<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 3, 1996 Commission File #1-7090
PHARMHOUSE CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2634868
-------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
860 Broadway, New York, New York 10003
------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 477-9400
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(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- --------------------------------------------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Shares,
par value $.01 per share
------------------------
(Title of Class)
<PAGE> 2
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K.
YES X NO
--- ---
The aggregate market value of the Registrant's Common Shares held by persons,
other than officers and directors and their affiliates, of the Registrant at
April 19, 1996 was approximately $3,990,587.
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of April 19, 1996.
<TABLE>
<CAPTION>
Class Number of Shares
----- ----------------
<S> <C>
Common Shares
par value $.01 per share 2,228,978
</TABLE>
<PAGE> 3
Documents incorporated by Reference:
1. The Registrant's Annual Report on Form 10-K for the fiscal year ended
January 29, 1994.
2. The Registrant's Annual Report on Form 10-K for the fiscal year ended
January 28, 1995.
3. Amendment No. 1 to the Registrant's Annual Report on Form 10-K/A for
the fiscal year ended January 28, 1995.
4. The Registrant's Current Report on Form 8-K dated February 2, 1996.
<PAGE> 4
PART I
Item 1. Business
Pharmhouse Corp.(the "Registrant" or the "Company" ) operates a chain of 38 deep
discount drug stores, 14 of which are operated under the name Pharmhouse (the
"Pharmhouse Stores") and 24 of which are operated under the name The Rx Place
(the "Rx Place Stores"). The Registrant's stores are located primarily in the
mid-Atlantic and New England states and emphasize a pricing policy of everyday
deep discount prices on all merchandise. The Pharmhouse Stores are approximately
35,000 square feet in size and the Rx Place Stores are approximately 25,000
square feet. The Registrant maintains one distribution center to support its
store operations.
(a) General Development of the Registrant's Business Since Commencement of
the Fiscal Year Ended February 3, 1996 ("fiscal 1996")
Since the beginning of the Registrant's fiscal 1996, the following significant
events occurred with respect to the Registrant and its business:
(i) Acquisition of Rx Place Stores
On April 28, 1995, the Registrant consummated the acquisition of the assets and
business of 24 "Rx Place" discount drug stores (the "Acquisition") from F. W.
Woolworth Co., a subsidiary of Woolworth Corporation (collectively,
"Woolworth"), pursuant to the terms of an Asset Purchase Agreement (as amended,
the "Acquisition Agreement"). The Rx Place Stores acquired in the Acquisition
consist of deep discount drug stores which offer categories of merchandise
similar to those offered by the Registrant's Pharmhouse stores, including health
and beauty care products, prescription drugs, video rental and other merchandise
described under "Merchandise" in paragraph (c) of Item 1 of this Report.
The purchase price paid by the Registrant to Woolworth for the assets and
business of the Rx Place Stores was approximately $39.5 million, of which
approximately $23.5 million was paid in cash at or shortly following the closing
and the balance by promissory notes with maturity dates ranging from January
1996 to April 1998 (the "Purchase Money Notes"). The assets acquired by the
Registrant pursuant to this transaction consist of merchandise inventory in the
Rx Place Stores (and certain specified merchandise inventory held in one of
Woolworth's distribution centers) plus furniture, fixtures and equipment, store
supplies and related items. In connection with the Acquisition, the Registrant
assumed Woolworth's obligations under the leases of the Rx Place Stores as well
as certain other obligations of Woolworth specified in the Acquisition
Agreement. Pursuant to the Acquisition Agreement, the Registrant did not assume
Woolworth's obligations for trade payables of the Rx Place Stores subject to
certain minor exceptions.
The Acquisition Agreement contains warranties, representations and
indemnification provisions which are customary for transactions similar to the
Acquisition. Furthermore, in connection with the Acquisition, Woolworth granted
the Registrant a three year non-exclusive license to use the registered service
mark "The Rx Place" in its operation of the Rx Place Stores. For further
information concerning the Acquisition, reference is made to "Properties", in
Item 2 of this Report and to the Acquisition Agreement, as amended, which is
filed as Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 28, 1995 (the "1995 10-K Report").
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The Acquisition was financed through (a) a senior secured revolving credit
facility (the "Senior Credit Facility") provided by Congress Financial
Corporation ("Congress"), (b) a $3 million secured subordinated term loan (the
"Subordinated Loan") provided by an unaffiliated trade supplier which is
evidenced and governed by a Promissory Note and a Security Agreement (the
"Subordinated Loan Agreements") and (c) the Purchase Money Notes. The Senior
Credit Facility is secured by a first priority security interest in the
Registrant's inventory, accounts receivable and other assets, including a
mortgage on the Registrant's owned store premises located in Winchester,
Virginia. All of the Registrant's indebtedness to the trade supplier is secured
by a second priority security interest in the assets (not including real
property) of the Registrant. Each of the Senior Credit Facility and the
Subordinated Loan has a term of three years, subject to extension upon terms and
conditions referred to in the Senior Credit Facility Agreement and the
Subordinated Loan Agreements, respectively. For further information concerning
the terms and conditions of these financing agreements, reference is made to
paragraph (iii) of this Item 1(a) and to copies of the Senior Credit Facility
Agreement and the Subordinated Loan Agreements filed as Exhibits 10.8, 10.10 and
10.11 to the 1995 10-K Report.
The Registrant prepaid a portion of the Purchase Money Notes in June 1995. In
light of its pending legal action against Woolworth, the Registrant has elected
to withhold payment of installments of principal and interest payable under such
notes after commencement of such action, pending resolution of the Registrant's
claims therein.
For further information concerning disputes arising out of the Acquisition and
the waivers under the Registrant's Senior Credit Facility and Subordinated Loan
agreements, reference is hereby made to "Legal Proceedings", in Item 3 of this
Report.
(ii) Fiscal 1996 net loss of $2,507,000
Reference is made to Selected Financial Data, in Item 6 of this Report, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") in Item 7 of this Report, concerning the loss of $2,507,000
incurred by the Registrant in fiscal 1996.
(iii) Financing
As noted under Item 1(a)(i) of this report, on April 28, 1995, the Registrant
entered into new secured financing arrangements with Congress pursuant to which
Congress provided the Registrant with a Senior Credit Facility equal to the
lesser of $45 million or 60% of its eligible inventory. In addition, the
Registrant received a $3 million Subordinated Loan from one of its unaffiliated
suppliers. The proceeds of these secured credit facilities were used as follows:
(1) to pay Woolworth an aggregate of $23.5 million at closing and shortly after
closing, representing the cash portion of the purchase price paid by the
Registrant for the inventory, furniture, fixtures and equipment and other
related assets in the Rx Place Stores;
(2) to repay and retire all of the outstanding indebtedness owing by the
Registrant to its prior secured lenders in the aggregate approximate amount of
$7.5 million;
(3) to pay approximately $ 2.9 million in transactional costs incurred in
connection with the Acquisition as well as the refinancing of the Registrant's
previously outstanding secured
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indebtedness.
The remaining available balance of this Senior Credit Facility is available for
use by the Registrant to finance its increased working capital requirements
incurred and to be incurred in connection with the operation of 38 discount drug
stores.
Pursuant to the terms of the agreements governing the Senior Credit Facility and
the Subordinated Loan, the lenders have been granted security interests in the
inventory and other assets of the Registrant. In addition, the availability
under the Senior Credit Facility is subject to certain reserves which may be
established by Congress based upon several factors. Both the Senior Credit
Facility and the Subordinated Loan require that the Registrant satisfy minimum
net worth requirements and restrict the Registrant from paying cash dividends.
The Senior Credit Facility and the Subordinated Loan each have an initial term
of three years subject to extensions upon terms and conditions described in the
agreements governing such facilities filed as Exhibits 10.8, 10.10 and 10.11 to
the 1995 10-K Report.
In connection with the Acquisition, the Registrant issued warrants to Brenner
Securities Corporation, the Registrant's investment banking firm in such
transaction, to purchase up to 85,867 Common Shares of the Registrant at an
exercise price of $.94 per share. The difference between the fair market value
of the warrants on the date of grant and the exercise price has been included in
the acquisition cost of the Rx Place Stores.
(b) Financial Information About Lines of Business
The Registrant is currently engaged in one line of business. For further
information with regard to the Registrant's store operations, reference is made
to MD&A, Item 7 of this Report, and to the Notes to the Consolidated Financial
Statements contained in Part IV of this Report.
(c) Narrative Description of Business
RETAIL OPERATIONS
The Registrant's deep discount drug stores focus on offering various types of
merchandise at everyday deep discount prices. Eleven Pharmhouse stores are
located in smaller communities (rather than major metropolitan centers) in small
strip shopping centers or free-standing facilities on major thoroughfares with
substantial parking facilities. (For further information concerning the premises
occupied by these eleven stores, reference is made to Item 2 (b) of this
Report). The Registrant opened two Pharmhouse stores in 1992 and one Pharmhouse
store in 1993 in areas more densely populated than the locations in which most
of its other Pharmhouse stores are situated, reflecting management's decision to
expand into such markets. The Pharmhouse Stores are located in single-story, air
conditioned facilities and occupy on average 35,000 square feet. The Rx Place
Stores are located in more densely populated areas than the older Pharmhouse
Stores and occupy approximately 25,000 square feet each. All 38 stores have
pharmacies staffed by licensed pharmacists and are open seven days per week.
Merchandise is sold primarily on a cash-and-carry basis although certain credit
cards and checks are accepted.
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To some extent, the Registrant's revenues are affected by the same pattern of
seasonality common to most retail businesses. Similar to other retail
businesses, the Registrant's operations have generally been adversely affected
by recessions and unfavorable local economic developments as well as by adverse
weather conditions which result in reduced consumer spending in the markets
served by the stores.
MERCHANDISE
The Registrant's stores offer health and beauty care products, prescription
drugs, cosmetics, stationery, video rentals, housewares, pet supplies, greeting
cards, food, snacks, beverages, and certain other merchandise. The Registrant's
stores also offer certain merchandise on a seasonal basis, such as garden, patio
and Christmas items. Such merchandise is sold at everyday deep discount prices.
Except as described below, all merchandise is sold or, in the case of video
rentals, rented through departments operated by the Registrant. Masters, a
popular-priced clothing retailer, currently operates leased departments in two
Pharmhouse stores.
The following table sets forth information concerning the approximate
percentages of the Company's revenues attributable to major merchandise
categories:
<TABLE>
<CAPTION>
Pharmhouse Stores Rx Place Stores (*)
----------------- -------------------
Percentage of Revenues Percentage of Revenues
---------------------- ----------------------
Fiscal Year Ended Fiscal Year Ended
Merchandise Category 2/3/96 1/28/95 2/3/96 1/28/95
- -------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Pharmacy 28.9% 26.8% 30.6% 23.7%
Health & Beauty Care
and Related Items 23.8% 21.1% 29.5% 36.0%
----- ----- ----- -----
52.7% 47.9% 60.1% 59.7%
Other Merchandise
Categories (no one
category accounting
for more than 10%) 47.3% 52.1% 39.9% 40.3%
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
(*) Stores were operated by Woolworth until April 28, 1995.
Most merchandise is ordered from unaffiliated suppliers through the Registrant's
buying office, although certain merchandise is ordered at store level by store
management and through unaffiliated rack jobbers. As described above, men's and
women's clothing are supplied by Masters in two Pharmhouse store locations.
Where possible, as part of its deep discount merchandise pricing policy, the
Registrant seeks to purchase merchandise in bulk at special prices from product
manufacturers and other suppliers. Reorders of certain merchandise are processed
at store level subject to review by the buying office staff. In addition, the
Registrant consolidates the shipment of
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a significant percentage of its merchandise at a cross-docking distribution
center operated by the Registrant in a leased facility in Pottstown,
Pennsylvania in order to improve the coordination of shipments of merchandise to
its stores and to improve gross profit margins.
SUPPLIERS
The Registrant purchases merchandise from a large number of unaffiliated
suppliers and, except as described below, has no long-term contracts or
commitments with any of these suppliers. During fiscal 1996, the Registrant
purchased approximately 28% of its total merchandise from McKesson Drug Company
("McKesson"), the nation's largest wholesale distributor of pharmaceutical and
health and beauty care products. No other supplier accounted for more than ten
percent of the Registrant's total merchandise purchases during fiscal 1996.
At the closing of the Acquisition, the Registrant and McKesson entered into a
three-year merchandise supply agreement (the "Supply Agreement") governing
future purchases of merchandise by the Registrant and providing for deferred
payment by the Registrant of $1 million of existing trade payables during a
period of 12 to 18 months following the closing date of the Acquisition. The
Supply Agreement provides that the Registrant will purchase a minimum of 90% of
its pharmaceutical and certain other merchandise from McKesson.
COMPETITION
The Registrant's deep discount drug stores currently compete with local and
discount drug chains, discount department stores, local pharmacies, other deep
discount drug stores, supermarkets and other food stores, wholesale clubs and
other retail outlets which offer similar merchandise in those locations. While
there are several nationally-recognized deep discount drug store chains which
are potential competitors to the Registrant's retail operations, the most
significant existing competitor of the Registrant's stores is Wal-Mart Stores,
Inc. ("Wal-Mart"). Wal-Mart, as well as certain of the Registrant's other
competitors, have far greater financial resources and a far greater number of
retail outlets than the Registrant currently has or expects to have in the
foreseeable future.
Management believes that the competitive factors which affect the business of
the Registrant's stores primarily consist of price, depth of merchandise in
certain categories, store location and store environment.
ADVERTISING
Advertising for the Registrant's stores consists primarily of monthly
direct-mail circulars or newspaper inserts. The Registrant stresses the everyday
nature of its deep discount prices in its advertising to attract customers and
does not generally rely on periodic sales or promotional pricing in its
circulars. The Registrant maintains its own advertising department which designs
multi-colored monthly circulars. Printing and distribution of such materials is
performed by unaffiliated contractors.
The Registrant anticipates that a portion of its advertising costs will continue
to be offset by advertising allowances from unaffiliated suppliers in amounts
which cannot be determined at this time.
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During fiscal 1996, the Registrant spent approximately $3,342,000 for
advertising and promotion, net of amounts contributed by suppliers through
advertising allowances.
EMPLOYEES
As of April 19, 1996, the Registrant employed approximately 2,200 persons in its
operations, including a substantial number of part-time employees. The
Registrant is not a party to any collective bargaining agreements.
For further information with respect to the Registrant's retail operations,
reference is made to MD&A, in Item 7 of this Report.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
Not applicable.
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Item 2. Properties
(a) Stores
Of the Registrant's 38 stores in operation as of April 19, 1996, 37 are located
in leased premises (two of which are leased on a month-to-month basis) and one
is operated in premises owned by the Registrant in Winchester, Virginia. The
Registrant also operates a new distribution center in Pottstown, Pennsylvania in
leased premises occupying approximately 100,000 square feet. This facility
became operational on February 12, 1996. Prior to this date, the Registrant
operated a distribution facility in Anneville, Pennsylvania in leased premises
occupying approximately 80,000 square feet. The lease for the prior distribution
facility expired in fiscal 1996 and the Registrant has no remaining lease
obligation for this facility. Twenty-four of the Registrant's stores are Rx
Place Stores which it acquired from Woolworth in the Acquisition. All of the Rx
Place Stores are located in leased premises.
The following table sets forth the number of Pharmhouse stores and Rx Place
stores in operation in each of the following states at April 19, 1996:
<TABLE>
<CAPTION>
Number of Number of
Pharmhouse Stores Rx Place Stores Total stores
<S> <C> <C> <C>
Maryland 1 - 1
New Jersey 2 10 12
New York 6 6 12
Pennsylvania 2 3 5
Virginia 3 - 3
Connecticut - 1 1
Massachusetts - 2 2
Rhode Island 2 2
-- -- --
TOTAL 14 24 38
== == ==
</TABLE>
Twenty-three (23) leases governing the Registrant's store properties expire
during the period from 1996 through 2000 and twelve (12) such leases expire
during the period from 2001 through 2005. In addition, thirty-one (31) of such
leases have one or more renewal options for periods totaling from five to twenty
years.
Existing store leases provide for contingent rental payments based on a
percentage of revenues at varying rates of up to a maximum of two percent,
subject to minimum revenue levels and other conditions. During fiscal 1996,
contingent rentals based on revenues aggregated $117,000. During fiscal 1996,
rentals (including contingent rentals based on revenues) paid by the Registrant
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for all of its leased store locations aggregated approximately $5,971,000, net
of sublease revenue of $927,000.
(b) Unoccupied Space in Pharmhouse Stores
Eleven Pharmhouse stores occupy only a portion of the space previously occupied
by the Registrant's discount department stores which operated under the
"Nichols" name in various states in 1990. Approximately 66.0% of the unoccupied
space not being used in the operation of the Pharmhouse Stores is sublet or
licensed to an aggregate of 30 tenants for an annual rent revenue of
approximately $927,000, which produced rental income, net of expenses, of
$310,000 in fiscal 1996.
Masters, which formerly sublet a substantial portion of such unused space, and
which currently licenses space in two Pharmhouse stores for the sale of
popular-priced clothing, paid the Registrant $200,000 in fiscal 1995 in full
settlement of its obligations to the Registrant with respect to all space
previously sublet by Masters from the Registrant.
For further information concerning the terms of the Registrant's previous
sublease arrangements with Masters and the amendment thereto, reference is made
to the Registrant's Annual Report on Form 10-K for its fiscal year ended January
29, 1994.
(c) Executive Offices
The Registrant's principal executive offices are located in leased premises at
860 Broadway, New York, New York and occupy approximately 12,000 square feet.
The lease for the premises expires on June 30, 1998. The base annual rental
under the lease is $125,000 through June 30, 1996 and $150,000 thereafter.
Item 3. Legal Proceedings
In January 1996, the Registrant instituted legal proceedings against Woolworth
in the Supreme Court of the State of New York seeking, among other relief,
damages and indemnification arising out of Woolworth's alleged fraud and breach
of certain covenants, representations and warranties in connection with the
Acquisition. The Registrant's claims in such action are based upon its belief
that material misrepresentations were made by Woolworth regarding the inventory
and gross profit margins of the acquired stores and that the Registrant has
been damaged as a result thereof.
Pending resolution of the Registrant's claims in the above-described action, the
Registrant is withholding payment of all further installments of principal and
interest arising under the Purchase Money Notes. The Registrant's senior secured
and subordinated secured lenders have consented to the withholding by the
Registrant of payment of the January 1996 installments of principal and interest
under the Purchase Money Notes and have granted
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currently effective waivers of the relevant cross-default provisions of the
agreements evidencing the Senior Credit Facility and the Subordinated Loan. For
further information, reference is made to Item 1(a), MD&A, Item 7 and Notes to
the Consolidated Financial Statements contained in Part IV of this Report.
The Registrant is also subject to various legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of the Registrant's ultimate liability, if any, arising out of such
actions will not materially affect the financial condition or operations of the
Registrant.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year ended
February 3, 1996 to a vote of the Registrant's security holders.
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PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Identification of Principal Market
The Registrant's Common Shares, $.01 par value, are currently traded in The
Nasdaq SmallCap Market, a segment of The Nasdaq Stock Market, under the symbol
"PHSE".
The range of high and low bid and asked quotations of the Registrant's Common
Shares for each quarterly period during the last two fiscal years were as
follows:
Bid and Asked Quotations
------------------------
<TABLE>
<CAPTION>
Fiscal
Quarter Bid Ask
--- ---
Ending High Low High Low
------ ---- --- ---- ---
<S> <C> <C> <C> <C>
4/30/94 4 3/16 3 1/4 4 3/8 3 3/8
7/30/94 3 3/8 2 1/4 3 3/4 2 3/4
10/29/94 2 1/4 1 1/4 3 1 3/4
1/28/95 1 1/4 3/8 1 3/4 5/8
4/29/95 3 1/4 3/8 3 5/8 5/8
7/29/95 6 1/4 2 6 7/8 2 11/16
10/28/95 8 1/4 5 3/4 9 6 1/8
2/03/96 6 1/4 1 3/8 7 2
</TABLE>
(b) Holders of Common Shares
The approximate number of holders of record of Common Shares of the Registrant,
$.01 par value, as of April 19, 1996, was 950.
(c) Dividend History
During the past three fiscal years and through the date of this Report, the
Registrant has not declared any cash or stock dividends and was, and continues
to be, subject to a prohibition against the payment thereof under its agreements
with its senior and subordinated lenders.
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Item 6. Selected Financial Data
A consolidated summary of selected financial data follows
(all amounts in thousands except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
Feb 3, 1996(3)(4) Jan 28, 1995 Jan 29, 1994 Jan 30, 1993 Feb 1, 1992
----------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 209,529 $ 89,602 $ 98,241 $ 97,301 $ 90,627
Loss from continuing
operations $ (3,125) $ (1,997) $ (3,386)(1) $ (757)(1) $ (2,840)(1)
Loss from continuing
operations
per common share $ (1.41) $ (.90) $ (1.60)(2) $ (.37)(2) $ (1.31)(2)
Extraordinary gain $ 618 $ -- $ -- $ -- $ 54,147
Net income (loss) $ (2,507) $ (1,997) $ (3,386) $ (757) $ 51,307
Net income (loss)
per common share $ (1.13) $ (.90) $ (1.60)(2) $ (.37)(2) $ 23.61(2)
Total assets $ 73,210 $ 26,677 $ 30,465 $ 33,903 $ 31,363
Long-term borrowings $ 25,950 $ 1,103 $ 2,053 $ 2,277 $ 2,915
Cash dividends declared None Nonpe None None None
</TABLE>
(1) Includes provisions of ($244,000), ($1,010,000) and
$1,440,000 in fiscal 1994, 1993 and 1992, respectively,
associated with the restructuring of the Registrant's retail
operations and store closures.
(2) All per share amounts have been restated to reflect the
one for 4.35 reverse stock split effected April 1, 1993.
(3) Includes operations for 38 stores effective on April 28,
1995.
(4) Fifty-three weeks.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(i) Background
The most significant event affecting the Company in fiscal 1996 was its
acquisition of the Rx Place Stores from Woolworth in April 1995.
Since the date of the Acquisition, management's initial focus has been on the
task of integrating the accounting, management information, merchandising and
operational systems and personnel of the Rx Place Stores into the Company. By
the end of the first quarter of fiscal 1997, management has substantially
completed the integration of all systems, procedures and personnel.
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The Company reported a fiscal 1996 net loss of $2.5 million compared with a net
loss of $2.0 million in fiscal 1995. Although operating income in fiscal 1996
improved over the prior year by approximately $1.5 million, higher interest
expense in fiscal 1996 which was directly related to the Acquisition and
increased working capital requirements to operate the Rx Place Stores more than
offset the added operating income generated by these stores.
Management believes that the depressed revenue levels generated by the Rx Place
Stores were the result of inventory imbalances "inherited" by the Company from
Woolworth at the date of Acquisition. Fiscal 1996 revenue levels in these stores
were also negatively impacted by the systems and merchandising integration
issues inherent in integrating the large number of Rx Place Stores into the
Company's operations.
For further information with respect to the operations of and other developments
affecting the Registrant during fiscal 1996 and the disputes arising out of the
Acquisition, reference is hereby made to Item 1 and Item 3, and to the Notes to
the Consolidated Financial Statements included in Part IV, of this Report.
(ii) Results of Operations
The following table sets forth, as a percentage of revenues, certain items
appearing in the Company's Consolidated Statements of Operations:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of merchandise sold 76.1 76.4 77.8
----- ----- -----
Gross profit 23.9 23.6 22.2
Selling, general
and administrative (23.7) (24.8) (24.7)
----- ----- -----
Income (Loss) from operations 0.2 (1.2) (2.5)
Interest expense (1.7) (1.0) (.9)
----- ----- -----
Loss before extraordinary item (1.5) (2.2) (3.4)
Extraordinary item .3 -- --
----- ----- -----
Net loss (1.2)% (2.2)% (3.4)%
===== ===== =====
</TABLE>
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(iii) Fiscal Year 1996 vs. Fiscal Year 1995 and Fiscal Year 1995 vs. Fiscal Year
1994
FISCAL YEAR ENDED FEBRUARY 3, 1996 ("FISCAL 1996") COMPARED TO FISCAL YEAR ENDED
JANUARY 28, 1995 ("FISCAL 1995")
RESULTS OF OPERATIONS
Revenues
In fiscal 1996, revenues (including video rental, service and other income)
were $209.5 million, a 133.8% increase over revenues of $89.6 million in fiscal
1995. The revenue growth is primarily attributable to the Company's operation
of the Rx Place Stores for approximately 9 months during fiscal 1996 (the Rx
Place Stores were acquired on April 28, 1995, one day prior to the end of the
Company's fiscal 1996 1st quarter). Subsequently, the Company has been
operating a significantly larger store base (38 stores compared to 14 stores.)
Same-store revenues (stores open for a full year in both fiscal years -
consisting of 14 Pharmhouse stores) decreased $4.1 million in fiscal 1996, or
4.6%, compared to 1995. Approximately 60% of the same-store store revenue
decline resulted from increased competition in markets served by two Pharmhouse
stores; decline in same-store revenues also resulted from management's focus on
the integration of the Rx Place Stores as well as increased competition in other
markets to a lesser extent than the two markets described above. (Despite the
decline in same-store store revenues, the gross profit for the Pharmhouse Stores
in fiscal 1996 increased approximately $326,000, or 1.5 percentage points
compared with the prior year).
Gross Profit
The fiscal 1996 gross profit (total revenues less costs of merchandise and
services sold and freight/distribution services provided) was $50.0 million
compared to $21.2 million in the prior year, an increase of $28.8 million, or
135.8%. The increase in gross profit dollars is primarily attributable to the
contribution made by the Rx Place Stores which the Company operated for
approximately 9 months during fiscal 1996. As a percentage of revenues, gross
profit in fiscal 1996 increased to 23.9% from 23.6% in the prior year, primarily
the result of an improvement in the gross profit percentage of the Pharmhouse
Stores offset by lower gross profit percentages generated by the Rx Place
Stores. On a same-store basis (consisting of 14 Pharmhouse stores), the gross
profit percentage was 24.5% of revenues in fiscal 1996 compared to 23.0% of
revenues in 1995. The improvement in the gross profit percentage resulted from
several factors: a change in the merchandise mix to higher margin inventory;
efforts to increase initial markup on merchandise purchases through better
buying opportunities which include direct imports; the selective increase of
prices within certain merchandise categories; and bulk rate purchase discounts
negotiated as a result of increased buying capability.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $49.6 million in fiscal
1996 compared to $22.3 million in the prior year, an increase of approximately
$27.3 million, or 122.4%. The increase in SG&A is primarily attributable to
store expenses incurred in connection with operating 24 additional stores
beginning in late April 1995. Further, as a result of operating a considerably
larger Company, management added key personnel in general and administrative
positions which had previously been attended to by executives performing
16
<PAGE> 17
several functions at once. These positions include a General Merchandise Manager
and a Vice President of Store Operations. Positions were also added for field
supervision of stores, for clerical positions at the corporate office and for
personnel at the Company's distribution facility. As a percentage of revenues,
SG&A expense was 23.7% in fiscal 1996 compared to 24.8% in the prior year. The
percentage decrease is primarily attributable to increased revenues generated by
a larger store base from which to absorb SG&A expense.
Operating Income
Operating income generated by the Company in fiscal 1996 was $419,000, an
improvement of approximately $1.5 million over fiscal 1995. The increase is
primarily attributable to a larger revenue base generated by the Rx Place Stores
from which to absorb total SG&A expense.
Interest Expense
Interest expense in fiscal 1996 was $3.5 million compared with $1.0 million in
fiscal 1995, an increase of $2.5 million. The increased interest expense in
fiscal 1996 compared with 1995 resulted from higher levels of borrowing which
were required to finance the Acquisition and to fund the increased working
capital requirements for the operation of 24 additional stores since April 1995.
Extraordinary Gain
In June 1995, the Company prepaid $4.1 million of the Woolworth Purchase Money
Note due in January 1996 at a discount and realized an extraordinary gain of
$0.6 million.
Provision for Income Taxes
Although the Company is not subject to federal income taxes due to its fiscal
1996 net loss (the Company also has significant net operating loss carryforwards
(See Note 5 in the "Notes to the Consolidated Financial Statements")), in
certain states, the Company is subject to state and local taxes which are
computed on a basis other than income (e.g., capital stock, etc.). Such computed
amounts are not material and are included in SG&A expense.
Net Loss
The Company reported a fiscal 1996 net loss of $2.5 million compared with a net
loss of $2.0 million in fiscal 1995. As previously indicated, although fiscal
1996 operating income improved by $1.5 million over fiscal 1995, higher interest
expense related to the Acquisition and increased working capital requirements to
operate the Rx Place Stores more than offset the added operating income
generated by these stores.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
The Company generated cash flows from operating activities of $12.7 million in
fiscal 1996, primarily from a $14.5 million increase in accounts payable (vendor
trade credit), a $3.3 million increase in accrued expenses and $2.0 million in
depreciation and amortization expenses. These items were partially offset by
increased investment in accounts receivable of $3.4 million and the funding of
the net loss of $2.5 million.
17
<PAGE> 18
Investing Activities
During fiscal 1996, cash and notes of approximately $39.5 million were used to
purchase the assets of the Rx Place Stores from Woolworth, including related
costs of acquisition. Cash was also used for capital expenditures totaling $3.4
million, primarily for systems and store fixtures for the Rx Place Stores,
upgrades to existing receiving and management information systems, leasehold
improvements and major store repairs such as HVAC, roofs and parking lots.
Financing Activities
The Company's purchase of the assets of the Rx Place Stores was primarily
funded through borrowings of $34.5 million consisting of the following items:
$17.9 million from the Senior Credit Facility; $12.6 million in seller financed
Purchase Money Notes; $3.0 million from the Subordinated Loan and $1.0 million
in extended dating of certain accounts payable. Borrowing reductions in fiscal
1996 were $11.6 million and were comprised of a $7.5 million in payment of the
Company's pre-Acquisition senior and subordinated secured loans and a $4.1
million prepayment in June 1995 of a portion of one of the Purchase Money Notes
issued to Woolworth. Additions to borrowings of $8.6 million primarily relate
to additional net borrowing under the Senior Credit Facility which was used to
support the operation of the Company's expanded store base.
Summary of Borrowings
In late April 1995, the Company entered into the Senior Credit Facility with
Congress which provides for borrowing availability equal to the lower of sixty
percent (60%) of eligible inventory at cost or $45 million at a rate of prime
plus 1.5% or LIBOR plus 3.5%. The initial borrowings under the Senior Credit
Facility were used to finance a portion of the Acquisition, as previously
described, to repay in full the indebtedness of the Company under its then
existing senior and subordinated secured loans in the amount of approximately
$7.5 million and to provide working capital to the Company for the operation of
its 38 stores. The Senior Credit Facility prohibits the payment of dividends and
requires that the Company maintain minimum net worth levels.
In connection with the Acquisition, the Company received a $3.0 million
Subordinated Loan from an unaffiliated supplier and $1.0 million in extended
dating of certain accounts payable for 12 to 18 months. Further, the Company
issued Purchase Money Notes to Woolworth in an aggregate principal amount of
$12.6 million, of which $4.1 million were retired on June 28, 1995 at a
discount in the amount of approximately $0.6 million for which the Company
recorded an extraordinary gain. In light of its pending legal action against
Woolworth, the Company has elected to withhold payment of installments of
principal and interest payable under such notes after commencement of such
action, pending resolution of the Company's claims therein. For further
information concerning disputes arising out of the Acquisition and the waivers
under the Company's Senior Credit Facility and Subordinated Loan agreements,
reference is hereby made to "Legal Proceedings", in Item 3 of this Report.
Working Capital
Working capital amounted to $24.7 million at February 3, 1996 compared to $4.7
million at January 28, 1995. The increase in working capital relates primarily
to the purchase and operation of the Rx Place Stores. Increases in inventory and
accounts receivable, net, of $36.9 million and $3.4 million, respectively, were
offset by increases in accounts payable and accrued expenses totaling $17.5
million and a $5.3 million increase in the current portion of
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<PAGE> 19
long-term debt. The ratio of current assets to current liabilities at the end of
fiscal 1996 and fiscal 1995 was 1.6 and 1.3, respectively.
The combination of the financing made available through the Senior Credit
Facility, assuming the continuing availability of trade credit at the current
level and cash generated by the Company's operations will, in the opinion of
management, enable the Company to meet its estimated working capital
requirements in fiscal 1997.
Inflation
Inflation has been modest in recent years and has not had a significant effect
on the Company. If merchandise costs were to increase because of inflation,
management believes such increases could be recovered through higher selling
prices, since virtually all retailers would be similarly affected.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No.121") "Accounting for the
Impairment of Long-Lived Assets". This statement, effective for the Company's
fiscal year ended February 1, 1997, requires that long-lived assets be reviewed
for impairment if events or changes in circumstances indicate that the future
undiscounted cash flows of assets are less than the related carrying values. As
the Company continually evaluates the realizability of long-lived assets, the
adoption of SFAS No.121 is not expected to be material to the Company's
financial position or results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for Awards of
Stock-Based Compensation to Employees", issued in October 1995 sets forth
standards for accounting for stock-based compensation or allows companies to
continue to account for stock-based compensation under the requirements of
Accounting Principles Board ("APB") Opinion No. 25 and make additional
disclosure in the notes to the financial statements. It is the Company's
intention to continue to account for stock-based compensation in accordance with
APB Opinion No. 25 and provide the additional disclosure in the notes to
financial statements beginning in fiscal 1997.
FISCAL YEAR ENDED JANUARY 28, 1995 ("FISCAL 1995") COMPARED TO FISCAL YEAR ENDED
JANUARY 29, 1994 ("FISCAL 1994")
Revenue
In fiscal 1995, the Company operated a chain of 14 stores which generated
revenue of $89.6 million compared to $98.2 million in the prior year, a decrease
of 8.8%. The Company closed one store in fiscal 1995 (1995 revenues do not
reflect sales for the closed store), resulting in a decrease in the number of
stores in operation at January 28, 1995 to 14 stores as compared with 15 stores
in operation at January 29, 1994. Same-store revenues decreased 3.2% in fiscal
1995 compared with the prior year. The lower same-store revenues resulted from
new competition in several markets, disrupted merchandise supply from the
Company's housewares and hardware distributor, as well as sporadic merchandise
shortages due to some tightening of vendor credit.
19
<PAGE> 20
Gross Profit
As a percentage of revenues, the Company's gross profit (total revenues less
costs of merchandise and services sold and freight/distribution services
provided) in fiscal 1995 was 23.6%, an improvement of 1.4 percentage points over
fiscal 1994. The higher margin reflected management's efforts to increase
initial markup on merchandise purchases through better buying opportunities
including, but not limited to, direct imports.
Selling, General and Administrative
SG&A expense decreased $2.3 million in fiscal 1995 compared to the prior year
primarily due to a decrease in payroll expense resulting from a downsizing of
the corporate workforce, a decrease in advertising expense and higher sublease
income which is netted within SG&A expense.
Interest Expense
In fiscal 1995, interest expense increased $.1 million to $1.0 million compared
to the prior year as a result of a higher level of indebtedness outstanding
during the year as well as a higher prime interest rate. The additional
indebtedness resulted from amendments to the credit facility which raised the
borrowing availability from $7.0 million to $7.75 million and to $8.25 million
in May 1994 and October 1994, respectively. The additional debt was primarily
utilized to fund increased inventory levels. Substantially all interest expense
was paid under the credit facility with the secured lender.
Capital Expenditures
Capital expenditures in fiscal 1995 included approximately $228,000 to renovate
locations in preparation of new subtenants (including $146,000 to the Winchester
property to downsize the current store location and add a new subtenant) and
$367,000 to purchase new releases for video rental inventory.
Item 8. Financial Statements and Supplementary Data
The following documents are filed on the pages listed below as a part of this
report.
<TABLE>
<S> <C>
1. Consolidated Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets at
February 3, 1996 and
January 28, 1995 F-2
Consolidated Statements of Operations
for each of the three years in the
period ended February 3, 1996 F-3
Consolidated Statements of Shareholders'
Equity for each of the three years
in the period ended February 3, 1996 F-4
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
Consolidated Statements of Cash Flows
for each of the three years in the
period ended February 3, 1996 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedule
Report of independent accountants on consolidated
financial statement schedule F-18
VIII. Valuation and Qualifying Accounts F-19
</TABLE>
All other schedules have been omitted because either they are not applicable or
the required information is shown in the financial statements or notes thereto.
Item 9. Disagreements on Accounting and Financial Disclosure
Within the 24 months prior to the date of the Registrant's most recent
financial statements, there were no reports on Form 8-K filed or required to be
filed by the Registrant involving a reporting disagreement on any matter of
accounting principles, practices or financial statement disclosure.
PART III.
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
The following table contains information regarding all current directors of the
Registrant.
<TABLE>
<CAPTION>
Other Positions With the
Registrant; Principal Period Served
occupation(s) or as a Director
Employment During Past of the
Name Age Five Years Registrant
- ---- --- ------------------------ ----------
<S> <C> <C> <C>
Manfred Brecker 69 Chairman of the Board of the Registrant Since 1968
since 1983;
Chief Executive Officer from 1983 to
1989; President and Chief Operating
Officer of the Registrant from 1971
until 1983.
Kenneth A. Davis 46 President, Chief Executive Officer and Since 1979
Chief Operating Officer of the Registrant
since January 1990; President and Chief
Operating Officer from 1983 to December
1989; from 1980 to 1983, Vice-President
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C> <C>
of the Registrant; an employee of the
Registrant since 1979.
Joseph Keller 50 Senior Vice President-Administration Since 1991
and Operations since May 1995;
Senior Vice President-Operations
since October 1985; Vice President from
September 1984 to September 1985;
an employee of the Registrant since 1963.
Marcie B. Davis 43 Executive Vice President/Secretary & Since 1995
Treasurer; Executive Vice President
since November 1995. Senior Vice
President-Finance from 1991 to October
1995; Chief Financial Officer from January
1995 to October 1995; Secretary of the
Registrant since 1990, Treasurer since
1988 and Vice President since 1984; an
employee of the Registrant since 1971.
Melvin Katz 64 Partner, law firm of Maloney, Gerra, Since 1972
Mehlman & Katz since April 1994; prior
thereto practicing attorney in New York
City for more than 35 years and served
as a partner in various firms.
Raymond L. Steele 61 Retired. From August 1990 until Since 1991
September 1993, Executive Vice
President of Pacholder Associates, Inc.,
Cincinnati, Ohio; prior thereto Executive
Advisor at The Nickert Group from 1989
through 1990; Vice President, Trust Officer
and Chief Investment Officer of The
Provident Bank, Cincinnati, Ohio from 1984
through 1988.
Peter Gerard 49 Managing Director of Rauscher Pierce Since 1995
& Clark, Inc., a London based investment
banking firm, resident in Dallas, Texas,
since July 1995; Managing Partner of
Llama Associates, a provider of mezzanine
and bridge financing since 1990; Chairman
and Chief Executive Officer of Spinnaker
Partners, Westbrooke Hospitality
Corporation and affiliates since 1984;
prior to 1984 Senior Vice President-
Corporate Finance of Schneider Bernet
& Hickman, an investment banking and
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C> <C>
brokerage organization.
Michael A. Feder 44 Managing Director in the Investment Since 1995
Banking Department of CS First Boston,
an international investment banking firm
with which Mr. Feder has been
associated in the areas of investment
banking and capital markets since 1980;
prior thereto, a Vice President of the
Chase Manhattan Bank.
David Rubin 47 President of Brookgate Food Centre, Since 1991
Cleveland, Ohio from 1974 to 1995.
</TABLE>
Arrangements or Understandings With Regard to Selection
of Directors or Nominees
None.
(b) Identification of Executive Officers
The executive officers of the Registrant and their ages and offices with the
Registrant are as follows:
<TABLE>
<CAPTION>
Name and Age Positions with Registrant
------------ -------------------------
<S> <C>
Manfred Brecker (69) Chairman of the Board
Kenneth A. Davis (46) President, Chief Executive Officer,
Chief Operating Officer and a director
Marcie B. Davis (43) Executive Vice President, Secretary,
Treasurer and a director
Joseph Keller (50) Senior Vice President-Administration
and Operations and a director
Richard A. Davis (43) Senior Vice President-Finance and
Chief Financial Officer
Gerald Katz (45) Senior Vice President-Merchandising and
General Merchandise Manager
Michael Stock (42) Vice President-Management Information
Services
Eileen Abbate (48) Vice President-Advertising
Amparo Castro (39) Controller and Assistant Treasurer
</TABLE>
23
<PAGE> 24
Mr. Richard Davis has been an employee of the Registrant since November 1995.
From February 1990 to October 1995, he was a Senior Associate at BDO Seidman,
LLP, an international accounting and consulting firm. From July 1987 to January
1990, Mr. Davis was a supervisor at Laventhol & Horwath, an international
accounting and consulting firm. Prior thereto, he was controller of Laurel
Printing, Inc., a commercial printer. Mr. Davis is a Certified Public
Accountant.
Mr. Katz has been an employee of the Registrant since January 1996. From July
1988 through December 1995, he was Vice President-Merchandise of Fay's Drug
Stores. He was previously employed at Peoples Drug Stores as Vice
President-General Merchandise since 1984, having served in various positions at
Peoples since 1973.
Mr. Stock has been an employee of the Registrant since July 1987 and was elected
a Vice President of the Registrant on February 10, 1988. From 1983 to July 1987
he was Director of Information Services at NYNEX, Inc.
Ms. Abbate has been an employee of the Registrant since April 1990. She was
elected Vice President-Advertising in April 1992. Prior to joining the
Registrant she was the Advertising Director of Drug Fair/Cost Cutters from 1988
to March 1990. She was previously employed at Rickel Home Centers as Advertising
Manager/Media Director from 1977 to 1988.
Ms. Castro has been an employee of the Registrant since June 1989, other than
during a brief period while Ms. Castro was employed elsewhere. She was elected
Assistant Treasurer of the Registrant in 1996 and Comptroller of the Registrant
in August 1991. Prior to joining the Registrant she was manager of financial
reporting of Henri Bendel Inc., a division of The Limited Inc., from 1987 to
June 1989. Prior to 1987 Ms. Castro was an employee of The Limited Inc.
For information regarding officers of the Registrant who are also directors,
reference is hereby made to Item 10(a) of this Report.
(c) Identification of Certain Significant Employees
None.
(d) Family Relationships
Mr. Kenneth A. Davis is the son-in-law of Mr. Brecker; Mrs. Davis is the
daughter of Mr. Brecker and the wife of Mr. Kenneth A. Davis; Mr. Richard A.
Davis is the brother of Mr. Kenneth A. Davis.
(e) Business Experience
See Items 10(a) and 10(b) above.
(f) Involvement in Certain Legal Proceedings
David Rubin, a director of the Registrant, filed for protection under Chapter 13
of the Federal Bankruptcy Code in December 1995.
24
<PAGE> 25
Item 11. Executive Compensation
(a) General
The following sets forth certain information with respect to executive
compensation.
(b) Summary Compensation Table
The following table sets forth certain information concerning the compensation
of the named executive officers for each of the Registrant's last three
completed fiscal years:
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
NAME AND OTHER RESTRICTED OPTIONS ALL
PRINCIPAL ANNUAL STOCK (#OF LTIP OTHER
POSITION YEAR SALARY BONUS COMP AWARDS SHARES) PAYOUTS COMP
- -------- ---- ------ ----- ---- ------ ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kenneth 1996 $225,000 $ 0 $ 0 $ 48,772 $ 0 $ 0 $ 1,171
A. Davis 1995 135,000 0 0 5,468 0 0 1,115
President 1994 175,000 0 0 63,206 0 0 1,731
CEO, COO
Manfred 1996 153,845 25,000 0 0 0 0 1,254
Brecker 1995 125,000 0 0 0 0 0 985
Chairman 1994 175,000 0 0 0 0 0 1,344
of the Board
Marcie 1996 92,500 15,000 0 19,791 0 0 743
B. Davis 1995 59,200 0 0 2,219 0 0 656
Executive VP 1994 59,200 0 0 25,649 0 0 1,344
Sec, Treas
Joseph 1996 108,270 7,500 0 24,739 0 0 875
Keller 1995 100,000 0 0 2,774 0 0 842
S VP- 1994 97,939 0 0 32,061 0 0 1,067
Admin &
Operations
Gerald* 1996 12,500 0 0 0 0 0 0
Katz 1995 0 0 0 0 0 0 0
S VP- 1994 0 0 0 0 0 0 0
Merch &
GMM
</TABLE>
Certain fiscal 1995 and fiscal 1994 amounts have been reclassified to be
consistent with the presentation used in fiscal 1996.
(*) Gerald Katz began employment with the Registrant in January 1996. His
current annual salary is $130,000. In addition, in connection with his
employment by the Registrant in March 1996, Mr.
25
<PAGE> 26
Katz acquired restricted common shares at a de minimis purchase price
and was granted incentive stock options to purchase additional common shares
of the Registrant. See "Employment contracts and termination of employment and
change in control arrangements" under paragraph (h) of this Item 11.
YEAR - Refers to fiscal years ended February 3, 1996, January 28, 1995, and
January 29, 1994, respectively.
SALARY - The Registrant leases a number of automobiles that are made available
to certain of its executive officers as well as to other members of management
and supervisory employees for use in the performance of their duties. The
Summary Compensation Table does not include the value the executive officers
derived from their personal use of these automobiles, which in any event would
not exceed the lesser of $25,000 per year or 10% of the salary reported in the
Summary Compensation Table as to any executive officer.
OTHER ANNUAL COMPENSATION - None.
RESTRICTED STOCK AWARDS - The amounts set forth under this column represent the
excess of the fair market value of the restricted shares vested during the
fiscal year over the purchase price of such restricted shares. The restricted
shares were sold to the named executive officers in December 1991 in connection
with the Registrant's emergence from its Chapter 11 proceeding. A portion of
the shares purchased by each such officer vested over the subsequent four year
period.
OPTIONS - None.
LTIP PAYOUTS - None paid. No plan in place.
ALL OTHER COMPENSATION - Includes contributions made by the Registrant to its
401(k) plan on behalf of the named executive officers.
(c) Fiscal 1996 Option/SAR Grants
None. On March 6, 1996, Gerald Katz was granted options pursuant to the
Registrant's 1991 Incentive Stock Option Plan, to purchase 30,000 common shares
at an exercise price of $3.125 per share, the fair market value of the common
shares on the date of grant. See "Employment contracts and termination of
employment and changes in control arrangements" under paragraph (h) of this Item
11.
26
<PAGE> 27
(d) Options Exercised and Fiscal Year-End Option Values
The following table sets forth certain information concerning options exercised
and the options outstanding at February 3, 1996 held by certain named executive
officers.
<TABLE>
<CAPTION>
VALUE OF
SHARES NUMBER OF UNEXERCISED
ACQUIRED UNEXERCISED IN-THE-MONEY
ON VALUE OPTIONS OPTIONS
NAME EXERCISE REALIZED $ # OF SHARES(1) $
---- -------- ---------- -------------- -
<S> <C> <C> <C> <C>
Kenneth A. Davis - - 208,077 Exercisable $514,519
Manfred Brecker - - - -
Marcie B. Davis - - 59,678 Exercisable 145,139
Joseph Keller - - 38,874 Exercisable 74,432
Gerald Katz (2) - - - -
</TABLE>
(1) The exercisable options were granted pursuant to the 1991 Incentive Stock
Option Plan and the 1991 Non-Qualified Stock Option Plan at exercise prices of
$1.914 and $.544, respectively. The options have been valued at the average of
the high and low bid price on February 3, 1996 (i.e., $3.375 per share).
(2) On March 6, 1996, Gerald Katz was granted options pursuant to the
Registrant's 1992 Incentive Stock Option Plan, to purchase 30,000 common shares
at an exercise price of $3.125 per share, the fair market value of the common
shares on the date of grant. See "Employment contracts and termination of
employment and changes in control arrangements" under paragraph (h) of this Item
11.
(e) Long-term incentive plan
None.
(f) Defined benefit or actuarial plan
None.
(g) Compensation of directors
Each member of the Board who is not an officer or employee of the Registrant or
any of its subsidiaries (an "Independent Director"), is entitled to receive a
fee of $500 for each Board meeting attended and $250 for each Committee meeting
attended, in addition to each such Director's annual grant of common shares
pursuant to the Independent Directors Plan described below.
Pursuant to the Independent Directors Plan, as amended, a total of 75,000 common
shares were
27
<PAGE> 28
reserved for issuance to Independent Directors. The Independent Directors Plan
provides that each Independent Director elected by shareholders to serve as a
member of the Board, through the 1998 Annual Meeting of Shareholders, is
entitled to an award of 2,500 common shares upon his election or re-election.
Each annual award of common stock under the Independent Directors Plan is
effected automatically on the business day next succeeding each of the annual
meetings of shareholders (or special meeting in lieu thereof) at which an
Independent Director is elected.
(h) Employment contracts and termination of employment and change in
control arrangements
In July 1995, the Registrant entered into Executive Employment Agreements with
each of Manfred Brecker, Chairman of the Board, and Kenneth A. Davis, President
and Chief Executive Officer of the Company. Each such agreement provides for an
employment term continuing through the end of the Registrant's 1999 fiscal year
(i.e., January 30, 1999). Under his employment agreement, Mr. Brecker will be
paid an annual base salary of $175,000, subject to annual cost of living
increases, and a special bonus, in consideration of services rendered and to be
rendered, in the amount of $100,000, payable in four equal annual installments
commencing in 1995. Pursuant to his employment agreement, Mr. Davis will be paid
an annual base salary of $225,000 (increased to $250,000 effective January 31,
1996), subject to annual cost of living increases, and an annual bonus equal to
$10,000 for every $.05 per share of pre-tax income for the appropriate fiscal
year. Mr. Davis' base salary will further increase to $300,000 retroactively to
the first day of the fiscal year in which the Company achieves profitability.
The employment agreements with Messrs. Brecker and Davis also provide that, if
such executive's employment with the Company is terminated (i) by the Registrant
in breach of the agreement or (ii) by the executive for "Good Reason", as
defined in the agreement to include, among other events, the occurrence of a
change in control of the Registrant, then such executive shall be entitled to
continue to be paid his base salary then in effect for a period of three years
from the date of termination of employment or, in lieu thereof, a lump sum
amount equal to the discounted present value of such three years of base salary.
In December, 1995, the Registrant entered into an Executive Employment Agreement
with Gerald Katz, Senior Vice President - Merchandising and General Merchandise
Manager of the Registrant. Such agreement provides for an employment term
continuing through the end of the Registrant's 1999 fiscal year (i.e., January
30, 1999). Mr. Katz will be paid an annual base salary of $130,000 subject to
annual cost of living increases, and a special bonus of up to $10,000 during the
first six months of the current fiscal year provided he remains employed by the
Registrant through such period. Pursuant to the agreement and a Restricted Stock
Purchase Agreement between the Registrant and Mr. Katz on March 6, 1996, Mr.
Katz was sold 45,000 Common Shares of the Registrant at a de minimis purchase
price, subject to vesting and forfeiture provisions contained in such agreement
pursuant to which such shares will vest over a three year period. The Registrant
also agreed to grant Mr. Katz incentive stock options to purchase up to 30,000
Common Shares at an exercise price equal to the market price of such Common
Shares on the date of grant. Such options were granted on March 6, 1996, at
which time the market price for a Common Share on the Nasdaq SmallCap
Market was $3.125. Such options also vest over a 3 year period commencing on the
first anniversary of the date of his employment. The Employment Agreement
further provides that, if Mr. Katz' employment with the Registrant is terminated
(i) by the Registrant without cause or (ii) by the executive for "Good Reason",
as defined in the agreement to include, among other events, the occurrence of a
change in control of the Registrant, then he shall be entitled to continue to be
paid his base salary then in effect for a period of twelve months from the date
of termination of employment or through the remaining employment term, if
shorter.
28
<PAGE> 29
(i) Re-pricing of options
None.
(j) Additional information with respect to compensation committee
interlocks and insider participation in compensation decisions
The Registrant has a Compensation Committee none of whose members is an officer
or employee of the Registrant. The members of the Compensation Committee are
Melvin Katz, Michael Feder and Raymond Steele. The Compensation Committee is
involved in the development of criteria to determine future compensation of the
Chief Executive Officer and other executive officers of the Registrant. During
the last fiscal year, deliberations concerning compensation for executive
officers of the Registrant were undertaken which resulted in changes in the
amount and form of such compensation for the Chairman of the Board, President,
Executive Vice President and Senior Vice President-Administration & Operations.
Additionally, the Committee determined the compensation to be paid to the Senior
Vice President-Finance and Chief Financial Officer as well as the compensation
to be paid to the Senior Vice President-Merchandising and General Merchandise
Manager, both of whom were new employees of the Registrant and both of whom
received employment contracts based upon the recommendation of the President and
voted on by the Committee. In addition, the Committee recommended and approved
employment contracts with the Chairman of the Board and the President/CEO of the
Registrant.
(k) Board compensation report on executive compensation
Pursuant to the instructions for this Item, no response is required.
(l) Performance graph
Pursuant to the instructions for this Item, no response is required.
29
<PAGE> 30
Item 12. Security Ownership of Certain
Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The following table sets forth certain information as of April 19, 1996, with
respect to holdings of the Registrant's Common Shares by all persons known by
the Registrant to be the beneficial owners of more than 5% of the total number
of Common Shares outstanding as of that date. Each beneficial owner has sole
voting and investment power with respect to the shares set forth opposite his or
her name in the following table, except as otherwise disclosed in the footnotes
to the table:
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percentage
of Beneficial Owner of Beneficial Ownership of Class *
- ------------------- ----------------------- ----------
<S> <C> <C>
Anne Brecker 562,139 (1) 18.8%
860 Broadway
New York, New York 10003
Rosenthal & Rosenthal 209,195 (2) 7.0%
1370 Broadway
New York, New York 10018
Kenneth A. Davis 387,381 (3) 13.0%
860 Broadway
New York, New York 10003
</TABLE>
*Calculation based upon 2,985,813 Common Shares outstanding as of April
19, 1996 (including total incentive options of 198,190, total non-qualified
options of 218,583, total warrants of 295,062 and restricted shares of 45,000).
(1) Includes 556,343 shares owned by Mrs. Brecker and 5,796 shares held by
trusts, of which she is the trustee, for the benefit of her children. Mrs.
Brecker disclaims beneficial ownership of the shares held by such trusts. Does
not include 11,281 shares beneficially owned by Mrs. Brecker's husband, Manfred
Brecker, the Chairman of the Board of the Registrant, with respect to which Mrs.
Brecker disclaims beneficial ownership.
(2) Includes 209,195 shares beneficially owned by Rosenthal & Rosenthal, Inc.
("Rosenthal") which Rosenthal has the right to acquire pursuant to warrants
currently exercisable.
(3) Includes 54,414 shares subject to options granted to Mr. Davis pursuant to
the Registrant's 1991 Incentive Stock Option Plan (the "Incentive Option Plan")
and 153,663 shares subject to options granted pursuant to Registrant's 1991
Non-Qualified Stock Option Plan (the "Non-Qualified Plan") all of which are
exercisable within 60 days. Does not include 132,472 shares beneficially owned
by Mr. Davis' wife. Mr. Davis disclaims beneficial ownership of the shares held
by his wife.
30
<PAGE> 31
(b) Security Ownership of Management
The following table sets forth certain information as of April 19, 1996 with
respect to holdings of the Registrant's Common Shares beneficially owned by each
of the Registrant's directors and named executive officers and by all officers
and directors of the Registrant as a group.
<TABLE>
<CAPTION>
Name Amount and Nature Percentage
of Beneficial Owner of Beneficial Ownership of Class *
- ------------------- ----------------------- ----------
<S> <C> <C>
Manfred Brecker 11,281 (1) *
Kenneth A. Davis 387,381 (2) 13.0%
Joseph Keller 116,153 (3) 3.9%
Marcie B. Davis 132,472 (4) 4.4%
Gerry Katz 45,000 (5) 1.5%
David Rubin 2,960 *
Melvin Katz 2,960 *
Michael A. Feder 2,500 *
Peter Gerard 2,500 *
Raymond L. Steele 3,880 *
Officers and directors
as a group (consisting of
16 persons) 798,520 (6) 26.7%
</TABLE>
*Less than 1%
(1) Does not include 556,343 shares owned by Mr. Brecker's wife, Anne Brecker,
or 5,796 shares held by trusts for the benefit of Mr. Brecker's adult children,
of which his wife is the trustee, as to which Mr. Brecker disclaims beneficial
ownership.
(2) Includes 54,414 shares subject to options granted pursuant to the
Registrant's Incentive Option Plan and 153,663 granted pursuant to the
Registrant's Non-Qualified Plan all of which are exercisable within 60 days.
Does not include 132,472 shares beneficially owned by Mr. Davis' wife.
(3) Includes 26,000 shares subject to options granted to Mr. Keller under the
Incentive Option Plan and 12,874 granted under the Non-Qualified Plan all of
which are exercisable within 60 days.
(4) Includes 17,379 shares subject to options granted to Ms. Davis pursuant to
the Incentive Plan and 42,299 shares subject to options granted to Ms. Davis
pursuant to the Non-Qualified Plan, all
31
<PAGE> 32
of which are exercisable within 60 days. Does not include 387,381 shares
beneficially owned by Ms. Davis' husband. Ms. Davis disclaims beneficial
ownership of the shares held by her husband.
(5) Such shares were purchased by Mr. Katz in March 1996 for a de minimis
purchase price in connection with his employment by the Registrant. Such shares
are subject to vesting and forfeiture by Mr. Katz in the event his employment is
terminated prior to the vesting thereof. See, "Employment contracts and
termination of employment and change in control arrangements" under Item 11(h)
of this Report.
(6) Includes an aggregate of 121,242 shares subject to options granted under the
Incentive Option Plan and 218,583 granted under the Non-Qualified Plan, all of
which are exercisable within 60 days.
(c) Changes in Control
None
Item 13. Certain Relationships and Related Transactions
(a) Transactions with Management and Others
None.
(b) Certain Business Relationships
Maloney, Gerra, Mehlman & Katz, a law firm of which Melvin Katz, a director of
the Registrant, is currently a member, currently provides legal services to the
Registrant, and received fees for services rendered to the Registrant during
fiscal 1996. In addition, such firm also represented the Registrant in
connection with the acquisition of the Rx Place Stores and rendered services in
connection with the financing thereof. For services rendered to the Registrant
during fiscal 1996, the firm and its partners received fees aggregating
approximately $328,000.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
Pursuant to the instructions for this Item, no response is required.
32
<PAGE> 33
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
<TABLE>
<S> <C>
1. Consolidated Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets at
February 3, 1996 and January 28, 1995 F-2
Consolidated Statements of Operations
for each of the three years in the
period ended February 3, 1996 F-3
Consolidated Statements of Shareholders'
Equity for each of the three years
in the period ended February 3, 1996 F-4
Consolidated Statements of Cash Flows
for each of the three years in the
period ended February 3, 1996 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedule
Report of independent accountants on consolidated
financial statement schedule F-18
VIII. Valuation and Qualifying Accounts F-19
</TABLE>
All other schedules have been omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
3. Exhibits
3.1 Restated Certificate of Incorporation, as amended, of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's Current
Report on Form 8-K dated December 24, 1991, Commission File No.
1-7090).
3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant dated April 1, 1993
33
<PAGE> 34
(incorporated by reference to Exhibit 3.1 to the Registrant's Current
Report on Form 8-K dated April 9, 1993, Commission File No. 1090).
3.3 By-Laws, as amended, of the Registrant (incorporated by reference from
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 3, 1990, Commission File No. 1-7090).
Exhibits 10.1 through 10.5 were filed as Exhibits 10.4 and 10.9 through 10.12,
respectively, to the Registrant's Current Report on Form 8-K dated December 24,
1991, Commission File Number 1-7090, and are incorporated herein by reference
thereto:
10.1 Warrant Agreement dated as of December 24, 1991 by and between the
Registrant and Rosenthal & Rosenthal, Inc.
10.2 S.E. Nichols Inc. 1991 Incentive Stock Option Plan.
10.3 S.E. Nichols 1991 Non-Qualified Stock Option Plan.
10.4 Form of Agreement under S.E. Nichols Inc. 1991 Non-Qualified Stock
Option Plan.
10.5 Form of Restricted Stock Purchase Agreement and Memorandum.
10.6 Pharmhouse Corp. 1995 Stock Option Plan previously filed with the
Registrant's Definitive Proxy Statement filed with the Commission on
October 11, 1995.
10.7 Amendment to 1992 Equity Compensation Plan for Non-Employee Directors
previously filed with the Registrant's Definitive Proxy Statement filed
with the Commission on October 11, 1995.
10.8 Warrant Agreement dated January 23, 1996 between the Registrant and
Brenner Securities Corporation.
10.9 Employment Agreement dated July 14, 1995 between the Registrant and
Kenneth A. Davis.
10.10 Employment Agreement dated July 14, 1995 between the Registrant and
Manfred Brecker.
10.11 Employment Agreement dated December 15, 1995 between the Registrant and
Gerald Katz.
10.12 Employment Agreement dated November 6, 1995 between the Registrant and
Richard A. Davis.
10.13 Restricted Stock Purchase Agreement dated March 6, 1996 between the
Registrant and Gerald Katz.
Unless otherwise noted, all references to the "Commission" in this index shall
mean the Securities and Exchange Commission.
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Pharmhouse Corp.
(Registrant)
By:/s/ Kenneth A. Davis
----------------------------
Kenneth A. Davis
President, Chief Executive
Officer and Chief Operating
Officer
By:/s/ Richard A. Davis
----------------------------
Richard A. Davis
Senior Vice President-Finance
and Chief Financial Officer
Dated: May 3, 1996
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Manfred Brecker Chairman of the Board of Directors May 3, 1996
- ----------------------------
Manfred Brecker
/s/ Kenneth A. Davis President, Chief Executive May 3, 1996
- ----------------------------
Kenneth A. Davis Officer, Chief Operating
Officer and a Director
/s/ Marcie B. Davis Executive Vice President, May 3, 1996
- ----------------------------
Marcie B. Davis Secretary, Treasurer and
a Director
/s/ Joseph Keller Senior Vice President- May 3, 1996
- ----------------------------
Joseph Keller Administration & Operations
and a Director
/s/ Melvin Katz Director May 3, 1996
- ----------------------------
Melvin Katz
Director May 3, 1996
- ----------------------------
David Rubin
</TABLE>
35
<PAGE> 36
<TABLE>
<S> <C> <C>
/s/Michael A. Feder Director May 3, 1996
- ----------------------------
Michael A. Feder
/s/Peter Gerard Director May 3, 1996
- ----------------------------
Peter Gerard
/s/ Raymond L. Steele Director May 3, 1996
- ----------------------------
Raymond L. Steele
</TABLE>
36
<PAGE> 37
EXHIBIT 22.1
Subsidiaries of the Registrant
Name State of Incorporation
- ---- ----------------------
Nichols Realty, Inc. Pennsylvania
Rx Realty Corp. Delaware
37
<PAGE> 38
REPORT OF INDEPENDENT ACCOUNTANTS
April 26, 1996
To the Board of Directors and
Shareholders of Pharmhouse Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Pharmhouse
Corp. and its subsidiaries at February 3, 1996 and January 28, 1995, and the
results of their operations and their cash flows for each of the three fiscal
years ended February 3, 1996, January 28, 1995 and January 29, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
New York, New York
April 26, 1996
F-1
<PAGE> 39
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
February 3, January 28,
1996 1995
<S> <C> <C>
ASSETS
Current assets
Cash $ 2,884 $ 1,313
Accounts receivable, net of
allowances of $918 and $618, respectively 5,837 2,428
Merchandise inventory 53,778 16,867
Prepaid expenses and other 1,650 694
-------- --------
Total current assets 64,149 21,302
Property, fixtures and equipment, net 5,733 4,806
Video inventory held for rental, net 2,123 451
Other assets 1,205 118
-------- --------
Total assets $ 73,210 $ 26,677
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 12,510 $ 7,181
Accounts payable 22,149 7,600
Accrued expenses and other 4,749 1,789
-------- --------
Total current liabilities 39,408 16,570
Long-term debt, net of current portion 25,950 300
Other liabilities 1,028 803
-------- --------
Total liabilities 66,386 17,673
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par; authorized
and unissued 2,500,000 shares
Common stock, $.01 par; authorized
25,000,000 shares; issued 2,245,715
and 2,235,631, respectively 22 22
Additional paid-in capital, net of
unearned compensation of $0
and $73, respectively 21,305 20,978
Accumulated deficit (14,502) (11,995)
-------- --------
6,825 9,005
Treasury stock, at cost 1 1
-------- --------
Total shareholders' equity 6,824 9,004
-------- --------
Toatl liabilities and shareholders' equity $ 73,210 $ 26,677
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE> 40
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
February 3, January 28, January 29,
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net store sales $ 203,130 $ 86,838 $ 94,915
Video rental, service
and other income 6,399 2,764 3,326
---------------------------------------------------
209,529 89,602 98,241
---------------------------------------------------
Costs and Expenses:
Cost of merchandise sold 159,528 68,377 76,463
Selling, general and
administrative 49,582 22,262 24,547
Provision for restructure
and store closure costs -- -- (244)
---------------------------------------------------
209,110 90,639 100,766
---------------------------------------------------
Income (loss) from operations 419 (1,037) (2,525)
Interest expense 3,544 960 861
---------------------------------------------------
Loss before extraordinary item (3,125) (1,997) (3,386)
Extraordinary item 618 -- --
---------------------------------------------------
Net loss $ (2,507) $ (1,997) $ (3,386)
===================================================
Per Common Share:
Loss before extraordinary item $ (1.41) $ (0.90) $ (1.60)
Extraordinary item 0.28 -- --
---------------------------------------------------
Net loss per Common Share $ (1.13) $ (0.90) $ (1.60)
===================================================
Average shares outstanding 2,217,377 2,225,767 2,113,438
===================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 41
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common stock issued Treasury Stock
------------------- Additional --------------
Number of paid-in Number of Accumulated
shares par value capital shares $ deficit Total
------ --------- ------- ------ - ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 30, 1993 $ 2,028,845 $ 20 $ 19,792 $ - $ - $ (6,612) 13,200
Activity-FYE January 29, 1994:
Share grants to directors 2,300 13 13
Issuance of warrants 375 375
Exercise of warrants 200,000 2 398 400
Purchase of fractional shares (983) (3) (3)
Amortization of unearned
compensation relating
to share grants 44 44
Sale of stock options 138 138
Net loss for the year (3,386) (3,386)
--------------------------------------------------------------------------------------------
Balance, January 29, 1994 2,230,162 22 20,757 - - (9,998) 10,781
Activity- FYE January 28, 1995:
Exercise of options 3,287 6 6
Share grants to directors 2,300 7 7
Purchase of treasury stock 16,734 (1) (1)
Purchase of fractional shares (118) -
Amortization of unearned
compensation relating
to share grants 81 81
Sales of stock options 127 127
Net loss for the year (1,997) (1,997)
--------------------------------------------------------------------------------------------
Balance, January 28, 1995 2,235,631 22 20,978 16,734 (1) (11,995) 9,004
Activity- FYE February 3, 1996:
Issuance of warrants 176 176
Share grants to directors 12,500 78 78
Amortization of unearned
compensation relating
to share grants 73 73
Cancellation of S. E. Nichols
pre-filing shares (2,416)
Net loss for the year (2,507) (2,507)
--------------------------------------------------------------------------------------------
Balance, February 3, 1996 $ 2,245,715 $ 22 $ 21,305 $ 16,734 $ (1) $(14,502) 6,824
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 42
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
February 3, January 28, January 29,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows provided by Operating Activities:
Net loss $ (2,507) $ (1,997) $ (3,386)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 2,013 1,563 1,329
Provision for restructure and store
closure costs -- (208) (504)
(Decrease) increase in deferred rent (86) (72) 352
Gain on early extinguishment of debt (618) -- --
Gain on disposal of property, net -- -- (414)
Changes in operating assets and liabilities exclusive of
amounts arising from
Acquisition:
(Increase) decrease in:
Accounts receivable (3,409) (246) 638
Merchandise inventory 1,389 4,137 2,842
Prepaid expenses and other (833) (124) 73
Other assets (1,086) -- --
Increase (decrease) in:
Accounts payable 14,549 (1,286) 721
Accrued expenses 3,270 (597) (716)
Reserve for restructure and store closure costs -- (105) (303)
------------------------------------------
Net Cash flows provided by Operating Activities 12,682 1,065 632
------------------------------------------
Cash Flows used by Investing Activities:
Acquired business, net of store cash (39,538) -- --
Capital expenditures (3,423) (804) (1,630)
Proceeds from disposition of fixed assets -- -- 616
------------------------------------------
Net Cash Flows used by Investing Activities (42,961) (804) (1,014)
------------------------------------------
Cash Flows provided by Financing Activities:
Revolver borrowings, net 8,568 407 (469)
Borrowings to finance acquisition 34,460 -- --
Retirement of debt (7,481) -- --
Paydown of notes (3,951) -- --
Proceeds from issuance of common stock
and stock options 254 133 551
------------------------------------------
Net Cash Flows provided by Financing Activities 31,850 540 82
------------------------------------------
Net increase (decrease) in cash 1,571 801 (300)
Cash, beginning of year 1,313 512 812
------------------------------------------
Cash, end of year $ 2,884 $ 1,313 $ 512
==========================================
Supplemental information:
Income tax refund, net $ -- $ 203 $ --
Interest payments 3,329 960 861
</TABLE>
F-5
<PAGE> 43
PHARMHOUSE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Pharmhouse Corp. operates a chain of 38 deep discount drug stores located in
eight states in the mid-Atlantic and New England regions of the United States.
All stores offer a full service pharmacy. Fourteen stores operate under the name
Pharmhouse (the "Pharmhouse Stores") and twenty-four stores operate under the
name Rx Place (the "Rx Place Stores"), the latter stores having been acquired
from F. W. Woolworth Co., a subsidiary of Woolworth Corporation (collectively
"Woolworth"), in late April 1995.
Fiscal Year
The fiscal year is a 52 or 53 week reporting period ending on the Saturday
closest to January 31 of each year. References to fiscal 1996, 1995 and 1994
refer to the fiscal years ended February 3, 1996, January 28, 1995 and January
29, 1994, respectively. Fiscal 1996 had a 53 week reporting period whereas
fiscal 1995 and 1994 each had a 52 week reporting period.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Pharmhouse Corp. and its two wholly-owned real estate subsidiaries, Nichols
Realty, Inc. and Rx Realty Corp. (collectively the "Company"). All intercompany
transactions and balances have been eliminated.
Reclassification
Certain amounts in the fiscal 1995 and fiscal 1994 consolidated financial
statements have been reclassified to be consistent with the presentation used in
fiscal 1996.
Use of Estimates
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
Name Change and Reverse Stock Split
In fiscal 1994, the Company amended its certificate of incorporation to change
the name of the corporation from "S.E. Nichols Inc." to "Pharmhouse Corp." and
to effect a one for 4.35 reverse stock split of all of the Company's issued
Common Shares, par value $.01 per share. Except for the number of shares issued
pursuant to the Company's Plan of Reorganization (Note 11), all references in
the Consolidated Financial Statements and Notes thereto to shares and per share
amounts reflect the aforementioned reverse stock split.
F-6
<PAGE> 44
Accounts Receivable
Accounts receivable are primarily generated by 3rd party pharmacy revenues (i.e.
Medicare, Medicaid and health insurance plans). Accounts receivable also include
vendor coupons receivable and vendor advertising and promotional allowances
receivable.
Merchandise Inventory
Merchandise inventory is carried at the lower of cost or market, with cost
determined on a first-in first-out basis using the retail inventory method.
Pre-opening Costs
Store pre-opening costs are expensed in the fiscal year in which the store is
opened.
Property, Fixtures and Equipment and Video Held for Rental, Net
Property, fixtures and equipment, including significant improvements thereto,
are recorded at cost. Expenditures for repairs and maintenance are charged to
expense as incurred. The cost of property, fixtures and equipment is depreciated
over the estimated useful lives using the straight-line method. Estimated useful
lives range from 5 to 25 years. Leasehold improvements are amortized over the
shorter of the estimated useful life of the asset or the remaining term of the
lease. Video inventory held for rental is amortized over an estimated useful
life of two years.
Income Taxes
Income taxes are provided based on the liability method of accounting pursuant
to Statement of Financial Accounting Standards No.109, "Accounting for Income
Taxes", which was adopted in fiscal 1994. Deferred income taxes are recorded to
reflect the tax consequences on future years of differences between the tax
basis of assets and liabilities and their financial reporting amounts at each
year-end.
Primary and Fully Diluted Earnings (Loss) per Common Share
Primary loss per common share for fiscal 1996, 1995 and 1994 is based on the
weighted average number of shares outstanding during each year. Fully diluted
earnings per share, which includes common share equivalents, is not presented
because in each of the fiscal years 1996, 1995 and 1994 such amount is
anti-dilutive.
Leased department
Leased department revenues are excluded from net store revenues and totaled $1.9
million, $1.3 million and $1.9 million in fiscal 1996, 1995 and 1994,
respectively. Leased department income of $103,000, $135,000 and $179,000 in
fiscal 1996, 1995 and 1994, respectively, is included in other income.
Significant Supplier
Approximately 28%, 29% and 26% of the Company's total purchases in each of the
fiscal years 1996, 1995 and 1994, respectively, represented purchases from one
unaffiliated supplier.
F-7
<PAGE> 45
NOTE 2 - ACQUISITION
On April 28, 1995, the Company acquired, and accounted for as a purchase, the
assets and business of the Rx Place Stores (the "Acquisition"). The total
acquisition cost, net of store cash acquired, amounted to approximately $39.5
million and consisted of the following items: $23.5 million in cash; notes
issued to Woolworth amounting to $12.5 million (of which $4.1 million was paid
at a discount in June 1995 resulting in an extraordinary gain of $0.6 million);
$2.9 million for the related costs of acquisition (includes cost of issuance of
warrants to the Company's financial advisor, see Note 7); and $0.6 million in
other liabilities. The assets acquired consist of merchandise inventory,
furniture, fixtures and equipment, store supplies and related items. In
addition, the Company assumed Woolworth's obligations under the leases of the Rx
Place Stores. The operations of the acquired business have been included in the
Company's consolidated financial statements from the date of acquisition.
As a result of the application of Accounting Principles Board Opinion No. 16
("APB #16") which governs the purchase method of accounting, the property,
fixtures and equipment located in the Rx Place Stores were recorded at a zero
value in the Company's consolidated financial statements. In accordance with APB
#16, which requires allocation of the total acquisition cost to estimated fair
values of assets acquired, substantially all of the total acquisition cost was
allocated to merchandise inventory and video inventory held for rental. There
was no available balance to allocate to property, fixtures and equipment.
Pro Forma Information (unaudited)
The following unaudited pro forma summary statements of operations for fiscal
1996 and fiscal 1995 have been prepared giving effect to the Acquisition and the
related financing as if the Acquisition and related financing had occurred on
the first day of fiscal 1995. The unaudited pro forma results, however, are not
necessarily indicative of the actual results that may have been obtained had the
Acquisition and the related financing actually occurred on the first day of
fiscal 1995 nor are they indicative of future operating results of the Company.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
February 3, 1996 January 28, 1995
---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 253,728 $279,906
Loss before extraordinary item (16,052)(i) (5,982)
Extraordinary item 618 -
Net loss (15,434) (5,982)
Net loss per common share $ (6.96) $ (2.69)
</TABLE>
(i) Approximately 70% of the loss is directly attributable to the Rx Place
Stores during the period January 29, 1995 to April 28, 1995 as reported by
Woolworth.
The foregoing unaudited pro forma summary statements of operations reflect the
results of operations of the 24 acquired stores for the periods prior to the
Acquisition. The results of
F-8
<PAGE> 46
operations have been furnished to the Company by Woolworth. The Company has
instituted legal proceedings against Woolworth which pertain to, among other
matters, the results of operations and certain assets of the Rx Place Stores
acquired by the Company from Woolworth reported upon and referred to in such
financial statements (see discussion of Woolworth Lawsuit in Note 12).
NOTE 3 - PROPERTY, FIXTURES AND EQUIPMENT AND VIDEO HELD FOR RENTAL, NET
A summary of property, fixtures and equipment and video held for rental, net as
of February 3, 1996 and January 28, 1995 follows (000's):
<TABLE>
<CAPTION>
February 3, January 28,
1996 1995
---------- ----------
<S> <C> <C>
Property, fixtures and equipment $10,697 $ 8,828
Less accumulated depreciation
and amortization 4,964 4,022
------- -------
$ 5,733 $ 4,806
======= =======
Video inventory held for rental $ 4,102 $ 1,792
Less accumulated amortization 1,979 1,341
------- -------
$ 2,123 $ 451
======= =======
</TABLE>
Total depreciation and amortization expense of property, fixtures and equipment
and video inventory held for rental was $1,940, $1,223 and $1,145 in fiscal
1996, 1995 and 1994, respectively.
In accordance with applying the asset valuation guidelines under APB #16, the
property, fixtures and equipment located in the Rx Place Stores were recorded at
zero value in the Company's consolidated financial statements (see discussion in
Note 2).
NOTE 4 - BORROWINGS
POST ACQUISITION BORROWINGS
Long-term Debt
A summary of the Company's long-term debt at February 3, 1996, all of which
arose in connection with the Company's acquisition of the Rx Place Stores, is as
follows (000's):
<TABLE>
<CAPTION>
February 3,
1996
----------
<S> <C>
Senior Credit Facility $27,488
Subordinated Loan 2,550
Purchase Money Notes - Woolworth 8,422
-------
Total debt 38,460
Less current portion 12,510
-------
Long-term debt, net of current portion $25,950
=======
</TABLE>
The current portion of total debt includes a portion of the Subordinated Loan,
all three
F-9
<PAGE> 47
Purchase Money Notes due to Woolworth and a portion of the Senior Credit
Facility. The amount attributable to the Senior Credit Facility was estimated
based on the amount of the potential pay-down of the Senior Credit Facility from
the fiscal 1996 year-end level based on estimated borrowing base availability
during fiscal 1997.
Senior Credit Facility
The borrowing availability under the Senior Credit Facility is based on the
lesser of 60% of eligible inventory at cost or $45 million, requires that the
Company satisfy minimum net worth levels and restricts the Company from paying
cash dividends. The three year term of the agreement expires in April 1998 and
provides for borrowing rates at LIBOR plus 3.5% or prime plus 1.5% and
facilities fees. As of February 3, 1996, the LIBOR interest rate was 5.75% and
the prime interest rate was 8.25%. During fiscal 1996, the highest borrowing
level under the Senior Credit Facility was $31.5 million, which borrowing
occurred in November 1995, and the lowest borrowing level was $20.2 million,
which borrowing occurred in June 1995.
Subordinated Loan
The Subordinated Loan payable to an unaffiliated trade supplier, originally in
the amount of $3 million, is being repaid in monthly installments of $50,000
with a balloon payment of $1.2 million due in April 1998. The loan has a
borrowing rate of prime plus 3% and a commitment fee.
Under the terms of the agreements governing the Senior Credit Facility and the
Subordinated Loan, the lenders thereunder have been granted security interests
in substantially all of the Company's assets.
Purchase Money Notes - Woolworth
In connection with the acquisition of the Rx Place Stores from Woolworth, the
Company issued three Purchase Money Notes to Woolworth as follows (000's):
<TABLE>
<CAPTION>
Interest
Description rate Due date Amount (i)
----------- ---- -------- ----------
<S> <C> <C> <C>
Note #1 9.0% 1/96 $ 6,625
Note #2 10.0% 4/97 2,983
Note #3 11.0% 4/98 2,933
---------
$ 12,541
=========
</TABLE>
(i) Amount includes post-closing adjustments.
In June 1995, the Company prepaid approximately $4.1 million of the Purchase
Money Note due in January 1996 at a discount and recorded an extraordinary gain
of $618,000. In January 1996, the Company instituted legal proceedings against
Woolworth. Pending resolution of the legal proceedings, the Company is
withholding payment of all installments of principal and interest arising under
the Purchase Money Notes (see Note 12).
PRE-ACQUISITION BORROWINGS
Short-term Debt
Revolving Credit Agreement
In December 1991, the Company entered into the Revolving Credit Agreement ("the
"Credit Agreement") with a secured lender to provide $5.0 million of secured
financing for a two year period (subsequently extended through June 1996) at a
rate of 3.5% over prime plus administrative and facility fees. The Credit
Agreement was amended in November 1992, September 1993, April 1994, May 1994
and October 1994 to increase the borrowing availability and
F-10
<PAGE> 48
administrative fees and to revise the working capital and net worth maintenance
requirements. At January 28, 1995, the Credit Agreement provided for borrowing
available to the Company at the lower of $8.25 million or 40% of eligible
inventory as defined in the Credit Agreement. The amount borrowed under the
Credit Agreement at January 28, 1995 was $6.7 million. The obligation under the
Credit Agreement was secured by the Company's inventory and substantially all of
its other assets including the Company's one owned property. The Credit
Agreement prohibited the Company from paying cash dividends or incurring
additional indebtedness (as defined) and required the maintenance of certain
levels of working capital and net worth. The outstanding indebtedness of
approximately $6.7 million was paid in full on April 28, 1995 and the agreement
was terminated.
Long-term Debt
Senior Subordinated Convertible Note
In December 1991, the Company entered into a Note Purchase and Revolving Trade
Agreement (the "Note Purchase Agreement") with an unaffiliated supplier. Under
the terms of the Note Purchase Agreement, the Company issued a $1.0 million
Senior Subordinated Convertible Promissory Note ("Convertible Note") to the
supplier in exchange for $1.0 million. The Convertible Note was convertible into
179.31 of the Company's common shares per $1,000 principal amount of note,
provided for interest at the rate of prime plus 2% and was secured by a junior
security interest in the Company's inventory. Payment of the Convertible Note
was due in equal $500,000 installments in December 1995 and December 1996. In
conjunction with the April 1994 amendment to the Company's Credit Agreement,
$200,000 was paid on the Convertible Note (against the December 1996
installment). The remaining $800,000 was paid on April 28, 1995.
NOTE 5 - INCOME TAXES
Provision for Income Taxes
In fiscal 1996, the Company is not subject to federal income taxes due to the
net loss. However, in certain states, the Company is subject to state and local
taxes which are computed on a basis other than income (e.g., capital stock).
Such computed amounts are not material and are included in selling, general and
administrative expenses.
Net Operating Loss
The Company has available two classes of net operating loss ("NOL") which may be
used to offset future taxable income. NOL Class #1 is the NOL generated
pre-petition (e.g., prior to the 1990 Chapter 11 filing of S.E. Nichols). The
Company's use of NOL Class #1 is limited by formula, pursuant to the federal
income tax code, to $255,000 per annum, plus the unused carry-forward balance.
The total available NOL Class #1 at February 3, 1996 amounts to approximately
$3.90 million which expires in 2006.
NOL Class #2 is the NOL generated subsequent to the filing and is not subject to
annual limitation. The NOL Class #2 available at February 3, 1996 amounts to
approximately $7.95 million.
F-11
<PAGE> 49
Deferred Income Taxes
Deferred income tax temporary differences are determined in accordance with FAS
109. At February 3, 1996, the Company has established a valuation allowance of
100% since it does not appear more likely than not that a tax asset will be
realized. The temporary differences giving rise to deferred taxes primarily
relate to property and equipment, employee stock options and allowances for
doubtful accounts.
NOTE 6 - STOCK OPTION PLANS
The Company has the following three stock option plans in effect: 1991
Non-Qualified Stock Option Plan; 1991 Incentive Stock Option Plan; 1995 Stock
Option Plan (collectively the "Stock Option Plans").
1991 Non-Qualified Stock Option Plan
In December 1991, the Board of Directors of the Company authorized the 1991
Non-Qualified Stock Option Plan (the "Non-Qualified Plan") which was approved by
the Company's shareholders at the annual meeting held June 30, 1992. Under the
Non-Qualified Plan, a total of 274,604 Common Shares were reserved for issuance
to employees of the Company. The exercise price of such options is not less than
25% of the fair market value of the Common Shares subject to such options on the
date of grant.
Participation in the Non-Qualified Plan is voluntary but an election to
participate is irrevocable. Seven employees of the Company elected to
participate (two such employees are no longer employed by the Company), each of
whom has specified the dollar amount by which his or her respective annual
salary will be reduced during each of the Company's three fiscal years
commencing February 2, 1992. In return for such salary reductions, each employee
participating in the Non-Qualified Plan will receive discounted stock options
entitling each such employee to purchase Common Shares at 25% of the fair market
value of such common shares on the date of grant of the options. These options
may be exercised in increments of 1/36 for each full month of employment
completed by the employee during the salary reduction period. However, none of
the options were exercisable prior to June 30, 1993.
On June 30, 1992, 253,525 of the options available for grant under the
Non-Qualified Plan were granted at an exercise price of $.544 per Common Share
which was equal to 25% of the fair market value on the date of grant. The
salaries of the participants in the Non-Qualified Plan have been reduced by an
aggregate of $126,000 in fiscal 1995 and $138,000 in each of fiscal 1994 and
1993. As of February 3, 1996, 218,583 of these options were exercisable and
34,942 were forfeited.
1991 Incentive Stock Option Plan
In 1991, the Board of Directors of the Company authorized the 1991 Incentive
Stock Option Plan (the "Incentive Plan") which was approved the by the Company's
shareholders at the annual meeting held on June 30, 1992. Under the Incentive
Plan, a total of 298,850 Common Shares were reserved for issuance to employees
of the Company. Each of the options granted under the Incentive Plan is an
incentive stock option, as that term is defined in Section 422 of the Internal
Revenue Code of 1986, as amended, the exercise price of which is the fair market
value, as determined by the Company's Board of Directors or its committee, of
the Common Shares subject to such options on the date the options were granted.
Of the options available for grant under the Incentive Plan, 286,902 were
granted in December 1991 at an
F-12
<PAGE> 50
exercise price of $1.914 per Common Share which was equal to the fair market
value on the date of grant. As of February 3, 1996, 85,425 of the options
granted under the Incentive Plan were canceled due to employees terminated,
3,287 were exercised and 198,190 remain exercisable.
1992 Equity Compensation Plan for Non-Employee Directors
In April 1992, the Board of Directors authorized the 1992 Equity Compensation
Plan for Non-Employee Directors (the "Independent Directors Plan") which was
approved by the Company's shareholders at the annual meeting held June 30, 1992.
Under the Independent Directors Plan, a total of 11,500 Common Shares were
reserved for issuance to members of the Board of Directors of the Company who do
not serve as officers or employees of the Company or any of its subsidiaries
(the "Independent Directors'). The Independent Directors Plan provides that each
Independent director elected by shareholders to serve as a member of the Board
of Directors, commencing with the shareholders meeting held June 30, 1992
through the 1996 shareholders' meeting, shall be entitled to an award of 460
Common Shares upon his election or re-election. Each annual award of 460 common
shares under the Independent Directors Plan shall be effected automatically, on
the business day next succeeding each of the shareholders meeting at which each
Independent Director shall have been elected. On each of July 1, 1993 and July
22, 1994, 460 shares were authorized and issued to each Independent Director and
the fair market value of such shares was expensed and added to Additional
Paid-in Capital.
During fiscal 1996, the 1992 Equity Compensation Plan for Non-Employee Directors
was amended. Pursuant to the Independent Directors Plan, as amended, a total of
75,000 Common Shares were reserved for issuance to Independent Directors. The
Independent Directors Plan provides that each Independent Director elected by
shareholders to serve as a member of the Board, through the 1998 Annual Meeting
of Shareholders, is entitled to an award of 2,500 Common Shares upon his
election or re-election. Each annual award of Common Stock under the Independent
Directors Plan is effected automatically on the business day next succeeding
each of the annual meetings of shareholders (or special meeting in lieu thereof)
at which an Independent Director is elected. On October 26, 1995, 2,500 shares
were authorized and issued to each Independent director and the fair market
value of such shares was expensed and added to Additional Paid-in Capital.
1995 Stock Option Plan
The Company's 1995 Stock Option Plan (the "1995 Plan") was adopted by the Board
in July 1995 and approved by shareholders in October 1995. Under the 1995 Plan,
a total of 500,000 Common Shares have been reserved for issuance upon the
exercise of stock options and related stock appreciation rights ("SARs").
Pursuant to the 1995 Plan, the Company may grant incentive stock options
("ISOs"), non-qualified stock options ("NSOs"), and SAR's to officers, directors
and key employees of the Company. The 1995 Plan is administered by the
Compensation Committee of the Company's Board of Directors which selects the
optionees, authorizes the grant of options and determines the exercise price and
other terms of the options, including the vesting schedule thereof, if any. The
per share exercise price of each ISO granted under the 1995 Plan must be at
least 100% of the fair market value of a Common Share (and not less than 110% of
the fair market value in the case of any optionee of an ISO who beneficially
owns more than 10% of the total
F-13
<PAGE> 51
combined voting power of the Company) on the date such option is granted. The
per share exercise price of an NSO must be at least 25% of the fair market value
of a Common Share on the date such option is granted.
The 1995 Plan also provides for the grant of SAR's, which may be granted on a
stand-alone basis or in tandem with stock options, which may be surrendered to
the Company in exchange for cash, Common Shares or a combination thereof, as
determined by the committee administering the 1995 Plan, having a value equal to
the dollar amount obtained by multiplying (x) the number of shares subject to
the surrendered SAR or option by (y) the amount by which the fair market value
per Common Share exceeds the exercise price per share specified in the agreement
governing the surrendered SAR's or options.
As of February 3, 1996, no options or SAR's have been granted under the 1995
Plan.
The combined activity in the Stock Option Plans for the three years in the
period ended February 3, 1996 was as follows:
<TABLE>
<CAPTION>
Number of Option price
shares per share
--------- ------------
<S> <C> <C>
Outstanding at January 31, 1993 531,237 $ 0.544 - $ 1.914
Fiscal 1994 Activity:
Granted -
Exercised -
Canceled (22,649) $ 0.544 - $ 1.914
-------
Outstanding at January 29, 1994 508,588
Fiscal 1995 Activity:
Granted -
Exercised (3,287) $ 0.544 - $ 1.914
Canceled (82,752) $ 0.544 - $ 1.914
-------
Outstanding at January 28, 1995 422,549
Fiscal 1996 Activity:
Granted -
Exercised -
Canceled (5,776) $ 0.544 - $ 1.914
-------
Outstanding at February 3, 1996 416,773
=======
Available for grant at February 3, 1996 653,395
=======
</TABLE>
NOTE 7 - WARRANTS
In fiscal 1996, in connection with the Acquisition, the Company issued 85,867
warrants to its financial advisor to purchase the Company's Common Shares (such
amount being equal to 3% of the Company's issued and outstanding shares,
including Common Share equivalents), subject to certain anti-dilution
protection, for a per share exercise price of approximately $0.94. The
difference between the fair market value of the warrants on the date of grant
and the exercise price has been included in the acquisition cost of the Rx Place
Stores (see Note 2).
F-14
<PAGE> 52
As of February 3, 1996, none of such warrants were exercised.
In fiscal 1994, the Company signed an agreement with an unaffiliated third party
and issued 300,000 warrants at an exercise price of $2.00 per share in
consideration of certain consulting services with respect to financial and
investor relations provided to the Company through December 31, 1994. The value
of the warrants, on the date of grant, was capitalized as a prepaid expense and
amortized over the life of the agreement. Pursuant to the terms of the
agreement, 200,000 of the warrants were exercised in August 1993. The remaining
100,000 warrants were not exercised and have since expired.
In December 1991, the Company issued warrants to the secured lender to purchase
209,195 of its Common Shares at varying exercise prices ranging from $.19 to
$1.91. Such warrants are still outstanding at February 3, 1996 and expire from
December 1996 to December 1998.
NOTE 8 - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) savings plan which allows
employees to contribute a percentage of compensation not to exceed amounts
permitted under the Internal Revenue Code. The Company matches 100% of the first
$1 of employee contribution each week plus 25% of any additional compensation
contributed, up to a maximum of 3% of annual compensation. The Company's
contribution into the 401(k) savings plan amounted to $81,000, $60,000 and
$64,000 in fiscal 1996, 1995 and 1994, respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS
One of the Company's directors is a member of a law firm which provided legal
services to the Company for fees and disbursements aggregating $328,000, $81,000
and $193,000 in fiscal 1996, 1995 and 1994, respectively.
NOTE 10 - RESTRUCTURE AND STORE CLOSURE COSTS
Prior to fiscal 1993, the Company established provisions relating to anticipated
restructure and store closure costs and expenses. Closed store expenses charged
against the provision were $456,000 and $663,400 in fiscal 1995 and 1994,
respectively. The Company also changed the provision by ($244,000) in fiscal
1994 due to the reevaluation of anticipated store closing and restructuring
charges. At January 28, 1995, there was no remaining reserve as all anticipated
store closures had been completed.
NOTE 11 - PLAN OF REORGANIZATION
On August 2, 1990, the Company filed for protection under Chapter 11 of the
Federal Bankruptcy Code. From August 2, 1990 until September 11, 1991, the
Company operated its business as debtor-in-possession under Chapter 11 and was
subject to the jurisdiction of the Bankruptcy Court throughout the Chapter 11
case. By order dated September 11, 1991 and entered on September 23, 1991, the
Bankruptcy Court confirmed the Company's Plan of Reorganization ("Plan") and the
Company emerged from bankruptcy. On December 24, 1991, the Company substantially
consummated its Plan under Section 1101 (2) of the Bankruptcy code. On February
2, 1995, the Company applied for its Final Decree and on February 15, 1995 the
application for Final decree was signed by the Bankruptcy Court.
Under the provisions of the Plan, the Company has completed the distribution of
$3.1 million in cash and 2.6 million of the Company's Reorganization Common
Shares to its Allowed Secured
F-15
<PAGE> 53
Creditors (as defined under the Plan) as payment in full of their claims. The
Company has arranged long-term payment schedules with certain state authorities
with respect to its pre-petition priority sales and use tax liabilities, which
amounts are included in accrued expenses in the Consolidated Balance Sheets.
Upon completion of the remaining payments amounting to approximately $407,000,
which are due in December 1996, the Company will have fully consummated the
Plan.
Upon confirmation of the Plan, certain members of management and members of
their families acquired 4,036,839 Reorganization Common Shares in exchange for
an investment of approximately $1,776,200 in the Company. This investment
included approximately $490,000 in severance pay, net of all withholding taxes,
paid to members of management under the provisions of the Plan. Certain members
of management acquired 1,040,000 Reorganization Common Shares at one cent per
share pursuant to a Restricted Share Purchase Memorandum and Agreement (the
"Share Purchase Agreement"), dated as of December 24, 1991, between the members
of management and the Company. Pursuant to the terms of the Share Purchase
Agreement, certain members of management received a bonus totaling $295,973 in
fiscal 1992. An amount representing unearned employee compensation relating to
such shares was recorded as a deduction from shareholders' equity and amortized
over the forfeiture period. In fiscal 1996, 1995 and 1994, $73,000, $81,000 and
$44,000, respectively, of this unearned income was amortized. Since certain
members of management and their families have retained a controlling interest
in the Company, the Company did not adopt fresh-start reporting upon its
emergence from Chapter 11.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company's operating leases are principally for retail store locations. At
February 3, 1996, future minimum rental payments required under operating leases
that have initial or remaining noncancellable lease terms in excess of one year,
without regard to potential sublease revenue, are as follows (000's):
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1997 $ 8,479
1998 8,576
1999 8,505
2000 8,518
2001 8,569
Thereafter 96,927
</TABLE>
Rent expense, excluding certain real estate tax and maintenance costs, for all
operating leases is comprised of the following (000's):
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Minimum rentals $ 6,781 $ 2,454 $ 2,732
Contingent rentals 117 112 135
Sublease revenue (927) (719) (660)
------- ------- -------
$ 5,971 $ 1,847 $ 2,207
======= ======= =======
</TABLE>
F-16
<PAGE> 54
In fiscal 1992, a major subtenant of the Company, Masters, Inc. ("Masters"),
filed for relief under Chapter 11 of the Bankruptcy Code. On October 5, 1992,
Masters gave notice that it intended to terminate the subleases effective
January 31, 1993 and would, as required by the terms of the amended subleases,
continue to pay rent through April 30, 1993. In fiscal 1993, under a settlement
agreement with reorganized Masters, the Company was due to receive cash payments
of $100,000 per year for five years for leasehold expenditures made by the
Company on Masters' behalf. In fiscal 1994, the Company recorded income of
$100,000 from the first installment from Masters which was received in March
1994. In fiscal 1995, the Company recorded income of $300,000 from the second
installment of $100,000 received in March 1995 and $200,000 received in April
1995 as a settlement of the remaining $300,000 balance.
Supply Agreement
The Company is a party to a three year supply agreement with McKesson Drug
Company pursuant to which the Company is required to purchase a minimum of 90%
of its pharmaceutical and certain other merchandise from McKesson.
Woolworth Lawsuit
In January 1996, the Company instituted legal proceedings against Woolworth in
the Supreme Court of the State of New York seeking, among other relief, damages
and indemnification arising out of Woolworth's alleged fraud and breach of
certain convenience, representations and warranties made by Woolworth in
connection with the Acquisition. The Company's claims in such action are based
upon its belief that material misrepresentations were made by Woolworth
regarding the inventory and gross profit margins of the acquired stores and that
the Company has been damaged as a result thereof.
Pending resolution of the Company's claims in the above-described action, the
Company is withholding payment of all further installments of principal and
interest arising under the Purchase Money Notes. The Company's senior secured
and subordinated secured lenders have consented to the withholding by the
Company of payment of the installments of principal and interest under the
Purchase Money Note due in January 1996 and have granted currently effective
waivers of the relevant cross-default provisions of the agreements evidencing
the Company's indebtedness to such lenders.
Other Legal Matters
In the normal course of business, the Company is subject to various legal
proceedings and claims. In the opinion of management, any ultimate liability
arising from or related to these claims should not have a material adverse
effect on future results of operations or the consolidated financial position of
the Company.
F-17
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Shareholders of Pharmhouse Corp.
Our audits of the consolidated financial statements referred to in our report
dated April 26, 1996 appearing on page F-1 of the 1996 Annual Report on Form
10-K of Pharmhouse Corp. for the year ended February 3, 1996 also included an
audit of the Financial Statement Schedule listed in Item 14(a) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PRICE WATERHOUSE LLP
New York, New York
April 26, 1996
F-18
<PAGE> 56
PHARMHOUSE CORP. AND SUBSIDIARY Schedule VIII
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions Deductions
--------- ----------
Balance at Charged to Balance
beginning costs and Bad debt Bad debt at end
of period expenses write offs recoveries of period
--------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Reserves deducted in balance sheet
from trade and other receivables
February 3, 1996:
Allowance for doubtfull accounts $ 618 $ 383 $ (37) $ (46) $ 918
================================================================
January 28, 1995:
Allowance for doubtfull accounts $ 563 $ 168 $ (100) $ (13) $ 618
================================================================
January 29, 1994:
Allowance for doubtfull accounts $1,108 $ 64 $ (355) $ (254) $ 563
================================================================
</TABLE>
F-19
<PAGE> 57
Exhibit Index
- --------------
3.1 Restated Certificate of Incorporation, as amended, of the Registrant
(incorporated by reference to Exhibit 3.1 to the Registrant's Current
Report on Form 8-K dated December 24, 1991, Commission File No.
1-7090).
3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant dated April 1, 1993
(incorporated by reference to Exhibit 3.1 to the Registrant's Current
Report on Form 8-K dated April 9, 1993, Commission File No. 1090).
3.3 By-Laws, as amended, of the Registrant (incorporated by reference from
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended February 3, 1990, Commission File No. 1-7090).
Exhibits 10.1 through 10.5 were filed as Exhibits 10.4 and 10.9 through 10.12,
respectively, to the Registrant's Current Report on Form 8-K dated December 24,
1991, Commission File Number 1-7090, and are incorporated herein by reference
thereto:
10.1 Warrant Agreement dated as of December 24, 1991 by and between the
Registrant and Rosenthal & Rosenthal, Inc.
10.2 S.E. Nichols Inc. 1991 Incentive Stock Option Plan.
10.3 S.E. Nichols 1991 Non-Qualified Stock Option Plan.
10.4 Form of Agreement under S.E. Nichols Inc. 1991 Non-Qualified Stock
Option Plan.
10.5 Form of Restricted Stock Purchase Agreement and Memorandum.
10.6 Pharmhouse Corp. 1995 Stock Option Plan previously filed with the
Registrant's Definitive Proxy Statement filed with the Commission on
October 11, 1995.
10.7 Amendment to 1992 Equity Compensation Plan for Non-Employee Directors
previously filed with the Registrant's Definitive Proxy Statement filed
with the Commission on October 11, 1995.
10.8 Warrant Agreement dated January 23, 1996 between the Registrant and
Brenner Securities Corporation.
10.9 Employment Agreement dated July 14, 1995 between the Registrant and
Kenneth A. Davis.
10.10 Employment Agreement dated July 14, 1995 between the Registrant and
Manfred Brecker.
10.11 Employment Agreement dated December 15, 1995 between the Registrant and
Gerald Katz.
10.12 Employment Agreement dated November 6, 1995 between the Registrant and
Richard A. Davis.
10.13 Restricted Stock Purchase Agreement dated March 6, 1996 between the
Registrant and Gerald Katz.
27 Financial Data Schedule.
Unless otherwise noted, all references to the "Commission" in this index shall
mean the Securities and Exchange Commission.
<PAGE> 1
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of January 23, 1996 between
PHARMHOUSE CORP., a New York corporation (the "Company"), and Brenner Securities
Corporation, a Delaware corporation ("Brenner").
WHEREAS, pursuant to the terms of an engagement letter (the
"Engagement Letter") dated November 14, 1994 between Brenner and the Company
regarding the Rx Place Acquisition (as defined in the Engagement Letter), as the
same has been amended through the date hereof, the Company is obligated to issue
to Brenner warrants (the "Warrants") to purchase EIGHTY FIVE THOUSAND EIGHT
HUNDRED AND SIXTY SEVEN (85,867) Common Shares (as hereinafter defined) of the
Company, which is equal to three percent (3%) of the Company's outstanding
Common Shares on a fully diluted basis as of April 28, 1995, the date on which
Brenner became entitled to the Warrants; and
WHEREAS, the purpose of this Agreement is to set forth the
terms and conditions governing the issuance and terms of the Warrants, the
exercise price thereof, the registration rights granted to the holders of the
Warrants, the adjustment in the number of Common Shares issuable upon exercise
of the Warrants pursuant to the anti-dilution provisions hereof and such other
terms and conditions as are hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Definitions For purposes of this Agreement:
"Act" means the Securities Act of 1933, as amended.
"Affiliate" means, with respect to any specified Person, any
other Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person.
"Board Resolution" means a resolution by the Board of
Directors of the Company or the Executive Committee thereof, if any, which shall
be certified as being duly adopted and in full force and effect by the Secretary
or any Assistant Secretary of the Company.
"Business Day" means any day other than a day on which banks
in the City of New York are required or authorized by law to be closed.
"Common Shares" means the Company's Common Shares, par value
$.01 per share, as constituted on the date hereof, or shares of any class or
classes of the Company resulting from any reclassifications or recapitalizations
pertaining to the Common Shares and which have no preference in respect of
dividends or of amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
<PAGE> 2
"Market Price" means the average of the closing prices per
Share on the principal national securities exchange or the NASDAQ Stock Market
(National Market System or Small Cap Market) ("NASDAQ"), whichever of the
foregoing exchanges or systems is the principal market or system on which the
Common Shares are listed, admitted for trading or quoted, as the case may be,
or, if there be no such closing prices, the mean between the bid and asked
prices reported on any such national securities exchange, NASDAQ or any other
over-the-counter market on which such quotations are regularly available, as the
case may be, on each of the ten (10) trading days immediately preceding the date
as of which such determination of Market Price is to be made. If at any time the
Common Shares are not listed, admitted for trading or quoted on any of the
foregoing markets or systems, the Market Price of the Common Shares shall be
deemed to be the fair value thereof determined in good faith by a reputable
independent brokerage or investment banking firm (other than Brenner) as of a
date which is within fifteen (15) days prior to the date as of which the
determination of Market Price is to be made.
"Permitted Assignees" means executive officers or directors of
Brenner identified by written notice from Brenner to the Company to whom
percentages of the Warrants may be assigned, provided that (a) such assignee is
serving as an officer or director of Brenner as of the date of any such
assignment and (b) any and all such assignments must be effected on a basis
exempt from registration under the Act.
"Person" means any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended.
"Registration Expenses" means the Company's expenses incurred
in connection with the Company's performance of or compliance with Section 9 of
this Agreement, including fees and disbursements of counsel for the Company and
of its independent public accountants, expenses of printing the Registration
Statement and the prospectus constituting a part thereof, but excluding legal
fees and disbursements of Brenner's counsel, registration or filing fees payable
to the Securities and Exchange Commission, NASD filing fees and any state
securities or blue sky filing fees, underwriters' or brokers' discounts or
commissions, in each case, relating only to the offer and sale of any of the
Securities held by Brenner and its Permitted Assignees, and any transfer, income
or gains taxes incurred by reason, or arising out, of the sale or other
disposition of any of such Securities by Brenner and its Permitted Assignees in
a transaction governed by Section 9 hereof.
"Securities" means (a) the Warrants to be issued to Brenner
pursuant to this Agreement, (b) any Common Shares issued upon the exercise of
such Warrants, and (c) any Common Shares or other securities of the Company
issued subsequent to the exercise of the Warrants by Brenner, in whole or in
part, as a dividend or other distribution with respect to, or resulting from, a
subdivision of the Company's outstanding Common Shares into a greater or lesser
number of Common Shares by recapitalization, reclassification, stock splits,
combinations of shares or otherwise or in exchange for or in replacement of the
Common Shares issued upon such exercise.
"SEC" means the United States Securities and Exchange
Commission.
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"Warrant Expiration Date" means 5:00 p.m., New York City time,
on the fifth (5th) anniversary of the date hereof.
"Warrant Price" means ninety-four cents ($.94) per Share, as
such exercise price may be adjusted or readjusted in accordance with the
provisions of Section 10 hereof.
"Warrant(s)" has the meaning specified in the preamble of this
Agreement.
All other terms defined herein shall have the meanings
ascribed thereto in the parenthetical definitions appearing in the preambles and
recitals to and the various provisions of this Agreement.
SECTION 2. Issuance and Form of Warrants
On the date hereof, or within five (5) Business Days after the
date hereof, the Company shall execute and deliver to Brenner one or more
certificates evidencing the Warrants (the "Warrant Certificates").
The text of each Warrant Certificate shall be substantially as
set forth in Exhibit "A" attached hereto. Each Warrant Certificate shall entitle
the holder of record thereof to purchase from the Company all or any portion of
the total number of Common Shares evidenced by such Warrant Certificate at any
time from the date hereof until the Warrant Expiration Date at the Warrant
Price. The Warrant Price and the number of Common Shares issuable upon exercise
of the Warrants are subject to adjustment upon the occurrence of certain events,
all as herein provided.
The Warrant Certificates may contain such letters, numbers or
other marks of identification as the Company may deem appropriate and such
legends not inconsistent with the provisions of this Agreement as may be
required to comply with applicable federal or state law or with any rule or
regulation of any stock exchange or other system on which the Warrants may be
listed, traded or quoted.
Each Warrant Certificate shall be dated as of the date hereof.
Upon the issuance of the Warrant Certificates, the Company
shall register the Warrants represented thereby on the books and records of the
Company in the name of Brenner.
SECTION 3. Execution
Each Warrant Certificate shall be executed on behalf of the
Company by the President or a Senior Vice President of the Company and attested
to by the Secretary or any Assistant Secretary of the Company.
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SECTION 4. Registration, Transfers and Exchanges
The Company shall maintain at its principal corporate office
in New York City, New York (the "Warrant Register Office") a register for the
registration of the Warrant Certificates and of their transfer and exchange from
time to time (the "Warrant Register").
The Company shall deem and treat Brenner or any other
registered holder of a Warrant Certificate in the case of a subsequent transfer
by Brenner of Warrants, as the absolute owner of each Warrant Certificate and of
the Warrants represented thereby for all purposes (notwithstanding any notation
to the contrary), except that if and when any Warrant Certificate is properly
assigned in blank, the Company may (but shall not be obligated to) deem and
treat the bearer thereof as the absolute owner thereof and of the Warrants
represented thereby for all purposes (notwithstanding any notation to the
contrary). The Company shall record in the Warrant Register the transfer, from
time to time in accordance with the terms hereof, of any outstanding Warrant
Certificate, upon surrender thereof for transfer at the Warrant Register Office,
together with a written assignment of the Warrant Certificate, duly executed by
the registered holder thereof or by such registered holder's duly authorized
attorney or legal representative, together with funds to pay any transfer taxes
payable in connection with such transfer. Upon such surrender and payment, a new
Warrant Certificate or new Warrant Certificates, in the name(s) of the
assignee(s) and in the denomination or denominations specified in such
instrument of assignment, shall be issued and delivered. If less than all of the
Warrants evidenced by a Warrant Certificate are being transferred, a new Warrant
Certificate or Certificates shall be issued for Warrants evidenced by such
Warrant Certificate not being so transferred. Any Warrant Certificate
surrendered shall be canceled by the Company.
The Warrants evidenced by a Warrant Certificate may be divided
into more than one Warrant Certificate or combined with Warrants evidenced by
other Warrant Certificates upon surrender of the Warrant Certificate or
Certificates, as the case may be, at the Warrant Register Office, together with
a written notice specifying the names and denominations in which new Warrant
Certificates are to be issued and properly endorsed in the manner specified in
the preceding paragraph. Upon such surrender by Brenner or any subsequent holder
of such Warrant Certificates and the payment thereby of any applicable transfer
tax, a new Warrant Certificate or Certificates shall be issued and delivered in
accordance with such notice. Any Warrant Certificate surrendered shall be
canceled by the Company.
The Company shall impose no service or other charge in
connection with any such transfer or exchange of Warrant Certificates, except
for any transfer taxes payable in connection therewith which shall be paid
promptly by Brenner or any subsequent holder of the Warrant Certificates.
SECTION 5. Duration of Warrants
Subject to the terms of this Agreement, the Warrants shall
expire on the Warrant Expiration Date. Thereafter, unexercised Warrants will be
void in their entirety and of no value or
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<PAGE> 5
force or effect whatsoever and all rights granted by the Company to Brenner
hereunder shall thereupon be canceled and terminated in their entirety.
SECTION 6. Exercise of Warrants
Subject to the provisions of this Agreement, Brenner or any
subsequent registered holder of a Warrant Certificate shall have the right, upon
the exercise from time to time of the Warrants evidenced thereby, commencing at
the opening of business on the date hereof, to purchase from the Company (and
the Company shall issue and sell to such registered holder) the total or any
lesser number of fully paid and nonassessable Common Shares issuable upon the
exercise of such Warrants. To exercise such Warrants, Brenner or such subsequent
registered holder shall surrender (by delivery in person, or by certified mail
or by an express mail service which provides proof of delivery) to the Company
at the Warrant Register Office the Warrant Certificate evidencing such Warrants
accompanied by (i) an election to purchase in the form set forth on the reverse
of such Warrants, duly completed and signed, and (ii) payment to the Company of
the Warrant Price in effect on such date for the number of Common Shares in
respect of which such Warrants are then being exercised. At the option of
Brenner or such subsequent registered holder, payment of the Warrant Price may
be made (x) in cash or by certified check, money order or wire transfer of
immediately available funds to the order of the Company or (y) by delivery to
the Company of a written notice that Brenner or such subsequent registered
holder is exercising the Warrants (or a portion thereof) by authorizing the
Company to withhold from issuance a number of Common Shares otherwise issuable
upon exercise of such number of Warrants which, when multiplied by the Market
Price of a Common Share as of the date of such exercise, is equal to the
aggregate Warrant Price for such exercise (and such withheld Common Shares shall
no longer be issuable under the Warrants).
As soon as practicable after the exercise of any Warrants, the
Company shall, subject to the provisions of Section 7 hereof, issue and cause to
be delivered to or upon the written order of Brenner or any subsequent
registered holder of the Warrant Certificate evidencing such Warrants, and in
such name or names as Brenner or such registered holder may designate, a
certificate or certificates for the number of fully paid and nonassessable
Common Shares so purchased upon the exercise of such Warrants. Such certificate
or certificates for Common Shares shall be deemed to have been issued, and any
person so designated to be named therein shall be deemed to have become a holder
of record of such Common Shares, as of the date of the surrender of such Warrant
Certificate and payment of the Warrant Price as hereunder provided.
The Warrants evidenced by a Warrant Certificate shall be
exercisable, at the election of Brenner or any subsequent registered holder
thereof, either as an entirety or from time to time for a part only of the
integral number of Warrants evidenced by the Warrant Certificate. In the event
that less than all of the Warrants evidenced by a Warrant Certificate
surrendered upon the exercise of Warrants are exercised at any time prior to the
Warrant Expiration Date, a new Warrant Certificate or Certificates shall be
issued to or upon the written order of Brenner or a subsequent registered holder
for the remaining number of Warrants evidenced by the Warrant Certificate so
surrendered. The Company shall only be required to execute and deliver the
required new Warrant Certificate or Certificates in accordance with the
provisions of this Section.
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Warrants, represented by a properly assigned Warrant
Certificate, may be exercised by a subsequent holder thereof without first
having a new Warrant Certificate issued.
All Warrant Certificates surrendered upon the exercise of
Warrants shall be canceled by the Company.
SECTION 7. Payment of Taxes
The Company will pay any issue or documentary stamp taxes
attributable to the issuance of the Warrants or of the Common Shares upon the
exercise of any Warrant; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer of
Warrant Certificates or any transfer involved in the issuance or delivery of any
certificates for Common Shares in a name other than that of Brenner or a
subsequent registered holder of the Warrant Certificate in respect of which such
Common Shares are issued upon exercise of the Warrants, in whole or part, and in
such case the Company shall not be required to issue or deliver any Warrant
Certificate or certificate for Common Shares until the person requesting the
same has paid to the Company the amount of such tax or has established to the
Company's satisfaction that such tax has been paid.
SECTION 8. Mutilated or Missing Warrant Certificate
In case any of the Warrant Certificates shall be mutilated,
lost, stolen or destroyed, the Company, at the request of Brenner or any
subsequent registered holder thereof, shall issue and deliver in exchange and
substitution for and upon cancellation of the mutilated Warrant Certificate, or
in lieu of and in substitution for the Warrant Certificate lost, stolen or
destroyed, a new Warrant Certificate representing an equivalent right or
interest, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and, in the case of a lost, stolen or
destroyed Warrant Certificate, indemnity, if requested, in a form satisfactory
to the Company, it being understood that, in the case of Brenner its corporate
indemnity shall be satisfactory. Applicants for such substitute Warrant
Certificates shall also comply with such other reasonable regulations and pay
such reasonable charges as the Company may prescribe.
SECTION 9. Reservation of Common Shares; Listing and
Registration; Indemnification
(A) The Company hereby warrants, represents and
covenants that there have been reserved, and the Company shall keep reserved
through the Warrant Expiration Date, out of its authorized and unissued Common
Shares or its authorized and issued Common Shares held in its treasury, for the
purpose of enabling it to satisfy any obligation to issue Common Shares upon
exercise of the Warrants, the aggregate amount of Common Shares deliverable upon
the exercise of all outstanding Warrants after giving effect to the adjustments
set forth in Section 10 of this Agreement.
The Company covenants that all Common Shares which
may be issued upon the exercise of Warrants will, upon issuance (and assuming
payment of the Warrant Price therefor),
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be duly authorized, validly issued, fully paid and nonassessable and free from
all liens, charges and security interests created or granted by the Company with
respect to, or arising out of, the issuance thereof.
(B) Upon the written request of Brenner that the Company
effect the registration under the Act of all or a designated portion of
Brenner's Securities and specifying Brenner's intended method of offer, sale or
other disposition thereof, the Company will use its best efforts to effect the
registration under the Act of such Securities to permit their lawful offer, sale
or other disposition; provided, however, that:
(i) at the time of any such request, the Company is
required to file periodic reports with the SEC under the Exchange Act;
(ii) the Company shall be required to effect not more
than a total of two (2) registrations under the Act pursuant to this
Section 9(B); provided, further that, in the event Securities are
registered by the Company pursuant to a request made under this Section
9(B), no further request for registration may be made hereunder for a
period of one year following the effective date of the registration
statement filed by the Company with the SEC with respect to such prior
registration;
(iii) any registration requested pursuant to this
Section 9(B) shall be effected by the filing by the Company of a
registration statement on SEC Form S-3 (or any substitute or
replacement SEC registration statement form that includes substantially
the same information as would be required to be included in a
registration statement on such form as currently constituted) and such
form is available for use by the Company pursuant to the applicable
rules and forms of the SEC under the Act;
(iv) all expenses, including any Registration
Expenses, incurred in connection with any registration under the Act
requested by Brenner pursuant to this Section 9(B) shall be borne and
paid in full by Brenner;
(v) the Company shall not be required to register
Securities pursuant to this Section 9(B) unless Brenner agrees in
writing to include in any such registration not less than (X) in the
case of the first registration of Securities by Brenner pursuant to a
request made under this Section 9, fifty percent (50%) of the total
number of Shares issuable as of the date hereof to Brenner upon
exercise of the Warrants, and (Y) in the case of any subsequent
registration of Securities by Brenner pursuant to a request made under
this Section 9, thirty three percent (33%) of the total number of
Shares issuable as of the date hereof to Brenner upon exercise of the
Warrants, in each case, subject to adjustment pursuant to Section 10
hereof;
(vi) a registration requested by Brenner pursuant to
this Section 9(B) will not be deemed to have been effected unless it
has become effective under the Act; provided further, however, that a
registration that does not become effective after the Company has filed
a registration statement with respect thereto
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<PAGE> 8
solely by reason of the refusal of Brenner to proceed with the offer
and sale of the Securities included therein (other than any refusal to
proceed based upon the advice of Brenner's counsel that the
registration statement, or the prospectus included therein, contains an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing)
shall be deemed to have been effected by the Company at the request of
Brenner and in fulfillment of the Company's obligations to Brenner in
response thereto;
(vii) the Company may delay the initiation of any
registration requested pursuant to this Section 9(B) if there is a
pending material transaction or development that would have to be
disclosed in the registration statement pursuant to which the
Securities held by Brenner would be registered under the Act. The
Company will advise Brenner of any such delay and the reasonably
anticipated duration thereof subject to the obligation of Brenner to
retain information concerning such transaction on a strictly
confidential basis for such period as the Company shall reasonably
request;
(viii) the Company shall have the right, in its sole
discretion, to include in any registration statement filed under the
Act pursuant to a request made by Brenner under this Section 9(B) such
additional Shares or other securities of the Company to be offered and
sold by the Company for its own account or to be offered and sold by
and for the account of other securityholders of the Company; and
(ix) all requests by Brenner to have Securities
registered under the Act under this Section 9(B) and the Company's
obligations with respect to any registration under the Act in response
to such requests by Brenner shall be subject to the terms and
conditions set forth in Sections 9(D) through 9(J) hereof, inclusive.
(C) If the Company shall at any time hereafter propose to
register for offer and sale under the Act any of its Common Shares, whether or
not for sale for its own account (except for offers and sales of Common Shares
or options or other rights to acquire Common Shares pursuant to the Company's
employee benefit, bonus or incentive plans or agreements required or permitted
to be registered on SEC Form S-8 or any successor SEC form thereto, with respect
to which registration the Company may, but shall not be obligated to, include
Securities held by Brenner), in a manner that would permit registration of
Brenner's Securities for sale to the public under the Act, it will give written
notice to Brenner of its intention to do so and, upon the written request of
Brenner made within twenty (20) days after the receipt of any such notice (which
request shall specify the number or amount of Securities intended to be disposed
of by Brenner and the intended method of disposition thereof), the Company will
use its best efforts to effect the registration under the Act of the Securities
that the Company has been so requested to register by Brenner to permit their
disposition (in accordance with the intended method so designated by Brenner);
provided, however, that:
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(i) Brenner shall not be entitled to include any of
its Securities in any registration to be effected pursuant to this
Section 9(C) unless Brenner agrees in writing to register for offer and
sale under the Act not less than (X) in the case of the first
registration of Securities by Brenner pursuant to a request made under
this Section 9, fifty percent (50%) of the total number of Shares
issuable as of the date hereof to Brenner upon exercise of the
Warrants, and (Y) in the case of any subsequent registration of
Securities by Brenner pursuant to a request made under this Section 9,
thirty three percent (33%) of the total number of Shares issuable as of
the date hereof to Brenner upon exercise of the Warrants, in each case,
subject to adjustment pursuant to Section 10 hereof;
(ii) if, at any time after giving written notice of
its intention to register its Common Shares under the Act and prior to
the effective date of the registration statement filed in connection
with such registration, the Company determines for any reason not to
register such Common Shares under the Act, the Company may, at its
election, give written notice of such determination to Brenner and,
thereupon, shall be relieved of its obligation to register any of
Brenner's Securities in connection with such registration (but not from
its obligation to pay the Registration Expenses in connection
therewith);
(iii) if the Common Shares being registered under the
Act pursuant to this Section 9(C) for sale for the account of the
Company or any security holder of the Company (other than Brenner) are
to be distributed by or through one or more underwriters on a "firm
commitment", "best efforts all or none" or "best efforts" basis (an
"Underwriting Transaction"), then either of the following provisions,
whichever is applicable, shall govern Brenner's right to have its
Securities registered pursuant to this Section 9(C): (A) except as
provided in Section 9(F) hereof, if Brenner desires that the Securities
to be so registered for Brenner's account are to be included in the
Underwriting Transaction, and the managing underwriter(s) of such
Underwriting Transaction (other than Brenner) agree(s) that such
Securities of Brenner may be sold and distributed pursuant to or as
part of such Underwriting Transaction, Brenner shall be required to
agree not to sell or distribute in the public markets in which the
Company's Common Shares are then traded any additional Securities
(beyond those Securities so registered and included in such
Underwriting Transaction) for such "lock up" period and upon such terms
and conditions as such managing underwriter(s) shall impose, or (B) if
Brenner desires that the Securities to be so registered for Brenner's
account not be included in the Underwriting Transaction, and the
managing underwriter(s) of such Underwriting Transaction (other than
Brenner) advise(s) the Company in writing that, in its opinion, the
distribution of Brenner's Securities concurrently with the Common
Shares being distributed by such underwriter on behalf of the Company
and/or any other security holders of the Company might materially and
adversely affect the distribution of such Common Shares by such
underwriters, then the Company shall have the right to require that
Brenner defer the distribution of its Securities until the completion
of the distribution of the Common Shares by such underwriters, but in
no event later than one hundred twenty (120) days after the effective
date of the registration statement under the Act pertaining to such
distribution; and
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(iv) if the Common Shares being so registered for
sale under the Act are not for the account of the Company and such
registration is being effected pursuant to registration rights granted
by the Company to holders (other than Brenner) of its outstanding
Common Shares or options, warrants, convertible securities or other
rights to acquire its Common Shares, and such registration rights
preclude the exercise of incidental registration rights with respect to
those registrations initiated by such purchasers (or their
transferees), the provisions of this Section 9(C) shall be inapplicable
to such registration and the Company shall have no obligation to
include any of Brenner's Securities in any registration statement filed
by the Company under the Act in compliance with such other registration
rights; and
(v) the Registration Expenses incurred in connection
with each registration under the Act of Securities pursuant to this
Section 9(C) shall be borne and paid in full by the Company.
(D) If and whenever the Company is required to use its best
efforts to effect the registration of any Securities held by Brenner under the
Act as provided in Section 9(B) and (C) hereof, the Company will as promptly as
practicable:
(i) prepare and file with the SEC a registration
statement with respect to the Securities held by Brenner and the
securities held by any other proposed sellers which are included
therein and use its best efforts to cause such registration statement
to become effective under the Act;
(ii) prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus used
in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Act with
respect to the lawful disposition of all of Brenner's Securities and
all other Common Shares or other securities of the Company covered by
such registration statement until such time as all of such Securities
have been disposed of in accordance with the intended lawful method of
disposition thereof by Brenner (set forth in the notice from Brenner to
the Company required under Section 9(B) or 9(C) hereof, as such notice
may be amended pursuant to Section 9(E)(i) hereof) and the intended
lawful method of disposition of Common Shares or other securities of
the Company by any other seller thereof set forth in such registration
statement, but in no event for a period of more than one hundred eighty
(180) days after the date such registration statement (as distinguished
from any post-effective amendment thereto) shall have become effective
under the Act;
(iii) furnish to Brenner a conformed copy of such
registration statement and of each such amendment and supplement
thereto, plus such number of copies of the prospectus constituting a
part of such registration statement (including each preliminary
prospectus and any summary prospectus), in conformity with the
requirements of the Act, and such other documents, as Brenner may
reasonably request in order to facilitate the lawful disposition of the
Securities owned by Brenner;
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(iv) use its best efforts to register or qualify such
securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as Brenner shall
reasonably request, except that the Company shall not for any such
purpose be required to qualify generally to do business as a foreign
corporation in any jurisdiction wherein it is not so qualified or to
subject itself to taxation in any such jurisdiction or to consent to
general service of process in any such jurisdiction;
(v) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC and, if required, make
available to its security holders, as soon as reasonably practicable,
an earnings statement covering the period of at least twelve months,
but not more than eighteen months, beginning with the first month of
the first quarter after the effective date of any such registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Act; and
(vi) use its best efforts to list such Securities
held by Brenner on any securities exchange on which the Company's
Common Shares are then listed or on an interdealer quotation system
upon which such Common Shares are then quoted, if such Securities are
not already so listed or so quoted and if such listing is then
permitted under the rules of such exchange or such system.
(E) (i) Brenner shall furnish to the Company in writing such
information regarding or pertaining to the offer, sale and distribution
of the Securities as the Company may from time to time request in
writing and as shall be required by law or by the SEC in connection
therewith. Brenner shall promptly notify the Company, at any time when
a prospectus relating to any such offer, sale or distribution is
required to be delivered under the Act, of the happening of any change
in Brenner's intended method of offering, selling or otherwise
disposing of the Securities as would require an amendment or supplement
to such prospectus or to the registration statement of which it is a
part.
(ii) In connection with each exercise by Brenner of
its registration rights under this Section 9, Brenner hereby agrees
that it shall comply with all of the provisions of the Act and the
Exchange Act and all applicable rules and regulations of the SEC
pertaining to the offer, sale or distribution by Brenner of such
Securities, including without limitation, the provisions of Rule 10b-6
under the Exchange Act as the same may be amended from time to time
hereafter.
(F) Whenever a registration under the Act requested by Brenner
pursuant to Section 9(C) is for a distribution of Securities pursuant to an
Underwriting Transaction, only such Securities as are to be distributed by the
underwriters may be included in the registration statement pertaining thereto.
If the managing underwriter(s) (other than Brenner) determine(s) that the amount
of the Securities to be sold in any such underwritten offering should be
limited, due to market conditions or otherwise, the number of the Securities of
the Company, including the Securities held by Brenner, to be included in the
registration shall be reduced in the following order of priority:
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(i) first, there shall be excluded Securities
proposed to be included by persons not possessing rights to include the
same pursuant to any agreement with the Company providing for
registration rights; and
(ii) second, to the extent necessary, there shall be
excluded Securities proposed to be registered by or for the account of
each person, including Brenner but excluding the Company, seeking to
include Securities in such registration pursuant to rights granted to
such person under an agreement to have Securities registered on an
incidental basis (i.e., a "piggyback" registration) in such proportion
that the number of Securities sought to be included in such
registration by each such person bears to the number of Securities
sought to be included in such registration by all persons seeking to
include Securities in such registration on an incidental basis; and
(iii) Third, to the extent necessary, there shall be
excluded Securities proposed to be registered by or for the account of
each person, excluding the Company, seeking to include Securities in
such registration pursuant to rights granted to such person pursuant to
an agreement to have Securities registered on a demand basis (i.e., a
"demand" registration) in such proportion as the number or amount of
Securities sought to be registered by each such person bears to the
aggregate number or amount of Securities sought to be included in such
registration by all persons seeking to include securities in such
registration on a demand basis; provided, however, that there shall in
no event be any reduction in the number of Securities to be included in
any such registration by the Company for sale for its own account;
provided, however, that (X) in no event shall the percentage of securities held
by members of management of the Company included in any such underwritten
offering (determined as a percentage of the number of such securities sought to
be included in such offering by such members of management) be greater than the
percentage of Brenner's Securities included in such underwritten offering
(determined as a percentage of the number of Securities sought to be included in
such offering by Brenner); and (Y) in the event the number of Brenner's
Securities included in any such underwritten offering is equal to one-third
(1/3) or fewer of the number of such Securities sought to be included by Brenner
in such underwritten offering, then Brenner shall not be required to agree to
the "lock up" described in Section 9(C)(iii)(A) hereof.
(G) (i) If requested by the managing underwriter(s) for any
Underwriting Transaction of the Securities held by Brenner pursuant to
a registration requested under Section 9(B) hereof, the Company shall
enter into an underwriting agreement with such managing underwriter(s)
for such offering, provided, however, that Brenner shall not offer,
sell and distribute the Securities pursuant to any such Underwriting
Transaction unless the managing underwriter(s) thereof shall first be
approved by the Company, which approval shall not be unreasonably
withheld. Such underwriting agreement shall contain such
representations and warranties by the Company and such other terms and
provisions as are customarily contained in agreements contemplating an
Underwriting Transaction, including (without limitation) indemnities to
the effect and to the extent provided in Section 9(H) hereof. Brenner
and any other securityholders whose Common Shares or
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other securities are to be distributed by such underwriters shall be
parties to such underwriting agreement and the representations,
warranties, covenants and other conditions precedent to the obligations
of Brenner under such underwriting agreement shall be satisfactory to
Brenner. All indemnification agreements, warranties, covenants,
conditions and representations of the Company contained therein shall
be in form reasonably satisfactory to the Company and its counsel.
(ii) If the Company at any time proposes to register
any of its Common Shares under the Act for sale for its own account and
such Common Shares are to be distributed by or through one or more
underwriters in an Underwriting Transaction, the Company will use
reasonable efforts, if requested by Brenner pursuant to its incidental
registration rights under Section 9(C) hereof, to arrange for such
underwriters to include the Securities to be offered and sold by
Brenner among those to be distributed in such Underwriting Transaction.
In such case, Brenner shall be required to become a party to the
underwriting agreement between the Company and the managing
underwriter(s) thereof and the representations, warranties, covenants
and other conditions precedent to the obligations of Brenner with
respect to the sale of the Securities under such underwriting agreement
shall be approved by Brenner, which approval shall not be unreasonably
withheld.
(H) (i) In the event of a registration of Securities
under the Act pursuant to this Section 9, the Company will indemnify
and hold harmless Brenner and each other person, if any, who controls
Brenner within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which Brenner or
such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any
registration statement under which the Securities held by Brenner were
registered under the Act pursuant to this Section 9, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and will reimburse Brenner, and each such controlling
person for the reasonable legal and other expenses incurred by them in
connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall
not be liable in any such case if and to the extent that any such
loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with information furnished in writing
by Brenner, its officers or directors, or any such controlling person,
or their respective agents or representatives, specifically for use
in such registration statement or prospectus.
(ii) In the event of a registration of any Securities
under the Act pursuant to this Section 9, Brenner and its Permitted
Assignees shall severally indemnify and hold harmless the Company and
each person who controls the Company, within the meaning of the Act,
each officer of the Company who signs the
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<PAGE> 14
registration statement and each director of the Company, against all
losses, claims, damages or liabilities, joint or several, to which the
Company or such officer or director or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any
material fact contained in the registration statement under which such
Securities were registered under the Act pursuant to this Section 9,
any preliminary prospectus or final prospectus contained therein, or
any amendment or supplement thereof, or arise out of or are based upon
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company and each such
officer, director, underwriter and controlling person for all
reasonable legal and other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that Brenner and its
Permitted Assignees shall be liable hereunder in any such case only if
and to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity
with information furnished in writing by Brenner, its Permitted
Assignees and their respective agents or representatives specifically
for use in any such registration statement or prospectus; and provided
further, however that the liability of Brenner and/or its Permitted
Assignees under this Section 9(H)(ii) shall in no event exceed the
proceeds (net of underwriters' discounts and commissions) derived by
Brenner and its Permitted Assignees, as a group, from the sale of
Securities pursuant to such registration statement.
(iii) In order to provide for just and equitable
contribution in circumstances in which the indemnification agreements
provided for in subsections (i) and (ii) of this Section 9(H) are
unavailable to the respective party entitled to indemnification
thereunder in accordance with their terms, the Company, Brenner and its
Permitted Assignees shall each contribute to the aggregate losses,
claims, damages and liabilities, of the nature contemplated by such
indemnification provisions, incurred by the Company, Brenner and its
Permitted Assignees and the other persons referred to therein, in such
proportions so that each of Brenner and its Permitted Assignees is
responsible for that portion represented by the percentage that the
public offering price appearing on the cover page of the prospectus
contained in the relevant registration statement pertaining to the
Securities held by Brenner and each of its Permitted Assignees bears to
such public offering price of all of the Common Shares and other
Securities being sold pursuant to such Registration statement;
provided, however, that Brenner and its Permitted Assignees shall be
liable to contribute hereunder in any such case only if and to the
extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity
with information furnished in writing by Brenner, its Permitted
Assignees and their respective agents or representatives specifically
for use in any such registration statement or prospectus; and provided
further, however, that (i) no person found
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<PAGE> 15
guilty of fraudulent misrepresentation within the meaning of Section
11(f) of the Act shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation and (ii) the
liability of Brenner and/or its Permitted Assignees under this Section
9(H)(iii) shall in no event exceed the proceeds (net of underwriters'
discounts and commissions) derived by Brenner and its Permitted
Assignees, as a group, from the sale of Securities pursuant to such
registration statement.
(I) In the event the Company and Brenner agree, upon the
advice of their respective counsel, or in the event the Company is advised by
the SEC or the staff of the SEC through an interpretive or "no action" letter
that the intended method of offer, sale or distribution by Brenner of the
Securities held by Brenner at such time does not require registration under the
Act (as then in effect), then the Company shall not be required to so register
the Securities held by Brenner and intended by Brenner to be so offered, sold or
distributed pursuant to the provisions of Section 9(B) or 9(C) hereof; provided,
however, that if the Company and Brenner do not agree, based upon their
respective counsel's advice, whether or not such intended method of offer, sale
or distribution of Brenner's Securities requires registration under the Act,
then, in such event, the Company shall, at its cost and within fifteen (15)
Business Days after written request therefor by Brenner, submit a request for
"no action" or interpretive letter from the SEC or staff of the SEC with respect
to such question and both the Company and Brenner agree to be bound by any such
"no action" or interpretive letter concerning the need to register such
Securities for offer, sale or distribution so intended by Brenner.
(J) Notwithstanding any other provisions of this Section 9,
the following terms and conditions shall govern the right of Brenner to have the
Securities registered under the Act by the Company:
(i) any registration statement prepared and filed by
the Company under the Act shall only be prepared and filed for and on
behalf of the Company by legal counsel designated by the Company and
final determination by the Company and its legal counsel of the form
and contents of any registration statements, prospectuses, amendments
or supplements thereto shall be binding upon Brenner; and
(ii) the right of Brenner to have Securities
registered under the Act pursuant to Section 9(B) or 9(C) hereof shall
be transferable or assignable, in whole or in part, only to its
Permitted Assignees and all references to Brenner in this Section 9
shall, to the extent applicable, be deemed to include its Permitted
Assignees; provided, however, that each of Brenner's Permitted
Assignees shall acquire such registration rights subject to all of the
conditions and limitations set forth in this Section 9, including
without limitation the condition that the calculation of the minimum
percentages of the Common Shares (issuable upon exercise of the total
number of the Warrants issued to Brenner hereunder) required to be
included in a registration under the Act in order for any one or more
such Permitted Assignees to exercise his or their registration rights
hereunder (whether or not in concert with Brenner) shall be as set
forth in Section 9(B) or 9(C) hereof.
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<PAGE> 16
SECTION 10. Adjustment of Warrant Price and Number of Common
Shares Purchasable
(A) In case the Company shall at any time after the date
hereof issue and sell any Common Shares:
(i) pursuant to a public offering of such Common
Shares requiring registration under the Act (the "Public Offering") at
a price per Common Share equal to less than twenty five percent (25%)
of the Market Price determined as of the date immediately preceding the
effective date (within the meaning of the Act) of the registration
statement pursuant to which such public offering by the Company is
undertaken,
(ii) pursuant to a private sale or placement of such
Common Shares, within the meaning of Section 4(2) of the Act or
Regulation D thereunder (the "Private Placement"), at a price per
Common Share equal to less than forty percent (40%) of the Market Price
determined as of the date immediately preceding the date of the
consummation of such Private Placement, or
(iii) except as otherwise provided herein, in any
other transaction pursuant to which Common Shares are issued and sold
by the Company.
then, in either such event, the Warrant Price shall be reduced by multiplying
the Warrant Price then in effect by a fraction, (i) the numerator of which shall
be the sum of (x) the number of Common Shares outstanding at the close of
business on the date immediately preceding the date of such sale and issuance
plus (y) the number of Common Shares which the aggregate amount of consideration
received or receivable in such sale and issuance would purchase at such current
Market Price per Common Share, and (ii) the denominator of which shall be the
total number of Common Shares outstanding immediately after such sale and
issuance. Such adjustments shall be made successively whenever such an issuance
is made; provided, however, that no adjustment otherwise required by clause (i)
or (ii) of this Section 10(A) shall be made in the event that Brenner or any of
its Affiliates acts as a managing underwriter in the Public Offering or a
placement agent in the Private Placement.
(B) In case the Company shall pay or make a dividend or other
distribution to the holders of its outstanding Common Shares in Common Shares or
securities convertible into or exchangeable for Common Shares (such securities
being hereinafter called "Convertible Securities"), other than Convertible
Securities which require payments of cash to be made by the holder thereof in
connection with any conversion into or exchange for Common Shares, the Warrant
Price in effect at the close of business on the day fixed for the determination
of shareholders entitled to receive such dividend or other distribution shall be
reduced by multiplying the Warrant Price then in effect by a fraction, (i) the
numerator of which shall be the number of Common Shares outstanding at the close
of business on the date immediately preceding the date fixed for such
determination and (ii) the denominator of which shall be the sum of such number
of Common Shares plus the total number of Common Shares constituting such
dividend or other distribution or the maximum number of Common
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<PAGE> 17
Shares issuable upon conversion or exchange of all Convertible Securities
constituting such dividend or other distribution.
(C) In case at any time the Company shall grant or issue
(whether directly or otherwise) any rights (other than the Warrants) to
subscribe for or to purchase, or any options for the purchase of, Common Shares
or Convertible Securities, whether or not such rights or options or the right to
convert or exchange any such Convertible Securities are immediately exercisable,
and the price per Common Share at which Common Shares are issuable upon the
exercise of such rights or options or upon conversion or exchange of such
Convertible Securities (determined by dividing (x) the total amount, if any,
received or receivable by the Company as consideration for the granting of such
rights or options, or, in the case of such rights or options which relate to
Convertible Securities, the total amount, if any, received or receivable by the
Company as consideration for the granting of such rights or options, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Company upon the exercise of such options or rights or upon the conversion or
exchange thereof, by (y) the total maximum number of Common Shares issuable upon
the exercise of such rights or options or upon the conversion or exchange of all
such Convertible Securities issuable upon the exercise of such rights or
options) shall be less than (i) twenty five percent (25%) of the Market Price,
of the Common Shares if such rights are granted or issued by the Company in a
Public Offering or (ii) forty percent (40%) of the Market Price of the Common
Shares if such rights are granted or issued by the Company in a Private
Placement, the determination of such Market Price, in either such case, to be
made as of the date immediately preceding the date of granting or issuing such
rights or options, the Warrant Price in effect at the close of business on the
date immediately preceding the date of granting such rights or options shall be
adjusted by multiplying the Warrant Price then in effect by a fraction, (i) the
numerator of which shall be the sum of (x) the number of Common Shares
outstanding at the close of business on the date immediately preceding the date
of granting such rights or options plus (y) the quotient obtained by dividing
the product of the price per Common Share, determined as set forth above, and
the maximum number of Common Shares issuable upon the exercise of such rights or
options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such rights or options by the Market Price, and
(ii) the denominator of which shall be the sum of the number of Common Shares
outstanding at the close of business on the date immediately preceding the date
of granting such rights or options plus the maximum number of Common Shares
issuable upon the exercise of such rights or options or upon the conversion or
exchange of all such Convertible Securities issuable upon the exercise of such
rights or options. Except as provided in this subparagraph (C), no further
adjustments of the Warrant Price shall be made upon the issuance of such Common
Shares or of such Convertible Securities upon exercise of such rights or options
or upon the actual issuance of such Common Shares upon conversion or exchange of
such Convertible Securities.
(D) In case the Company shall issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible Securities, whether
or not the rights to exchange or convert thereunder are immediately exercisable,
and the price per Common Share for which Common Shares are issuable upon such
conversion or exchange (determined by dividing (x) the total amount received or
receivable by the Company as consideration for the issuance or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (y) the total maximum number of Common Shares issuable
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<PAGE> 18
upon the conversion or exchange of all such Convertible Securities) shall be
less than (i) twenty five percent (25%) of the Market Price of the Common Shares
if such Convertible Securities are issued or sold by the Company in a Public
Offering or (ii) forty percent (40%) of the Market Price of the Common Shares if
such Convertible Securities are issued or sold by the Company in a Private
Placement, the determination of such Market Price, in either such case, to be
made as of the date immediately preceding the date of such issuance or sale of
such Convertible Securities, the Warrant Price in effect at the close of
business on the date of such sale or issuance shall be adjusted by multiplying
the Warrant Price then in effect by a fraction, (i) the numerator of which shall
be the sum of (x) the number of Common Shares outstanding at the close of
business on the date immediately preceding the date of issuance or sale of such
Convertible Securities plus (y) the quotient obtained by dividing the product of
the price per Common Share, determined as set forth above, and the maximum
number of Common Shares issuable upon conversion or exchange of all such
Convertible Securities by the Market Price, and (ii) the denominator of which
shall be the sum of the number of Common Shares outstanding at the close of
business on the date immediately preceding the date of issuance or sale of such
Convertible Securities plus such maximum number of Common Shares issuable upon
conversion or exchange, provided that (1) except as provided in subsection (E)
of this Section 10, no further adjustments of the Warrant Price shall be made
upon the actual issuance of such Common Shares upon conversion or exchange of
such Convertible Securities, and (2) if any such issuance or sale is made upon
exercise of any rights to subscribe for or to purchase or any option to purchase
any such Convertible Securities for which adjustments of the Warrant Price have
been or are to be made pursuant to subsection (C) of this Section 10 or the
other provisions of this subparagraph (D), no further adjustments of the Warrant
Price shall be made by reason of such issuance or sale.
(E) If (x) the purchase price provided for in any rights or
options referred to in subsection (C) of this Section 10, or (y) the amount of
additional consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subsections (C) and/or (D) of this Section
10, or (z) the rate at which any Convertible Securities referred to in
subsection (C) and/or (D) are convertible into or exchangeable for Common Shares
shall change (other than under or by reason of provisions contained in the
instruments governing such rights, options or Convertible Securities that are
designed to protect against dilution), the Warrant Price in effect at the close
of business on the date of such event shall forthwith be adjusted to the Warrant
Price which would have been in effect at such time had such rights, options or
Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold. On the expiration of any such right to
convert or exchange such Convertible Securities, the Warrant Price in effect at
the close of business on the date of expiration or termination shall be
readjusted to the Warrant Price which would have been in effect at such time had
such right, option or Convertible Securities, to the extent outstanding
immediately prior to the date of such expiration or termination, never been
granted, issued or sold.
(F) In case the Company shall, by dividend or otherwise,
declare a dividend or other distribution on its Common Shares payable in
evidences of its indebtedness or assets (including Securities, but excluding (i)
any rights or options referred to in subsection (C) of this Section 10, (ii) any
dividend or distribution paid in cash out of consolidated retained earnings or
consolidated earned surplus, determined in accordance with generally accepted
accounting principles, including the
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<PAGE> 19
making of appropriate deductions for minority interests, if any, in
subsidiaries, and (iii) any dividend or distribution otherwise paid in Common
Shares or Convertible Securities), the Warrant Price in effect at the close of
business on the date fixed for the determination of shareholders entitled to
receive such dividend or other distribution shall be adjusted so that the same
shall equal the price determined by multiplying the Warrant Price in effect at
the close of business on the date fixed for the determination of shareholders
entitled to receive such dividend or other distribution by a fraction of which
the numerator shall be the current Market Price per Common Share on the date
fixed for such determination less the then fair market value (as determined by
the Company's Board of Directors, whose determination shall be conclusive and
described in a Board Resolution) of the portion of the assets or evidences of
indebtedness so distributed applicable to one Common Share and of which the
denominator shall be such current Market Price.
(G) In case the Company shall at any time subdivide its
outstanding Common Shares into a greater number of shares, the Warrant Price in
effect immediately prior to such subdivision shall be proportionately reduced,
and, conversely, in case the outstanding Common Shares shall be combined into a
smaller number of Common Shares, the Warrant Price in effect immediately prior
to such combination shall be proportionately increased, such reduction or
increase, as the case may be, to become effective immediately upon the
effectiveness of such subdivision or combination.
(H) In case of any consolidation of the Company with, or
merger of the Company into, any other corporation or other entity, or in case of
any merger of another corporation or other entity into the Company (other than a
merger which does not result in any reclassification, conversion, exchange or
cancellation of outstanding Common Shares), or in case of any sale or transfer
of all or substantially all of the assets of the Company, or in the case of a
capital reorganization or recapitalization of the capital shares of the Company
in such a manner that holders of Common Shares shall be entitled to receive
securities, cash or assets with respect to or in exchange for such Common Shares
from the corporation or other entity formed by such consolidation or resulting
from such merger or which acquires such assets, as the case may be, or from the
Company, in the case of a capital reorganization or recapitalization not
involving a consolidation, merger or sale or transfer of all or substantially
all of the assets of the Company, such corporation or other entity or the
Company, as the case may be, and the Company shall execute and deliver an
amendment to this Agreement providing that the holders of the Warrants then
outstanding shall have the right thereafter, during the period such Warrant
shall be exercisable, to exercise such Warrant only for the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or recapitalization by a holder of the
number of Common Shares for which such Warrant might have been exercised on the
date immediately prior to such consolidation, merger, sale, transfer, capital
reorganization or recapitalization (provided that if the kind or amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or recapitalization is not the same for
each Common Share in respect of which such rights of election shall not have
been exercised (the "Non-electing Common Shares"), then, for the purpose of this
subparagraph (H), the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale, transfer, capital
reorganization or recapitalization by each Non-electing Common Share shall be
deemed to be the kind and amount so receivable per Common Share by a plurality
of the Non-electing Common Shares).
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Such amendment shall provide for adjustments which,
for events subsequent to the effective date of such amendment, shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section 10. The foregoing provisions of this subsection (H) shall similarly
apply to successive consolidations, mergers, sales, transfers, capital
reorganizations or recapitalizations.
The Company shall not effect any such consolidation,
merger, sale or transfer unless prior to or simultaneously with the consummation
thereof the successor corporation (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing or otherwise
acquiring such assets or other appropriate corporation or entity shall assume,
by written instrument executed and delivered to the Company, the obligation to
deliver to the holder of each Warrant such shares of stock, securities, cash or
assets as, in accordance with the foregoing provisions, such holders may be
entitled to receive and the other obligations under this Agreement.
(I) In case an adjustment in the Warrant Price shall be
required by Section 10(A), (B), (C), (D) and/or (F) hereof, the required
adjustment shall become effective at the opening of business on:
(i) the Business Day immediately following the date
fixed for the determination of shareholders of the Company entitled to
receive such dividend or distribution, in the case of any adjustment
pursuant to Section 10(B) or (F), or
(ii) the Business Day immediately following the date
of such sale and issuance or the date of such granting of such rights
or options, as the case may be, in the case of an adjustment pursuant
to Section 10(A), (C) or (D).
(J) Notwithstanding any other provisions of this Section 10,
no adjustments to the Warrant Price or the number of Common Shares issuable upon
exercise of the Warrants shall be made with respect to or by reason of the
following transactions of the Company with respect to the Common Shares:
(i) (a) any and all of the Common Shares reserved for
issuance by the Company upon exercise of the Warrants issued to Brenner
pursuant to the provisions of this Agreement as the number of such
Common Shares may be adjusted from time to time in accordance with the
anti-dilution provisions of this Agreement, (b) an aggregate of 209,195
Common Shares reserved for issuance pursuant to the Class A Warrants,
Class B Warrants and Class C Warrants issued by the Company to
Rosenthal & Rosenthal, Inc. pursuant to a Warrant Agreement dated as of
December 24, 1991 as the number of such Common Shares may be adjusted
from time to time in accordance with the anti-dilution provisions set
forth in such Warrant Agreement, and (c) an aggregate of 620,166 Common
Shares issued or reserved for issuance by the Company pursuant to the
Company's existing 1991 Incentive Stock Option Plan, 1991 Non-Qualified
Stock Option-Salary Reduction Plan and 1992 Equity Compensation Plan
for Non-Employee Directors, as the number of such Common
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<PAGE> 21
Shares may be adjusted from time to time hereafter in accordance with
the respective anti-dilution provisions set forth in each of such
plans; and
(ii) The issuance, sale or grant by the Company after
the date hereof of any Common Shares, warrants, options or other rights
to purchase Common Shares (including without limitation, any such
Common Shares, warrants, options or other rights issued pursuant to any
incentive or compensation plan or program), or the exercise of such
warrants, options or other rights, to or by employees, officers and/or
directors of the Company pursuant to any employee, officer and/or
director stock option, bonus or incentive compensation plans,
(collectively the "Management Plans"), provided that (a) such Common
Shares are issued, sold or granted by the Company (directly or upon the
exercise of such warrants, options or other rights) pursuant to any
such Management Plans at a price per Share equal to not less than
seventy five percent (75%) of the Market Price determined as of the
date immediately preceding the date of the issuance, sale or grant
thereof or (b) if such Common Shares are issued, sold or granted by the
Company (directly or upon exercise of such warrants, options or other
rights) pursuant to any such Management Plans at a price per Share of
less than seventy five percent (75%) of the Market Price so determined,
then the total number of Common Shares so issued, sold or granted by
the Company (directly or upon exercise of any such warrants, options or
other rights) at such lesser price to any such employees, officers
and/or directors of the Company pursuant to any such Management Plans
shall not exceed, in the aggregate, more than five percent (5%) of the
Common Shares of the Company outstanding and reserved for issuance
(under warrants, options, Convertible Securities or other rights
theretofore issued, sold or granted by the Company) as of the date
hereof.
(K) For purposes of this Section 10, the number of Common
Shares outstanding at any given time shall not include Common Shares owned or
held by or for the account of the Company or of any of its wholly or majority
owned subsidiaries.
(L) Upon each adjustment of the Warrant Price pursuant to this
Section 10, each Warrant outstanding at the time of and immediately prior to
such adjustment shall give the holder thereof the right to purchase, at the
Warrant Price resulting from such adjustment, the number of Common Shares
obtained by multiplying the Warrant Price in effect immediately prior to such
adjustment by the number of Common Shares issuable upon exercise of such Warrant
immediately prior to such adjustment and dividing the product thereof by the
Warrant Price resulting from such adjustment.
(M) No adjustment in the Warrant Price shall be required
unless such adjustment would require an increase or decrease of at least one
percent (1%) in such Warrant Price; provided, however, that any one or more such
adjustments which, by reason of this subsection (M) is not required to be made,
shall be carried forward on a cumulative basis and fully taken into account in
any subsequent adjustment. All calculations under this Section shall be made to
the nearest cent or to the nearest 1/100 of a Share, as the case may be. The
provisions of this Section 10(M) shall also apply to readjustments provided for
in subparagraph (E).
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(N) The certificate of any independent firm of public
accountants of recognized standing selected by the Board of Directors of the
Company shall be conclusive of the correctness of any computation of any
adjustment required to be made under this Section 10 and shall be final and
binding upon the Company, Brenner, its Permitted Assignees and all other
subsequent registered holders of the Warrants.
(O) Whenever any adjustment is required in the Warrant Price,
the Company shall forthwith:
(i) prepare a statement describing in reasonable
detail the adjustment and the method of calculation used; and
(ii) cause a copy of such statement to be mailed to
Brenner as of the effective date of such adjustment at its address as
the same shall appear on the books on the Company.
(P) The Company shall be obligated to issue any additional
Common Shares which become issuable upon exercise of Warrants as a result of any
event described in this Section 10 which requires an adjustment in the Warrant
Price and the number of Common Shares issuable upon exercise of the Warrants.
(Q) In case of any issuance or sale by the Company for cash of
Common Shares, Convertible Securities or other rights or options with respect to
Common Shares which requires an adjustment pursuant to Sections 10(A), (C), (D)
or (H) hereunder, the amount of consideration therefor shall be the amount of
cash received by the Company for such Common Shares before deducting therefrom
any compensation paid or discount allowed in the sale, underwriting or purchase
thereof by underwriters, dealers, placement agents or others performing similar
services, or any other fees or expenses incurred directly in connection
therewith. In case of any such issuance or sale of Common Shares, Convertible
Securities or other rights or options with respect to Common Shares for
consideration part or all of which shall be other than cash, the amount of the
non-cash consideration shall be deemed to be the value of such consideration as
determined reasonably and in good faith by a resolution of the Board of
Directors of the Company, in consultation with the Company's regular independent
accountants, which determination shall be final and binding upon the Company,
Brenner, its Permitted Assignees and all other subsequent registered holders of
the Warrants.
SECTION 11. Avoidance of Certain Actions
The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, issue or sale of securities or otherwise, avoid or take any action which
would have the effect of breaching this Warrant in any material respect or
precluding the performance by the Company of its obligations hereunder, but will
at all times in good faith assist in implementing the provisions of this Warrant
Agreement and in taking all of such actions as may be reasonably necessary or
appropriate in order to protect the rights of Brenner against material dilution
or other impairment of its rights hereunder.
22
<PAGE> 23
SECTION 12. Fractional Interest
Notwithstanding anything contained herein to the contrary, the
Warrants may only be exercised to purchase full Common Shares and the Company
shall not be required to issue fractions of Common Shares on the exercise of
Warrants. To the extent that a holder would otherwise be entitled to a
fractional share, the Company shall return to such holder a portion of the
purchase price paid by such holder upon exercise of the Warrants held by such
holder determined by multiplying the price per Common Share calculated at the
Warrant Price by such fraction.
SECTION 13. Notices to Company and Brenner
Any notice given pursuant to this Agreement shall be
sufficiently given if delivered personally or sent by first-class mail, postage
prepaid, or by overnight express delivery service, addressed (until another
address is filed in writing with Brenner or, in the case of a change in address
of Brenner, with the Company) as follows:
If to the Company:
Pharmhouse Corp.
860 Broadway
New York, New York 10003
Attention: Kenneth A. Davis, President
Copy to:
Melvin Katz, Esq.
Maloney, Gerra, Mehlman & Katz
The Chrysler Building
405 Lexington Avenue - 36th Floor
New York, New York 10174
If to Brenner:
Brenner Securities Corporation
Two World Trade Center
38th Floor
New York, New York 10018
Attention: Mr. David Boris, Senior Managing
Director
23
<PAGE> 24
Copy to:
Mara H. Rogers, Esq.
Fulbright & Jaworski
666 Fifth Avenue
New York, New York 10103
SECTION 14. Notices to Warrant Holders
Upon any adjustment of the Warrant Price or the number of
shares issuable upon the exercise of Warrants pursuant to this Agreement, the
Company shall promptly thereafter cause to be forwarded to Brenner a certificate
of the principal financial or principal accounting officer of the Company
setting forth the Warrant Price of the Warrants then outstanding after such
adjustment or the adjusted number of Common Shares purchasable upon exercise of
each such Warrants and setting forth in reasonable detail the method of
calculation and the facts upon which the calculations are based. For purposes of
this Agreement, delivery by the Company of any notice hereunder to Brenner shall
constitute delivery thereof to all Permitted Assignees of Brenner.
SECTION 15. Entire Agreement; Supplements and Amendments
This Agreement is an integrated document and represents the
entire understanding of the parties with respect to the subject matter hereof;
contains all representations, warranties, covenants and conditions, express or
implied, which have been made by the Company and Brenner; and cancels and
supersedes all previous and/or contemporaneous written and oral agreements,
understandings, statements, promises, inducements and memoranda by or between
the parties or their affiliates relating to the subject matter hereof. The
Company and Brenner may from time to time supplement or amend this Agreement in
writing without the approval of any subsequent holders of Warrant Certificates
in order to cure any ambiguity or to correct or supplement any provision
contained herein which may be defective or inconsistent with any other provision
herein, or to make any other provisions in regard to matters or questions
arising hereunder which the Company and Brenner may deem necessary or desirable
and which shall not be inconsistent in any material respect with the provisions
of the Warrant Certificates and which shall not adversely affect in any material
respect the interests of Brenner hereunder; provided, however, that in the event
of any conflicts or inconsistencies between the provisions of this Agreement and
the provisions of any of the Warrant Certificates issued hereunder, the
provisions of this Agreement shall govern and be deemed controlling.
SECTION 16. New York Contract: Jurisdiction
This Agreement and each Warrant Certificate issued hereunder
shall be governed by and construed in accordance with the laws of the State of
New York, without giving effect to the conflicts of laws provisions thereof. The
Company and Brenner hereby consent, unconditionally and irrevocably, to the
jurisdiction of the state and Federal courts located in the Borough of
Manhattan, City of New York, State of New York for the adjudication of any
actions arising out of this Agreement.
24
<PAGE> 25
SECTION 17. Benefits of this Agreement
Nothing in this Agreement shall be construed to give to any
person or corporation other than the Company and Brenner and any subsequent
registered holders of the Warrants any legal or equitable right, remedy or claim
under or by reason of this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, Brenner and such subsequent registered
holders of the Warrants.
SECTION 18. Successors
Subject to the terms and conditions of this Agreement, all the
covenants and provisions of this Agreement by or for the benefit of the Company,
the holders of the Warrants, and/or Brenner shall bind and inure to the benefit
of each of the parties hereto and their respective successors and Permitted
Assigns hereunder.
SECTION 19. References and Captions
Unless otherwise expressly noted, all references to Sections,
subsections or clauses herein shall be deemed to refer solely to the provisions
of this Agreement so designated. The captions of the Sections of this Agreement
have been inserted for convenience only and have no substantive effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
PHARMHOUSE CORP.
By: /s/ Marcie B. Davis
-------------------------------------
Name: Marcie B. Davis
Title: Executive Vice President
BRENNER SECURITIES CORPORATION
By: /s/
-------------------------------------
Name:
Title: Managing Director
25
<PAGE> 26
EXHIBIT A
Certificate No.: _____
Date of Issuance: _______________, 199__
Aggregate Number of Warrants: _______________
PHARMHOUSE CORP.
WARRANTS TO PURCHASE COMMON SHARES
THIS CERTIFIES THAT ______________________________, or
registered assigns, is the registered holder of the aggregate number of Warrants
set forth above. Each Warrant entitles the holder thereof to purchase from
Pharmhouse Corp., a New York corporation (the "Company"), subject to the terms
and conditions set forth hereinafter and set forth in the Warrant Agreement
dated as of April 28, 1995 (the "Agreement") by and between the Company and
Brenner Securities Corporation, a Delaware corporation, one (subject to
adjustments referred to below) fully paid and nonassessable Common Share, par
value $.01 per share (each a "Share"), upon presentation and surrender of this
Warrant Certificate with the Form of Election to Purchase duly executed, and
with the instructions for the registration and delivery of Shares completed, at
any time on or after April 28, 1995 until 5:00 p.m., New York City time, on
April 27, 2000, or if such day is not a Business Day as defined in the
Agreement, the next succeeding Business Day (the "Expiration Date"), at the
offices of the Company, 860 Broadway, New York, New York 10003, Attention:
Secretary, or at such other address as the Company may specify in writing to the
registered holder of this Warrant Certificate and upon payment in full of the
Warrant Exercise Price payable upon such exercise or partial exercise in cash or
by certified check, money order or wire transfer to the order of the Company and
payment of any applicable taxes payable by the holder hereof under the terms of
the Agreement. The Exercise Price and the number of Shares issuable upon the
exercise of the Warrants represented hereby are subject to modification and
adjustment upon the happening of certain events as more fully described in the
Agreement.
This Warrant Certificate is subject to all of the terms,
provisions and conditions of the Agreement (terms defined therein and not
otherwise defined herein being used herein as therein defined), to all of which
terms, provisions and conditions the registered holder of this Warrant
Certificate consents by acceptance hereof. The Agreement is hereby incorporated
herein by reference and made a part hereof. Copies of the Agreement are
available for inspection at the principal offices of the Company in New York,
New York and may be obtained by writing to the Company.
No fractional Shares will be issued upon exercise of the
Warrants. In lieu of any fractional Share to which the holder hereof would
otherwise be entitled, the Company will return to such holder such portion of
the purchase price paid by such holder upon exercise of the Warrant as is
attributable to such fractional Share, as provided in the Agreement.
<PAGE> 27
This Warrant Certificate, with or without other Certificates
evidencing Warrants, upon surrender to the Company at the address referred to
above, may be exchanged for another Warrant Certificate or Certificates
evidencing, in the aggregate, the same number of Warrants as the Warrant
Certificate or Certificates so surrendered. If the Warrants evidenced by this
Warrant Certificate shall be exercised in part, the holder hereof shall be
entitled to receive, upon surrender hereof, another Warrant Certificate or
Certificates evidencing the number of Warrants not so exercised.
Every holder of this Warrant Certificate, by accepting the
same, consents and agrees with the Company and with every other holder of a
Warrant Certificate that:
(A) This Warrant Certificate is transferable on the registry
books of the Company only upon the terms and conditions set forth in the
Agreement;
(B) The Company may deem and treat the person in whose name
this Warrant Certificate is registered as the absolute owner hereof and of the
Warrants represented hereby for all purposes whatsoever and the Company shall
not be affected by any notice to the contrary, except that, if and when this
Warrant Certificate is properly assigned in blank, the Company may (but shall
not be obligated to) treat the bearer hereof as the absolute owner hereof and of
the Warrants represented hereby for all purposes, notwithstanding any notice to
the contrary; and
(C) This Warrant Certificate shall not entitle the holder
hereof to any rights of a holder of Shares, including without limitation the
right to vote, to receive dividends or other distributions or to receive any
notice of, or to attend, meetings of holders of Shares or any other proceedings
of the Company.
The issuance or delivery by the Company or its agent of any
certificate for Shares or other securities upon the exercise of Warrants
evidenced by this Warrant Certificate shall not be required until any tax which
may be payable by the holder hereof under the terms of the Agreement in respect
thereof shall have been paid, such tax being payable by the holder of this
Warrant Certificate at the time of surrender.
This Warrant Certificate shall be void and the Warrants and
any rights represented hereby shall cease and be of no further force or effect
whatsoever unless exercised on or before 5:00 p.m. New York City time on the
Expiration Date.
In the event of any conflicts or inconsistencies between the
provisions of the Agreement and this Warrant Certificate, the provisions of the
Agreement shall govern and be deemed controlling.
This Warrant certificate shall be governed by New York law
without giving effect to the conflicts of laws provisions thereof.
* * * * * * *
2
<PAGE> 28
WITNESS the signatures of the proper officers of PHARMHOUSE
CORP. and its corporate seal.
Dated as of _______________, 199__
PHARMHOUSE CORP.
By:
------------------------
Name:
Title:
ATTEST:
- ------------------------
Secretary
3
<PAGE> 29
[FORM OF ELECTION TO PURCHASE]
[To be Executed by the Holder if it Desires to Exercise
Warrants Evidenced by the Within Warrant Certificate]
To Pharmhouse Corp:
The undersigned hereby irrevocably elects to exercise ____
Warrants, evidenced by the within Warrant Certificate(s), and to purchase
thereunder the number of full Common Shares, par value $.01 per share, of
Pharmhouse Corp. issuable upon exercise of said Warrants and hereby delivers
$__________ and pays all applicable taxes payable by the undersigned pursuant to
the Agreement.
The undersigned requests that certificates for such shares be
issued in the name of:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print or type name and address)
If said number of Warrants shall not be all of the Warrants evidenced
by the within Warrant Certificate(s), the undersigned requests that a new
Warrant Certificate evidencing the Warrants not so exercised be issued in the
name of and delivered to:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print or type name and address)
Dated:
-----------------------------
Signature:
-----------------------------
NOTICE: The above signature must correspond with the name as written upon the
face of the within Warrant Certificate(s) in every particular, without
alteration or enlargement or any change whatsoever, or if signed by any other
person, or attorney-in-fact, an appropriate instrument of transfer or assignment
of such Warrant Certificate must be duly executed and delivered herewith and if
the certificate representing Shares or any Warrant Certificate representing
Warrants not exercised is to be registered in a name other than that in which
the within Warrant Certificate is registered, the signature of the holder
thereof must be guaranteed by a commercial bank or trust company, or by a member
firm of any national securities exchange whose signature is known to the
Company, and a person acting under power of attorney shall deliver a certified
copy of such power-of-attorney.
<PAGE> 1
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of July 14, 1995 between Kenneth A. Davis, an
individual residing at 22 Clover Lane, Great Neck, New York 11021 ("Executive"),
and Pharmhouse Corp., a New York corporation with offices at 860 Broadway, New
York, New York 10003 (the "Company").
WITNESSETH
WHEREAS, Executive is currently employed as the President and Chief
Executive Officer of the Company; and
WHEREAS, the Company expressly acknowledges that Executive has
heretofore performed and is continuing to perform a significant role in the
furtherance of the Company's business activities; and
WHEREAS, the Company desires to continue to employ Executive as a
senior executive officer and to be assured of its right to his services in such
capacity and Executive desires to continue his employment with the Company in
such capacity, all upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and conditions herein contained and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, do hereby agree as follows:
1. Employment; Duties.
The Company hereby employs Executive and Executive hereby
accepts such employment as a principal executive officer of the Company on the
terms and conditions hereinafter set forth. In his capacity as a principal
executive officer of the Company, Executive shall have, subject to the authority
of the Company's Board of Directors (the "Board"), general supervision over the
day to day business and operations of the Company and shall perform such other
functions with respect to the business and affairs of the Company, consistent
with his position, as the Board shall determine from time to time. Executive
shall perform his duties at such offices as, from time to time, the Company
shall establish and shall travel to the extent reasonably required to perform
his duties hereunder. Executive shall devote substantially his full business
time and energies to the business and affairs of the Company and shall not
accept other employment, perform any services for any other person, firm or
corporation, or permit his personal business or investment affairs to interfere
with the performance of his duties hereunder; provided, however, that Executive
may devote reasonable amounts of time to activities having a charitable,
educational or other public interest purpose if and to the extent such
activities do not substantially interfere with Executive's performance of his
responsibilities hereunder. Executive shall, upon reasonable notice, furnish
such information and proper assistance to the Company as reasonably may be
required by the Company in connection with any legal action involving the
Company or any of its affiliates. Executive agrees to use his best efforts,
skill and abilities to promote and protect the interests of the Company and,
faithfully and to the best of his ability, perform his duties hereunder.
Executive agrees to serve as a director or officer
<PAGE> 2
of any of the Company's subsidiaries or affiliates requesting his services and
to perform such services for such affiliate, consistent with his office, as its
Board of Directors shall request. The Company agrees to use its best efforts to
have Executive elected to serve as President and Chief Executive Officer of the
Company during the Employment Term (as defined below).
2. Term; Termination.
(a) Executive's employment pursuant to the terms hereof shall
become effective as of the date hereof (the "Employment Date") and shall remain
in effect, subject to the provisions of subparagraph (b) of this paragraph 2,
through January 30, 1999. The term of employment hereunder, commencing with the
Employment Date and including any renewals or extensions hereof, is hereinafter
referred to as the "Employment Term."
(b) This Agreement and Executive's employment by the
Company shall terminate on the Date of Termination (as defined in subparagraph
(d) of this paragraph 2) as follows:
(i) Automatically upon Executive's death;
(ii) At the Company's option if, as a result of
Executive's incapacity due to physical or mental illness, he is unable to
perform the duties of his employment hereunder for a continuous period exceeding
one hundred twenty (120) days or an aggregate of more than one hundred eighty
(180) days in any consecutive 12-month period (each such period being
hereinafter referred to as a "Disability Period");
(iii) At the Company's option at any time for
Cause. "Cause" shall be defined to mean (A) the commission by Executive of any
felony, (B) the commission by Executive of any crime involving dishonesty or
moral turpitude, (C) the engagement by Executive in any act of fraud,
misappropriation or similar misfeasance, (D) the engagement by Executive in any
activity in contravention of paragraph 9 of this Agreement or otherwise
materially adverse to the Company or constituting a material breach of this
Agreement, or (E) the engagement by Executive in any transaction with the
Company involving a conflict of interest or self dealing unless such transaction
has been theretofore approved by a disinterested majority of the Board or a
Committee of the Board; or
(iv) by Executive for Good Reason. For purposes
of this Agreement, the term "Good Reason" shall mean (A) a change in control of
the Company (as defined below), (B) any assignment to Executive of any duties
inconsistent with his present duties as a principal executive officer of the
Company or a significant change in his (i) present responsibilities or (ii)
status or reporting responsibilities or titles in effect immediately prior to
such change without his express written consent, (C) any removal of Executive
from or any failure to re-elect Executive as a principal executive officer of
the Company, except as a result of his death, his Disability, for Cause, or
termination by him of this Agreement other than for Good Reason, (D) a reduction
in Executive's Base Salary as in effect on the date hereof or as the same may be
increased from time to time hereafter, (E) any change or relocation of the
Company's principal executive offices to a location more than 50 miles from
Executive's present principal residence without the prior written consent of
2
<PAGE> 3
Executive, or (F) the failure of the Company to cause any resulting, surviving
or transferee of the Company to assume all of the Company's continuing
obligations hereunder.
(c) Any termination by the Company pursuant to subparagraph
(b)(ii) or (iii) above or by Executive pursuant to subparagraph (b)(iv) above
shall be communicated to Executive or the Company, as the case may be, by a
Notice of Termination. "Notice of Termination" shall mean a written notice
indicating the specific provision of this Agreement upon which such termination
is based and setting forth in reasonable detail the facts and circumstances
giving rise to such termination.
(d) As appropriate under the circumstances, "Date of
Termination" shall mean the earlier of: (i) the date of Executive's death; (ii)
thirty (30) days after a Notice of Termination is given to Executive if
Executive's employment is terminated pursuant to subparagraph (b)(ii) above; or
(iii) the date specified in the Notice of Termination if Executive's employment
is terminated by the Company or by him pursuant to subparagraph (b)(iii) or (iv)
above, respectively.
(e) For purposes of this Agreement, a "change in control of
the Company" shall mean a change in control of a category that would be required
to be reported under relevant provisions of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or any successor statute or any rule or
regulation of the Securities and Exchange Commission (the "SEC") thereunder then
in effect; provided that, without limitation, such a change in control shall be
deemed to have occurred if (i) any person (as such term is used in Paragraphs
13(d) and 14(d) of the Exchange Act), other than the Company or any "person" who
on the date hereof is a director or officer of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities and the
Board, upon having been advised that such ownership level has been reached, does
not, within fifteen (15) business days thereafter, adopt a resolution approving
the acquisition of that level of securities ownership by such person or (ii)
during any period of two consecutive years during the Employment Term,
individuals who, at the beginning of such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless the election of
each director who was not a director at the beginning of such period has been
approved in advance by directors representing at least two-thirds (2/3) of the
directors then in office who were directors at the beginning of such period.
3. Compensation.
(a) The Company shall pay Executive an annual base salary
("Base Salary") of $225,000 (subject to increase as provided herein), payable in
equal installments in accordance with the Company's regular payroll practices
for executive level employees, as determined from time to time by the Board, but
in no event less frequently than monthly in arrears. Executive's Base Salary
shall be increased, effective January 31, 1996, to $250,000. In addition,
Executive's Base Salary shall be increased annually as of the first day of each
fiscal year during the Employment Term (commencing February 2, 1997) by an
amount equal to the greater of (A) five percent (5%) of the Base Salary in
effect for the immediately preceding year, or (B) the product of the Base Salary
theretofore in effect multiplied by a fraction of which (i) the numerator is the
Consumer Price Index
3
<PAGE> 4
for All Urban Consumers - New York City (1982/84=100) (the "Index"), prepared by
the Bureau of Labor Statistics of the United States Department of Labor (or if
the Index is not then being published, the most nearly comparable successor
index), of the month immediately preceding such date and (ii) the denominator is
the Index for the month immediately preceding the last date on which the Base
Salary has been adjusted pursuant to this sentence or, in the case of the first
such adjustment, January 1996. The annual percentage increase in the Base Salary
pursuant to the preceding sentence is hereinafter referred to as a "Cost of
Living Increase."
(b) Executive's Base Salary shall be further increased to
$300,000 (as adjusted on a compound basis to reflect all Cost of Living
Increases prior to and including the effective date of such increase) commencing
with the fiscal year, including the current fiscal year, in which the Company
next realizes positive net income, as determined (after giving effect to such
increase) by reference to the Company's audited consolidated financial
statements for such fiscal year (the "Audited Financial Statements"), as filed
with the SEC as a portion of the Company's Annual Report on Form 10-K for such
fiscal year (the "Form 10-K"). The Base Salary determined pursuant to this
subparagraph (b) shall be retroactive to the first day of such fiscal year and
the unpaid amount of such Base Salary (as adjusted pursuant to this Paragraph
3(b)) for such fiscal year shall be paid to Executive in full (without interest)
not less than thirty (30) days after filing of the Form 10-K for such fiscal
year; provided, however, that, in the event the Company realizes net income for
the current fiscal year, the amount of additional Base Salary payable to
Executive pursuant to this subparagraph (b) with respect to the current fiscal
year shall be based upon the period from the date of this Agreement through the
last day of such fiscal year.
(c) In addition to the foregoing compensation, during the
Employment Term, Executive shall be paid additional incentive compensation
(hereinafter referred to as "Incentive Compensation") equal to an amount
determined by multiplying $10,000 times each $.05 (rounded down to the nearest
whole multiple of $.05) of Pre-Tax Earnings Per Common Share of the Company (as
hereinafter defined) for each fiscal year of the Company during the Employment
Term. "Pre-Tax Earnings Per Common Share of the Company" for any fiscal year
shall be equal to the quotient of (x) the Company's net income before taxes for
such fiscal year (after giving effect to the payment of any Incentive
Compensation for such fiscal year), if any, divided by (y) the number of issued
and outstanding Common Shares of the Company as of the last day of such fiscal
year, in each case determined by reference to the Audited Financial Statements
for such fiscal year. In the event Executive is entitled to Incentive
Compensation for a period comprising less than an entire fiscal year of the
Company, the amount thereof shall be computed based on the Pre-Tax Earnings Per
Common Share of the Company for such entire fiscal year multiplied by a
fraction, the numerator of which is the number of days of such fiscal year in
which Executive shall have been employed by the Company pursuant to this
Agreement and the denominator of which shall be the total number of days in such
fiscal year. Incentive Compensation, if any, for a fiscal year shall be paid to
Executive in full not less than thirty (30) days after the date of filing by the
Company with the SEC of the Company's Form 10-K for such fiscal year.
4
<PAGE> 5
4. Compensation Upon Termination and During Disability.
(a) If Executive's employment shall be terminated by his
death, the Company shall pay to his estate Executive's unpaid Base Salary for
the period through the Date of Termination and the Company shall thereafter
continue to pay to Executive's estate Executive's Base Salary (as and when the
same would otherwise have been payable to Executive) for a period equal to the
shorter of (i) one year from the Date of Termination and (ii) the date on which
the Employment Term would otherwise have expired pursuant to the first sentence
of paragraph 2(a) hereof. In addition, not more than ninety (90) days following
the Date of Termination, the Company shall pay to Executive's estate any
Incentive Compensation or other bonus to which Executive is or has become
unconditionally entitled prior to the Date of Termination.
(b) In the event of Executive's physical or mental disability,
during the Disability Period, the Company shall continue to pay Executive his
Base Salary and any Incentive Compensation or other bonus to which Executive has
become unconditionally entitled, as and when the same would otherwise become due
and payable to Executive hereunder. If the Company terminates Executive's
employment hereunder following the Disability Period, the Company shall pay
Executive his Base Salary for the period through the Date of Termination and the
Company shall thereafter continue to pay to Executive his Base Salary (as and
when the same would otherwise have been payable to Executive) for a period equal
to the shorter of (i) one year from the Date of Termination and (ii) the date on
which the Employment Term would otherwise have expired pursuant to the first
sentence of paragraph 2(a) hereof. In addition, not more than ninety (90) days
following the Date of Termination, the Company shall pay Executive any Incentive
Compensation or other bonus to which Executive has become unconditionally
entitled prior to the date of Termination.
(c) If Executive's employment shall be terminated for Cause,
the Company shall continue to pay Executive his Base Salary through the Date of
Termination, but shall have no obligation to make any payment to Executive on
account of any Incentive Compensation or other bonus following the Date of
Termination, regardless of whether Executive has theretofore become entitled
thereto.
(d) If (A) the Company shall terminate Executive's employment
in breach of this Agreement or (B) Executive shall terminate his employment for
Good Reason, then:
(i) the Company shall pay Executive his full
Base Salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given by the Company or Executive, as the case may be.
In addition, not more than ninety (90) days following the Date of Termination,
the Company shall pay to Executive any Incentive Compensation or other bonus to
which Executive is or has become unconditionally entitled prior to the Date of
Termination;
(ii) in lieu of any further payments of Base
Salary and Incentive Compensation to Executive for periods subsequent to the
Date of Termination, as liquidated damages if such termination by the Company is
in breach of this Agreement or as severance pay if Executive terminates this
Agreement for Good Reason, (x) the Company shall pay to Executive, on or before
the thirtieth day following the Date of Termination, a lump sum amount equal to
the present value,
5
<PAGE> 6
based on a discount rate equal to 50% of the prime rate of Chemical Bank (or any
of its successors) then in effect in New York City, of an amount equal to three
times Executive's Base Salary in effect as of the Date of Termination; or (y) if
Executive shall so elect, the Company shall continue to pay to Executive his
annual Base Salary in effect on the Date of Termination until the third
anniversary of the Date of Termination;
(iii) if termination of Executive's employment
arises out of a breach by the Company of this Agreement, the Company shall pay,
in addition to the payments to be made to Executive under clauses (i) and (ii)
of this paragraph 4(d), all other damages to which Executive may be entitled as
a result of such breach, including damages for any and all loss of benefits to
Executive under the Company's employee benefit plans which Executive would have
received if the Company had not breached this Agreement and had Executive's
employment continued for the Employment Term and including all legal fees and
expenses incurred by him as a result of such termination and in enforcing his
rights hereunder;
(iv) the Company shall maintain in full force and
effect, for the continued benefit of Executive for the number of years
(including partial years) remaining in the Employment Term, all employee benefit
plans and programs in which Executive was entitled to participate immediately
prior to the Date of Termination, provided that Executive's continued
participation is possible under the general terms and provisions of such plans
and programs, and provided further that, in the event Executive's participation
in any such plan or program is barred, the Company shall arrange to provide
Executive with benefits substantially similar to those which Executive would
otherwise have been entitled to receive under such plans and programs from which
its continued participation is barred; and
(v) Executive shall not be required to mitigate
the amount of any payment provided for in this paragraph 4(d) by seeking other
employment or otherwise.
(e) Notwithstanding any other provision hereof, in the event
any payment to be made to Executive under paragraph 4(d) of this Agreement,
together with all other payments, compensation or rights accruing to Executive
from the Company or any affiliate of the Company (collectively, his "Total
Compensation"), would constitute a "parachute payment" under Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder, subject to the last sentence of this paragraph 4(e), such payment
shall be reduced to the largest amount that will result in no portion of the
Total Compensation being subject to an excise tax under Section 4999 of the Code
or being disallowed as a deduction under Section 280G of the Code. The
determination of whether there shall be any reduction in Executive's Total
Compensation pursuant to this paragraph 4(e) shall be made by the Board in good
faith after consultation with Executive, and such determination shall be
conclusive and binding on Executive. Executive shall cooperate in good faith
with the Board in making such determination and shall provide the Board with
such information as shall be reasonably required for this purpose. The foregoing
provisions of this paragraph 4(e) shall apply to Executive only if, after
reduction for any applicable federal excise tax imposed by section 4999 of the
Code and federal income tax imposed by the Code, Executive's Total Compensation
would be less than the amount of his Total Compensation as reduced, if
6
<PAGE> 7
applicable, under such foregoing provisions of this paragraph 4(e) and after
reduction for only federal income taxes.
5. Reimbursement of Expenses.
In addition to the compensation and benefits provided to
Executive pursuant to other provisions of this Agreement, the Company will
reimburse Executive, in a manner consistent with such policies as the Company
may establish from time to time, for all reasonable out-of-pocket expenses
actually incurred or paid by him in the performance of his services hereunder
during the Employment Term, subject to presentation of expense statements,
vouchers or other supporting information in such reasonable detail as the
Company may reasonably require.
6. Other Benefits.
In addition to the compensation and benefits provided to
Executive pursuant to other provisions of this Agreement, during the Employment
Term, Executive shall be entitled to the following:
(a) Participation in and receipt of benefits under: (i) any
retirement plan or arrangement for the benefit of executive employees of the
Company, (ii) any health, life, disability or other insurance plan or
arrangement for the benefit of executive employees of the Company; and (iii) any
stock option or other cash or equity compensation plan, program or arrangement,
other than the Company's employee incentive bonus program, as and when
established, and any substitute or replacement plan, arrangement or program, but
in each case consistent with and subject to the terms, conditions and
administration of such plan, program or arrangement (including the discretion of
the Board or a Committee of the Board consistent with the terms of such plan,
program or arrangement), and further subject to any limitations upon Executive's
participation imposed pursuant to applicable laws or regulations; and
(b) A number of paid vacation days and paid sick days
consistent with the past practice of the Company for Executive.
Without the prior consent of Executive, the Company shall not
make any changes in any employee benefit plans or arrangements in effect on the
date hereof in which Executive participates (including without limitation any
pension and retirement plan, supplemental pension and retirement plan, savings
and profit sharing plan, stock ownership plan, stock purchase plan, stock option
plan, life insurance plan, medical insurance plan, disability plan, dental plan,
or health and accident plan or arrangement) which would adversely affect
Executive's rights or benefits thereunder unless such change occurs pursuant to
a program applicable to all executives of the Company and does not result in a
proportionately greater reduction in the rights of or benefits to Executive
compared to those made available to any other Company executive.
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<PAGE> 8
7. Other Agreements.
Executive represents and warrants to the Company that he is
not a party to any agreement, written or oral, and is not otherwise bound by the
terms of any written or oral agreement to which he is not a party, which
prohibits or materially restricts him from performing his duties under this
Agreement or from serving the Company in any other capacity. Executive hereby
agrees to indemnify the Company and shall hold the Company harmless from and
against any liability, loss, cost or expense, including reasonable attorneys
fees and expenses, incurred by the Company by reason of the inaccuracy of the
representations and warranties made by Executive in this paragraph 7. The
Company represents that it has no knowledge of any such prohibition or
restriction.
8. Life Insurance.
Executive agrees that, if requested by the Company, he will
cooperate in the Company's obtaining a policy or policies of life insurance on
his life in such amount(s) as the Company may determine, including submitting to
any appropriate medical examinations and completing and executing any
appropriate application(s) or similar form(s). Any such policy or policies shall
be for the benefit of the Company and the Company shall pay all premiums.
9. Restrictive Covenants.
(a) Executive acknowledges that he will have access to, and
knowledge of Company Confidential Information (as defined below), and that
improper use or revelation of same by Executive, whether during or after the
termination of his employment by the Company, could cause serious injury to the
business of the Company. Accordingly, Executive agrees that, except as required
to perform his duties under this Agreement, or as required by law, he will keep
secret and inviolate in perpetuity all Company Confidential Information which
shall come into his possession, and he will not disclose the same to any other
person or organization for so long as such Company Confidential Information is
not generally known by, or accessible to, the public. Executive further agrees
that he will not use any Company Confidential Information for his own benefit or
directly or indirectly for the benefit of any person or organization other than
the Company and its affiliates. "Company Confidential Information" includes all
information concerning the business and affairs of the Company which is not
generally available to the public or reported to any governmental agency on a
public basis and any information concerning the Company which becomes generally
available to the public as a result of a breach by any person of any
confidentiality obligation to the Company (including, without limitation, its
secrets and information about its business, financial condition, prospects,
products, technology, management information systems, know-how, merchandising
and advertising programs and plans, and the names of its suppliers, customers
and lenders and the nature of its dealings with them).
(b) Without the prior written consent of the Company, during
the Employment Term and for a period of eighteen (18) months thereafter,
Executive will not directly or indirectly hire or endeavor to recruit or hire
for any purpose any person who is or was employed by the Company during the
twelve (12) month period immediately preceding such attempted hiring or
recruitment or otherwise induce or attempt to induce supplier or lender or other
business relation of the Company
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<PAGE> 9
to diminish or terminate such business relationship and Executive will not
participate with or assist any other person in engaging in any of the foregoing
prohibited activities.
(c) Executive acknowledges that the provisions of this
paragraph 9 are essential to the goodwill and results of operations of the
Company and Executive agrees that remedies at law for any breach by him of the
covenants contained in this paragraph 9 will be inadequate, and that in
the event of a violation of the covenants herein, in addition to any and all
legal and other equitable remedies which may be available to the Company, the
said covenants may be enforced by an injunction in a suit in equity, without the
necessity of posting any bond or other indemnity or of proving actual damage,
and that a temporary injunction may be granted immediately upon the commencement
of any such suit and without notice. If any provision of this paragraph 9 shall
be deemed by a court of competent jurisdiction to be unenforceable for any
reason, then such court shall be empowered to substitute, to the extent
enforceable, provisions similar thereto or other provisions so as to provide the
Company to the fullest extent permitted by applicable law, the benefits intended
by this paragraph 9.
10. Notices.
All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered if delivered personally or by facsimile (followed by
U.S. mail), or three days after mailing if mailed by registered or certified
mail (postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice, except that notice of changes of address shall be effective upon
receipt):
If to the Company:
Pharmhouse Corp.
860 Broadway
New York, New York 10003
Attn: Chairman
With a copy to:
Maloney, Gerra, Mehlman & Katz
405 Lexington Avenue
New York, New York 10174
Attn: Melvin Katz, Esq.
If to Executive, to him at his address set forth in the
introductory paragraph of this Agreement.
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<PAGE> 10
11. General.
(a) This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within such state (without regard to
principles of conflicts of law of New York or of any other jurisdiction).
(b) The paragraph headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
(c) This Agreement sets forth the entire agreement and
understanding of the parties relating to the subject matter hereof, and
supersedes all prior agreements, arrangements and understandings, written or
oral, between the parties.
(d) This Agreement and the benefits hereunder are personal to
the Company and are not assignable or transferable by Executive or Executive's
estate, in whole or in part, nor may this Agreement be assigned by the Company
to any person, firm or corporation; provided, however, that this Agreement and
the benefits hereunder may be assigned by the Company to any entity acquiring
all or substantially all of the assets or stock of the Company or to any
corporation into or with which the Company may be merged or consolidated. If the
Company shall at any time be merged into or consolidated with any other entity
or entities or if substantially all of the Company's assets shall be sold or
otherwise transferred to another entity or entities, the provisions of this
Agreement shall be binding upon and inure to the benefit of the Company or other
entity surviving or continuing after or resulting from such merger or
consolidation or the entity to which such assets shall have been sold or
transferred and the Company shall be obligated to cause such resulting surviving
or transferee company to assume all of the Company's continuing obligations
hereunder, as an express condition of any such merger, consolidation or sale of
assets.
(e) All references in this Agreement to amounts to be paid or
benefits to be provided to or on behalf of Executive are to the gross amounts
thereof which are due hereunder. The Company shall have the right to deduct
therefrom or collect from Executive all sums which may be required to be
deducted or withheld under any provision of law, including, but not limited to,
social security payments, income tax withholding, any other deduction required
by law and any interest, penalties or additions to tax imposed with respect
thereto.
(f) This Agreement may be amended, modified, superseded,
canceled, renewed or extended and the terms or covenants hereof may be waived,
only by a written instrument executed by both parties hereto, or in the case of
a waiver, by the party waiving compliance. The failure of either party at any
time or times to require performance of any provision hereof shall in no manner
affect the right of such party at a later time to enforce the same. No wavier by
either party of the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.
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<PAGE> 11
(g) This Agreement may be executed in counterparts, each of
which shall be an original and all of which taken together shall constitute one
and the same instrument.
(h) Subject to the provisions of paragraph 9(c) of this
Agreement, if any term or other provision of this Agreement is invalid, illegal
or incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the essential economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to either party hereto. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as practicable in an acceptable manner
to the end that the transactions contemplated hereby are fulfilled to the extent
practicable.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
PHARMHOUSE CORP.
By:/s/
---------------------------
Name:
Title:
/s/ Kenneth A. Davis
----------------------------
KENNETH A. DAVIS
11
<PAGE> 1
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of July 14, 1995 between Manfred Brecker, an
individual residing at _____________________ ("Executive"), and Pharmhouse
Corp., a New York corporation with offices at 860 Broadway, New York, New York
10003 (the "Company").
WITNESSETH
WHEREAS, Executive is currently employed as the Chairman of the Board
of the Company; and
WHEREAS, the Company expressly acknowledges that Executive is a
co-founder of the Company and has heretofore performed and is continuing to
perform a significant role in the furtherance of the Company's business
activities; and
WHEREAS, the Company desires to continue to employ Executive as a
senior executive officer and to be assured of its right to his services in such
capacity and Executive desires to continue his employment with the Company in
such capacity, all upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and conditions herein contained and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, do hereby agree as follows:
1. Employment; Duties.
The Company hereby employs Executive and Executive hereby
accepts such employment as an executive officer of the Company on the terms and
conditions hereinafter set forth. In his capacity as an executive officer of the
Company, Executive shall perform such functions with respect to the business and
affairs of the Company, consistent with his position, as the Company's Board of
Directors (the "Board") or Chief Executive Officer shall determine from time to
time. Executive shall perform his duties at such offices as, from time to time,
the Company shall establish and shall travel to the extent reasonably required
to perform his duties hereunder. Executive shall devote his available business
time and energies to the business and affairs of the Company and shall not
accept other employment, perform any services for any other person, firm or
corporation, or permit his personal business or investment affairs to interfere
with the performance of his duties hereunder; provided, however, that Executive
may devote reasonable amounts of time to activities having a charitable,
educational or other public interest purpose if and to the extent such
activities do not substantially interfere with Executive's performance of his
responsibilities hereunder. Executive shall, upon reasonable notice, furnish
such information and proper assistance to the Company as reasonably may be
required by the Company in connection with any legal action involving the
Company or any of its affiliates. Executive agrees to use his best efforts,
skill and abilities to promote and protect the interests of the Company and,
faithfully and to the best of his ability, perform his duties hereunder.
Executive agrees to serve as a director or officer of any of the Company's
subsidiaries or affiliates requesting his services and to perform such services
for such
<PAGE> 2
affiliate, consistent with his office, as its Board of Directors shall request.
The Company agrees to use its best efforts to have Executive elected to serve as
Chairman of the Board of the Company during the Employment Term (as defined in
paragraph 2 of this Agreement).
2. Term; Termination.
(a) Executive's employment pursuant to the terms hereof shall
become effective as of the date hereof (the "Employment Date") and shall remain
in effect, subject to the provisions of subparagraph (b) of this paragraph 2,
through January 30, 1999. The term of employment hereunder, commencing with the
Employment Date and including any renewals or extensions hereof, is hereinafter
referred to as the "Employment Term."
(b) This Agreement and Executive's employment by the Company
shall terminate on the Date of Termination (as defined in subparagraph (d) of
this paragraph 2) as follows:
(i) Automatically upon Executive's death;
(ii) At the Company's option if, as a result of
Executive's incapacity due to physical or mental illness, he is unable to
perform the duties of his employment hereunder for a continuous period exceeding
one hundred twenty (120) days or an aggregate of more than one hundred eighty
(180) days in any consecutive 12-month period (each such period being
hereinafter referred to as a "Disability Period");
(iii) At the Company's option at any time for
Cause. "Cause" shall be defined to mean (A) the commission by Executive of any
felony, (B) the commission by Executive of any crime involving dishonesty or
moral turpitude, (C) the engagement by Executive in any act of fraud,
misappropriation or similar misfeasance, (D) the engagement by Executive in any
activity in contravention of paragraph 9 of this Agreement or otherwise
materially adverse to the Company or constituting a material breach of this
Agreement, or (E) the engagement by Executive in any transaction with the
Company involving a conflict of interest or self dealing unless such transaction
has been theretofore approved by a disinterested majority of the Board or a
Committee of the Board; or
(iv) by Executive for Good Reason. For purposes
of this Agreement, the term "Good Reason" shall mean (A) a change in control of
the Company (as defined below), (B) any assignment to Executive of any duties
inconsistent with his present duties as a principal executive officer of the
Company or a significant change in his (i) present responsibilities or (ii)
status or reporting responsibilities or titles in effect immediately prior to
such change without his express written consent, (C) any removal of Executive
from or any failure to re-elect Executive as a principal executive officer of
the Company, except as a result of his death, his Disability, for Cause, or
termination by him of this Agreement other than for Good Reason, (D) a reduction
in Executive's Base Salary as in effect on the date hereof or as the same may be
increased from time to time hereafter, (E) any change or relocation of the
Company's principal executive offices to a location more than 50 miles from
Executive's present residence in the New York City metropolitan area without the
prior written consent of Executive, or (F) the failure of the Company to cause
any
2
<PAGE> 3
resulting, surviving or transferee of the Company to assume all of the Company's
continuing obligations hereunder.
(c) Any termination by the Company pursuant to subparagraph
(b)(ii) or (iii) above or by Executive pursuant to subparagraph (b)(iv) above
shall be communicated to Executive or the Company, as the case may be, by a
Notice of Termination. "Notice of Termination" shall mean a written notice
indicating the specific provision of this Agreement upon which such termination
is based and setting forth in reasonable detail the facts and circumstances
giving rise to such termination.
(d) As appropriate under the circumstances, "Date of
Termination" shall mean the earlier of : (i) the date of Executive's death; (ii)
thirty (30) days after a Notice of Termination is given to Executive if
Executive's employment is terminated pursuant to subparagraph (b)(ii) above; or
(iii) the date specified in the Notice of Termination if Executive's employment
is terminated by the Company or by him pursuant to subparagraph (b)(iii) or (iv)
above, respectively.
(e) For purposes of this Agreement, a "change in control of
the Company" shall mean a change in control of a category that would be required
to be reported under relevant provisions of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or any successor statute or any rule or
regulation of the Securities and Exchange Commission (the "SEC") thereunder then
in effect; provided that, without limitation, such a change in control shall be
deemed to have occurred if (i) any person (as such term is used in Paragraphs
13(d) and 14(d) of the Exchange Act), other than the Company or any "person" who
on the date hereof is a director or officer of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities and the
Board, upon having been advised that such ownership level has been reached, does
not, within fifteen (15) business days thereafter, adopt a resolution approving
the acquisition of that level of securities ownership by such person or (ii)
during any period of two consecutive years during the Employment Term,
individuals who, at the beginning of such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless the election of
each director who was not a director at the beginning of such period has been
approved in advance by directors representing at least two-thirds (2/3) of the
directors then in office who were directors at the beginning of such period.
3. Compensation.
(a) The Company shall pay Executive an annual base salary
("Base Salary") of $175,000 (subject to increase as provided herein), payable in
equal installments in accordance with the Company's regular payroll practices
for executive level employees, as determined from time to time by the Board, but
in no event less frequently than monthly in arrears. Executive's Base Salary
shall be increased annually as of the first day of each fiscal year during the
Employment Term by an amount equal to the greater of (A) five percent (5%) of
the Base Salary in effect for the immediately preceding year, or (B) the product
of the Base Salary theretofore in effect multiplied by a fraction of which (i)
the numerator is the Consumer Price Index for All Urban Consumers - New York
City (1982/84=100) (the "Index"), prepared by the Bureau of Labor Statistics of
the United States Department of Labor (or if the Index is not then being
published, the most nearly comparable
3
<PAGE> 4
successor index), of the month immediately preceding such date and (ii) the
denominator is the Index for the month immediately preceding the last date on
which the Base Salary has been adjusted pursuant to this sentence or, in the
case of the first such adjustment, the month immediately preceding the date of
this Agreement. The annual percentage increase in the Base Salary pursuant to
the preceding sentence is hereinafter referred to as a "Cost of Living
Increase."
(b) In acknowledgment of Executive's contributions to the
Company as a co-founder of the Company, the continuing demonstrations of loyalty
to the Company, as evidenced by the personal sacrifices made by Executive in the
past on behalf of and for the benefit of the Company, and in further
consideration for services performed and to be performed by Executive, Executive
is hereby granted a special cash bonus (the "Special Bonus") in the amount of
$100,000. The Special Bonus shall be payable to Executive in four equal annual
installments of $25,000, the first installment of which shall be paid on the
date hereof and the remaining installments of which shall be paid on each of the
first, second and third anniversaries of the date hereof.
4. Compensation Upon Termination and During Disability.
(a) If Executive's employment shall be terminated by his death
, the Company shall pay to his estate Executive's unpaid Base Salary for the
period through the Date of Termination and the Company shall thereafter continue
to pay to Executive's estate Executive's Base Salary (as and when the same would
otherwise have been payable to Executive) for a period equal to the shorter of
(i) one year from the Date of Termination and (ii) the date on which the
Employment Term would otherwise have expired pursuant to the first sentence of
paragraph 2(a) hereof. In addition, not more than ninety (90) days following the
Date of Termination, the Company shall pay to Executive's estate the full unpaid
balance of the Special Bonus and any other bonus to which Executive is or has
become unconditionally entitled prior to the Date of Termination.
(b) In the event of Executive's physical or mental disability,
during the Disability Period, the Company shall continue to pay Executive his
Base Salary and any installments of the Special Bonus or any other bonus to
which Executive has become unconditionally entitled, as and when the same would
otherwise become due and payable to Executive hereunder. If the Company
terminates Executive's employment hereunder following the Disability Period, the
Company shall pay Executive his Base Salary for the period through the Date of
Termination and the Company shall thereafter continue to pay to Executive his
Base Salary (as and when the same would otherwise have been payable to
Executive) for a period equal to the shorter of (i) one year from the Date of
Termination and (ii) the date on which the Employment Term would otherwise have
expired pursuant to the first sentence of paragraph 2(a) hereof. In addition,
not more than ninety (90) days following the Date of Termination, the Company
shall pay Executive the full unpaid balance of the Special Bonus and any other
bonus to which Executive has become unconditionally entitled prior to the date
of Termination.
(c) If Executive's employment shall be terminated for Cause,
the Company shall continue to pay Executive his Base Salary through the Date of
Termination, but shall have no obligation to make any payment to Executive on
account of any bonus, including any unpaid
4
<PAGE> 5
installments of the Special Bonus, following the Date of Termination, regardless
of whether Executive has theretofore become entitled thereto.
(d) If (A) the Company shall terminate Executive's employment
in breach of this Agreement or (B) Executive shall terminate his employment for
Good Reason, then:
(i) the Company shall pay Executive his full
Base Salary through the Date of Termination at the rate in effect at the time
Notice of Termination is given by the Companay or Executive, as the case may be.
In addition, not more than ninety (90) days following the Date of Termination,
the Company shall pay to Executive the full unpaid balance of the Special Bonus
and any other bonus to which Executive is or has become unconditionally entitled
prior to the Date of Termination;
(ii) in lieu of any further payments of Base
Salary to Executive for periods subsequent to the Date of Termination, as
liquidated damages if such termination by the Company is in breach of this
Agreement or as severance pay if Executive terminates this Agreement for Good
Reason, (x) the Company shall pay to Executive, on or before the thirtieth day
following the Date of Termination, a lump sum amount equal to the present value,
based on a discount rate equal to 50% of the prime rate of Chemical Bank (or any
of its successors) then in effect in New York City, of an amount equal to three
times Executive's Base Salary in effect as of the Date of Termination; or (y) if
Executive shall so elect, the Company shall continue to pay to Executive his
annual Base Salary in effect on the Date of Termination until the third
anniversary of the Date of Termination.;
(iii) if termination of Executive's employment
arises out of a breach by the Company of this Agreement, the Company shall pay,
in addition to the payments to be made to Executive under clauses (i) and (ii)
of this paragraph 4(d), all other damages to which Executive may be entitled as
a result of such breach, including damages for any and all loss of benefits to
Executive under the Company's employee benefit plans which Executive would have
received if the Company had not breached this Agreement and had Executive's
employment continued for the Employment Term and including all legal fees and
expenses incurred by him as a result of such termination and in enforcing his
rights hereunder;
(iv) the Company shall maintain in full force and
effect, for the continued benefit of Executive for the number of years
(including partial years) remaining in the Employment Term, all employee benefit
plans and programs in which Executive was entitled to participate immediately
prior to the Date of Termination, provided that Executive's continued
participation is possible under the general terms and provisions of such plans
and programs, and provided further that, in the event Executive's participation
in any such plan or program is barred, the Company shall arrange to provide
Executive with benefits substantially similar to those which Executive would
otherwise have been entitled to receive under such plans and programs from which
its continued participation is barred; and
(v) Executive shall not be required to mitigate
the amount of any payment provided for in this paragraph 4(d) by seeking other
employment or otherwise.
5
<PAGE> 6
(e) Notwithstanding any other provision hereof, in the event
any payment to be made to Executive under paragraph 4(d) of this Agreement,
together with all other payments, compensation or rights accruing to Executive
from the Company or any affiliate of the Company (collectively, his "Total
Compensation"), would constitute a "parachute payment" under Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder, subject to the last sentence of this paragraph 4(e), such payment
shall be reduced to the largest amount that will result in no portion of the
Total Compensation being subject to an excise tax under Section 4999 of the Code
or being disallowed as a deduction under Section 280G of the Code. The
determination of whether there shall be any reduction in Executive's Total
Compensation pursuant to this paragraph 4(e) shall be made by the Board in good
faith after consultation with Executive, and such determination shall be
conclusive and binding on Executive. Executive shall cooperate in good faith
with the Board in making such determination and shall provide the Board with
such information as shall be reasonably required for this purpose. The foregoing
provisions of this paragraph 4(e) shall apply to Executive only if, after
reduction for any applicable federal excise tax imposed by section 4999 of the
Code and federal income tax imposed by the Code, Executive's Total Compensation
would be less than the amount of his Total Compensation as reduced, if
applicable, under such foregoing provisions of this paragraph 4(e) and after
reduction for only federal income taxes.
5. Reimbursement of Expenses.
In addition to the compensation and benefits provided to
Executive pursuant to other provisions of this Agreement, the Company will
reimburse Executive, in a manner consistent with such policies as the Company
may establish from time to time, for all reasonable out-of-pocket expenses
actually incurred or paid by him in the performance of his services hereunder
during the Employment Term, subject to presentation of expense statements,
vouchers or other supporting information in such reasonable detail as the
Company may reasonably require.
6. Other Benefits.
In addition to the compensation and benefits provided to
Executive pursuant to other provisions of this Agreement, during the Employment
Term, Executive shall be entitled to the following:
(a) Participation in and receipt of benefits under: (i) any
retirement plan or arrangement for the benefit of executive employees of the
Company, (ii) any health, life, disability or other insurance plan or
arrangement for the benefit of executive employees of the Company; and (iii) any
stock option or other cash or equity compensation plan, program or arrangement,
including the Company's employee incentive bonus program, as and when
established, and any substitute or replacement plan, arrangement or program, but
in each case consistent with and subject to the terms, conditions and
administration of such plan, program or arrangement, including the discretion of
the Board or a committee of the Board consistent with the terms of such plan,
program or arrangement), and further subject to any limitations upon Executive's
participation imposed pursuant to applicable laws or regulations; and
6
<PAGE> 7
(b) A number of paid vacation days and paid sick days
consistent with the past practice of the Company for Executive.
Without the prior consent of Executive, the Company shall not
make any changes in any employee benefit plans or arrangements in effect on the
date hereof in which Executive participates (including without limitation any
pension and retirement plan, supplemental pension and retirement plan, savings
and profit sharing plan, stock ownership plan, stock purchase plan, stock option
plan, life insurance plan, medical insurance plan, disability plan, dental plan,
or health and accident plan or arrangement) which would adversely affect
Executive's rights or benefits thereunder unless such change occurs pursuant to
a program applicable to all executives of the Company and does not result in a
proportionately greater reduction in the rights of or benefits to Executive
compared to those made available to any other Company executive.
7. Other Agreements.
Executive represents and warrants to the Company that he is
not a party to any agreement, written or oral, and is not otherwise bound by the
terms of any written or oral agreement to which he is not a party, which
prohibits or materially restricts him from performing his duties under this
Agreement or from serving the Company in any other capacity. Executive hereby
agrees to indemnify the Company and shall hold the Company harmless from and
against any liability, loss, cost or expense, including reasonable attorneys
fees and expenses, incurred by the Company by reason of the inaccuracy of the
representations and warranties made by Executive in this paragraph 7. The
Company represents that it has no knowledge of any such prohibition or
restriction.
8. Life Insurance.
Executive agrees that, if requested by the Company, he will
cooperate in the Company's obtaining a policy or policies of life insurance on
his life in such amount(s) as the Company may determine, including submitting to
any appropriate medical examinations and completing and executing any
appropriate application(s) or similar form(s). Any such policy or policies shall
be for the benefit of the Company and the Company shall pay all premiums.
9. Restrictive Covenants.
(a) Executive acknowledges that he will have access to, and
knowledge of Company Confidential Information (as defined below), and that
improper use or revelation of same by Executive, whether during or after the
termination of his employment by the Company, could cause serious injury to the
business of the Company. Accordingly, Executive agrees that, except as required
to perform his duties under this Agreement, or as required by law, he will keep
secret and inviolate in perpetuity all Company Confidential Information which
shall come into his possession, and he will not disclose the same to any other
person or organization for so long as such Company Confidential Information is
not generally known by, or accessible to, the public. Executive further agrees
that he will not use any Company Confidential Information for his own benefit or
directly or indirectly for the benefit of any person or organization other than
the Company and its affiliates. "Company Confidential Information" includes all
information concerning the business and affairs of
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the Company which is not generally available to the public or reported to any
governmental agency on a public basis and any information concerning the Company
which becomes generally available to the public as a result of a breach by any
person of any confidentiality obligation to the Company (including, without
limitation, its secrets and information about its business, financial condition,
prospects, products, technology, management information systems, know-how,
merchandising and advertising programs and plans, and the names of its
suppliers, customers and lenders and the nature of its dealings with them).
(b) Without the consent of the Company, during the Employment
Term and for a period of eighteen (18) months thereafter, Executive will not
directly or indirectly hire or endeavor to recruit or hire for any purpose any
person who is or was employed by the Company during the twelve (12) month period
immediately preceding such attempted hiring or recruitment or otherwise induce
or attempt to induce supplier or lender or other business relation of the
Company to diminish or terminate such business relationship and Executive will
not participate with or assist any other person in engaging in any of the
foregoing prohibited activities.
(c) Executive acknowledges that the provisions of this
paragraph 9 are essential to the goodwill and results of operations of the
Company and Executive agrees that remedies at law for any breach by him of the
covenants contained in this paragraph 9 will be inadequate, and that in the
event of a violation of the covenants herein, in addition to any and all legal
and other equitable remedies which may be available to the Company, the said
covenants may be enforced by an injunction in a suit in equity, without the
necessity of posting any bond or other indemnity or of proving actual damage,
and that a temporary injunction may be granted immediately upon the commencement
of any such suit and without notice. If any provision of this paragraph 9 shall
be deemed by a court of competent jurisdiction to be unenforceable for any
reason, then such court shall be empowered to substitute, to the extent
enforceable, provisions similar thereto or other provisions so as to provide the
Company to the fullest extent permitted by applicable law, the benefits intended
by this paragraph 9.
10. Notices.
All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered if delivered personally or by facsimile (followed by
U.S. mail), or three days after mailing if mailed by registered or certified
mail (postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice, except that notice of changes of address shall be effective upon
receipt):
If to the Company:
Pharmhouse Corp.
860 Broadway
New York, New York 10003
Attn: President
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With a copy to:
Maloney, Gerra, Mehlman & Katz
405 Lexington Avenue
New York, New York 10174
Attn: Melvin Katz, Esq.
If to Executive, to him at his address set forth in the
introductory paragraph of this Agreement.
11. General.
(a) This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within such state (without regard to
principles of conflicts of law of New York or of any other jurisdiction).
(b) The paragraph headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
(c) This Agreement sets forth the entire agreement and
understanding of the parties relating to the subject matter hereof, and
supersedes all prior agreements, arrangements and understandings, written or
oral, between the parties.
(d) This Agreement and the benefits hereunder are personal to
the Company and are not assignable or transferable by Executive or Executive's
estate, in whole or in part, nor may this Agreement be assigned by the Company
to any person, firm or corporation; provided, however, that this Agreement and
the benefits hereunder may be assigned by the Company to any entity acquiring
all or substantially all of the assets or stock of the Company or to any
corporation into or with which the Company may be merged or consolidated. If the
Company shall at any time be merged into or consolidated with any other entity
or entities or if substantially all of the Company's assets shall be sold or
otherwise transferred to another entity or entities, the provisions of this
Agreement shall be binding upon and inure to the benefit of the Company or other
entity surviving or continuing after or resulting from such merger or
consolidation or the entity to which such assets shall have been sold or
transferred and the Company shall be obligated to cause such resulting surviving
or transferee company to assume all of the Company's continuing obligations
hereunder, as an express condition of any such merger, consolidation or sale of
assets.
(e) All references in this Agreement to amounts to be paid or
benefits to be provided to or on behalf of Executive are to the gross amounts
thereof which are due hereunder. The Company shall have the right to deduct
therefrom or collect from Executive all sums which may be required to be
deducted or withheld under any provision of law, including, but not limited to,
social security payments, income tax withholding, any other deduction required
by law and any interest, penalties or additions to tax imposed with respect
thereto.
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(f) This Agreement may be amended, modified, superseded,
canceled, renewed or extended and the terms or covenants hereof may be waived,
only by a written instrument executed by both parties hereto, or in the case of
a waiver, by the party waiving compliance. The failure of either party at any
time or times to require performance of any provision hereof shall in no manner
affect the right of such party at a later time to enforce the same. No wavier by
either party of the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.
(g) This Agreement may be executed in counterparts, each of
which shall be an original and all of which taken together shall constitute one
and the same instrument.
(h) Subject to the provisions of paragraph 9(c) of this
Agreement, if any term or other provision of this Agreement is invalid, illegal
or incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the essential economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to either party hereto. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as practicable in an acceptable manner
to the end that the transactions contemplated hereby are fulfilled to the extent
practicable.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
PHARMHOUSE CORP.
By:/s/ Kenneth A. Davis
---------------------------
Name: KENNETH A. DAVIS
Title: President
/s/ Manfred Brecker
---------------------------
MANFRED BRECKER
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<PAGE> 1
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of December 15, 1995 between Gerald Katz, an
individual residing at Manlius, New York ("Executive"), and Pharmhouse Corp.,
a New York corporation with offices at 860 Broadway, New York, New York 10003
(the "Company").
WITNESSETH
WHEREAS, the Company desires to employ Executive as its General
Merchandise Manager and to be assured of its right to his services in such
capacity and Executive desires to become employed by the Company in such
capacity, all upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and conditions herein contained and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, do hereby agree as follows:
1. Employment; Duties.
The Company hereby employs Executive and Executive hereby
accepts such employment as General Merchandise Manager of the Company on the
terms and conditions hereinafter set forth. In his capacity as General
Merchandise Manager of the Company, Executive shall perform such functions with
respect to the business and affairs of the Company, consistent with his
position, as the Company's Board of Directors (the "Board") or Chief Executive
Officer shall determine from time to time. Executive shall perform his duties at
such offices as, from time to time, the Company shall establish and shall travel
to the extent reasonably required to perform his duties hereunder. Executive
shall devote substantially his full business time and energies to the business
and affairs of the Company and shall not accept other employment, perform any
services for any other person, firm or corporation, or permit his personal
business or investment affairs to interfere with the performance of his duties
hereunder; provided, however, that Executive may devote reasonable amounts of
time to activities having a charitable, educational or other public interest
purpose if and to the extent such activities do not, in the judgment of the
Corporation's President, substantially interfere with Executive's performance of
his responsibilities hereunder. Executive shall, upon reasonable notice, furnish
such information and proper assistance to the Company as reasonably may be
required by the Company in connection with any legal action involving the
Company or any of its affiliates. Executive agrees to use his best efforts,
skill and abilities to promote and protect the interests of the Company and,
faithfully and to the best of his ability, perform his duties hereunder.
Executive agrees to serve as a director or officer of any of the Company's
subsidiaries or affiliates requesting his services and to perform such services
for such affiliate, consistent with his office, as its Board of Directors shall
request. The Company agrees to use its best efforts to have Executive elected to
serve as Senior Vice President--Merchandising of the Company during the
Employment Term.
<PAGE> 2
2. Term; Termination.
(a) Executive's employment pursuant to the terms hereof shall
become effective as of the date hereof (the "Employment Date") and shall remain
in effect, subject to the provisions of subparagraph (b) of this paragraph 2,
through January 30, 1999. The term of employment hereunder, commencing with the
Employment Date and including any renewals or extensions hereof, is hereinafter
referred to as the "Employment Term."
(b) This Agreement and Executive's employment by the Company
shall terminate on the Date of Termination (as defined in subparagraph (d) of
this paragraph 2) as follows:
(i) Automatically upon Executive's death;
(ii) At the Company's option if, as a result of
Executive's incapacity due to physical or mental illness, he is unable to
perform the duties of his employment hereunder for a continuous period exceeding
one hundred twenty (120) days or an aggregate of more than one hundred eighty
(180) days in any consecutive 12-month period (each such period being
hereinafter referred to as a "Disability Period");
(iii) At the Company's option at any time for
Cause. "Cause" shall be defined to mean (A) the commission by Executive of any
felony, (B) the commission by Executive of any crime involving dishonesty or
moral turpitude, (C) the engagement by Executive in any act of fraud,
misappropriation or similar misfeasance, (D) the engagement by Executive in any
activity in contravention of paragraph 9 of this Agreement or otherwise
materially adverse to the Company or constituting a material breach of this
Agreement, or (E) the engagement by Executive in any transaction with the
Company involving a conflict of interest or self dealing unless such transaction
has been theretofore approved by the Company's President, a disinterested
majority of the Board or a Committee of the Board;
(iv) At the Company's or Executives option at
any time without Cause; or
(v) By Executive for Good Reason. For purposes
of this Agreement, the term "Good Reason" shall mean (A) a change in control of
the Company (as defined below), (B) any assignment to Executive of any duties
inconsistent with his duties, commencing as of the date hereof, as a principal
executive officer of the Company or a significant change in his (i)
responsibilities, commencing as of the date hereof, or (ii) status or reporting
responsibilities or titles in effect immediately prior to such change without
his express written consent, (C) any removal of Executive from or any failure to
re-elect Executive as a principal executive officer of the Company, except in
connection with a termination of Executive's employment pursuant to the terms of
this Agreement, (D) a reduction in Executive's Base Salary as in effect on the
date hereof or as the same may be increased from time to time hereafter, (E) any
change or relocation of the Company's principal executive offices to a location
more than 50 miles from the Company's present principal executive offices
without the prior written consent of Executive, or (F) the failure of the
Company to cause any
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<PAGE> 3
resulting, surviving or transferee of the Company to assume all of the Company's
continuing obligations hereunder.
(c) Any termination by the Company pursuant to subparagraph
(b)(ii), (iii) or (iv) above or by Executive pursuant to subparagraph (b)(v)
above shall be communicated to Executive or the Company, as the case may be, by
a Notice of Termination. "Notice of Termination" shall mean a written notice
indicating the specific provision of this Agreement upon which such termination
is based and setting forth in reasonable detail the facts and circumstances
giving rise to such termination.
(d) As appropriate under the circumstances, "Date of
Termination" shall mean the earlier of: (i) the date of Executive's death; (ii)
thirty (30) days after a Notice of Termination is given to Executive if
Executive's employment is terminated pursuant to subparagraph (b)(ii) above; or
(iii) the date specified in the Notice of Termination if Executive's employment
is terminated by the Company pursuant to subparagraph (b)(iii) or (iv) or by him
pursuant to subparagraph (b)(v) above.
(e) For purposes of this Agreement, a "change in control of
the Company" shall mean a change in control of a category that would be required
to be reported under relevant provisions of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or any successor statute or any rule or
regulation of the Securities and Exchange Commission (the "SEC") thereunder then
in effect; provided that, without limitation, such a change in control shall be
deemed to have occurred if (i) any person (as such term is used in Paragraphs
13(d) and 14(d) of the Exchange Act), other than the Company or any "person" who
on the date hereof is a director or officer of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities and the
Board, upon having been advised that such ownership level has been reached, does
not, within fifteen (15) business days thereafter, adopt a resolution approving
the acquisition of that level of securities ownership by such person or (ii)
during any period of two consecutive years during the Employment Term,
individuals who, at the beginning of such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless the election of
each director who was not a director at the beginning of such period has been
approved in advance by directors representing at least two-thirds (2/3) of the
directors then in office who were directors at the beginning of such period.
3. Compensation.
(a) The Company shall pay Executive an annual base salary
("Base Salary") of $130,000 (subject to increase as provided herein), payable in
equal installments in accordance with the Company's regular payroll practices
for executive level employees, as determined from time to time by the Board, but
in no event less frequently than monthly in arrears. Executive's Base Salary
shall be increased (i) effective on the first anniversary of the Employment
Date, to $140,000, and (ii) annually as of the first day of each fiscal year
during the Employment Term (commencing February 2, 1997) by an amount equal to
the greater of (A) five percent (5%) of the Base Salary in effect for the
immediately preceding year, or (B) the product of the Base Salary theretofore in
effect multiplied by a fraction of which (i) the numerator is the Consumer Price
Index for All Urban Consumers - New York City (1982/84=100) (the "Index"),
prepared by the Bureau of Labor Statistics of the United
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<PAGE> 4
States Department of Labor (or if the Index is not then being published, the
most nearly comparable successor index), of the month immediately preceding such
date and (ii) the denominator is the Index for the month immediately preceding
the last date on which the Base Salary has been adjusted pursuant to this
sentence or, in the case of the first such adjustment, January 1996.
(b) The Company shall pay executive a special bonus of
$10,000, subject to Executive being employed by the Company on the date of
payment, as follows: (i) $5,000 on the last business day of the third full
calendar month following the Employment Date, and (ii) $5,000 on the last
business day of the sixth full calendar month following the Employment Date.
(c) As further compensation for services to be rendered to the
Company by Executive hereunder, the Corporation shall:
(i) grant to Executive, pursuant to the Company's
1991 Incentive Stock Option Plan (the "Option Plan"),
incentive stock options to purchase an aggregate of 30,000
Common Shares of the Company at an exercise price per share
equal to the fair market value per share (as defined in the
Option Plan) as of the Employment Date. The Options shall be
granted to Executive pursuant to a Stock Option Agreement to
be entered into between Executive and Company as of the date
hereof, which agreement shall provide, among other matters,
the following: (A) 10,000 Options shall vest and be first
exercisable on each of the the first, second and third
anniversaries of the Employment Date, and (B) all such Options
shall fully vest and become immediately exercisable
automatically upon a change in control of the Company. The
Options shall otherwise be governed by the Option Plan; and
(ii) issue and sell to Executive 45,000 Common Shares
of the Company (the "Shares") at a per share purchase price of
$.01 per share (equal to the par value per share of such
shares), pursuant to a Restricted Share Purchase Agreement
dated as of the date hereof to be entered into between
Executive and the Company, which agreement shall provide,
among other matters, the following: (A) the Shares shall be
subject to forfeiture to the Company if, prior to the vesting
thereof, Executive's employment hereunder is terminated, other
than termination by the Company without cause or termination
by Executive for Good Reason, (B) 15,000 Shares shall vest on
each of the the first, second and third anniversaries of the
Employment Date, (C) Executive shall not sell or otherwise
transfer any Shares prior to the third anniversary of the
Employment Date, except that, upon the vesting of any Shares,
Executive may sell to the Company and the Company shall
purchase from Executive a number of Shares such that the
aggregate purchase price for such Shares shall equal the
aggregate federal and state income taxes imposed on Executive
solely as a result of the vesting of such Shares, and (D) all
Shares shall fully vest automatically upon termination of this
Agreement by Executive for Good Reason.
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<PAGE> 5
4. Compensation Upon Termination and During Disability.
(a) If Executive's employment shall be terminated by his
death, the Company shall pay to his estate Executive's unpaid Base Salary for
the period through the Date of Termination and the Company shall thereafter
continue to pay to Executive's estate Executive's Base Salary (as and when the
same would otherwise have been payable to Executive) for a period equal to the
shorter of (i) twelve months from the Date of Termination and (ii) the date on
which the Employment Term would otherwise have expired pursuant to the first
sentence of paragraph 2(a) hereof. In addition, not more than 90 days following
the Date of Termination, the Company shall pay to Executive's estate any bonus
to which Executive is or has become unconditionally entitled prior to the Date
of Termination.
(b) In the event of Executive's physical or mental disability,
during the Disability Period, the Company shall continue to pay Executive his
Base Salary and any bonus to which Executive has become unconditionally
entitled, as and when the same would otherwise become due and payable to
Executive hereunder. If the Company terminates Executive's employment hereunder
following the Disability Period, the Company shall pay Executive his Base Salary
for the period through the Date of Termination and the Company shall thereafter
continue to pay to Executive his Base Salary (as and when the same would
otherwise have been payable to Executive) for a period equal to the shorter of
(i) twelve months from the Date of Termination and (ii) the date on which the
Employment Term would otherwise have expired pursuant to the first sentence of
paragraph 2(a) hereof. In addition, not more than 90 days following the Date of
Termination, the Company shall pay Executive any bonus to which Executive is or
has become unconditionally entitled prior to the date of Termination.
(c) If Executive's employment shall be terminated for Cause,
the Company shall continue to pay Executive his Base Salary through the Date of
Termination, but shall have no obligation to make any payment to Executive on
account of any bonus following the Date of Termination, regardless of whether
Executive has theretofore become entitled thereto.
(d) If Executive's employment shall be terminated by the
Company without Cause or terminated by Executive for Good Reason, the Company
shall pay Executive his Base Salary for the period through the Date of
Termination and the Company shall thereafter continue to pay to Executive his
Base Salary (as and when the same would otherwise have been payable to
Executive) for a period equal to the shorter of (i) twelve months from the Date
of Termination and (ii) the date on which the Employment Term would otherwise
have expired pursuant to the first sentence of paragraph 2(a) hereof; provided,
however, that any amounts payable to Executive pursuant to this paragraph (d)
for the period subsequent to the date which is six months after such Date of
Termination shall be reduced by the amount of any salary or other compensation
earned by or paid to Executive during such period pursuant to any employment
(including self-employment), consulting or similar arrangements entered into by
Executive. In addition, not more than 90 days following the Date of Termination,
the Company shall pay Executive any bonus to which Executive is or has become
unconditionally entitled prior to the date of Termination. At the election of
Executive, in lieu of any further payments to Executive under this paragraph (d)
for periods subsequent to the Date of Termination, as severance pay, the Company
shall pay to Executive, on or before the thirtieth day
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<PAGE> 6
following the Date of Termination, a lump sum amount equal to the present value,
based on a discount rate equal to 50% of the prime rate of Chemical Bank (or any
of its successors) then in effect in New York City, of twelve months Base
Salary, as in effect on the Date of Termination. In the event Executive enters
into any employment (including self-employment), consulting or similar
arrangement, he shall give notice thereof to the Company in writing indicating
the date of commencement of such empolyment and the compensation payable to him
in connection therewith.
5. Reimbursement of Expenses.
In addition to the compensation and benefits provided to
Executive pursuant to other provisions of this Agreement, the Company will
reimburse Executive, in a manner consistent with such policies as the Company
may establish from time to time, for all reasonable out-of-pocket expenses
actually incurred or paid by him in the performance of his services hereunder
during the Employment Term, subject to presentation of expense statements,
vouchers or other supporting information in such reasonable detail as the
Company may reasonably require.
6. Other Benefits.
In addition to the compensation and benefits provided to
Executive pursuant to other provisions of this Agreement, during the Employment
Term, Executive shall be entitled to the following:
(a) (i) Reimbursement by the Company of out-of-pocket expenses
reasonably incurred by Executive in commuting from his home in Manlius, New
York to the Company's principal executive offices in New York City, in an
amount up to $250 per week, for a period commencing the Employment Date and
ending on the sooner to occur of (A) Executive's relocation to the New York
City metropolitan area, and (B) 40 weeks following the Employment Date; and
(ii) reimbursement by the Company of out-of-pocket moving and relocation
expenses reasonably incurred by Executive in connection with the relocation of
himself and his family from Manlius, New York to the New York City metropolitan
area, subject to the prior approval of the amount thereof by the Company (based
upon a reasonably detailed written estimate of the cost of such relocation
which Executive shall provide to the Company) and presentation by Executive of
expense statements, receipts, vouchers and other information supporting such
expenses in such detail as the Company may reasonably require;
(b) Participation in and receipt of benefits under: (i) any
retirement plan or arrangement for the benefit of executive employees of the
Company, (ii) any health, life, disability or other insurance plan or
arrangement for the benefit of executive employees of the Company; and (iii) any
stock option or other cash or equity compensation plan, program or arrangement,
including the Company's executive incentive bonus program, as and when
established, and any substitute or replacement plan, arrangement or program, but
in each case consistent with and subject to the terms, conditions and
administration of such plan, program or arrangement (including the discretion of
the Board or a Committee of the Board consistent with the terms of such plan,
program or arrangement), and further subject to any limitations upon Executive's
participation imposed pursuant to applicable laws or regulations; and
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<PAGE> 7
(c) Three weeks of paid vacation time.
Without the prior consent of Executive, the Company shall not
make any changes in any employee benefit plans or arrangements in effect on the
date hereof in which Executive participates (including without limitation any
pension and retirement plan, supplemental pension and retirement plan, savings
and profit sharing plan, stock ownership plan, stock purchase plan, stock option
plan, life insurance plan, medical insurance plan, disability plan, dental plan,
or health and accident plan or arrangement) which would adversely affect
Executive's rights or benefits thereunder unless such change occurs pursuant to
a program applicable to all executives of the Company and does not result in a
proportionately greater reduction in the rights of or benefits to Executive
compared to those made available to any other Company executive.
7. Other Agreements.
Executive represents and warrants to the Company that he is
not a party to any agreement, written or oral, and is not otherwise bound by the
terms of any written or oral agreement to which he is not a party, which
prohibits or materially restricts him from performing his duties under this
Agreement or from serving the Company in any other capacity. Executive hereby
agrees to indemnify the Company and shall hold the Company harmless from and
against any liability, loss, cost or expense, including reasonable attorneys
fees and expenses, incurred by the Company by reason of the inaccuracy of the
representations and warranties made by Executive in this paragraph 7. The
Company represents that it has no knowledge of any such prohibition or
restriction.
8. Life Insurance.
Executive agrees that, if requested by the Company, he will
cooperate in the Company's obtaining a policy or policies of life insurance on
his life in such amount(s) as the Company may determine, including submitting to
any appropriate medical examinations and completing and executing any
appropriate application(s) or similar form(s). Any such policy or policies shall
be for the benefit of the Company and the Company shall pay all premiums.
9. Restrictive Covenants.
(a) Executive acknowledges that he will have access to, and
knowledge of Company Confidential Information (as defined below), and that
improper use or revelation of same by Executive, whether during or after the
termination of his employment by the Company, could cause serious injury to the
business of the Company. Accordingly, Executive agrees that, except as required
to perform his duties under this Agreement, or as required by law, he will keep
secret and inviolate in perpetuity all Company Confidential Information which
shall come into his possession, and he will not disclose the same to any other
person or organization for so long as such Company Confidential Information is
not generally known by, or accessible to, the public. Executive further agrees
that he will not use any Company Confidential Information for his own benefit or
directly or indirectly for the benefit of any person or organization other than
the Company and its affiliates. "Company Confidential Information" includes all
information concerning the business and affairs of the Company which is not
generally available to the public or reported to any governmental agency
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<PAGE> 8
on a public basis and any information concerning the Company which becomes
generally available to the public as a result of a breach by any person of any
confidentiality obligation to the Company (including, without limitation, its
secrets and information about its business, financial condition, prospects,
products, technology, management information systems, know-how, merchandising
and advertising programs and plans, and the names of its suppliers, customers
and lenders and the nature of its dealings with them).
(b) Without the prior written consent of the Company, during
the Employment Term and for a period of eighteen (18) months thereafter,
Executive will not directly or indirectly hire or endeavor to recruit or hire
for any purpose any person who is or was employed by the Company during the
twelve (12) month period immediately preceding such attempted hiring or
recruitment or otherwise induce or attempt to induce any supplier or lender or
other business relation of the Company to diminish or terminate such business
relationship and Executive will not participate with or assist any other person
in engaging in any of the foregoing prohibited activities.
(c) Executive acknowledges that the provisions of this
paragraphs 9 are essential to the goodwill and results of operations of the
Company and Executive agrees that remedies at law for any breach by him of the
covenants contained in this paragraph 9 will be inadequate, and that in the
event of a violation of the covenants herein, in addition to any and all legal
and other equitable remedies which may be available to the Company, the said
covenants may be enforced by an injunction in a suit in equity, without the
necessity of posting any bond or other indemnity or of proving actual damage,
and that a temporary injunction may be granted immediately upon the commencement
of any such suit and without notice. If any provision of this paragraph 9 shall
be deemed by a court of competent jurisdiction to be unenforceable for any
reason, then such court shall be empowered to substitute, to the extent
enforceable, provisions similar thereto or other provisions so as to provide the
Company to the fullest extent permitted by applicable law, the benefits intended
by this paragraph 9.
10. Notices.
All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered if delivered personally or by facsimile (followed by
U.S. mail), or three days after mailing if mailed by registered or certified
mail (postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice, except that notice of changes of address shall be effective upon
receipt):
If to the Company:
Pharmhouse Corp.
860 Broadway
New York, New York 10003
Attn: President
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With a copy to:
Maloney, Gerra, Mehlman & Katz
405 Lexington Avenue
New York, New York 10174
Attn: Melvin Katz, Esq.
If to Executive, to him at his address set forth in the
introductory paragraph of this Agreement.
11. General.
(a) This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within such state (without regard to
principles of conflicts of law of New York or of any other jurisdiction).
(b) The paragraph headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
(c) This Agreement sets forth the entire agreement and
understanding of the parties relating to the subject matter hereof, and
supersedes all prior agreements, arrangements and understandings, written or
oral, between the parties.
(d) This Agreement and the benefits hereunder are personal to
the Company and are not assignable or transferable by Executive or Executive's
estate, in whole or in part, nor may this Agreement be assigned by the Company
to any person, firm or corporation; provided, however, that this Agreement and
the benefits hereunder may be assigned by the Company to any entity acquiring
all or substantially all of the assets or stock of the Company or to any
corporation into or with which the Company may be merged or consolidated. If the
Company shall at any time be merged into or consolidated with any other entity
or entities or if substantially all of the Company's assets shall be sold or
otherwise transferred to another entity or entities, the provisions of this
Agreement shall be binding upon and inure to the benefit of the Company or other
entity surviving or continuing after or resulting from such merger or
consolidation or the entity to which such assets shall have been sold or
transferred and the Company shall be obligated to cause such resulting surviving
or transferee company to assume all of the Company's continuing obligations
hereunder, as an express condition of any such merger, consolidation or sale of
assets.
(e) All references in this Agreement to amounts to be paid or
benefits to be provided to or on behalf of Executive are to the gross amounts
thereof which are due hereunder. The Company shall have the right to deduct
therefrom or collect from Executive all sums which may be required to be
deducted or withheld under any provision of law, including, but not limited to,
social security payments, income tax withholding, any other deduction required
by law and any interest, penalties or additions to tax imposed with respect
thereto.
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(f) This Agreement may be amended, modified, superseded,
canceled, renewed or extended and the terms or covenants hereof may be waived,
only by a written instrument executed by both parties hereto, or in the case of
a waiver, by the party waiving compliance. The failure of either party at any
time or times to require performance of any provision hereof shall in no manner
affect the right of such party at a later time to enforce the same. No wavier by
either party of the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.
(g) This Agreement may be executed in counterparts, each of
which shall be an original and all of which taken together shall constitute one
and the same instrument.
(h) Subject to the provisions of paragraph 9(c) of this
Agreement, if any term or other provision of this Agreement is invalid, illegal
or incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the essential economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to either party hereto. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as practicable in an acceptable manner
to the end that the transactions contemplated hereby are fulfilled to the extent
practicable.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
PHARMHOUSE CORP.
By: /s/ Kenneth A. Davis
-------------------------------
Name: KENNETH A. DAVIS
Title: President
/s/ Gerald Katz
-------------------------------
GERALD KATZ
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<PAGE> 1
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of November 6, 1995 between Richard Davis, an
individual residing at 400 East 71st Street, New York, NY 10021 ("Executive"),
and Pharmhouse Corp., a New York corporation with offices at 860 Broadway, New
York, New York 10003 (the "Company").
WITNESSETH
WHEREAS, the Company desires to employ Executive as an executive
officer and to be assured of its right to his services in such capacity and
Executive desires to become employed by the Company in such capacity, all upon
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and conditions herein contained and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, do hereby agree as follows:
1. Employment; Duties.
The Company hereby employs Executive and Executive hereby
accepts such employment as an executive officer of the Company on the terms and
conditions hereinafter set forth. In his capacity as an executive officer of the
Company, Executive shall perform such functions with respect to the business and
affairs of the Company, consistent with his position, as the Company's Board of
Directors (the "Board"), Chief Executive Officer or Executive Vice President
shall determine from time to time. Executive shall perform his duties at such
offices as, from time to time, the Company shall establish and shall travel to
the extent reasonably required to perform his duties hereunder. Executive shall
devote substantially his full business time and energies to the business and
affairs of the Company and shall not accept other employment, perform any
services for any other person, firm or corporation, or permit his personal
business or investment affairs to interfere with the performance of his duties
hereunder; provided, however, that Executive may (i) devote reasonable amounts
of time, other than during normal business hours, to activities having a
charitable, educational or other public interest purpose and (ii) during the
first year of the Employment Term (as defined below), continue to devote
reasonable amounts of time to providing tax advisory and tax return preparation
services to those individuals and entities to whom Executive has provided such
services during the one year period preceding the Employment Date, in the case
of each of (i) and (ii) above, only if and to the extent such activities do not,
in the judgment of the Corporation's President or Executive Vice President,
interfere materially with Executive's performance of his responsibilities
hereunder. Executive shall, upon reasonable notice, furnish such information and
proper assistance to the Company as reasonably may be required by the Company in
connection with any legal action involving the Company or any of its affiliates.
Executive agrees to use his best efforts, skill and abilities to promote and
protect the interests of the Company and, faithfully and to the best of his
ability, perform his duties hereunder. Executive agrees to serve as a director
or officer of any of the Company's subsidiaries or affiliates requesting his
services and to perform such services for such affiliate, consistent with his
office, as its Board of Directors shall request. The Company agrees to use its
best efforts to have Executive elected to serve as Senior Vice President-Finance
and Chief Financial Officer of the Company during the Employment Term.
<PAGE> 2
2. Term; Termination.
(a) Executive's employment pursuant to the terms hereof shall
become effective as of the date hereof (the "Employment Date") and shall remain
in effect, subject to the provisions of subparagraph (b) of this paragraph 2,
through January 30, 1999. The term of employment hereunder, commencing with the
Employment Date and including any renewals or extensions hereof, is hereinafter
referred to as the "Employment Term."
(b) This Agreement and Executive's employment by the Company
shall terminate on the Date of Termination (as defined in subparagraph (d) of
this paragraph 2) as follows:
(i) Automatically upon Executive's death;
(ii) At the Company's option if, as a result of
Executive's incapacity due to physical or mental illness, he is unable to
perform the duties of his employment hereunder for a continuous period exceeding
one hundred twenty (120) days or an aggregate of more than one hundred eighty
(180) days in any consecutive 12-month period (each such period being
hereinafter referred to as a "Disability Period");
(iii) At the Company's option at any time for
Cause. "Cause" shall be defined to mean (A) the commission by Executive of any
felony, (B) the commission by Executive of any crime involving dishonesty or
moral turpitude, (C) the engagement by Executive in any act of fraud,
misappropriation or similar misfeasance, (D) the engagement by Executive in any
activity in contravention of paragraph 9 of this Agreement or otherwise
materially adverse to the Company or constituting a material breach of this
Agreement, or (E) the engagement by Executive in any transaction with the
Company involving a conflict of interest or self dealing unless such transaction
has been theretofore approved by a disinterested majority of the Board or a
Committee of the Board;
(iv) At the Company's option at any time without
Cause; or
(v) By Executive for Good Reason. For purposes
of this Agreement, the term "Good Reason" shall mean (A) a change in control of
the Company (as defined below), (B) any assignment to Executive of any duties
inconsistent with his duties, commencing as of the date hereof, as a principal
executive officer of the Company or a significant change in his (i)
responsibilities, commencing as of the date hereof, or (ii) status or reporting
responsibilities or titles in effect immediately prior to such change without
his express written consent, (C) any removal of Executive from or any failure to
re-elect Executive as a principal executive officer of the Company, except in
connection with a termination of Executive's employment pursuant to the terms of
this Agreement, (D) a reduction in Executive's Base Salary as in effect on the
date hereof or as the same may be increased from time to time hereafter, (E) any
change or relocation of the Company's principal executive offices to a location
more than 50 miles from the Company's present principal executive offices
without the prior written consent of Executive, or (F) the failure of the
Company to cause any resulting, surviving or transferee of the Company to assume
all of the Company's continuing obligations hereunder.
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<PAGE> 3
(c) Any termination by the Company pursuant to subparagraph
(b)(ii), (iii) or (iv) above or by Executive pursuant to subparagraph (b)(v)
above shall be communicated to Executive or the Company, as the case may be, by
a Notice of Termination. "Notice of Termination" shall mean a written notice
indicating the specific provision of this Agreement upon which such termination
is based and setting forth in reasonable detail the facts and circumstances
giving rise to such termination.
(d) As appropriate under the circumstances, "Date of
Termination" shall mean the earlier of: (i) the date of Executive's death; (ii)
thirty (30) days after a Notice of Termination is given to Executive if
Executive's employment is terminated pursuant to subparagraph (b)(ii) above; or
(iii) the date specified in the Notice of Termination if Executive's employment
is terminated by the Company pursuant to subparagraph (b)(iii) or (iv) or by him
pursuant to subparagraph (b)(v) above.
(e) For purposes of this Agreement, a "change in control of
the Company" shall mean a change in control of a category that would be required
to be reported under relevant provisions of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or any successor statute or any rule or
regulation of the Securities and Exchange Commission (the "SEC") thereunder then
in effect; provided that, without limitation, such a change in control shall be
deemed to have occurred if (i) any person (as such term is used in Paragraphs
13(d) and 14(d) of the Exchange Act), other than the Company or any "person" who
on the date hereof is a director or officer of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d- 3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities and the
Board, upon having been advised that such ownership level has been reached, does
not, within fifteen (15) business days thereafter, adopt a resolution approving
the acquisition of that level of securities ownership by such person or (ii)
during any period of two consecutive years during the Employment Term,
individuals who, at the beginning of such period constitute the Board cease for
any reason to constitute at least a majority thereof, unless the election of
each director who was not a director at the beginning of such period has been
approved in advance by directors representing at least two-thirds (2/3) of the
directors then in office who were directors at the beginning of such period.
3. Compensation.
(a) The Company shall pay Executive an annual base salary
("Base Salary") of $110,000 (subject to increase as provided herein), payable in
equal installments in accordance with the Company's regular payroll practices
for executive level employees, as determined from time to time by the Board, but
in no event less frequently than monthly in arrears. Executive's Base Salary
shall be increased, (i) to $120,000, effective as of the first anniversary of
the Employment Date, and (ii) annually thereafter as of the first day of each
fiscal year during the Employment Term (commencing February 2, 1997) by an
amount equal to the greater of (A) five percent (5%) of the Base Salary in
effect for the immediately preceding year, or (B) the product of the Base Salary
theretofore in effect multiplied by a fraction of which (x) the numerator is the
Consumer Price Index for All Urban Consumers - New York City (1982/84=100) (the
"Index"), prepared by the Bureau of Labor Statistics of the United States
Department of Labor (or if the Index is not then being published,
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<PAGE> 4
the most nearly comparable successor index), of the month immediately preceding
such date and (y) the denominator is the Index for the month immediately
preceding the last date on which the Base Salary has been adjusted pursuant to
this sentence or, in the case of the first such adjustment, January 1996.
(b) As further compensation for services to be rendered to the
Company by Executive hereunder, within sixty (60) days after the Employment
Date, the Corporation, by action of the Compensation Committee of the Board,
shall grant to Executive, pursuant to the Company's 1991 Incentive Stock Option
Plan (the "Option Plan"), options to purchase an aggregate of 50,000 Common
Shares of the Company at an exercise price per share equal to the fair market
value per share (as defined in the Option Plan) as of the date of grant. The
Options shall be granted to Executive pursuant to a Stock Option Agreement to be
entered into between Executive and Company, which agreement shall provide, among
other matters, the following: (i) 16,667 Options shall vest and be first
exercisable on the first anniversary of the Employment Date, (ii) 16,667 Options
shall vest and be first exercisable on the second anniversary of the Employment
Date, (iii) 16,666 Options shall vest and be first exercisable on the third
anniversary of the Employment Date, and (iv) all such Options shall fully vest
and become immediately exercisable automatically upon a change in control of the
Company. The Options shall otherwise be governed by the Option Plan.
4. Compensation Upon Termination and During Disability.
(a) If Executive's employment shall be terminated by his
death, the Company shall pay to his estate Executive's unpaid Base Salary for
the period through the Date of Termination and the Company shall thereafter
continue to pay to Executive's estate Executive's Base Salary (as and when the
same would otherwise have been payable to Executive) for a period equal to the
shorter of (i) twelve months from the Date of Termination and (ii) the date on
which the Employment Term would otherwise have expired pursuant to the first
sentence of paragraph 2(a) hereof. In addition, not more than 90 days following
the Date of Termination, the Company shall pay to Executive's estate any bonus
to which Executive is or has become unconditionally entitled prior to the Date
of Termination.
(b) In the event of Executive's physical or mental disability,
during the Disability Period, the Company shall continue to pay Executive his
Base Salary and any bonus to which Executive has become unconditionally
entitled, as and when the same would otherwise become due and payable to
Executive hereunder. If the Company terminates Executive's employment hereunder
following the Disability Period, the Company shall pay Executive his Base Salary
for the period through the Date of Termination and the Company shall thereafter
continue to pay to Executive his Base Salary (as and when the same would
otherwise have been payable to Executive) for a period equal to the shorter of
(i) twelve months from the Date of Termination and (ii) the date on which the
Employment Term would otherwise have expired pursuant to the first sentence of
paragraph 2(a) hereof. In addition, not more than 90 days following the Date of
Termination, the Company shall pay Executive any bonus to which Executive is or
has become unconditionally entitled prior to the date of Termination.
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<PAGE> 5
(c) If Executive's employment shall be terminated for Cause,
the Company shall continue to pay Executive his Base Salary through the Date of
Termination, but shall have no obligation to make any payment to Executive on
account of any bonus following the Date of Termination, regardless of whether
Executive has theretofore become entitled thereto.
(d) If Executive's employment shall be terminated by the
Company without Cause or terminated by Executive for Good Reason, the Company
shall pay Executive his Base Salary for the period through the Date of
Termination and the Company shall thereafter continue to pay to Executive his
Base Salary (as and when the same would otherwise have been payable to
Executive) for a period equal to the shorter of (i) twelve months from the Date
of Termination and (ii) the date on which the Employment Term would otherwise
have expired pursuant to the first sentence of paragraph 2(a) hereof ; provided,
however, that any amounts payable to Executive pursuant to this paragraph (d)
for the period subsequent to the date which is six months after such Date of
Termination shall be reduced by the amount of any salary or other compensation
earned by or paid to Executive during such period pursuant to any employment
(including self-employment), consulting or similar arrangements entered into by
Executive. In addition, not more than 90 days following the Date of Termination,
the Company shall pay Executive any bonus to which Executive is or has become
unconditionally entitled prior to the date of Termination. At the election of
Executive, in lieu of any further payments to Executive under this paragraph (d)
for periods subsequent to the Date of Termination, as severance pay, the Company
shall pay to Executive, on or before the thirtieth day following the Date of
Termination, a lump sum amount equal to the present value, based on a discount
rate equal to 50% of the prime rate of Chemical Bank (or any of its successors)
then in effect in New York City, of twelve months Base Salary, as in effect as
of the Date of Termination. In the event Executive enters into any employment
(including self-employment), consulting or similar arrangement, he shall give
notice thereof to the Company in writing indicating the date of commencement of
such empolyment and the compensation payable to him in connection therewith.
5. Reimbursement of Expenses.
In addition to the compensation and benefits provided to
Executive pursuant to other provisions of this Agreement, the Company will
reimburse Executive, in a manner consistent with such policies as the Company
may establish from time to time, for all reasonable out-of-pocket expenses
actually incurred or paid by him in the performance of his services hereunder
during the Employment Term, subject to presentation of expense statements,
vouchers or other supporting information in such reasonable detail as the
Company may reasonably require.
6. Other Benefits.
In addition to the compensation and benefits provided to
Executive pursuant to other provisions of this Agreement, during the Employment
Term, Executive shall be entitled to the following:
(a) Participation in and receipt of benefits under: (i) any
retirement plan or arrangement for the benefit of executive employees of the
Company, (ii) any health, life, disability
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<PAGE> 6
or other insurance plan or arrangement for the benefit of executive employees of
the Company; and (iii) any stock option or other cash or equity compensation
plan, program or arrangement, including the Company's executive incentive bonus
program, as and when established, and any substitute or replacement plan,
arrangement or program, but in each case consistent with and subject to the
terms, conditions and administration of such plan, program or arrangement
(including the discretion of the Board or a Committee of the Board consistent
with the terms of such plan, program or arrangement), and further subject to any
limitations upon Executive's participation imposed pursuant to applicable laws
or regulations; and
(b) Three weeks of paid vacation time.
Without the prior consent of Executive, the Company shall not
make any changes in any employee benefit plans or arrangements in effect on the
date hereof in which Executive participates (including without limitation any
pension and retirement plan, supplemental pension and retirement plan, savings
and profit sharing plan, stock ownership plan, stock purchase plan, stock option
plan, life insurance plan, medical insurance plan, disability plan, dental plan,
or health and accident plan or arrangement) which would adversely affect
Executive's rights or benefits thereunder unless such change occurs pursuant to
a program applicable to all executives of the Company and does not result in a
proportionately greater reduction in the rights of or benefits to Executive
compared to those made available to any other Company executive.
7. Other Agreements.
Executive represents and warrants to the Company that he is
not a party to any agreement, written or oral, and is not otherwise bound by the
terms of any written or oral agreement to which he is not a party, which
prohibits or materially restricts him from performing his duties under this
Agreement or from serving the Company in any other capacity. Executive hereby
agrees to indemnify the Company and shall hold the Company harmless from and
against any liability, loss, cost or expense, including reasonable attorneys
fees and expenses, incurred by the Company by reason of the inaccuracy of the
representations and warranties made by Executive in this paragraph 7. The
Company represents that it has no knowledge of any such prohibition or
restriction.
8. Life Insurance.
Executive agrees that, if requested by the Company, he will
cooperate in the Company's obtaining a policy or policies of life insurance on
his life in such amount(s) as the Company may determine, including submitting to
any appropriate medical examinations and completing and executing any
appropriate application(s) or similar form(s). Any such policy or policies shall
be for the benefit of the Company and the Company shall pay all premiums.
9. Restrictive Covenants.
(a) Executive acknowledges that he will have access to, and
knowledge of Company Confidential Information (as defined below), and that
improper use or revelation of
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<PAGE> 7
same by Executive, whether during or after the termination of his employment by
the Company, could cause serious injury to the business of the Company.
Accordingly, Executive agrees that, except as required to perform his duties
under this Agreement, or as required by law, he will keep secret and inviolate
in perpetuity all Company Confidential Information which shall come into his
possession, and he will not disclose the same to any other person or
organization for so long as such Company Confidential Information is not
generally known by, or accessible to, the public. Executive further agrees that
he will not use any Company Confidential Information for his own benefit or
directly or indirectly for the benefit of any person or organization other than
the Company and its affiliates. "Company Confidential Information" includes all
information concerning the business and affairs of the Company which is not
generally available to the public or reported to any governmental agency on a
public basis and any information concerning the Company which becomes generally
available to the public as a result of a breach by any person of any
confidentiality obligation to the Company (including, without limitation, its
secrets and information about its business, financial condition, prospects,
products, technology, management information systems, know-how, merchandising
and advertising programs and plans, and the names of its suppliers, customers
and lenders and the nature of its dealings with them).
(b) Without the prior written consent of the Company, during
the Employment Term and for a period of eighteen (18) months thereafter,
Executive will not directly or indirectly hire or endeavor to recruit or hire
for any purpose any person who is or was employed by the Company during the
twelve (12) month period immediately preceding such attempted hiring or
recruitment or otherwise induce or attempt to induce any supplier or lender or
other business relation of the Company to diminish or terminate such business
relationship and Executive will not participate with or assist any other person
in engaging in any of the foregoing prohibited activities.
(c) Executive acknowledges that the provisions of this
paragraphs 9 are essential to the goodwill and results of operations of the
Company and Executive agrees that remedies at law for any breach by him of the
covenants contained in this paragraph 9 will be inadequate, and that in the
event of a violation of the covenants herein, in addition to any and all legal
and other equitable remedies which may be available to the Company, the said
covenants may be enforced by an injunction in a suit in equity, without the
necessity of posting any bond or other indemnity or of proving actual damage,
and that a temporary injunction may be granted immediately upon the commencement
of any such suit and without notice. If any provision of this paragraph 9 shall
be deemed by a court of competent jurisdiction to be unenforceable for any
reason, then such court shall be empowered to substitute, to the extent
enforceable, provisions similar thereto or other provisions so as to provide the
Company to the fullest extent permitted by applicable law, the benefits intended
by this paragraph 9.
10. Notices.
All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered if delivered personally or by facsimile (followed by
U.S. mail), or three days after mailing if mailed by registered or certified
mail (postage prepaid, return receipt requested) to the parties at the following
addresses
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(or at such other address for a party as shall be specified by like notice,
except that notice of changes of address shall be effective upon receipt):
If to the Company:
Pharmhouse Corp.
860 Broadway
New York, New York 10003
Attn: President
With a copy to:
Maloney, Gerra, Mehlman & Katz
405 Lexington Avenue
New York, New York 10174
Attn: Melvin Katz, Esq.
If to Executive, to him at his address set forth in the
introductory paragraph of this Agreement.
11. General.
(a) This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York applicable to
contracts made and to be performed entirely within such state (without regard to
principles of conflicts of law of New York or of any other jurisdiction).
(b) The paragraph headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
(c) This Agreement sets forth the entire agreement and
understanding of the parties relating to the subject matter hereof, and
supersedes all prior agreements, arrangements and understandings, written or
oral, between the parties.
(d) This Agreement and the benefits hereunder are personal to
the Company and are not assignable or transferable by Executive or Executive's
estate, in whole or in part, nor may this Agreement be assigned by the Company
to any person, firm or corporation; provided, however, that this Agreement and
the benefits hereunder may be assigned by the Company to any entity acquiring
all or substantially all of the assets or stock of the Company or to any
corporation into or with which the Company may be merged or consolidated. If the
Company shall at any time be merged into or consolidated with any other entity
or entities or if substantially all of the Company's assets shall be sold or
otherwise transferred to another entity or entities, the provisions of this
Agreement shall be binding upon and inure to the benefit of the Company or other
entity surviving or continuing after or resulting from such merger or
consolidation or the entity to which such assets shall have been sold or
transferred and the Company shall be obligated to cause such resulting surviving
or transferee
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<PAGE> 9
company to assume all of the Company's continuing obligations hereunder, as an
express condition of any such merger, consolidation or sale of assets.
(e) All references in this Agreement to amounts to be paid or
benefits to be provided to or on behalf of Executive are to the gross amounts
thereof which are due hereunder. The Company shall have the right to deduct
therefrom or collect from Executive all sums which may be required to be
deducted or withheld under any provision of law, including, but not limited to,
social security payments, income tax withholding, any other deduction required
by law and any interest, penalties or additions to tax imposed with respect
thereto.
(f) This Agreement may be amended, modified, superseded,
canceled, renewed or extended and the terms or covenants hereof may be waived,
only by a written instrument executed by both parties hereto, or in the case of
a waiver, by the party waiving compliance. The failure of either party at any
time or times to require performance of any provision hereof shall in no manner
affect the right of such party at a later time to enforce the same. No wavier by
either party of the breach of any term or covenant contained in this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as, a further or continuing waiver of any such breach, or a
waiver of the breach of any other term or covenant contained in this Agreement.
(g) This Agreement may be executed in counterparts, each of
which shall be an original and all of which taken together shall constitute one
and the same instrument.
(h) Subject to the provisions of paragraph 9(c) of this
Agreement, if any term or other provision of this Agreement is invalid, illegal
or incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the essential economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to either party hereto. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as practicable in an acceptable manner
to the end that the transactions contemplated hereby are fulfilled to the extent
practicable.
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IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the date first above written.
PHARMHOUSE CORP.
By: /s/ Kenneth A. Davis
-------------------------------
Name: KENNETH A. DAVIS
Title:
/s/ Richard Davis
-------------------------------
RICHARD DAVIS
10
<PAGE> 1
PHARMHOUSE CORP.
RESTRICTED SHARE PURCHASE AGREEMENT
AGREEMENT made as of the 2nd day of January, 1996 between
PHARMHOUSE CORP., a New York corporation (the "Company") and Gerald Katz, an
individual residing in Manlius, New York ("Executive").
W I T N E S S E T H:
WHEREAS, Executive is employed by the Company in a key
managerial position pursuant to the terms of an Employment Agreement dated as of
December 15, 1995 (the "Employment Agreement") and his services are of
considerable value to the Company; and
WHEREAS, pursuant to the Employment Agreement, the Company has
agreed to sell to Executive, and Executive has agreed to purchase from the
Company, 45,000 Common Shares, $.0l par value (the "Shares"), of the Company
subject to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises, the parties
hereby agree as follows:
1. Definitions
For purposes of and as used in this Agreement, terms that are
defined parenthetically immediately after their first use herein shall have the
respective meanings ascribed by such parenthetical definitions and the following
additional terms set forth below shall have the following meanings which shall
be equally applicable to both the singular and plural forms of the terms so
defined:
(a) "Board" means the Board of Directors of the Company;
(b) "Change of Control" means any of the following
transactions or events:
(i) the acquisition by any theretofore
unaffiliated corporation, partnership,
person or group of beneficial ownership of
30% or more of either the then outstanding
Shares or the combined voting power of the
then outstanding voting securities of the
Company entitled to vote generally in the
election of directors, except that no such
person or group shall be deemed to own
beneficially (1) any securities acquired
directly from the Company pursuant to a
written agreement with the Company approved
by the Board, or (2) any securities held
<PAGE> 2
by the Company or a Subsidiary or any
employee benefit plan (or any related trust)
of the Company or a Subsidiary;
(ii) individuals who, as of the date of this
Agreement, constitute the Board (the
"Incumbent Directors") cease for any reason
to constitute at least a majority of the
Board; provided that any individual who
becomes a director after the date hereof
whose election, or nomination for election,
by the Company's shareholders was approved
by a vote or written consent of at least
two-thirds of the directors then comprising
the Incumbent Directors shall be considered
as though such individual were an Incumbent
Director, but excluding, for this purpose,
any such individual whose initial assumption
of office is in connection with an actual or
threatened contest relating to the election
or removal of the directors of the Company
(within the meaning of Rule 14a-11 under the
1934 Act, as hereinafter defined); or
(iii) approval by the shareholders of the Company
of (A) a merger, reorganization or
consolidation with respect to which the
individuals and entities who were the
respective beneficial owners of the Shares
and voting securities of the Company
immediately before such merger,
reorganization or consolidation do not,
immediately after such merger,
reorganization or consolidation,
beneficially own, directly or indirectly,
more than 50% of, respectively, the then
outstanding common shares and the combined
voting power of the then outstanding voting
securities entitled to vote generally in the
election of directors of the corporation
resulting from such merger, reorganization
or consolidation, (B) a liquidation or
dissolution of the Company or (C) the sale
or other disposition of all or substantially
all of the assets of the Company.
For purposes of this definition, "person(s)" has the meaning given to such term
in Section 13(d)(3) of the 1934 Act, "beneficial owner" has the meaning given to
such term in SEC Rule 13d-3 under the 1934 Act, and "group" has the meaning
given to such term in Section 13(d) of the 1934 Act. For purposes of this
definition, the term "Effective Date of a Change of Control", means the date
upon which the acquisition of beneficial ownership of the requisite percentage
of the Shares or of the combined voting power of the then outstanding voting
securities has been consummated under clause (i) of this paragraph 1(c), or the
date upon which the Incumbent Directors cease to comprise a majority of the
Board subject to the conditions specified in clause (ii) of this paragraph 1(c),
or the date of approval by the shareholders of the Company of any of the
transactions described in clause (iii) of this paragraph 1(c), as the case may
be.
2
<PAGE> 3
(c) "Code" means the Internal Revenue Code of 1986, as
amended, and regulations and rulings thereunder. References to a particular
section of the Code shall include references to successor provisions thereto.
(d) "Committee" means the Compensation Committee of the Board.
(e) "Disability" means a mental or physical condition which,
in the opinion of the Board, renders Executive unable or incompetent to carry
out the job responsibilities which the Executive held or the task to which
Executive was assigned immediately prior to the time the disability was incurred
and which is expected to be permanent or for an indefinite duration.
(f) "Escrow Agent" means Messrs. Maloney, Gerra, Mehlman &
Katz, general counsel to the Company.
(g) "Fair Market Value" of Shares of the Company as of any
applicable date means:
(i) if the Shares are listed on a national securities
exchange or authorized for quotation on the National
Association of Securities Dealers Automated Quotation
System (National Market System or Small Cap Market)
("NASDAQ"), the closing price of the Shares on such
exchange or on NASDAQ, as the case may be, or if no
such reported sale of the Shares shall have occurred
on such date, on then next preceding date on which
there was such a reported sale; or
(ii) if the Shares are not listed for trading on a
national securities exchange or authorized for
quotation on NASDAQ, the last reported bid price
published in the "pink sheets" or displayed on the
NASD Electronic Bulletin Board, as the case may be;
or
(iii) in lieu of the foregoing, or if the Shares are not
listed for trading on a national securities exchange,
are not authorized for quotation on NASDAQ, and are
not published in the "pink sheets" or displayed on
the NASD Electronic Bulletin Board, the Fair Market
Value of the security as determined in good faith by
the Board or the Committee, as the case may be. In
making such determination, the Board or the
Committee, as the case may be, may, in the Board's or
Committee's sole discretion, but shall not be
required to, rely upon a report or opinion with
respect to the Fair Market Value of a security
rendered by a reputable brokerage or investment
banking firm qualified to render such reports or
opinions.
3
<PAGE> 4
(h) "1934 Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder. References to a
particular section of, or rules or regulation under, the 1934 Act shall include
references to successor provisions.
(i) "Restricted Shares" means Shares issued by the Company to
Executive hereunder which are subject to a Substantial Forfeiture Risk.
(j) "SEC" means the United States Securities and Exchange
Commission.
(k) "Section 83(b) Election" means the election which may be
filed by the Executive within thirty (30) days after the date hereof with
respect to the Federal Income Tax payable by reason of the difference between
the Share Sale Price of the Vested Shares and their Fair Market Value as of the
date hereof.
(l) "Share Sale Price" means $.01 per share.
(m) "Subsidiaries" means one or more corporations, a majority
of whose outstanding voting shares are owned beneficially, directly or
indirectly, by the Company.
(n) "Substantial Forfeiture Risk" means the substantial risk
of forfeiture to which the Restricted Shares to be sold to Executive hereunder
shall be subject within the meaning of Section 83 of the Code.
(o) "Termination of Employment" means the voluntary or
involuntary termination of employment of Executive by the Company with or
without Cause (as defined in the Employment Agreement) and/or for any reason
other than the relevant Vesting Events set forth in Paragraph 3(c) hereof.
(p) "Vested Shares" means Restricted Shares which shall cease
to be subject to a Substantial Forfeiture Risk from and after (a) the Vesting
Date with respect to such Shares or (b) the Vesting Events specified in
Paragraph 3 of this Agreement, as the case may be.
(q) "Vesting Dates" means the respective dates from and after
which specified percentages of the Restricted Shares shall cease to be subject
to a Substantial Forfeiture Risk as provided in Paragraph 3(a) hereof.
(r) "Vesting Events" means the respective events from and
after which all of the then remaining Restricted Shares shall cease to be
subject to a Substantial Forfeiture Risk as provided in Paragraph 3(b) hereof.
4
<PAGE> 5
2. Sale of Shares To Executive
(a) The Company hereby issues and sells to Executive, and
Executive hereby purchases from the Company, 45,000 Shares for a purchase price
per Share equal to the Share Sale Price, constituting an aggregate purchase
price of $450.00. Simultaneously with the execution and delivery of this
Agreement, Executive shall pay the total purchase price for such Shares to the
Company and the Company shall issue all of such Shares and shall instruct the
Company'S transfer agent for the Shares to deliver a certificate or certificates
evidencing such Shares to the Escrow Agent to be held by the Escrow Agent in
accordance with relevant provisions of this Agreement.
3. Vested Shares and Restricted Shares
(a) Of the Shares issued and sold by the Company to Executive
pursuant to this Agreement:
(i) as of the date hereof, 100% of such Shares are
Restricted Shares and shall be forfeited by
Executive as provided in Paragraph 4 hereof in the
event of Termination of Employment of Executive
prior to the close of business on the date
immediately preceding the first anniversary of
this Agreement;
(ii) 30,000 such Shares, equal to 66-2/3% of such
Shares, shall be Restricted Shares and shall be
forfeited by Executive as provided in Paragraph 4
hereof in the event of Termination of Employment
of Executive prior to the close of business on the
date immediately preceding the second anniversary
of this Agreement;
(iii) 15,000 such Shares, equal to 33-1/3% of such
Shares, shall be Restricted Shares and shall be
forfeited by Executive as provided in Paragraph 4
hereof in the event of Termination of Employment
of Executive prior to the close of business on the
date immediately preceding the third anniversary
of this Agreement;
(iv) all of such Shares shall be Vested Shares and shall
not be subject to a Substantial Forfeiture Risk in
the event no Termination of Employment of Executive
has occurred as of the close of business on the
date immediately preceding the third anniversary
of this Agreement.
The respective percentages of the Restricted Shares specified
in clauses (i) through (iii), inclusive of this Paragraph 3(a) shall,
automatically and without satisfaction of any further conditions by Executive
(subject, however, to the provisions of Paragraph 5(c) hereof), become and
5
<PAGE> 6
be deemed Vested Shares if Executive remains employed by the Company or any of
its Subsidiaries as of and through the dates set forth in each of such clauses.
(b) Notwithstanding the provisions of subparagraph (a) of this
paragraph 3, all or any then remaining portion of the Restricted Shares shall
cease to be subject to Substantial Forfeiture Risk and shall, automatically and
without satisfaction of any further conditions by Executive (subject, however,
to the provisions of Paragraph 5(c) hereof), become and be deemed Vested Shares
upon the date of occurrence of any of the following Vesting Events:
(i) the death of Executive;
(ii) the Disability of Executive;
(iii) the Effective Date of a Change of Control of the
Company; or
(iv) termination of the Employment Agreement by
Executive for Good Reason (as defined therein).
(c) Nothwithstanding the foregoing, the Board may, in its sole
discretion at any time prior to the vesting of any Restricted Shares pursuant to
the terms hereof, accelerate the vesting of all or any portion of such
Restricted Shares, upon the happening of which such portion of the Restricted
Shares shall cease to be subject to Substantial Forfeiture Risk and shall,
automatically and without satisfaction of any further conditions by Executive
(subject, however, to the provisions of Paragraph 5(c) hereof), become and be
deemed Vested Shares.
(d) All Restricted Shares which become Vested Shares upon the
Vesting Dates or by reason of the Vesting Events specified in subparagraphs (a),
(b) or (c) of this paragraph 3, as the case may be, shall thereafter be held by
Executive subject only to restrictions against resale or distribution set forth
in Paragraph 8 hereof.
4. Forfeiture of Restricted Shares
In the event of the Termination of Employment of Executive
prior to the respective Vesting Dates set forth in clauses (i) through (iv) of
Paragraph 3(a) hereof, Executive hereby expressly agrees that Executive shall
thereupon forfeit to the Company all or the remaining portion of the Restricted
Shares issued to Executive pursuant to this Agreement. Such forfeiture shall be
effected through the required resale by Executive to the Company of all such
Restricted Shares at an aggregate purchase price equal to the Share Sale Price
(the "Forfeiture Resale") multiplied by the total number of Restricted Shares so
forfeited (the "Forfeiture Shares"). In furtherance of the Forfeiture Resale:
(i) the transfer and assignment of such Restricted Shares
to the Company shall be effected by the release and
delivery of the certificate or certificates
6
<PAGE> 7
evidencing such Restricted Shares by the Escrow Agent
to the Company without any further act or the
execution of any document or instrument by Executive;
and
(ii) after delivery by the Escrow Agent to the Company of
the certificate or certificates evidencing such
Restricted Shares, the Company shall remit to
Executive the Forfeiture Price, without any interest
or premium, for and in consideration of the
Restricted Shares so forfeited.
5. Section 83(b) Election
(a) Executive may file an election under Section 83(b) of the
Code within thirty (30) days after the date hereof pursuant to which Executive
may elect to pay Federal Income Tax equal to the difference between (i) the
Share Sale Price at which the Vested Shares are being sold by the Company to the
Executive pursuant to paragraph 3(a) hereof and (ii) their Fair Market Value per
Share as of the date hereof multiplied by the total number of the Vested Shares.
Promptly upon any filing by Executive of such election, Executive shall forward
a copy thereof to the Company.
(b) Notwithstanding any other provisions of this Agreement,
including without limitation paragraph 5(b) hereof, Executive hereby expressly
acknowledges and agrees that Executive shall be responsible for and obligated to
pay: (i) all federal, state and local income taxes as may be owing by Executive
with respect to his purchase of Shares hereunder, including any such taxes for
the year or years during which the Vesting Dates specified in Paragraph 3(b)
hereof fall or any of the Vesting Events occur, as the case may be, by reason of
which the Restricted Shares shall no longer be subject to the Substantial
Forfeiture Risk, and (ii) all federal, state or local income or capital gains
taxes as may be payable upon or by reason of the sale, exchange or other
disposition of any or all of the Vested Shares and Restricted Shares sold by the
Company to Executive hereunder. Accordingly, the Company shall:
(i) have no direct or indirect liability or obligation to
Executive for or with respect to the obligation of
Executive to pay any such taxes in whole or in any
part; and
(ii) at such times as any portion of the Restricted Shares
become Vested Shares pursuant to the provisions of
Paragraphs 3(a) or 3(b) of this Agreement, whichever
is applicable, the Company shall be entitled to
require, as a condition of delivery to Executive by
the Escrow Agent of the certificate or certificates
evidencing Vested Shares, (A) that Executive remit in
cash a dollar amount sufficient to satisfy all
federal, state, and local withholding tax
requirements related thereto, (B) the withholding of
such sums from compensation otherwise then owing
Executive or from the number of Vested Shares then
required to be
7
<PAGE> 8
delivered to Executive under either of the
foregoing provisions of this Agreement or
(C) any combination of the foregoing.
6. Escrow Agent
(a) The Company and Executive hereby agree that the stock
certificate or certificates in Executive'S name evidencing all of the Restricted
Shares are to be deposited by the Company'S transfer agent for the Shares with
the Escrow Agent as soon as practicable following the execution of this
Agreement. Each of such stock certificates shall be accompanied by a stock power
duly executed by Executive in blank.
(b) The Escrow Agent shall hold the certificate or
certificates evidencing all of the Restricted Shares subject to the following
terms and conditions:
(i) Upon Escrow Agent's receipt of written notice from
the Company, the Escrow Agent shall release and
deliver to Executive (or the representative of
Executive's estate, if applicable) the certificate or
certificates evidencing such number of the Restricted
Shares as shall no longer be subject to the
Substantial Forfeiture Risk as of the respective
Vesting Dates specified in Paragraph 3(b) hereof or
by reason of any of the Vesting Events specified in
Paragraph 3(c) hereof and the Company shall authorize
its transfer agent for the Shares to reissue (or
otherwise cause the reissuance) to Executive of a
stock certificate or certificates evidencing such
Shares without the first legend set forth in
Paragraph 10(b) hereof and subject only to
satisfaction of the provisions of Paragraph 5(b)
hereof and the requirements of applicable federal and
state securities laws;
(ii) Upon Escrow Agent's receipt of written notice from
the Company, the Escrow Agent shall deliver to the
Company a certificate or certificates evidencing all
or any remaining portion of the Restricted Shares as
promptly as practicable after being notified in
writing by the Company of the Termination of
Employment of Executive (except and unless
Executive's employment terminates by reason of any of
the Vesting Events specified in Paragraph 3(b)
hereof) prior to the respective Vesting Dates
specified in Paragraph 3(a) hereof;
(c) Compliance by the Escrow Agent with the instructions of
the Company in accordance with the provisions of clauses (i) or (ii) of this
paragraph 6(b), whichever is applicable, shall constitute full performance by
the Escrow Agent of all of its duties under this Agreement, provided, however,
that, in the event that the Escrow Agent receives conflicting notices or
instructions from the Company and Executive, then the Escrow Agent shall be
entitled to rely solely
8
<PAGE> 9
and exclusively upon any notice or instructions from the Company in determining
whether to release all or any portion of the Restricted Shares to Executive or
the Company, as the case may be.
(d) The Company and Executive hereby jointly and severally
indemnify and hold harmless the Escrow Agent from and against any and all
liabilities, claims, losses, costs and expenses (including reasonable attorneys'
fees) arising out of or in connection with this Agreement and the performance by
the Escrow Agent of its duties hereunder, including without limitation any
action taken or omitted, failed or refused to be taken by the Escrow Agent
hereunder except for such monetary losses as shall be sustained by the Company
or Executive as a proximate and direct result of the Escrow agent'S wilful
misconduct or gross negligence in the performance of its duties hereunder;
provided, however, that the foregoing indemnification is not exclusive of any
other rights at law or in equity against the Company and/or Executive to which
the Escrow Agent may otherwise be entitled.
(e) The Company shall be responsible for fees charged and
expenses incurred by the Escrow agent in and by reason of the performance of its
duties hereunder.
7. Status as Shareholder; Anti-Dilution
(a) Any other provisions of this Agreement to the contrary,
the Executive shall have and may exercise all rights as a shareholder of the
Company with respect to all of the Vested Shares and the Restricted Shares being
issued and sold to Executive hereunder, including the right to vote all of such
Vested Shares and Restricted Shares on all matters presented to shareholders of
the Company for their consideration and action and to receive from the Company
any and all dividends or distributions (in cash, securities or other property),
including distributions in liquidation or upon reorganization or
recapitalization of the Company, available to the holders of the same class of
the Company's equity securities as the Shares.
(b) In the event of any merger, consolidation, stock dividend,
stock split, combination of shares, recapitalization or reclassification of the
Company's outstanding securities (collectively, a "Capital Event"), the
Substantial Forfeiture Risk applicable to the number of Restricted Shares held
by Executive immediately prior to any such Capital Event shall remain in full
force and effect with respect to any new class of securities or changed number
of Shares or other securities into or for which such Restricted Shares shall be
changed or exchanged by reason of such Capital Event until the respective
Vesting Dates or the occurrence of the respective Vesting Events set forth in
Paragraphs 3(a) or 3(b) hereof, whichever is applicable.
8. Contractual and Securities Law Restrictions
(a) Neither this Agreement nor any of the Restricted Shares
being issued and sold to Executive hereunder may be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of, nor may any right, title or
interest therein be granted, in whole or in part, by Executive to any third
party until the designated portions of such Restricted Shares become Vested
Shares as
9
<PAGE> 10
of the respective Vesting Dates specified in Paragraph 3(a) hereof or all of
such Restricted Shares become Vested Shares by reason of any of the Vesting
Events specified in Paragraph 3(b) hereof and, in furtherance of the foregoing
restriction, neither this Agreement nor any of such Restricted Shares shall be
subject to execution, attachment, or similar process, except that this Agreement
and such Restricted Shares may be transferred to Executive's heirs, distributees
or legal representatives upon the death or Disability of Executive. Upon any
attempt by Executive to transfer, assign, pledge, hypothecate or otherwise
dispose of the Restricted Shares or his obligations under or the restrictions
imposed by this Agreement contrary to the provisions hereof, or upon the levy of
any execution or attachment or similar process upon the rights and privileges
conferred hereby, this Agreement, and the rights and privileges conferred hereby
shall immediately become null, void and of no further force or effect whatsoever
and the then remaining Restricted Shares held by Executive shall forthwith be
forfeited to the Company pursuant to the relevant provisions of paragraph 4
hereof.
(b) Executive hereby expressly acknowledges and agrees that,
in addition to, and not in lieu of, the contractual restrictions set forth in
this Agreement pursuant to which the Restricted Shares are being issued and sold
by the Company to Executive hereunder, the Executive is acquiring all of such
Vested Shares and Restricted Shares subject to restrictions against their resale
or distribution except in accordance with the Securities Act of 1933, as
amended, or pursuant to exemptions therefrom which are the subject of a
favorable opinion by counsel to the Company.
(c) Executive hereby further acknowledges and agrees that, to
the extent that Executive may now or hereafter be subject to Section 16 of the
1934 Act, Executive shall file in a timely fashion all required forms to be
filed with the SEC (and any national securities exchange upon which the Shares
are or may hereafter be listed) in order to comply with the provisions of
Section 16(a) of the 1934 Act with respect to the acquisition and/or sale or
other disposition of any of such Shares and shall furnish copies of such forms
to the Secretary of the Company promptly upon the filing thereof.
9. Status As Employee of The Company
None of the provisions of this Agreement shall constitute or
in any way be construed as (i) an express or implied obligation of the Company
to employ Executive for any specific or minimum period or periods of time
hereafter, it being expressly understood that, subject to the terms of the
Employment Agreement, the Company retains the right to cause the Termination of
Employment of the Executive at any time hereafter or (ii) an express or implied
obligation of the Board to continue to employ Executive as an executive officer
of the Company, it being expressly understood by Executive that, subject to the
terms of the Employment Agreement, Executive will continue to serve as an
executive officer of the Company solely at the pleasure of the Board.
10
<PAGE> 11
10. Legends on Share Certificates
The Company and Executive hereby further agree that:
(a) Certificates evidencing all of the Shares being sold by
the Company to Executive hereunder shall bear legends substantially as follows:
"The Shares evidenced by this certificate are subject to
forfeiture and resale to the Company by the registered owner
hereof in accordance with the terms and conditions of a
Restricted Share Purchase Agreement between the Company and
the registered owner hereof dated as of January ____, 1996."
"The Securities evidenced by this certificate have been issued
in reliance upon an exemption from registration under the
Securities Act of 1933, as amended, and may not be offered or
resold except in accordance with the registration provisions
of the Securities Act of 1933, as amended, or an exemption
therefrom"; and
(b) In addition to the legends on the certificates evidencing
all of the Shares set forth in Subparagraph (a) of this paragraph 10, the
Company may instruct the Transfer Agent for the Shares to impose "stop transfer"
instructions thereon.
11. Miscellaneous
(a) Any provisions of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
(b) Except as otherwise expressly provided herein, no term or
provision of this Agreement may be amended, waived, discharged or terminated
orally, but only by an instrument in writing duly executed by the Company and
Executive.
(c) The headings of the various paragraphs herein are for
convenience of reference only and shall not define, limit or otherwise affect
any of the terms or provisions hereof.
(d) This Agreement and all rights hereunder shall be construed
in accordance with and governed by the internal laws of the State of New York
applicable to agreements to be performed wholly within the State of New York,
giving effect to principles of conflicts of laws of such State or of any other
jurisdiction.
11
<PAGE> 12
(e) No course of dealing and no delay on the part of any
either hereto in exercising any right, power or remedy conferred by this
Agreement shall operate as a waiver thereof or otherwise prejudice such party's
rights, powers and remedies hereunder or in connection herewith. No single or
partial exercise of any right, power or remedy conferred by this Agreement shall
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
(f) This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute a single agreement.
(g) This Agreement sets forth the entire understanding of the
parties with respect to the subject matter hereof and shall be binding upon and
inure to the benefit of the Company and its successors and assigns and Executive
and Executive's heirs, executors, personal representatives, successors and
assigns.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
PHARMHOUSE CORP.
By: /s/ Kenneth A. Davis
-------------------------------
Name: KENNETH A. DAVIS
Title: President
/s/ Gerald Katz
-------------------------------
GERALD KATZ
12
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