inaccurate or untrue in any respect whatsoever, and (ii) any noncompliance in any immaterial respect of the documents presented under a Letter of Credit with the terms thereof shall, in each case, not be deemed wilful misconduct or gross negligence of a Fronting Bank. SECTION 3.06. Letter of Credit Operations. Each Fronting Bank shall, within a reasonable time after its receipt thereof, examine all documents purporting to represent a demand for payment under an Outstanding Letter of Credit to ascertain that the same appear on their face to be in conformity with the terms and conditions of such Outstanding Letter of Credit. Each Fronting Bank shall as promptly as possible give electronic or facsimile notification or telephonic notification, 47 promptly confirmed by electronic or facsimile notice, to the Borrower of such demand for payment and of the determination by such Fronting Bank as to whether such demand for payment was in conformity with such terms and conditions, and shall as promptly as possible give prior telephonic notification to the Borrower of the determination by such Fronting Bank as to whether such demand for payment was in accordance with the terms and conditions of such Outstanding Letter of Credit and whether such Fronting Bank has made or will make a LC Disbursement thereunder, provided that the failure to give such notice shall not relieve the Borrower of its obligation to reimburse such Fronting Bank with respect to any such LC Disbursement. SECTION 3.07. Cash Collateralization. If any Event of Default shall occur and be continuing, the Borrower shall on the Business Day it receives notice from the Administrative Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Participating Lenders holding participations in Outstanding Letters of Credit and Outstanding Bankers' Acceptances representing greater than 50% of the aggregate undrawn amount of all Outstanding Letters of Credit and the aggregate amount of Outstanding Bankers' Acceptances) therefor, deposit in an account with the Collateral Agent, for the benefit of the Participating Lenders, an amount in cash equal to the LC/BA Exposure as of such date. Such deposit shall be held by the Collateral Agent as collateral for the payment and performance of the Obligations. The Collateral Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits in Permitted Investments, which investments shall be made at the option and sole discretion of the Collateral Agent, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall (a) automatically be applied by the Administrative Agent to reimburse the Fronting Banks on a pro rata basis for LC Disbursements and BA Disbursements, (b) be held for the satisfaction of the reimbursement obligations of the Borrower for the LC/BA Exposure at such time and (c) if the maturity of the Loans has been accelerated (but subject to the consent of Participating Lenders holding participations in Outstanding Letters of Credit and Outstanding Bankers' Acceptances representing greater than 50% of the aggregate undrawn amount of all Outstanding Letters of Credit and the aggregate amount of all Outstanding Bankers' Acceptances), be applied to satisfy the Obligations. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived. SECTION 3.08. Termination of LC/BA Commitment. The Borrower may permanently terminate, or from time to time in part permanently reduce, the LC/BA Commitment, in each case upon at least three Business Days' prior written or facsimile notice to the Administrative Agent and the Fronting Banks, provided that, after giving effect to such termination or reduction, the LC/BA Commitment shall not be less than the LC/BA Exposure at such time or greater than the available Revolving Credit Commitments at such time. SECTION 3.09. Fronting Bank Fees. (a) The Borrower shall pay to each Fronting Bank, for its own account, such commissions, issuance fees, transfer fees and other fees and charges in connection with the issuance or administration of each Letter of Credit as the Borrower and such Fronting Bank shall agree upon. (b) The Borrower shall pay to each Fronting Bank, for its own account, (i) a fronting fee on the average daily aggregate maximum amount available to be drawn (assuming compliance with all conditions to drawing) under all Outstanding Letters of Credit issued by such Fronting Bank and (ii) 48 without duplication of the amounts payable pursuant to Section 3.02(d)(ii), an origination fee on the average daily aggregate face amount of all Outstanding Bankers' Acceptances originated by such Fronting Bank, at the rate of 3/16 of 1% per annum, payable in arrears on the second Business Day following the last day of March, June, September and December of each year and on the LC/BA Maturity Date. Such fronting and origination fees shall be computed on the basis of the actual number of days elapsed over a year of 360 days. SECTION 3.10. Resignation or Removal of a Fronting Bank. (a) A Fronting Bank may resign at any time by giving 180 days' prior written notice to the Administrative Agent, the Lenders and the Borrower, and may be removed at any time by the Borrower by notice to such Fronting Bank, the Administrative Agent and the Lenders. Upon any such resignation or removal, the Borrower shall (within 180 days after such notice of resignation or removal) either (i) appoint a Lender (with the consent of such Lender) as successor or (ii) terminate the unutilized LC/BA Commitment; provided, however, that, if the Borrower elects to terminate the unutilized LC/BA Commitment, the Borrower may at any time thereafter that the Revolving Credit Commitments are in effect reinstate the LC/BA Commitment, by notice to the Administrative Agent and the Lenders, in connection with the appointment of a Lender as successor Fronting Bank. Subject to paragraph (b) below, upon the acceptance of any appointment as a Fronting Bank hereunder by a successor Fronting Bank, such successor shall succeed to and become vested with all the interests, rights and obligations of the retiring Fronting Bank and the retiring Fronting Bank shall be discharged from its obligations to issue additional Letters of Credit and originate additional Bankers' Acceptances hereunder. At the time such removal or resignation shall become effective, the Borrower shall pay all accrued and unpaid fees pursuant to Section 2.05(d). The acceptance of any appointment as a Fronting Bank hereunder by a successor Lender shall be evidenced by an agreement entered into by such successor, in a form satisfactory to the Borrower and the Administrative Agent, and, from and after the effective date of such agreement, (i) such successor Lender shall have all the rights and obligations of the previous Fronting Bank under this Agreement and the other Loan Documents and (ii) references herein and in the other Loan Documents to a "Fronting Bank" shall be deemed to refer to such successor or to any previous Fronting Bank, or to such successor and all previous Fronting Banks, as the context shall require. (b) After the resignation or removal of a Fronting Bank hereunder, the retiring Fronting Bank shall remain a party hereto and shall continue to have all the rights and obligations of a Fronting Bank under this Agreement and the other Loan Documents with respect to Letters of Credit issued by it or Bankers' Acceptances originated by it prior to such resignation or removal, but shall not be required to issue additional Letters of Credit or originate additional Bankers' Acceptances. ARTICLE IV Representations and Warranties The Borrower represents and warrants to each of the Lenders, the Administrative Agent, the Managing Agents, the Swingline Lenders and the Fronting Banks that: SECTION 4.01. Organization; Powers. Each of the Borrower and the Guarantors (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted, (c) is qualified to do business in every jurisdiction where such qualification is required by the nature of its business, the character and location of its property, business or 49 customers, or the ownership or leasing of its properties, except for such jurisdictions in which the failure so to qualify, in the aggregate, could not reasonably be expected to have a Material Adverse Effect, and (d) has the corporate power and authority to execute, deliver and perform its obligations under each of the Loan Documents and each other agreement or instrument contemplated thereby to which it is or will be a party and, in the case of Borrower, to borrow hereunder. Each Subsidiary is a Guarantor. SECTION 4.02. Authorization. The execution, delivery and performance by each of the Borrower and the Guarantors of each of the Loan Documents to which it is a party, the Borrowings hereunder, the issuance of the Letters of Credit, the origination of the Bankers' Acceptances, the use of the proceeds of the Loans, the Swingline Loans, the Letters of Credit and the Bankers' Acceptances, the creation of the security interests contemplated by the Security Documents and the other transactions contemplated by the Loan Documents (all the foregoing, collectively, the "Transactions") (a) have been duly authorized by all requisite corporate and, if required, stockholder action and (b) will not (i) violate (A) any provision of law, statute, rule or regulation, other than any law, statute, rule or regulation, the violation of which will not result in a Material Adverse Effect, or of the Certificate of Incorporation or other constitutive documents or By-laws of the Borrower or any Subsidiary, (B) any order of any Governmental Authority or (C) any provision of any material indenture, agreement or other instrument to which the Borrower or any Subsidiary is a party or by which any of them or any of their property is or may be bound, (ii) constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien (other than any Lien created under the Security Documents) upon or with respect to any property or assets now owned or hereafter acquired by the Borrower or any Subsidiary. SECTION 4.03. Enforceability. This Agreement has been duly executed and delivered by the Borrower and constitutes, and each other Loan Document when executed and delivered by the Borrower and each Guarantor party thereto will constitute, a legal, valid and binding obligation of the Borrower and the Guarantors, as applicable, enforceable against each of them in accordance with its terms (a) except as the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (b) subject to general principles of equity. SECTION 4.04. Governmental Approvals. No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is or will be required in connection with the Transactions, except for (a) the filing of UCC financing statements and filings with the United States Patent and Trademark Office to perfect the security interests that can be perfected by such filings and (b) such actions, consents, approvals, registrations and filings as have been made or obtained and are in full force and effect. SECTION 4.05. Financial Statements. The Borrower has heretofore furnished to the Lenders its consolidated balance sheets and statements of operations, stockholders' equity and cash flows (a) as of and for the fiscal years ended January 28, 1995, January 29, 1994, and January 30, 1993, audited by and accompanied by the opinion of KPMG Peat Marwick, independent auditors. Such financial statements present fairly the financial condition and results of operations of the Borrower and its consolidated Subsidiaries as of such dates and for such periods. Such balance sheets and the notes thereto disclose all material liabilities, direct or contingent, of the Borrower and its consolidated Subsidiaries as of the dates thereof. Such financial statements were prepared in accordance with GAAP applied on a consistent basis. 50 SECTION 4.06. No Material Adverse Change. There has been no material adverse change in the business, assets, operations, properties, financial condition, results of operations or prospects of the Borrower and the Subsidiaries, taken as a whole, since January 28, 1995. SECTION 4.07. Title to Properties; Possession Under Leases. (a) Each of the Borrower and the Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets, except for minor defects in title that do not interfere in any material respect with its ability to conduct its business as currently conducted. All such title to, or leasehold interest in, material properties and assets are free and clear of Liens, other than Liens expressly permitted by Section 7.02 and Liens with respect to which the Collateral Agent has received on or prior to the Restatement Date duly executed releases and termination statements in connection therewith. (b) Each of the Borrower and the Subsidiaries has complied with all obligations under all material leases to which it is a party. Each of the Borrower and the Subsidiaries enjoys peaceful and undisturbed possession under all such material leases necessary in any material respect for the operation of their respective properties and assets taken as a whole. SECTION 4.08. Subsidiaries. Schedule 4.08 sets forth as of the Restatement Date a list of all the Subsidiaries and the percentage ownership interest of the Borrower and any other Subsidiary therein. SECTION 4.09. Litigation; Compliance with Laws. (a) Except as set forth on Schedule 4.09, there are not any actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary or any business or property of any such person (i) that involve any Loan Document or the Transactions or (ii) as to which there is a reasonable possibility of an adverse determination and which, if adversely determined, could reasonably be expected to, individually or in the aggregate, result in a Material Adverse Effect. (b) Neither the Borrower nor any of the Subsidiaries, nor any of their respective material properties or assets, is (i) in violation of, nor will the continued operation of their material properties and assets as currently conducted violate, any law, rule, regulation or statute (including any zoning, building, environmental and safety law, ordinance, code or approval or any building permits) or any restrictions of record or agreements affecting the Mortgaged Properties or (ii) in default with respect to any judgment, writ, injunction, decree or order of any Governmental Authority, where such violation or default could reasonably be expected to result in a Material Adverse Effect. Neither the issuance of the Letters of Credit nor the origination of the Bankers' Acceptances will violate any applicable law or regulation or violate or be prohibited by any judgment, writ, injunction, decree or order of any Governmental Authority. SECTION 4.10. Agreements. Neither the Borrower nor any of the Subsidiaries is in default under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be expected to result in a Material Adverse Effect. 51 SECTION 4.11. Federal Reserve Regulations. (a) Neither the Borrower nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (b) No part of the proceeds of any Letter of Credit or Bankers' Acceptance or any Loan or Swingline Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose or (ii) for any purpose that entails a violation of, or is inconsistent with, the provisions of the Regulations of the Board, including Regulation G, U or X. SECTION 4.12. Investment Company Act; Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary (a) is an "investment company" as defined in, or is subject to regulation under, the Investment Company Act of 1940 or (b) is a "holding company" as defined in, or is subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 4.13. Use of Proceeds. The Borrower will use the Letters of Credit and the Bankers' Acceptances and the proceeds of the Loans and any Swingline Loans only for the purposes specified in the preamble to this Agreement. SECTION 4.14. Tax Returns. Each of the Borrower and the Subsidiaries has filed or caused to be filed all Federal, state and local income and other material tax returns required to have been filed by it or with respect to it and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it or with respect to it, except taxes that are being contested in good faith by appropriate proceedings and for which the Borrower has set aside on its books adequate reserves in accordance with GAAP. SECTION 4.15. No Material Misstatements. The information provided by or on behalf of the Borrower and contained in the Confidential Information Memorandum (including all attachments and exhibits thereto), as supple- mented, and as supplemented further by information heretofore provided in writing by or on behalf of the Borrower to the Lenders and any other materials, documents and information that the Borrower or any of its Affiliates may have furnished to the Lenders, was (other than with respect to information as to Persons other than the Borrower and the Subsidiaries), as of the date of such Confidential Information Memorandum, the dates otherwise specified therein or the dates upon which such information was provided in writing, accurate in all material respects and, taken as a whole, does not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided that to the extent any such information therein was based upon or constitutes a forecast or projection, the Borrower represents only that it acted in good faith and utilized reasonable assumptions, due and careful consideration and the information actually known to Responsible Officers at the time in the preparation of such information. SECTION 4.16. Employee Benefit Plans. Each of the Borrower and its ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the regulations thereunder. No Reportable Event has occurred in respect of any Plan of the Borrower, any Subsidiary or, to the Borrower's knowledge after due inquiry, any other ERISA Affiliate, and the present value of all benefit liabilities under each Plan (based on those assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed by more than $500,000 the value of the assets of such Plan. Neither the Borrower nor any ERISA Affiliate has incurred any Withdrawal Liability that 52 could result in a Material Adverse Effect. Neither the Borrower nor any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization or has been terminated within the meaning of Title IV of ERISA and, to the Borrower's knowledge after due inquiry, no Multiemployer Plan is reasonably expected to be in reorganization or to be terminated where such reorganization or termination has resulted or could reasonably be expected to result, through increases in the contributions required to be made to such Plan or otherwise, in a Material Adverse Effect. SECTION 4.17. Environmental and Safety Matters. Except as set forth in Schedule 4.17, the Borrower and each Subsidiary has complied in all respects with all Federal, state, local and other statutes, ordinances, orders, judgments, rulings and regulations relating to environmental pollution or to environmental regulation or control or to employee health or safety, except where the failure to do so would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Effect. Except as set forth in Schedule 4.17, neither the Borrower nor any Subsidiary has received notice of any material failure so to comply. Except as set forth in Schedule 4.17, the Borrower's and the Subsidiaries' facilities do not manage any hazardous wastes, hazardous substances, hazardous materials, toxic substances, toxic pollutants or substances similarly denominated, as those terms or similar terms are used in the Resource Conservation and Recovery Act, the Comprehensive Environmental Response Compensation and Liability Act, as amended by the Superfund Amendment and Reauthorization Act, the Hazardous Materials Transportation Act, the Toxic Substance Control Act, the Clean Air Act, as amended, the Clean Water Act, the Occupational Health and Safety Act or any other applicable law relating to environmental pollution or employee health and safety, in violation in any respect of any law or any regulations promulgated pursuant thereto, except where the failure to do so would not reasonably be expected to, individually or in the aggregate, result in a Material Adverse Effect. Except as set forth in Schedule 4.17, the Borrower is aware of no events, conditions or circumstances involving environmental pollution or contamination or employee health or safety that could reasonably be expected to result in Material Adverse Effect. SECTION 4.18. Solvency. After giving effect to the Transactions to occur on the Restatement Date, (a) the fair salable value of the assets of the Borrower and the Subsidiaries, on a consolidated basis, will exceed the amount that will be required to be paid on or in respect of the existing debts and other liabilities (including contingent liabilities) of the Borrower and the Subsidiaries, on a consolidated basis, as they mature, (b) the assets of the Borrower and the Subsidiaries, on a consolidated basis, will not constitute unreasonably small capital to carry out their businesses as conducted or as proposed to be conducted, including the capital needs of the Borrower and the Subsidiaries, on a consolidated basis (taking into account the particular capital requirements of the businesses conducted by such entities and the projected capital requirements and capital availability of such businesses) and (c) the Borrower does not intend to, or intend to permit any of the Subsidiaries to, and does not believe that it or any Subsidiary will, incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be received by it or any such Subsidiary and the amounts to be payable on or in respect of its obligations). SECTION 4.19. Labor Agreements. Except as set forth on Schedule 4.19, as of the Restatement Date there are no collective bargaining agreements or other labor agreements covering any of the employees of the Borrower or any Subsidiary. SECTION 4.20. Security Documents. (a) The Pledge Agreement creates in favor of the Collateral Agent, for the ratable benefit of the Secured Par- ties, a legal, valid and enforceable security interest in the Collateral (as defined in the Pledge Agreement) and proceeds thereof and constitutes a fully perfected first priority Lien on, and security interest in, all right, title and interest of the Borrower or the 53 Guarantors party thereto, as applicable, in such Collateral and the proceeds thereof, in each case prior and superior in right to any other Person. (b) The Security Agreement creates in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Security Agreement) and proceeds thereof, and, on the basis of financing statements in appropriate form filed in the offices specified on Schedule 4.20(b), the Lien created under the Security Agreement constitutes a fully perfected Lien on, and security interest in, all right, title and interest of the Borrower and the Guarantors, as applicable, in such Collateral and the proceeds thereof (except insofar as the perfection of a Lien on, and security interest in, such Collateral is obtained as described in paragraph (d) below), in each case prior and superior in right to any other Person, other than with respect to Liens expressly permitted by Sec- tion 7.02. (c) The Mortgages create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable Lien on all of Borrower's right, title and interest in and to the Mortgaged Properties thereunder and the proceeds thereof, and, on the basis of the Mortgages filed in the offices specified on Schedule 4.20(c), the Mortgages constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Borrower in such Mortgaged Properties and the proceeds thereof, in each case prior and superior in right to any other Person, other than with respect to the rights of Persons pursuant to Liens expressly permitted by Section 7.02. (d) The Trademark Security Agreement creates in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Trade- mark Security Agreement) and the proceeds thereof, and, on the basis of the recordation of such Trademark Security Agreement with the United States Patent and Trademark Office and the financing statements in appropriate form filed in the offices specified on Schedule 4.20(d), the Liens created under the Trademark Security Agreement constitute a fully perfected Lien on, and security interest in, all right title and interest of the Borrower in the Collateral and the proceeds thereof in which a security interest may be perfected by filing in the United States and its territories and possessions, in each case prior and superior in right to any other person, other than with respect to Liens expressly permitted by Section 7.02; provided, however, that subsequent recordings in the United States Patent and Trademark Office may be necessary to perfect a Lien in registered trademarks and trademark applications acquired by the Borrower after the date hereof. (e) As of the Restatement Date, Schedule 4.20(e) accurately sets forth each post office box and bank account to which any customers of the Borrower or any Subsidiary have been instructed to transmit payments on account of goods or services purchased from the Borrower or any Subsidiary. SECTION 4.21. Labor Matters. As of the Restatement Date, there are no strikes, lockouts or slowdowns against the Borrower or any Subsidiary pending or, to the Borrower's knowledge, threatened. The hours worked by and payment made to employees of the Borrower have not been in violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters, where such violations could reasonably be expected to result in a Material Adverse Effect. The consummation of the Transactions will not give rise to a right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which the Borrower or any Subsidiary is a party or by which the Borrower or any Subsidiary is bound on the Restatement Date. SECTION 4.22. Location of Real Property; Location of Leased Premises. (a) Schedule 4.22(a) sets forth completely and correctly as of the Restatement Date all material real property owned by the 54 Borrower or any Subsidiary, the addressees thereof and the county or counties in which such properties are situated. The Borrower owns in fee all the real property set forth on Schedule 4.22(a). (b) Schedule 4.22(b) lists completely and correctly as of the Restatement Date all material real property leased by the Borrower or any Subsidiary, the addresses thereof and the county or counties in which such properties are situated. The Borrower has a valid lease in all the real property set forth on Schedule 4.22(b). ARTICLE V Conditions of Lending and Issuance of Letters of Credit The obligations of the Lenders to make Loans hereunder, the obligation of the Swingline Lenders to make Swingline Loans hereunder and the obligation of the Fronting Banks to issue any Letter of Credit or originate any Clean Bankers' Acceptance (each, a "Credit Event") hereunder are subject to the satisfaction of the following conditions: SECTION 5.01. All Credit Events. On the date of each Credit Event, other than any Revolving Credit Loan made pursuant to Section 2.02(f) and (g): (a) The Administrative Agent and, where applicable, the Primary Fronting Bank, the IRB Fronting Bank or the Swingline Lenders shall have received a notice of such Credit Event as required by Sec- tion 2.03, Section 3.01(f), Section 3.02(c) and Section 2.22(b), respectively. (b) The representations and warranties set forth in Article IV hereof shall be true and correct in all material respects on and as of the date of such Credit Event with the same effect as though made on and as of such date, except to the extent that such representations and warranties expressly relate to an earlier date. (c) At the time of and immediately after such Credit Event no Event of Default or Default shall have occurred and be continuing. Each Credit Event shall be deemed to constitute a representation and warranty by the Borrower on the date of such Credit Event as to the matters specified in paragraphs (b) and (c) of this Section 5.01. Neither (a) continuations and conversions of outstanding Term Borrowings pursuant to Section 2.10 nor (b) Revolving Credit Borrowings pursuant to Section 2.02(e) in which Revolving Credit Loans are refinanced without any increase in the aggregate principal amount of Revolving Credit Loans outstanding shall be deemed to be Borrowings for the purpose of this Section 5.01. SECTION 5.02. First Borrowing. On the Restatement Date: (a) Each Lender and each Swingline Lender shall have received, as applicable, a duly executed Revolving Credit Note, Term Note and Swingline Note, in each case complying with the provisions of Section 2.04. (b) The Managing Agents shall have received a written opinion of (i) Robert Lewis, Esq., Corporate Counsel of the Borrower, to the effect set forth in Exhibit M-1 and (ii) Skadden, Arps, Slate, Meagher & Flom, counsel for the Borrower and the Guarantors, to 55 the effect set forth in Exhibit M-2, in each case (A) dated the Restatement Date, (B) addressed to the Administrative Agent, the Managing Agents, the Fronting Banks, the Lenders, the Swingline Lenders and the Collateral Agent and (C) covering such matters inci- dental to the Loan Documents and the Transactions as the Managing Agents shall request. The Borrower hereby instructs each such counsel to deliver its opinion to the Administrative Agent. (c) All legal matters incident to this Agreement and the Borrowings hereunder shall be satisfactory to the Lenders and their counsel and to Cravath, Swaine & Moore, counsel for the Managing Agents. (d) The Managing Agents shall have received (i) a copy of the certificate of incorporation, including all amendments thereto, of the Borrower and each Guarantor, certified as of a recent date by the Secretary of State of the state of its organization, and a certificate as to the good standing of the Borrower and each Guarantor as of a recent date, from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of the Borrower and each Guarantor dated the Restatement Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of the Borrower or such Guarantor, as the case may be, as in effect on the Restatement Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of the Borrower or such Guarantor, as the case may be, authorizing the execution, delivery and performance of this Agreement and any other agreement to which they are a party that is reasonably required by the Managing Agents on the Restatement Date, and that such resolutions have not been modified, rescinded or amended and are in full force and effect as of the Restatement Date, (C) that the certificate of incorporation of the Borrower or such Guarantor, as the case may be, has not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above and (D) as to the incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection herewith on behalf of the Borrower or such Guarantor, as the case may be; (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (ii) above; and (iv) such other documents as the Lenders or their counsel or Cravath, Swaine & Moore, counsel for the Managing Agents, may reasonably request. (e) The Managing Agents shall have received a certificate, dated the Restatement Date and signed by a Financial Officer of the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 5.01. (f) The Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the Restatement Date. (g) The Collateral Agent shall have received an acknowledgement signed by the Borrower and each of its Subsidiaries stating that: (i) the Guarantee Agreement has been duly executed by the Guarantors and delivered to the Collateral Agent, and is in full force and effect; (ii) the Indemnity, Subrogation and Contribution Agreement has been duly executed by the Guarantors and the Collateral Agent, and is in full force and effect; 56 (iii) the Pledge Agreement has been duly executed by the Borrower, the Guarantors and the Collateral Agent and is in full force and effect, all the outstanding capital stock of each of the Subsidiaries has been duly and validly pledged thereunder to the Collateral Agent for the ratable benefit of the Secured Parties and certificates representing such shares, accompanied by stock powers endorsed in blank, have been delivered into the actual possession of the Collateral Agent; (iv) each of the Security Agreement, the Trademark Security Agreement and any Lockbox Agreement in existence as of the Restatement Date has been duly executed by the Borrower, the Guarantors parties thereto and the Collateral Agent and is in full force and effect, and each document (including each Uniform Commercial Code financing statement) required by law or reasonably requested by the Agent to be filed, registered or recorded in order to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid and perfected first- priority security interest in or lien on the Collateral (subject to any Lien expressly permitted by Section 7.02) described in each of such agreements has been delivered to the Collateral Agent and has been duly filed, registered or recorded; and (v) (A) each of the Security Documents, in form and substance satisfactory to the Lenders, relating to each of the Mortgaged Properties (including each Mortgage and each Assignment of Leases and Rents (as defined in each Mortgage)) has been duly executed by the parties thereto and delivered to the Collateral Agent and is in full force and effect, (B) none of such Mortgaged Properties is subject to any Lien other than those permitted under Section 7.02, (C) each of such Security Documents has been filed and recorded in the recording office as specified on Schedule 4.20(b) (or a lender's title insurance policy, in form and substance acceptable to the Managing Agents, insuring such Security Document as a first lien on such Mortgaged Property (subject to any Lien expressly permitted by Section 7.02) has been received by the Managing Agents). (h) The terms and conditions of any Indebtedness of the Borrower or any Subsidiary that will remain outstanding on the Restatement Date shall be reasonably satisfactory to the Lenders in all respects. (i) After giving effect to the Transactions on the Restatement Date, the Borrower shall have no Indebtedness other than (i) Indebtedness under the Loan Documents, (ii) Indebtedness evidenced by the 9-1/4% Senior Subordinated Notes and (iii) other liabilities reasonably satisfactory to the Required Lenders and Indebtedness permitted under Section 7.01. (j) The Lenders shall be reasonably satisfied in all respects with the tax and litigation position and the contingent tax and other material liabilities of the Borrower and the Subsidiaries and plans of the Borrower with respect thereto. (k) The Managing Agents shall be reasonably satisfied as to the amount and nature of any environmental or employee health and safety exposures to which the Borrower or any Subsidiary may be subject and the plans of the Borrower with respect thereto. (l) All requisite Governmental Authorities and third parties shall have approved or consented to the Transactions and the other transactions contemplated hereby to the extent 57 required, all applicable appeal periods shall have expired and there shall be no governmental or judicial action, actual or threatened, that has or would have a reasonable likelihood of restraining, preventing or imposing burdensome conditions on the transactions contemplated hereby. (m) There shall be no litigation or administrative proceedings or other legal or regulatory developments (including but not limited to any governmental policy or initiative relating to healthcare), actual or overtly threatened, that, in the reasonable judgment of the Lenders, involve a reasonable possibility of a material adverse effect on the business, assets, operations, condition (financial or otherwise), liabilities, prospects or material agreements of the Borrower or any Subsidiary or the ability of the Borrower or any Subsidiary to perform its obligations under Loan Documents, or the ability of the parties to consummate the Transactions or the validity or enforceability of any of the Loan Documents or the rights, remedies and benefits available to the Administrative Agent, the Managing Agents, the Fronting Banks, the Swingline Lender, the Collateral Agent and the Lenders under the Loan Documents or which would be materially inconsistent with the assumptions underlying the projections contained in the Confidential Information Memorandum. (n) The Lenders shall be satisfied that the consummation of the Transactions will not (i) violate any applicable law, statute, rule or regulation or (ii) conflict with, or result in a default or event of default under, (A) any indenture relating to any existing Indebtedness of the Borrower or any Subsidiary or (B) any other material agreement of the Borrower or any Subsidiary. (o) The Lenders shall have received evidence satisfactory to them that there has been no material adverse change in the condition (financial or otherwise), operations, business, assets, liabilities, prospects or material agreements of the Borrower and the Subsidiaries taken as a whole since January 28, 1995. ARTICLE VI Affirmative Covenants The Borrower covenants and agrees with each Lender, the Administrative Agent and each Managing Agent, Fronting Bank and Swingline Lender that, so long as this Agreement shall remain in effect, the LC/BA Exposure shall not equal zero or the principal of or interest on any Loan or Swingline Loan or any LC Disbursement, BA Disbursement, Fees or any other expenses or amounts payable under any Loan Document shall be unpaid, unless the Required Lenders shall otherwise consent in writing, the Borrower will, and will cause each of the Subsidiaries (other than any Receivables Subsidiary) to: SECTION 6.01. Existence; Businesses and Properties. (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise permitted under Section 7.05. (b) Do or cause to be done all things necessary to preserve, renew and keep in full force the rights, licenses, permits, trademarks, trade names, privileges and franchises necessary or desirable in the normal conduct of its business, except for any trademarks, trade names or franchises that are not material to the business of the Borrower and the Subsidiaries taken as a whole; maintain and operate such business in substantially the manner in which it is currently conducted and operated; comply with 58 all applicable laws, rules, regulations and statutes affecting the Mortgaged Properties (including any zoning, building, environmental and safety law, ordinance, code or approval or any building permits or any restrictions of record or agreements affecting the Mortgaged Properties) and decrees and orders of any Governmental Authority having jurisdiction with respect thereto, except where noncompliance would not reasonably be expected to have a material adverse effect on the value, use or operation of any of the Mortgaged Properties; and at all times keep all property useful and necessary in its business in good, working order and condition to the extent required by sound business practices. SECTION 6.02. Insurance. Keep its insurable properties adequately insured at all times by financially sound and reputable insurers; maintain such other insurance, to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies of established repute in the same general area engaged in the same or similar businesses, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by it or the use of any products sold by it; and maintain such other insurance as may be required by law and with respect to the Mortgaged Properties, as set forth in the Mortgages. SECTION 6.03. Obligations and Taxes. Pay and discharge promptly when due all lawful taxes, assessments and governmental charges or levies imposed upon it or upon or in respect of its property or assets, as well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such obligation, tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the Borrower shall have set aside on its books, in accordance with GAAP, adequate reserves with respect thereto and such contest operates to suspend enforcement of a Lien and, in the case of a Mortgaged Property, there is no material risk of forfeiture of such property. SECTION 6.04. Financial Statements, Reports, etc. In the case of the Borrower, furnish to the Administrative Agent and each Lender: (a) within 90 days after the end of each fiscal year, its consolidated balance sheets and related statements of operations, stockholders' equity and cash flows, showing the financial condition of the Borrower and its consolidated subsidiaries as of the close of such fiscal year and the results of its operations and the operations of such subsidiaries during such year, all audited by KPMG Peat Marwick or other independent auditors of recognized national standing acceptable to the Required Lenders and accompanied by an opinion of such accountants (which shall not be qualified in any material respect) to the effect that such consolidated financial statements fairly present the financial condition and results of operations of the Borrower on a consolidated basis in accordance with GAAP consistently applied; (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, its consolidated balance sheets and related statements of operations, stockholders' equity and cash flows, showing the financial condition of the Borrower and its consolidated subsidiaries as of the close of such fiscal quarter and the results of its operations and the operations of such subsidiaries during such fiscal quarter and the then elapsed portion of the fiscal year; 59 (c) concurrently with any delivery of financial statements under paragraph (a) or (b) above, a certificate of the accounting firm or Financial Officer opining on or certifying such statements (which certificate, when furnished by an accounting firm, may be limited to accounting matters and disclaim responsibility for legal interpretations) (i) certifying that, after due investigation and reasonable inquiry, no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (ii) setting forth computations in reasonable detail satisfactory to the Administrative Agent demonstrating compliance with the covenants contained in Sections 7.11, 7.12 and 7.13. (d) concurrently with any delivery of financial statements under paragraph (a) above, a certificate of a Financial Officer setting forth in reasonable detail the calculation of Change in Liquidity From Receivables Programs for the fiscal year of the Borrower covered by such financial statements; (e) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials (other than (i) the exhibits to registration statements and (ii) any registration statements on Form S-8 or its equivalent) filed by it with the Securities and Exchange Commission, or any governmental authority succeeding to any of or all the functions of said Commission, or with any national securities exchange, or distributed to its shareholders, as the case may be; (f) promptly following the preparation thereof, copies of each management letter prepared by the Borrower's auditors (together with any response thereto prepared by the Borrower); (g) as soon as available, and in any event no later than 90 days after (i) February 3, 1996, and (ii) the end of each fiscal year through January 29, 2000, thereafter, one set of projected consolidated balance sheets of the Borrower and its consolidated subsidiaries as of the end of the following fiscal year and each of the next four succeeding fiscal years, and the related consolidated statements of projected cash flow, projected changes in financial position and projected income for each of such five fiscal years, and, as soon as available, significant revisions, if any, of such projections with respect to any such fiscal year, such set of statements to be prepared on a basis consistent with the statements delivered pursuant to paragraph (k) below, and such statement to be based, and to be certified by a Financial Officer of the Borrower as being based on reasonable estimates, information and assumptions at the time, and all such statements to be in reasonable detail; (h) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of the Borrower, or compliance with the terms of any Loan Document, as the Administrative Agent, the Managing Agents, either Fronting Bank or Swingline Lender or any Lender may reasonably request; (i) promptly, a copy of any amendment or waiver of any provisions of any agreement referenced in Section 7.10, or any other amendment or waiver of any provisions of any agreement to the extent that such amendment or waiver is required hereunder to be furnished to the Administrative Agent, either Fronting Bank or any Lender; 60 (j) a copy of all notices (other than regarding any scheduled or mandatory repayments), certificates, financial statements and reports, as and when delivered by or on behalf of the Borrower to the holders of any Subordinated Indebtedness (except to the extent any such notice, certificate, financial statement or report is otherwise required to be delivered pursuant to this Agreement); and (k) within 30 days after the end of each month for which such a report was prepared, a copy of the monthly report to the Board of Directors of the Borrower comparing the actual results of operations to the projected results of operations of the Borrower and its consolidated subsidiaries for such month and the portion of the fiscal year then ended, including management's discussion and analysis with respect to such actual results of operations and any revisions by management of its projections for the next succeeding month and for the remainder of the then-current fiscal year. SECTION 6.05. Litigation and Other Notices. Furnish to the Administrative Agent, each Fronting Bank and Swingline Lender, the Collateral Agent and each Lender prompt written notice of the following: (a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) proposed to be taken with respect thereto; (b) the filing or commencement of, or any notice to the Borrower or any Subsidiary of the intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against the Borrower or any subsidiary thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; (c) any development that has resulted in, or could reasonably be anticipated to result in, a Material Adverse Effect; and (d) any transaction, event or development that results in the Borrower or any Subsidiary owning a parcel (or adjoining parcels) of real property that (i) is not a Mortgaged Property and (ii) has a fair market value in excess of $3,000,000. SECTION 6.06. ERISA. (a) Comply in all material respects with the applicable provisions of ERISA and (b) furnish to the Administrative Agent, the Managing Agents, each Fronting Bank, Swingline Lender and Lender (i) as soon as possible after, and in any event within 30 days after any Respon- sible Officer of the Borrower or any ERISA Affiliate either knows or has reason to know that, any Reportable Event has occurred that alone or together with any other Reportable Event could reasonably be expected to result in liability of the Borrower to the PBGC in an aggregate amount exceeding $1,000,000, (A) a copy of the notice of such event required to be given to the PBGC or, if notice is not so required, a statement of an officer of the Borrower having responsibility over its employee benefits (a "Benefits Officer") setting forth in reasonable detail the nature of such event and the action proposed to be taken with respect thereto and (B) as soon as practicable after the reasonable request of the Lender following receipt of such copy of such notice, a like statement, (ii) promptly after receipt thereof, a copy of any notice the Borrower or any ERISA Affiliate may receive from the PBGC relating to the intention of the PBGC to terminate any Plan or Plans (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of 61 Section 414 of the Code) or to appoint a trustee to administer any Plan or Plans, (iii) within 10 days after the due date for filing with the PBGC pursuant to Section 412(n) of the Code of a notice of failure to make a required installment or other payment with respect to a Plan, a copy of such notice, and, as soon as practicable after the reasonable request of the Lender, a statement of a Benefits Officer setting forth in reasonable detail the nature of such failure and the action proposed to be taken with respect thereto and (iv) promptly and in any event within 30 days after receipt thereof by the Borrower or any ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy of each notice received by the Borrower or any ERISA Affiliate concerning (A) the imposition of Withdrawal Liability or (B) a determination that a Multiemployer Plan is, or is expected to be, terminated or in reorganization, in each case within the meaning of Title IV of ERISA. SECTION 6.07. Maintaining Records; Access to Properties and Inspections. Maintain all financial records in accordance with GAAP and permit any representatives designated by the Administrative Agent, the Managing Agents, either Fronting Bank or Swingline Lender, the Collateral Agent or any Lender to visit and inspect the financial records and the properties of the Borrower at reasonable times and upon reasonable notice and as often as reasonably requested and to make extracts from and copies of such financial records, and permit any representatives designated by the Administrative Agent, the Managing Agents, either Fronting Bank or Swingline Lender, the Collateral Agent or any Lender to discuss at such reasonable times and at such reasonable intervals as may be reasonably requested the affairs, finances and condition of the Borrower or any properties of Borrower with the officers thereof and independent accoun- tants therefor. SECTION 6.08. Use of Proceeds. Use the proceeds of the Letters of Credit, the Bankers' Acceptances and the Loans only for the purposes set forth in the preamble to this Agreement. SECTION 6.09. Fiscal Year. Cause its fiscal year to end on a date other than the Saturday nearest to January 31 in each year without the prior written consent of the Managing Agents, which consent shall not be unreasonably withheld. SECTION 6.10. Further Assurances. (a) Execute any and all further documents, financing statements, agreements and instruments, and take all further action (including filing Uniform Commercial Code and other financ- ing statements, mortgages and deeds of trust) that may be required under applicable law, or which the Required Lenders, the Administrative Agent, either Managing Agent or the Collateral Agent may reasonably request, in order to effectuate the transactions contemplated by the Loan Documents and in order to grant, preserve, protect and perfect the validity and first priority of the security interests created or intended to be created by the Security Documents. In addition, from time to time, the Borrower, at its cost and expense, will promptly secure the Obligations by pledging or creating, or causing to be pledged or created, perfected security interests with respect to such of its assets and properties as the Administrative Agent, either Managing Agent or the Required Lenders shall designate (it being understood that it is the intent of the parties that the Obligations shall be secured by, among other things, substantially all the assets of the Borrower and the Subsidiaries (including real and other properties (other than leasehold interests of the Borrower and the Subsidiaries relating to retail stores) acquired subsequent to the Restatement Date)). Such security interests and Liens will be created under the Security Docu- ments and other security agreements, mortgages, deeds of trust and other instruments and documents in form and substance satisfactory to the Required Lenders, and the Borrower shall deliver or cause to be delivered to the Lenders all such instruments and documents (including legal opin- ions, title insurance policies and lien searches) as the Required Lenders shall reasonably request to evidence compliance with this Section 6.10; provided, however, that the Lenders shall not be entitled to receive landlord waivers in connection with security interests granted the Collateral Agent in assets 62 located on property leased by the Borrower or any Guarantor. The Borrower agrees to provide such evidence as the Required Lenders shall reasonably request as to the perfection and priority status of each such security interest and Lien. (b) Cause each Subsidiary created or acquired by it from time to time, and each Inactive Subsidiary prior to becoming a Subsidiary, to undertake the obligation of and to become a Guarantor hereunder and a party to the Security Documents pursuant to one or more instruments or agreements satisfactory in form and substance to the Collateral Agent. (c) Within 90 days after the Restatement Date, (i) deliver to the Managing Agents a written opinion of each local counsel listed on Schedule 6.10(c) to the effect set forth in Exhibit M-3, (A) dated the Restatement Date, (B) addressed to the Administrative Agent, the Managing Agents, the Fronting Banks, the Lenders, the Swingline Lenders and the Collateral Agent and (C) covering such matters incidental to the Loan Documents and the Transactions as the Managing Agents shall request or (ii) deliver such duly executed Security Documents relating to each of the Mortgaged Properties encumbering the Borrower's interest in such premises as the Managing Agents may request, together with (A) a lender's title insurance policy, insuring such Security Document as a first lien on such Mortgaged Property (subject to any Lien expressly permitted by Section 7.02), (B) a survey, (C) evidence of each filing and recordation in the recording office as specified in Schedule 4.20(b) and (D) local counsel opinion as set forth in clause (i) above, in each case, in form and substance acceptable to the Managing Agents. SECTION 6.11. Material Contracts. Maintain in full force and effect (including exercising any available renewal option), and without amendment or modification, all its material contracts unless the failure so to maintain such contracts (or the amendments or modifications thereto), individually or in the aggregate, would not have a Material Adverse Effect, and promptly notify each Lender of each failure to comply with this Section 6.11. SECTION 6.12. Compliance with Law. Comply with the requirements of all applicable laws, rules, regulations, court orders and decrees, and orders of any Governmental Authority that are applicable to it or to any of its properties, except where noncompliance would not reasonably be expected to result in a Material Adverse Effect. ARTICLE VII Negative Covenants The Borrower covenants and agrees with each Lender, the Administrative Agent and each Managing Agent, Fronting Bank and Swingline Lender that, so long as this Agreement shall remain in effect, the LC/BA Exposure shall not equal zero or the principal of or interest on any Loan or Swingline Loan or any LC Disbursement, BA Disbursement, Fees or any other expenses or amounts payable under 63 any Loan Document shall be unpaid, unless the Required Lenders shall otherwise consent in writing, the Borrower will not, and will not cause or permit any of the Subsidiaries (other than any Receivables Subsidiary) to: SECTION 7.01. Indebtedness. Incur, create, assume or permit to exist any Indebtedness, except: (a) Indebtedness existing on the date hereof and set forth on Schedule 7.01 (and any extensions, renewals or replacements of such Indebtedness to the extent that such Indebtedness is not at any time increased); (b) in the case of the Borrower, Indebtedness represented by the Notes and reimbursement obligations in respect of the Letters of Credit and Bankers' Acceptances; (c) in the case of each Guarantor, its guarantee of the Obligations pursuant to the Guarantee Agreement; (d) (i) in the case of the Borrower, Indebtedness consisting of purchase money Indebtedness or Capital Lease Obligations incurred in the ordinary course of business after the Restatement Date to finance Capital Expenditures and (ii) in the case of the Borrower or any Subsidiary, Indebtedness consisting of purchase money Indebtedness or Capital Lease Obligations in existence with respect to any Acquired Entity at the time such Acquired Entity is acquired by the Borrower or any Subsidiary; provided, however, that in the case of Indebtedness incurred pursuant to clause (i) above, such Indebtedness shall be incurred within 90 days after the making of the Capital Expenditures financed thereby; (e) Indebtedness consisting of obligations of the Borrower to make deferred purchase price payments in connection with any Permitted Acquisition or the Borrower's purchase from time to time of the assets of pharmacy businesses; provided, however, that the aggregate principal amount of all Indebtedness incurred pursuant to this paragraph (e) shall not exceed $10,000,000 at any time outstanding; (f) reimbursement obligations incurred by the Borrower or any Subsidiary in connection with letters of credit and bankers' acceptances, provided that (i) such reimbursement obligations are unsecured and (ii) the sum of (A) the aggregate undrawn face amount of such outstanding letters of credit, (B) the aggregate face amount of drafts drawn under such letters of credit and paid or accepted by the issuers thereof and unreimbursed and (C) the aggregate face amount of such outstanding bankers' acceptances shall not exceed $10,000,000 at any time; (g) in the case of the Borrower, Indebtedness to any wholly owned Subsidiary and, in the case of any Subsidiary, Indebtedness to the Borrower or any wholly owned Subsidiary, provided that any such Indebtedness is evidenced by an intercompany note duly and validly pledged to the Collateral Agent for the benefit of the Secured Parties under the Pledge Agreement; 64 (h) in the case of the Borrower, Indebtedness evidenced by the 9-1/4% Senior Subordinated Notes; (i) in the case of the Borrower, Rate Protection Agreements on terms and with parties reasonably acceptable to the Managing Agents; (j) in the case of the Borrower, Indebtedness that is subordinate to the Obligations and the proceeds of which are used solely to redeem, repay or repurchase any then-outstanding Subordinated Indebtedness; provided, however, that (i) the weighted average interest rate applicable to such Indebtedness must be less than or equal to the interest rate applicable to the Subordinated Indebtedness being redeemed, repaid or repurchased, (ii) no material terms applicable to such Indebtedness (including the subordination provisions thereof) shall be more favorable to the refinancing lenders (as determined by the Borrower in good faith) than the terms that are applicable to the holders of the Subordinated Indebtedness being redeemed, repaid or repurchased, (iii) the weighted average life to maturity of such Indebtedness shall be greater than or equal to the weighted average life to maturity of the Subordinated Indebtedness being redeemed, repaid or repurchased and the first scheduled prin- cipal payment in respect of such Indebtedness shall not be earlier than the first scheduled principal payment in respect of the Subordinated Indebtedness being redeemed, repaid or repurchased (iv) such Indebtedness shall be unsecured and shall not be guaranteed by any Person in any respect, (v) the principal amount of such Indebtedness shall be equal to the principal amount then outstanding of the Subordinated Indebtedness then being redeemed or repurchased and (vi) such Indebtedness may not be incurred if at the time of such refinancing a Default or Event of Default has occurred and is continuing or would result therefrom; (k) in the case of the Borrower, other Indebtedness that is subordinate to the Obligations; provided, however, that (i) no material terms applicable to such Indebtedness (including the subordination provisions thereof) shall be more favorable to the lenders providing such Indebtedness (as determined by the Borrower in good faith) than the terms that are applicable to the holders of the 9-1/4% Senior Subordinated Notes, (ii) the weighted average life to maturity of such Indebtedness shall be greater than or equal to the weighted average life to maturity of the Facilities, and the first scheduled principal payment in respect of such Indebtedness shall not be earlier than the Term Loan Maturity Date, (iii) such Indebtedness shall be unsecured and shall not be guaranteed by any Person in any respect and (iv) such Indebtedness may not be incurred if at the time of such refinancing a Default or Event of Default has occurred and is continuing or would result therefrom; (l) Indebtedness of the Borrower incurred in connection with the purchase or redemption pursuant to the Management Subscription Agreement of shares of Common Stock held by the Management Investors as provided in Section 7.06(b); and (m) Indebtedness of the Borrower to insurance companies borrowed against existing life insurance policies maintained by the Borrower under the Borrower's Executive Supplemental Benefit Plan, the proceeds of which Indebtedness are used to pay the annual insurance premiums on such policies and the interest due under such policies with respect to the Indebtedness permitted under this paragraph (m), provided that the Borrower shall not incur such Indebtedness for the payment of premiums in any given year in excess of $750,000 in the aggregate, and provided further that the aggregate amount of Indebtedness permitted under this 65 paragraph (m) shall not at any time exceed the then-current aggregate cash surrender value of such policies. SECTION 7.02. Liens. Create, incur, assume or permit to exist any Lien on any property or assets (including stock or other securities of any Person) now owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof, except: (a) Liens on property or assets of the Borrower existing on the date hereof and set forth on Schedule 7.02(a), provided that, subject to paragraph (j) below, such Liens shall secure only those obligations that they secure on the date hereof; (b) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary, provided that (i) such Lien is not created in contemplation of or in connection with such acquisition, (ii) such Lien does not apply to any other property or assets of the Borrower or any Subsidiary and (iii) such Lien does not (A) materially interfere with the use, occupancy and operation of any property or (B) materially reduce the fair market value of such property but for such Lien; (c) Liens for taxes, assessments or charges not yet due or which are being contested in compliance with Section 6.03; (d) carriers', warehousemen's, mechanics', materialmen's, repair- men's, vendors', workmen's, operators', landlord's or other like Liens arising in the ordinary course of business and securing obligations that are not due and payable or are being contested in compliance with Section 6.03; (e) pledges or deposits made in the ordinary course of business in compliance with workmen's compensation, unemployment insurance and other social security laws or regulations; (f) pledges and deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases, licenses, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (g) leases or subleases or other similar encumbrances incurred in the ordinary course of business or minor imperfections in title that, in the aggregate, are not material in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; (h) purchase money security interests in real property, improvements thereto or equipment hereafter acquired (or, in the case of improvements, constructed) by the Borrower or any Subsidiary (or, in the case of an Acquired Entity, in existence at the time such Acquired Entity is acquired by the Borrower or any Subsidiary), provided that (i) such security interests secure Indebtedness permitted by Section 7.01(d), (ii) such security interests are incurred, and the Indebtedness secured thereby is created, within 90 days after such acquisition (or construction), (iii) the Indebtedness secured thereby does not exceed 80% of the lesser of the cost or the fair market value of such real property, improvements or equipment at the time of such acquisition (or construction) and (iv) such security interests do not apply to any other 66 property or assets of the Borrower or any Subsidiary; provided, however, that clauses (ii) and (iii) shall not apply to any security interests created or Indebtedness incurred by any Acquired Entity prior to the date such Acquired Entity is acquired by the Borrower or any Subsidiary; (i) Liens incurred in connection with Capital Lease Obligations permitted by Section 7.01(d); (j) any Lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted under paragraphs (a) through (i) above, provided that such Indebtedness is not increased and is not secured by any additional assets; (k) Liens arising pursuant to one or more orders of attachment, distraint or similar legal process issued in connection with one or more court proceedings (which may or may not be related) so long as the execution or other enforcement thereof is effectively stayed and the claims secured thereby do not exceed $2,000,000 in the aggregate and are being contested in good faith by appropriate proceedings; (l) Liens in respect of goods consigned to the Borrower or any Subsidiary in the ordinary course of business, including, but not limited to (i) goods consisting of lamps, light bulbs and related products consigned to the Borrower and all accounts receivable, contract rights, chattel paper and any other right to payment arising from the sale of said inventory, (ii) goods consisting of packaged vitamins, minerals, nutritional supplements and related products bearing the "Your Life" brand name and packaged natural vitamins bearing the Eckerd private label consigned to the Borrower, (iii) videotapes, display racks and related equipment consigned to the Borrower, (iv) goods consisting of hosiery, pantyhose and related products bearing the trade name "L'eggs" and display racks and related equipment consigned to the Borrower and (v) any pharmaceuticals consigned to the Borrower; (m) Liens on equipment consisting of an Equipment Lessor's right to acquire such equipment under an Equipment Agency Arrangement; (n) a collateral assignment by the Borrower, to the lessor under the Funding II Lease, of subleases by the Borrower, as sublessor, to Visionworks, Inc., as sublessee, of the properties listed on Schedule 7.02(n); and (o) any Lien created under the Loan Documents. SECTION 7.03. Sale and Leaseback Transactions. Enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property being sold or transferred; provided, however, that the foregoing shall not prohibit (a) the IFS Sale and Leaseback or the renewal, modification, extension or replacement of the Funding I Lease or the Funding II Lease so long as the terms of the Funding I Lease or the Funding II Lease, as applicable, after giving effect to such renewal, modification, extension or replacement shall be no less favorable to the Borrower (as determined by the Borrower in good faith) than the then-existing terms of such lease or (b) transactions effected pursuant to the Equipment Agency Agreements. 67 SECTION 7.04. Investments, Loans and Advances. Purchase, hold or acquire any capital stock, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment or any other interest in, any other Person, except: (a) investments existing on the date hereof and set forth on Schedule 7.04; (b) Permitted Investments; (c) the Borrower's and any Subsidiary's equity investments in any Subsidiary, the Borrower's and any Subsidiary's equity investments in any Inactive Subsidiary as of the date hereof and loans or advances by the Borrower to Subsidiaries to the extent such loans or advances are permitted by Section 7.01(g); (d) loans or advances by any Subsidiary to the Borrower or other Subsidiaries to the extent such loans or advances are permitted by Section 7.01(g); (e) deposits permitted under Section 7.02(f); (f) investments constituting all the capital stock of any Acquired Entity acquired in connection with any Permitted Acquisition so long as such capital stock is duly and validly pledged to the Collateral Agent for the benefit of the Secured Parties under the Pledge Agreement; (g) loans or advances to employees of the Borrower or any Subsidiary not in excess of $1,000,000 in the aggregate at any time outstanding; (h) guarantees by the Borrower of obligations of any Subsidiary in the ordinary course of business; (i) advances consisting of payments by the Borrower on behalf of Equipment Lessors in respect of the purchase price of equipment under Equipment Agency Agreements not in excess of $6,000,000 in the aggregate at any time outstanding; (j) all Guarantees permitted by Section 7.01 hereof; and (k) investments not otherwise permitted above so long as the amount of all such investments does not exceed $7,000,000 in the aggregate at any time outstanding. SECTION 7.05. Mergers, Consolidations, Sales of Assets and Acquisitions. Merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, assign, lease, sublease or otherwise dispose of (in one transaction or in a series of transactions) all or any substantial part of any asset (whether now owned or hereafter acquired) or any capital stock of any Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series 68 of transactions) all or any substantial part of the assets of any other Person (other than in connection with an acquisition of the stock, or all or substantially all the assets, of any Person whose assets consist solely of equipment or real estate that do constitute an independent business organization); provided, however, that the foregoing shall not prohibit: (a) sales, transfers and other dispositions of used or surplus equipment, vehicles and other assets in the ordinary course of business; (b) sales of inventory in the ordinary course of business; (c) if at the time thereof and immediately after giving effect thereto no Event of Default or Default shall have occurred and be continuing (i) any wholly owned Subsidiary or Acquired Entity may merge into the Borrower in a transaction in which the Borrower is the surviving corporation and (ii) any wholly owned Subsidiary or Acquired Entity may merge into or consolidate with any other wholly owned Subsidiary or Acquired Entity in a transaction in which the surviving entity is a wholly owned Subsidiary and no person other than the Borrower or a wholly owned Subsidiary receives any consideration; (d) sales of assets after the Restatement Date so long as (i) the aggregate Net Proceeds of all such sales does not exceed $35,000,000 (of which sales with Net Proceeds of no more than $10,000,000 may be made in any twelve-month period) and (ii) prior to the consummation of each such sale, a Financial Officer of the Borrower certifies to the Collateral Agent on behalf of the Secured Parties that such sale is at a price equal to or greater than the then fair market value of such asset; (e) sales of Third Party Receivables pursuant to a Permitted Receivables Purchase Agreement, provided that the aggregate net investment in such Third Party Receivables of the purchaser thereof shall not at any time exceed $125,000,000; (f) the purchase or other acquisition of any assets acquired in connection with any Permitted Acquisitions; (g) the lease or sublease of all or part of any interest, including a leasehold interest, of the Borrower or any Subsidiary in real property or the assignment of any lease of real property of the Borrower or any Subsidiary, provided that (i) such lease, sublease or assignment is on commercially reasonable terms, (ii) such lease or sublease could not and will not be characterized by the lessor or lessee thereunder as a capital lease under GAAP, (iii) the leasing or subleasing of such real property or the assignment of such lease shall not have an adverse material effect, individually or in the aggregate, upon the conduct of the Borrower's or any Subsidiary's business or the value or use of the real property encumbered by such lease or sublease, (iv) in the case of a lease in respect of any real property owned by the Borrower or any Subsidiary (other than a retail store and the distribution center located in Clearwater, Florida), the lease shall be of an immaterial portion of such real property and (v) in the case of a lease or sublease in respect of a retail store, the decision to lease or sublease such retail store is made on a basis that is consistent with the practices of the Borrower or such Subsidiary prior to the date hereof with respect to the leasing or subleasing of retail stores; 69 (h) sales of equipment to Equipment Lessors pursuant to the Equipment Agency Arrangements; and (i) Acquisition-Related Sales, the Life Care Sale, the Hammond Sale and the Photolab Business Sale. SECTION 7.06. Dividends and Distributions. Declare or pay, directly or indirectly, any dividend or make any other distribution on any shares of the Borrower's capital stock (except dividends payable solely in shares of such capital stock or rights to acquire shares of such capital stock) (by reduction of capital or otherwise), whether in cash, property, securities or a combination thereof, with respect to any shares of its capital stock or directly or indirectly redeem, purchase, retire or otherwise acquire for value (or permit any Subsidiary to purchase or acquire) any shares of any class of its capital stock or set aside any amount for any such purpose, except that: (a) any Subsidiary may declare and pay dividends or make other distributions to the Borrower; and (b) the Borrower may (i) purchase or redeem shares of Common Stock held by the Management Investors under the circumstances and at the prices specified in the Management Subscription Agreement or the Borrower's restated certificate of incorporation or purchase or redeem up to 540,000 shares of Common Stock under a long-term incentive or other employee benefit plan to the extent permitted by applicable law (provided in each case that the aggregate number of shares of Common Stock purchased or redeemed during the twelve-month period commencing on April 12, 1994, or any subsequent April 12 shall not exceed 4% of the shares of Common Stock outstanding on such date) and (ii) purchase up to 240,000 shares of Common Stock from employees of the Borrower or any Subsidiary in accordance with the terms of Sections III.E and III.F of the Borrower's restated certificate of incorporation, provided that the aggregate amount of all payments made pursuant to clause (i) and (ii) above (other than any such payments made in respect of amounts shown as accruals on the Borrower's consolidated balance sheet as of April 30, 1994) shall not exceed $10,000,000. SECTION 7.07. Transactions with Affiliates. Sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except that the Borrower or any Subsidiary may engage in any of the fore- going transactions in the ordinary course of business at prices and on terms and conditions no less favorable to the Borrower or such Subsidiary, as the case may be, than could be obtained on an arm's-length basis from unrelated third parties; provided, however, that the foregoing shall not restrict the transactions contemplated by the Funding I Lease and the Funding II Lease and, as long as no Default or Event of Default shall have occurred and be continuing, the following transactions: (a) any transaction listed on Schedule 7.07; (b) any transaction with an Affiliate expressly permitted by this Agreement (including transactions expressly permitted by Section 7.01, 7.04, 7.05 or 7.06); 70 (c) the Borrower or any Subsidiary may participate in, or effect any transaction in connection with, any joint enterprise or other joint arrangement with any Affiliate if the Borrower or such Subsidiary participates in the ordinary course of its business and on a basis no less advantageous than the basis on which such Affiliate participates; and (d) the Borrower may make payments or provide compensation for investment banking services rendered by any Affiliate if such services are rendered in the ordinary course of such Affiliate's business and if the amount of any such payment or compensation is comparable to the amount that would be charged if such services were performed by a Person not an Affiliate. SECTION 7.08. Business of Borrower and Subsidiaries. (a) Engage at any time in any business or business activity other than the business currently conducted by it and the Subsidiaries and business activities reasonably related thereto. (b) In the case of any Subsidiary, fail to be a Guarantor or a party to any Security Document. SECTION 7.09. Limitations on Debt Prepayments. (a) Optionally prepay, repurchase or redeem or otherwise defease or segregate funds with respect to any Indebtedness for borrowed money of the Borrower; provided, however, that the foregoing shall not prevent the Borrower from (i) making any payment pursuant to Section 2.12 or 2.13 or (ii) redeeming or repurchasing any then-outstanding Subordinated Indebtedness with Indebtedness incurred pursuant to Section 7.01(j) (it being understood that, following any such redemption or repurchase under this clause (ii), this Section 7.09 shall apply to the Indebtedness incurred in connection with any such refinancing), (iii) redeeming or repurchasing any then-outstanding Subordinated Indebtedness with the Net Proceeds of any Equity Issuance or (iv) consummating the Hammond Sale. (b) Permit any amendment, waiver or modification to the terms of any Subordinated Indebtedness, or any indenture relating to, or other agreement of the Borrower entered into in connection with, any Subordinated Indebtedness, if the effect of such amendment or modification is to impose additional or increased scheduled or mandatory repayment, retirement, repurchase or redemption obligations in respect of such Indebtedness or to require any scheduled or mandatory payment to be made in respect of such Indebtedness prior to the date that such payment would otherwise be due; provided, however, that the foregoing shall not prevent any amendment, waiver or modification to the terms of any such Subordinated Indebtedness or indenture if such Subordinated Indebtedness as so amended, waived or modified could have been issued by the Borrower pursuant to Section 7.01(k). SECTION 7.10. Amendment of Certain Documents. Permit any termination of, or any amendment, waiver or modification to, (a) the Certificate of Incorporation of the Borrower or any Subsidiary, (b) the By-laws of the Borrower or any Subsidiary, (c) the Management Subscription Agreement, (d) the Stockholders' Agreement, (e) the Investor Stock Subscription Agreements, (f) any Subordinated Indebtedness or (g) the indenture relating to any Subordinated Indebtedness unless any such termination, amendment, waiver or modification is not adverse in any respect to the Lenders. Without limiting the generality of the foregoing, with respect to the documents specified in clauses (f) and (g) of the immediately preceding sentence, it is understood that any increase in the interest, fees or other amounts payable in connection therewith, or any amendment that imposes additional covenants or events of default or makes more restrictive the covenants or events of default contained therein, shall require the consent of the Required Lenders. 71 SECTION 7.11. Funded Debt to EBITDA Ratio. Permit the Funded Debt to EBITDA Ratio of the Borrower for any period of four consecutive fiscal quarters ending on the last day of or during the period indicated below to be greater than the ratio set forth opposite such period: From and Including: To and Including: Ratio: ------------------- ----------------- ------ October 28, 1995 November 2, 1996 3.50 November 3, 1996 November 1, 1997 3.00 November 2, 1997 October 31, 1998 2.50 November 1, 1998 October 30, 1999 2.00 October 31, 1999 November 29, 2000 2.00 SECTION 7.12. Interest Coverage Ratio. Permit the Interest Coverage Ratio on the last day of any period of four consecutive fiscal quarters ending on any day prior to the Term Loan Maturity Date to be less than 3.00 to 1.00. SECTION 7.13. Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio on the last day of any period of four consecutive fiscal quarters ending on the last day of or during any period indicated below (or, if shorter than four consecutive fiscal quarters, any period beginning on October 29, 1995 and ending on the last day of or during such period) to be less than the ratio set forth opposite such period: From and Including: To and Including: Ratio: ------------------- ----------------- ------ October 28, 1995 November 2, 1996 1.000 November 3, 1996 November 1, 1997 1.025 November 2, 1997 October 31, 1998 1.050 November 1, 1998 October 30, 1999 1.100 October 31, 1999 November 29, 2000 1.100 SECTION 7.14. Bank Accounts. Establish or maintain a bank account or similar account with any financial institution that is not a Lender, other than (a) a bank account used exclusively by one or more drug stores or other retail stores of the Borrower or any Subsidiary in which an aggregate amount is on deposit not in excess of the amount reasonably required to finance the working capital requirements of the depositor, (b) a collection account used exclusively in connection with a Permitted Receivables Purchase Agreement and (c) bank accounts of the Borrower or any Subsidiary maintained with Barnett Bank of Pinellas County and Wachovia Bank of N.C., N.A., in which an aggregate amount is on deposit not in excess of $4,000,000. ARTICLE VIII Events of Default In case of the happening of any of the following events ("Events of Default"): (a) any representation or warranty made or deemed made in any Loan Document, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished pursuant to any Loan Document, shall prove 72 to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the payment of any principal of any Loan or Swingline Loan or LC Disbursement or BA Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (c) default shall be made in the payment of any interest on any Loan or Swingline Loan or any Fee or any other amount (other than an amount referred to in paragraph (b) above) due under any Loan Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of three Business Days; (d) default shall be made in the due observance or performance by the Borrower of any covenant, condition or agreement contained in Sec- tion 2.13(b), 6.01(a), 6.05(a), 6.08 or in Article VII; (e) default shall be made in the due observance or performance by the Borrower or any Subsidiary of any covenant, condition or agreement contained in any Loan Document (other than those defaults specified in paragraph (b), (c) or (d) above) and, except as may be otherwise provided in the applicable Mortgage, if any, such default shall continue unremedied for a period of 15 days after written notice thereof from the Administrative Agent or any Lender to the Borrower; (f) the Borrower or any Subsidiary shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $3,000,000, when and as the same shall become due and payable (after giving effect to any applicable grace period), or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument evidencing or governing any such Indebtedness (after giving effect to any applicable grace period) if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf to cause, such Indebtedness to become due prior to its stated maturity; (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Borrower or any Subsidiary, or of a substantial part of the property or assets of the Borrower or a Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary (other than Life Care) or for a substantial part of the property or assets of the Borrower or any Subsidiary (other than Life Care) or (iii) the winding-up or liquidation of the Borrower or a Subsidiary (other than Life Care); and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (h) the Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar 73 law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in paragraph (h) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of the property or assets of the Borrower or any Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; (i) one or more judgments for the payment of money in an aggregate amount in excess of $250,000 (to the extent not covered by insurance) shall be rendered against the Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of ten consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of the Borrower or any Subsidiary to enforce any such judgment; (j) a Reportable Event or Reportable Events, or a failure to make a required installment or other payment (within the meaning of Section 412(n)(l) of the Code), shall have occurred with respect to any Plan or Plans that reasonably could be expected to result in a Material Adverse Effect and, within 30 days after the reporting of any such Reportable Event to the Administrative Agent pursuant to Section 6.06(b)(i)(A) or after the receipt by the Agent of the statement required pursuant to Section 6.06(b)(iii), the Administrative Agent shall have notified the Borrower in writing that (i) the Required Lenders have reasonably determined that, on the basis of such Report- able Event or Reportable Events or the failure to make a required payment, there are reasonable grounds (A) for the termination of such Plan or Plans by the PBGC, (B) for the appointment by the appropriate United States District Court of a trustee to administer such Plan or Plans or (C) for the imposition of a lien in favor of a Plan and (ii) as a result thereof an Event of Default exists hereunder; or a trustee shall be appointed by a United States District Court to admin- ister any such Plan or Plans; or the PBGC shall institute proceedings to terminate any Plan or Plans; (k) (i) the Borrower or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan, (ii) the Borrower or such ERISA Affiliate does not have reasonable grounds for contesting such Withdrawal Liability or is not in fact contesting such Withdrawal Liability in a timely and appropriate manner and (iii) the amount of the Withdrawal Liability specified in such notice, when aggregated with all other amounts required to be paid to Multiemployer Plans in connection with Withdrawal Liabilities (determined as of the date or dates of such notification), either (A) is $500,000 or more or (B) is less than $500,000 and any payment due as a result of such liability remains unpaid 30 days after such payment is due; (l) the Borrower or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if solely as a result of such reorganization or termination the aggregate annual contributions of the Borrower and its ERISA Affiliates to all Multiemployer Plans that are then in reorganization or have been or are being terminated have been or will be increased over the amounts required to be contributed to such Multiemployer Plans for their most recently completed plan years by an amount exceeding $500,000; 74 (m) there shall have occurred a Change in Control; (n) any material security interest purported to be created by any Security Document shall cease to be, or shall be asserted by the Borrower or any Guarantor not to be, a valid, perfected, first priority (except as otherwise expressly provided in this Agreement or such Security Document) security interest in the securities, assets or properties covered thereby, except to the extent that any such loss of perfection or priority results from the failure of the Collateral Agent to maintain possession of certificates representing securities pledged under the Pledge Agreement or otherwise take any action within its control (including the filing of UCC continuation statements); (o) any Loan Document shall not be for any reason, or shall be asserted by the Borrower or any Guarantor party thereto not to be, in full force and effect and enforceable in all material respects in accordance with its terms; (p) the Obligations and the guarantee thereof pursuant to the Guarantee Agreement shall cease to constitute, or shall be asserted by the Borrower not to constitute, senior indebtedness under the subordination provisions of any Subordinated Indebtedness or such sub- ordination provisions shall be invalidated or otherwise cease to be a legal, valid and binding obligation of the parties thereto, enforceable in accordance with its terms; or (q) any Person shall (i) become the owner or holder of record of all the common equity securities of the Borrower and (ii) fail, prior to or simultaneously with obtaining such shares, to (A) become a Guarantor of the Obligations and (B) pledge all such common equity securities to the Collateral Agent for the benefit of the Secured Parties, in each case pursuant to one or more instruments or agreements reasonably satisfactory in form and substance to the Collateral Agent; then, and in every such event (other than an event with respect to the Borrower or any Subsidiary described in paragraph (g) or (h) above), and at any time thereafter during the continuance of such event, the Administrative Agent may and, at the request of the Required Lenders, shall, by notice to the Borrower, take any of or all the following actions, at the same or different times: (i) terminate forthwith the Commitments and the LC/BA Commitment, (ii) declare the Loans and the Swingline Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans and the Swingline Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding, (iii) require cash collateral as contemplated by Section 3.07 and (iv) exercise any reme- dies available under any Loan Document or otherwise; and in any event with respect to the Borrower or any Subsidiary described in paragraph (g) or (h) above, the Commitments and the LC/BA Commitment shall automatically terminate and the principal of the Loans and the Swingline Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding. 75 ARTICLE IX The Administrative Agent, the Managing Agents and the Fronting Banks In order to expedite the transactions contemplated by this Agreement, (a) Chemical Bank is hereby appointed to act as Administrative Agent on behalf of the Fronting Banks, the Swingline Lenders and the Lenders and (b) Chemical Bank and NationsBank are hereby appointed to act as Managing Agents on behalf of the Lenders (the Administrative Agent, the Managing Agents and the Collateral Agent for purposes of this Article are collectively referred to as the "Agents"). Each of the Lenders, each subsequent holder of any Note by its acceptance thereof, the Fronting Banks and the Swingline Lenders hereby irrevocably authorize each Agent to take such actions on their behalf and to exercise such powers as are specifically delegated to such Agent by the terms and provisions hereof and of the other Loan Documents, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders, the Fronting Banks and the Swingline Lenders, without hereby limiting any implied authority, (a) to receive all Loan Documents on the Restatement Date, including the Notes, (b) to receive on behalf of the Lenders, the Fronting Banks and the Swingline Lenders all payments of principal of and interest on the Loans, all the Swingline Loans, all payments in respect of BA Disbursements and LC Disbursements and all other amounts due to the Lenders, the Fronting Banks and the Swingline Lenders hereunder, and promptly to distribute to each Lender, Fronting Bank and Swingline Lender its proper share of each payment so received, (c) to give notice on behalf of each of the Lenders to the Borrower of any Event of Default specified in this Agreement of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder and (d) to distribute to each Lender, Fronting Bank and Swingline Bank copies of all notices, financial statements and other materials delivered by the Borrower pursuant to this Agreement as received by the Administrative Agent (including notices of an occurrence of any Event of Default). None of the Agents nor either Fronting Bank nor any of their respective directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its, his or her own gross negligence or wilful misconduct, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by the Bor- rower or any Guarantor of any of the terms, conditions, covenants or agreements contained in any Loan Document. The Agents shall not be responsible to the Lenders or the holders of the Notes or the Fronting Banks or the Swingline Lenders for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement, the Notes or any other Loan Documents or other instruments or agreements. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof until it shall have received from the payee of such Note notice, given as provided herein, of the transfer thereof in compliance with Section 10.04. The Administrative Agent shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders (and a Fronting Bank, with respect to Letters of Credit and Bankers' Acceptances) and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders, each subsequent holder of any Note, the Fronting Banks and the Swingline Lenders. The Administrative Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. None of the Agents nor either Fronting Bank nor any of their respective directors, officers, employees or agents shall have any responsibility to the Borrower on account of the failure of or delay in performance or breach by any Lender (or, in the case of the Agents, by the Fronting Bank or either Swingline 76 Lender) of any of its obligations hereunder or to any Lender (or, in the case of the Agents, the Fronting Banks or Swingline Lenders) on account of the failure of or delay in performance or breach by any other Lender (or, in the case of the Agents, the Fronting Banks or the Swingline Lenders) or the Borrower or any Guarantor of any of their respective obligations here- under or under any other Loan Document or in connection herewith or there- with. Each Agent and Fronting Bank may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by either of them with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by either of them in accordance with the advice of such counsel. The Lenders, the Fronting Banks and the Swingline Lenders hereby acknowledge that none of the Agents nor either Fronting Bank shall be under any duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. Subject to the appointment and acceptance of a successor Agent as provided below, any Agent may resign at any time by notifying the Lenders, the Fronting Banks, the Swingline Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders and the Fronting Bank, appoint a successor Agent, which shall be a bank with an office in New York, New York, having a combined capital and surplus of at least $500,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations hereunder. After any Agent's resignation hereunder, the provisions of this Article and Section 10.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. With respect to the Loans made by it hereunder and the Notes issued to it, each Agent and Fronting Bank, in its individual capacity and not as Agent or Fronting Bank, as the case may be, shall have the same rights and powers as any other Lender and may exercise the same as though it were not an Agent or a Fronting Bank, as the case may be, and each Agent and its Affiliates and each Fronting Bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not an Agent or a Fronting Bank, as the case may be. Each Lender, Fronting Bank and Swingline Lender recognizes that applicable laws, rules, regulations or guidelines of Governmental Authorities may require the Administrative Agent to determine whether the transactions contemplated hereby should be classified as "highly leveraged" or assigned any similar or successor classification and that such determination may be binding upon the other Lenders, the Fronting Banks and the Swingline Lenders. Each Lender, Fronting Bank and Swingline Lender understands that any such determination shall be made solely by the Administrative Agent based upon such factors (which may include the Administrative Agent's internal policies and prevailing market practices) as the Administrative Agent shall deem relevant and agrees that the Administrative Agent shall have no liability for the consequences of any such determination. Each Lender agrees (a) to reimburse each Agent and Fronting Bank, on demand, in the amount of such Lender's pro rata share (based on its Commit- ment hereunder) of any expenses incurred for the 77 benefit of the Lenders by such Agent or Fronting Bank, including counsel fees and compensation of agents paid for services rendered on behalf of the Lenders, that shall not have been reimbursed by the Borrower and (b) to indemnify and hold harmless each Agent and Fronting Bank and any of their respective directors, officers, employees or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by or asserted against it in its capacity as an Agent or a Fronting Bank, as the case may be, or any of them in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by it or any of them under this Agreement or any other Loan Document, to the extent the same shall not have been reim- bursed by the Borrower, provided that (i) no Lender shall be liable to any Agent or a Fronting Bank for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or wilful misconduct of such Agent or Fronting Bank, as the case may be, or any of their respective directors, officers, employees or agents and (ii) Lenders that do not have Revolving Credit Commitments (other than through the termination thereof) shall be under no obligation to reimburse or indemnify the Fronting Banks under clauses (a) and (b) above. Each Lender acknowledges that it has, independently and without reli- ance upon the Agents, any other Lender, the Fronting Banks or the Swingline Lenders and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agents, any other Lender, the Fronting Banks or the Swingline Lenders and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder. ARTICLE X Miscellaneous SECTION 10.01. Notices. Except as otherwise expressly permitted herein, notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telex, graphic scanning or other telegraphic communications equipment of the sending party, as follows: (a) If to the Borrower, at 8333 Bryan Dairy Road, Largo, Florida 34647, Attention of Chief Financial Officer (Telecopy No. (813) 399- 6359). (b) If to the Administrative Agent or Chemical Bank, as Swingline Lender or Managing Agent, at 270 Park Avenue, 9th Floor, New York, New York 10017, Attention of Neil Boylan (Telecopy No. (212) 270-2625); with a copy to Chemical Bank Agency Services Corporation, Grand Central Tower, 140 East 45th Street, New York, New York 10017, Attention of Hilma Gabbidon (Telecopy No. (212) 622-0854). (c) If to NationsBank, as Swingline Lender, Primary Fronting Bank, Documentation Agent or Managing Agent, at 400 North Ashley Drive, Tampa, Florida 33602, Attention of Joseph J. Troy (Telecopy No. (813) 224-5948). 78 (d) If to the IRB Fronting Bank, at its address (or telecopy number) set forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. (e) If to a Lender, at its address (or telecopy number) set forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telex, telecopy or other telegraphic communications equipment of the sender, or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 10.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 10.01. The Administrative Agent shall deliver to the Borrower a copy of each Administrative Questionnaire received by it. SECTION 10.02. Survival of Agreement. All covenants, agreements, representations and warranties made by the Borrower herein and the Borrower and the Guarantors in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lenders, the Fronting Banks and the Swingline Lenders and shall survive the making by the Lenders of the Loans, the making by the Swingline Lenders of the Swingline Loans, the issuance of Letters of Credit by the Fronting Banks and the origination of the Bankers' Acceptances by the Primary Fronting Bank, and the execution and delivery to the Lenders and the Swingline Lenders of the Notes evidencing such loans, regardless of any investigation made by the Lenders, the Fronting Banks and the Swingline Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or Swingline Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid or any Letter of Credit or Bankers' Acceptance is outstanding and so long as the Commitments and the LC/BA Commitment have not been terminated. SECTION 10.03. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower, the Administrative Agent, the Managing Agents, the Fronting Banks and the Swingline Lenders and when the Administrative Agent shall have received copies hereof that, when taken together, bear the signatures of each Lender, and thereafter shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent, the Managing Agents, the Fronting Banks, the Swingline Lenders and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior consent of all the Lenders (and any attempted assignment by the Borrower shall be void). SECTION 10.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrower, the Managing Agents, the Administrative Agent, the Fronting Banks, the Swingline Lenders or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitments and LC/BA 79 Commitment, the outstanding Letters of Credit and Bankers' Acceptances and the Loans at the time owing to it and the Notes held by it); provided, how- ever, that (i) except in the case of an assignment to a Lender or an Affiliate of a Lender, each of the Administrative Agent and the Borrower (and in the case of an assignment of a Lender's Revolving Credit Commitment, the Swingline Lenders and the Fronting Banks) must give its prior written consent to such assignment (which consent shall not be unreasonably withheld); provided, however, the consent of the Borrower shall not be required if a Default or an Event of Default under paragraph (b) or (c) of Article VIII has occurred and is continuing on the date of the Assignment and Acceptance, (ii) if the assignee shall not be a Lender or an Affiliate of a Lender, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 (or an amount equal to the remaining balance of the Commitments), (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with the Note or Notes subject to such assignment and, unless the assigning Lender is a Managing Agent and the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent on or prior to the date that is 90 days after the Restatement Date, a processing and recordation fee of $3,500 and (iv) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Upon acceptance and recording pursuant to paragraph (e) of this Section 10.04, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (i) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (ii) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 10.05 and, with respect only to liabilities of the Borrower thereunder to such Lender that have accrued or otherwise arise by reason of circumstances or events prior to the assignment of its rights and obligations hereunder, Sections 2.14, 2.16 and 2.20, as well as to any Fees accrued for its account and not yet paid). (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and bene- ficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitments and LC/BA Commitment, and the outstanding balances of its Term Loans and Revolving Credit Loans, in each case without giving effect to assignments thereof that have not become effective, are as set forth in such Assignment and Acceptance; (ii) except as set forth in clause (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, gen- uineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto, or the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or the Borrower or any Guarantor under any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, such assigning 80 Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent and the Managing Agents to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent and the Managing Agents by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations that by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent, acting for this purpose as agent for the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Com- mitments and LC/BA Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive in the absence of manifest error and the Borrower, the Administrative Agent, the Fronting Banks, the Swingline Lenders and the Lenders shall treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Fronting Banks, the Swingline Lenders and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee together with the Note or Notes subject to such assignment, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and the written consent of the Administrative Agent and the Borrower (and if required under paragraph (b) above, the Swingline Lenders and the Fronting Banks) to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information con- tained therein in the Register and (iii) give prompt notice thereof to the Lenders, the Fronting Banks and the Swingline Lenders. No assignment shall be effective unless it has been recorded in the Register as provided in this paragraph (e). Within five Business Days after receipt of notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent, in exchange for the surrendered Note or Notes, a new Note or Notes payable to such assignee or registered assigns in a principal amount equal to the applicable Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Com- mitment, a new Note payable to such assigning Lender or registered assigns in a principal amount equal to the applicable Commitment retained by it; provided, however, that any such Note or Notes shall comply with Section 2.04. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note; such new Notes shall be dated the date of the surrendered Notes that they replace and shall otherwise be in substantially the form of Exhibit A-1, A-2 or A-3, as appropriate. Notes that are replaced with substitute Notes shall be returned to the Borrower. (f) Each Lender may without the consent of the Borrower, the Administrative Agent, the Fronting Banks or the Swingline Lenders sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a por- tion of its Commitments and the Loans owing to it and the Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obliga- tions, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.14, 2.16 and 2.20 to the same extent as if they were Lenders, provided that the Borrower 81 shall not be required to reimburse the participating lenders or other entities pursuant to Section 2.14, 2.16 or 2.20 in an amount in excess of the amount that would have been payable thereunder to such Lender had such Lender not sold such participation and (iv) the Borrower, the Administrative Agent, the Managing Agents, the Fronting Banks, the Swing- line Lenders and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loans, LC Disbursements or BA Disbursements and to approve any amendment, modification or waiver of any provision of this Agreement (provided that the participating bank or other entity may be provided with the right to approve amendments, modifications or waivers affecting it with respect to (A) any decrease in the Fees payable hereunder with respect to Loans in which the participating bank or other entity has purchased a participation, (B) any change in the amount of principal of, or decrease in the rate at which interest is payable, on the Loans in which the participating bank or other entity has purchased a participation, (C) any extension of the final scheduled maturity of any Loan in which the participating bank or other entity has purchased a participation or (D) any release of all or substantially all the Collateral). (g) In the event that S&P, Moody's and Thompson's BankWatch (or InsuranceWatch Ratings Service, in the case of Lenders that are insurance companies (or Best's Insurance Reports, if such insurance company is not rated by InsuranceWatch Ratings Service)) shall, after the date that any Lender with a Revolving Credit Commitment becomes a Lender, downgrade the long-term certificate of deposit ratings of such Lender, and the resulting ratings shall be below BBB-, Baa3 and C (or BB, in the case of a Lender that is an insurance company (or B, in the case of an insurance company not rated by InsuranceWatch Ratings Service)), then each Fronting Bank shall have the right, but not the obligation, at its own expense, upon notice to such Lender and the Administrative Agent, to replace (or to request the Borrower to use its reasonable efforts to replace) such Lender with an assignee (in accordance with and subject to the restrictions contained in Section 9.04(b)), and such Lender hereby agrees to transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 9.04(b)) all its interests, rights and obligations in respect of its Revolving Credit Commitment to such assignee; provided, how- ever, that (i) no such assignment shall conflict with any law, rule and regulation or order of any Governmental Authority and (ii) such Fronting Bank or such assignee, as the case may be, shall pay to such Lender in immediately available funds on the date of such assignment the principal of and interest accrued to the date of payment on the Loans made by such Lender hereunder and all other amounts accrued for such Lender's account or owed to it hereunder. (h) Notwithstanding the limitations set forth in paragraph (b) above, any Lender may at any time assign all or any portion of its rights under this Agreement and the Notes issued to it to a Federal Reserve Bank without the prior written consent of the Borrower or the Administrative Agent, provided that no such assignment shall release a Lender from any of its obligations hereunder. (i) The Borrower shall not assign or delegate any of its rights or duties hereunder without the prior written consent of the Administrative Agent, the Managing Agents, the Fronting Banks, the Swingline Lenders and each Lender. Except as provided in Section 3.10 and Section 2.22, respectively, neither Fronting Bank or Swingline Lender may assign or delegate any of its respective rights and duties hereunder without the prior written consent of the Borrower and Managing Agents (and any attempted assignment by the Borrower shall be void). SECTION 10.05. Expenses; Indemnity. (a) The Borrower agrees to pay all out-of-pocket expenses incurred by the Administrative Agent, the Managing Agents, the Fronting Banks, the Swingline Lenders and the Collateral Agent in connection with the preparation of this Agreement and the other 82 Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby contemplated shall be consummated) or incurred by the Administrative Agent, the Managing Agents, the Fronting Banks, the Swingline Lenders, the Collateral Agent or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement and the other Loan Documents or in connection with the Loans made or the Notes or Letters of Credit issued or Bankers' Acceptances originated hereunder, including the reasonable fees, other charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent, the Managing Agents, the Collateral Agent, the Swingline Banks and the Fronting Banks (which fees, other charges and disbursements will be set forth in accordance with the Borrower's standard billing policy), and, in connection with any such enforcement or protection, the reasonable fees, other charges and disbursements of any other counsel for the Administrative Agent, the Managing Agents, the Fronting Banks, the Swingline Lenders, the Collateral Agent or any Lender. The Borrower further agrees that it shall indemnify the Administrative Agent, the Managing Agents, the Fronting Banks, the Swingline Lenders, the Collateral Agent, the Lenders from and hold them harmless against any documentary taxes, assessments or similar charges made by any Governmental Authority by reason of the execution and delivery of this Agreement or any of the other Loan Documents. (b) The Borrower agrees to indemnify the Administrative Agent, the Collateral Agent and each Fronting Bank, Swingline Lender and Lender and each of their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereby or thereto of their respective obligations hereunder or thereunder or the consummation of the Transactions and the other transactions con- templated hereby or thereby, (ii) the use of the Letters of Credit or the Bankers' Acceptances or the proceeds of the Loans, the Swingline Loans and the Bankers' Acceptances or (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses have resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) The provisions of this Section 10.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans or the Swingline Loans, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Administrative Agent, the Managing Agents, the Fronting Banks, the Collat- eral Agent, the Swingline Lenders or any Lender. All amounts due under this Section 10.05 shall be payable on written demand therefor. SECTION 10.06. Right of Setoff. If an Event of Default shall have occurred and be continuing, and the Administrative Agent shall have declared, or the Required Lenders shall have requested the Administrative Agent to declare, the Loans and the Swingline Loans immediately due and payable pursuant to Article VIII, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any of and all the obligations of such entity now or here- after existing under this Agreement and other Loan Documents held by such Lender, irrespective of whether such Lender shall have made any demand under this Agreement or such other 83 Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section 10.06 are in addition to other rights and remedies (including other rights of setoff) that such Lender may have. SECTION 10.07. Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (OTHER THAN THE MORTGAGES) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 10.08. Waivers; Amendment. (a) No failure or delay on the part of the Administrative Agent, either Managing Agent, Fronting Bank or Swingline Lender, the Collateral Agent or any Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Managing Agents, the Fronting Banks, the Swingline Lenders, the Collateral Agent and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Each holder of a Note shall be bound by any amendment, modification, waiver or consent authorized as provided herein, whether or not such Note shall have been marked to indicate such amendment, modification, waiver or consent. (b) Neither this Agreement or any of the other Loan Documents nor any provision hereof or thereof may be waived, amended or modified except, (i) in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders, (ii) in the case of the Guarantee Agreement and the Indemnity, Subrogation and Contribution Agreement, pursuant to an agreement or agreements in writing entered into by the Guarantors and the Collateral Agent and consented to by the Required Lenders, (iii) in the case of any of the Security Documents, pursuant to an agreement or agreements in writing entered into by the Bor- rower and the Collateral Agent and consented to by the Required Lenders, (iv) in the case of a Letter of Credit, pursuant to an agreement or agreements entered into by the Borrower and the relevant Fronting Bank or (v) in the case of any Note, pursuant to an agreement or agreements entered into by the Borrower and the holder of such Note and consented to by the Required Lenders; provided, however, that no such agreement shall (A) change the principal amount of, or extend the final scheduled maturity of, any principal of or interest on, any Loan, or forgive any such payment or any part thereof, or reduce the rate of interest on any Loan, without the prior written consent of each holder of a Note affected thereby, (B) increase the Commitment or the LC/BA Commitment or reduce the Fees of any Lender without the prior written consent of such Lender, (C) amend or modify the provisions of Section 2.17, the provisions of this Section 10.08(b) or the definition of the term "Required Lenders" without the prior written consent of each Lender, (D) reduce any Term Loan Repayment amount or extend any Term Loan Repayment Date (other than the Term Loan Maturity Date), in each case without the prior written consent of Lenders holding Term Loans representing at least 75% of the aggregate outstanding principal amount of the Term Loans or (E) release any material Collateral under any Security Document or under such Security Document, except as expressly permitted thereby or hereby, without the prior written consent of each Lender, provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, the Managing Agents, the Fronting Banks or the Swingline Lenders hereunder 84 without the prior written consent of the Administrative Agent, the Managing Agents, the Fronting Banks or the Swingline Lenders, as the case may be. Each Lender and each holder of a Note shall be bound by any modification or amendment authorized by this Section 10.08 regardless of whether its Note shall have been marked to make reference thereto, and any consent by any Lender or holder of a Note pursuant to this Section 10.08 shall bind any person subsequently acquiring a Note from it, regardless of whether such Note shall have been so marked. SECTION 10.09. Interest Rate Limitation. Notwithstanding anything herein or in the Notes to the contrary, if at any time the applicable interest rate, together with all fees and charges that are treated as interest under applicable law (collectively, the "Charges"), as provided for herein or in any other document executed in connection herewith, or otherwise contracted for, charged, received, taken or reserved by any Lender or either Swingline Lender, shall exceed the maximum lawful rate (the "Maximum Rate") that may be contracted for, charged, taken, received or reserved by such Lender or such Swingline Lender in accordance with applicable law, the rate of interest payable under the Note held by such Lender or such Swingline Lender, together with all Charges payable to such Lender or such Swingline Lender, shall be limited to the Maximum Rate. SECTION 10.10. Entire Agreement. This Agreement and the other Loan Documents and the fee letter referred to in Section 2.05(c) constitute the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents. Nothing in this Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents. SECTION 10.11. Waiver of Jury Trial. Each party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this Agreement or any of the other Loan Documents. Each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it and the other parties hereto have been induced to enter into this Agreement and the other Loan Documents, as applicable, by, among other things, the mutual waivers and certifications in this Section 10.11. SECTION 10.12. Severability. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 10.13. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract, and shall become effective as provided in Section 10.03. SECTION 10.14. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 85 SECTION 10.15. Confidentiality. (a) Each Lender agrees not to disclose to any Person the Information (as defined below) without the prior written consent of the Borrower, which consent shall not be unreasonably withheld, except that any Lender shall be permitted to disclose Information (i) to its officers, directors, employees, agents and representatives; (ii) to the extent required by applicable laws and regulations or by any subpoena or similar legal process, or requested by any bank regulatory authority; (iii) to the extent such Information (A) becomes publicly available other than as a result of a breach of this Agreement, (B) becomes available to such Lender on a non-confidential basis from a source other than the Borrower or its Affiliates or (C) was available to such Lender on a non-confidential basis prior to its disclosure to such Lender by the Borrower or its Affiliates; (iv) to any actual or prospective assignee of, or prospective purchaser of a participation in, the rights of such Lender hereunder, in each case subject to paragraph (c) below; or (v) in connection with any suit, action or proceeding relating to the enforcement of rights hereunder or under any other Loan Document or in connection with the transactions contemplated hereby. As used in this Section 10.15, as to any Lender, the "Information" shall mean the Confidential Information Memorandum and any other materials, documents and information that the Borrower or any of its Affiliates may have furnished or may hereafter furnish to any Lender in connection with this Agreement. (b) Each Lender agrees that it will use the Information only for purposes related to the transactions contemplated hereby and by the other Loan Documents, provided that (i) if the conditions referred to in any of subclauses (A) through (C) of clause (iii) of paragraph (a) above are met, such Lender may otherwise use the Information and (ii) if such Lender is otherwise a creditor of the Borrower, such Lender may use the Information in connection with its other credits to the Borrower. (c) Each Lender agrees that it will not disclose any of the Information to any actual or prospective assignee of such Lender or participant in any rights of such Lender under this Agreement unless such actual or prospective assignee or participant first executes and delivers to such Lender a confidentiality letter containing substantially the undertakings set forth in this Section 10.15. SECTION 10.16. Jurisdiction; Consent to Service of Process. (a) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the Borrower or its properties in the courts of any jurisdiction. (b) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. 86 (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 10.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. 87 IN WITNESS WHEREOF, the Borrower, the Administrative Agent, the Managing Agents, the Swingline Lenders and the Lenders have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. ECKERD CORPORATION, by ------------------------- Name: Title: CHEMICAL BANK, individually and as Administrative Agent, Managing Agent and Swingline Lender, by ------------------------- Name: Title: 88 NATIONSBANK OF FLORIDA, N.A., individually and as Managing Agent, Swingline Lender, Primary Fronting Bank and Documentation Agent, by ------------------------- Name: Title: ABN-AMRO BANK, N.V., by ------------------------- Name: Title: by ------------------------- Name: Title: THE BANK OF NEW YORK, by ------------------------- Name: Title: THE BANK OF NOVA SCOTIA, by ------------------------- Name: Title: THE BANK OF TOKYO, by ------------------------- Name: Title: BANQUE FRANCAISE DU COMMERCE EXTERIEUR,EXTERIEUR, 89 by ------------------------- Name: Title: BANQUE PARIBAS, by ------------------------- Name: Title: COMPAGNIE FINANCIERE DE CIC ET DE L'UNION EUROPEENNE, by ------------------------- Name: Title: by ------------------------- Name: Title: CREDIT LYONNAIS CAYMAN ISLAND BRANCH, by ------------------------- Name: Title: FIRST INTERSTATE BANK OF TEXAS N.A., by ------------------------- Name: Title: 90 THE FIRST NATIONAL BANK OF BOSTON, by ------------------------- Name: Title: THE FIRST NATIONAL BANK OF CHICAGO, by ------------------------- Name: Title: Title: FIRST UNION NATIONAL BANK OF FLORIDA, by ------------------------- Name: Title: FLEET BANK OF MASSACHUSETTS, N.A., by ------------------------- Name: Title: THE FUJI BANK, LIMITED, by ------------------------- Name: Title: HIBERNIA NATIONAL BANK, by ------------------------- Name: Title: KREDIETBANK N.V. 91 by ------------------------- Name: Title: by ------------------------- Name: Title: THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, NEW YORK BRANCH, by ------------------------- Name: Title: MELLON BANK, N.A., by ------------------------- Name: Title: THE MITSUBISH BANK, LIMITED, by ------------------------- Name: Title: THE MITSUBISHI TRUST AND BANKING CORPORATION, by ------------------------- Name: Title: NATIONAL CANADA FINANCE CORP., 92 by ------------------------- Name: Title: NATWEST BANK N.A., by ------------------------- Name: Title: THE NIPPON CREDIT BANK, LTD., by ------------------------- Name: Title: PNC BANK, KENTUCKY, INC., by ------------------------- Name: Title: COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "RABOBANK NEDERLAND", NEW YORK BRANCH, by ------------------------- Name: Title: THE SAKURA BANK, LIMITED, by ------------------------- Name: Title: SOCIETE GENERALE, 93 by ------------------------- Name: Title: THE SUMITOMO BANK, LIMITED, ATLANTA AGENCY, by ------------------------- Name: Title: SUNTRUST BANK, TAMPA BAY, by ------------------------- Name: Title: THE TOKAI BANK, LIMITED, ATLANTA AGENCY, by ------------------------- Name: Title: UNION BANK OF FINLAND LTD., GRAND CAYMAN BRANCH, by ------------------------- Name: Title: UNION BANK OF SWITZERLAND, NEW YORK BRANCH,NEW YORK BRANCH, by ------------------------- Name: Title: 94 UNITED STATES NATIONAL BANK OF OREGON, by ------------------------- Name: Title: WELLS FARGO BANK, N.A., by ------------------------- Name: Title: THE YASUDA TRUST & BANKING COMPANY, LIMITED, NEW YORK BRANCH, by ------------------------- Name: Title: EX-5.1 3 Robert E. Lewis Vice President/General Counsel (813) 399-6129 December 7, 1995 Eckerd Corporation 8333 Bryan Dairy Road Largo, FL 34647 Ladies and Gentlemen: I am Vice President/General Counsel of Eckerd Corporation, a Delaware corporation (the "Company"). I am providing the opinion set forth herein in connection with the preparation of a registration statement on Form S-3 (No. 33-64409) filed with the Securities and Exchange Commission (the "Commission") on November 17, 1995, as amended by Amendment No. 1 thereto being filed by the Company with the Commission on the date hereof (as so amended, the "Registration Statement"). The Registration Statement relates to the registration by the Company under the Securities Act of 1933, as amended (the "Act"), of up to 5,750,000 shares of Common Stock of the Company, par value $.01 per share (the "Common Stock"), and the sale of (i) 5,000,000 shares of Common Stock (the "Firm Shares") by certain stockholders of the Company (the "Selling Stockholders") and (ii) up to 750,000 shares of Common Stock subject to an option given to the Underwriters (as defined below) by the Selling Stockholders solely to cover over-allotments, if necessary (the "Option Shares" and, together with the Firm Shares and any shares to be sold by the Selling Stockholders which are registered on a registration statement filed by the Company pursuant to Rule 462(b) of the General Rules and Regulations under the Act, the "Shares"), to the public through a syndicate of underwriters in a firm commitment public offering pursuant to a Purchase Agreement (the "Purchase Agreement") in the form filed as Exhibit 1.1 to the Registration Statement, to be entered into by and among the Company, the Selling Stockholders and Merrill Lynch and Co., CS First Boston Corporation, Morgan Stanley & Co., Incorporated and Raymond James & Associates, Inc., acting severally on behalf of themselves and the several Underwriters named therein (the "Underwriters"). This opinion is being delivered in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Act. In connection with this opinion, I have examined originals or copies, certified or otherwise identified to my satisfaction, of (i) the Registration Statement; (ii) the form of the Purchase Agreement; (iii) the Company's Restated Certificate of Incorporation, as in effect as of the respective issue dates of the Shares and as of the date hereof; (iv) the Company's Amended and Restated By-laws, as in effect as of the respective issue dates of the Shares and as of the date hereof; (v) the resolutions of the Board of Directors of the Company relating to among other things, the issuance of the Shares and the registration of the Shares under the Act; (vi) the form of a specimen certificate representing the Shares; and (vii) such other documents as I have deemed necessary or appropriate as a basis for the opinions set forth below. I have also examined originals or copies, certified or otherwise identified to my satisfaction, of such records of the company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as I have deemed necessary or appropriate as a basis for the opinion set forth herein. In my examination, I have assumed the legal capacity of all natural persons, the genuineness of signatures, the authenticity of all documents submitted to me as originals, the conformity to original documents submitted to me as certified or photostatic copies and the authenticity of the originals of such latter documents. In making my examination of documents executed by parties other than the Company, I have assumed that such parties Page 2 December 7, 1995 had the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and the execution and delivery by such parties of such documents and the validity and binding effect thereof. As to any facts material to the opinions expressed herein which were not independently established or verified, I have relied upon oral or written statements and representations of officers and other representatives of the Company and others. I am admitted to practice law in the State of Florida and I do not purport to be an expert on any law other than the laws of the State of Florida and the laws of the United States of America. Insofar as the opinions contained herein relate to the general corporate law of the State of Delaware, I have made such investigation of such laws as I have deemed necessary as a basis for such opinions. Based upon and subject to the foregoing and assuming (i) the conformity of the certificates representing the Shares to the form of the specimen thereof examined by me and the due execution and delivery of such certificates, and (ii) that the Company has received the full consideration for the Shares, I am of the opinion that the Shares are duly authorized, validly issued, fully paid and nonassessable. Page 3 December 7, 1995 I hereby consent to the use of my name in the Registration Statement under the caption "Legal Matters" and to the filing of this opinion as an Exhibit to the Registration Statement. I further consent to the incorporation of this opinion by reference as an exhibit to any registration statement relating to the offering which is filed pursuant to Rule 462(b) of the General Rules and Regulations under the Act and to the use of my name under the caption "Legal Matters" in the prospectus included in or incorporated by reference in any such registration statement. In giving such consent, I do not admit that I came within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission thereunder. Very truly yours, /s/ Robert E. Lewis ----------------------------- Robert E. Lewis Vice President/General Counsel Eckerd Corporation EX-15.1 4 EXHIBIT 15.1 Eckerd Corporation 8333 Bryan Dairy Road Largo, Florida 34647 Gentlemen: Re: Registration Statement on Form S-3 of Eckerd Corporation With respect to the subject registration statement, we acknowledge our awareness of the incorporation by reference therein of our reports dated June 10, 1995 and September 7, 1995 related to our reviews of interim financial information. Pursuant to Rule 436(c) under the Securities Act of 1933 (the "Act"), such reports are not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of sections 7 and 11 of the Act. Very truly yours, KPMG Peat Marwick LLP Tampa, Florida December 6, 1995 EX-23.1 5 EXHIBIT 23.1 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors: Eckerd Corporation and Subsidiaries: We consent to the use of our audit report dated March 20, 1995 on the consolidated financial statements of Eckerd Corporation and Subsidiaries included in its Annual Report on Form 10-K 405 as of January 28, 1995 and January 29, 1994 and the fiscal years ended January 28, 1995, January 29, 1994 and January 30, 1993, incorporated by reference into the Prospectus (the "Prospectus"), which forms a part of the Registration Statement on Form S-3 of the Company originally filed on the date hereof, and to the reference to this firm under the heading "Experts" in the Prospectus. Our report refers to a change in accounting policy related to the timing of the recognition of closed store obligations. KPMG Peat Marwick LLP Tampa, Florida December 6, 1995 -----END PRIVACY-ENHANCED MESSAGE-----