As more fully discussed in this note on pages 11 and 12, on October 6, 2011, the Company entered into a forbearance agreement with HD Smith. Under the terms of this agreement, the Company was provided a limited period of time, as defined in the agreement, to find a purchaser for the Pharmacy business. If a purchaser is not found during the forbearance period, the agreement provides for the wind down of the Pharmacy operations. The proceeds from either the sale of the business or the liquidation of its assets will to used to pay down the outstanding debt balance due HD Smith. The Company anticipates the sale or wind down of the Pharmacy business to be complete prior to December 31, 2011
In March 2011, the Company ceased the majority of its operations at its Minnesota pharmacy and began reflecting the ceased operations as discontinued operations in the consolidated financial statements. A portion of the business and the majority of the Minnesota assets were transferred to the Indianapolis, Indiana pharmacy location. The cost to close the Minnesota facility was immaterial.
The proceeds of any sale transaction, if consummated, will be used to pay the outstanding borrowings under the HD Smith Credit Agreement. HD Smith has agreed to accept an amount not less than $2.0 million in full satisfaction of the outstanding debt amount. As of September 30, 2011, the total amount due to HD Smith was approximately $5.0 million. In consideration of HD Smith entering into the forbearance agreement, (a) the Company has agreed to pay HD Smith a weekly cash payment equal to the decline, if any, in value of PrairieStone’s cash, inventory and accounts receivable collateral during the forbearance period (the “Collateral Maintenance Payment”); (b) the Company has put $100,000 cash in a reserve account (the “Collateral Deposit Account”) to be drawn on by HD Smith in the event the Company fails to make any required Collateral Maintenance Payment; and (c) PrairieStone paid all outstanding accrued interest. In the event the Collateral Deposit Account balance falls below $100,000, the Company has agreed to cause the potential purchaser of the business to deposit a sufficient amount of funds to bring the balance of the account back to $100,000 within three calendar days. The forbearance agreement automatically terminates if the Company fails to fulfil this requirement