<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 1, 1997 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
(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 405
of 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 18, 1997, was approximately $10,569,540.
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 18, 1997.
<TABLE>
<CAPTION>
Class Number of Shares
<S> <C>
Common Shares
par value $.01 per share 2,374,443
</TABLE>
<PAGE> 3
Documents incorporated by Reference:
1. The Registrant's Annual Report on Form 10-K for the fiscal year ended
February 3, 1996.
2. The Registrant's Quarterly Report on Form 10-Q for the Quarter ended
November 2, 1996.
3. The Registrant's Current Report on Form 8-K dated February 6, 1997.
<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 Stores"). Pursuant to the terms of a Mutual Release and Settlement
Agreement, dated January 31, 1997 (the "Woolworth Settlement"), between the
Registrant and F.W. Woolworth Co. and Woolworth Corporation (collectively,
"Woolworth"), it is anticipated that the Registrant will cease to operate up to
seven of the Rx Stores (the "Affected Stores") purchased from Woolworth. Two of
the seven Affected Stores specified in the Woolworth Settlement and one
Pharmhouse store are currently being closed; and, assuming that the Registrant
exercises its option, subject to the conditions of the Woolworth Settlement, to
reassign the leases for the five remaining Affected Stores to Woolworth by July
31, 1997, the Registrant will be operating a total of 30 discount drug stores
thereafter.
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 Stores are approximately 25,000 square feet. The Registrant
maintains one distribution center in Pennsylvania to support its store
operations.
(a) General Development of the Registrant's Business Since Commencement of the
Fiscal Year Ended February 1, 1997 ("fiscal 1997")
Since the commencement of fiscal 1997, the following significant events have
occurred with respect to the Registrant and its business:
(i) Woolworth Settlement
During fiscal 1997, the Registrant operated 14 Pharmhouse Stores as
well as 24 Rx Stores which were acquired by the Registrant from Woolworth in
late April 1995 (the "Acquisition"). The Rx Stores 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 rentals and other merchandise described under
"Merchandise" in paragraph (c) of this Item 1.
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 the asset
purchase agreement (the "Asset Purchase Agreement") governing the Acquisition
(the "Legal Proceedings"). The Registrant's claims were based upon its belief
that material misrepresentations were made by Woolworth regarding the inventory
and gross profit margins of the acquired Rx Stores and that the Registrant had
been damaged as a result thereof. Subsequent to the initiation by the Registrant
of these legal proceedings, Woolworth commenced arbitration proceedings relating
to the issues raised by the Registrant in the Legal Proceedings.
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On January 31, 1997, the Registrant and Woolworth and their respective
affiliates entered into the Woolworth Settlement pursuant to which the
Registrant and Woolworth resolved their outstanding disputes arising out of the
sale by Woolworth to the Registrant of the inventory, fixtures and leases
pertaining to the 24 Rx Stores in the Acquisition. The principal provisions of
the Woolworth Settlement include:
(A) The dismissal of the pending Legal Proceedings instituted by the
Registrant and the withdrawal of all claims asserted by Woolworth in the
arbitration proceedings with prejudice plus the exchange of reciprocal general
releases between the Registrant (including its principal officers) and
Woolworth, subject only to the continuing obligations of the respective parties
under the Woolworth Settlement.
(B) The cancellation of two of the three promissory notes of the
Registrant held by Woolworth which represented the then outstanding balance of
the deferred portion of the purchase price owing by the Registrant to Woolworth
for the assets of the Rx Stores pursuant to the Asset Purchase Agreement. (As of
December 28, 1996, the principal and accrued interest of these three promissory
notes amounted to approximately $9.5 million). The third promissory note (in the
original principal amount of $2.9 million and originally due on April 28, 1998)
was modified by the terms of the Woolworth Settlement and, as so modified,
represents a remaining contingent obligation of the Registrant in the principal
amount of $1 million (which does not bear interest) and will be surrendered by
Woolworth for cancellation on July 30, 1998, subject to certain conditions.
Accordingly, by reason of the Woolworth Settlement, the Registrant's
indebtedness to Woolworth was reduced by approximately $8.5 million after giving
effect to the remaining $1 million contingent obligation represented by the
modified third promissory note. (See Note 12 of Notes to the Consolidated
Financial Statements of the Registrant contained in Part IV of this Report).
(C) Pursuant to the Woolworth Settlement, the Registrant and Woolworth
also agreed to the following arrangements with respect to seven (the "Affected
Stores") of the 24 Rx Stores whose assets were acquired by the Registrant in the
Acquisition:
(i) The leases of two of the seven Affected Stores have either
been reassigned or delivered by the Registrant to Woolworth and the
Registrant will surrender the premises of such Affected stores by
stipulated dates in the near future and the Registrant shall not
thereafter have any further responsibility under such leases.
(ii) With respect to the remaining five Affected Stores, the
Registrant has been granted the option by Woolworth to surrender
possession and reassign the leases governing any one or more of these
Affected Stores which has not shown a store operating profit during the
four month period ending May 31, 1997 (as calculated by the
Registrant). Such option is exercisable by the Registrant with respect
to each of these five Affected stores by not later than July 31, 1997.
Woolworth has reserved the right under the Woolworth Settlement to
terminate the Registrant's possession of the premises of any one or
more of these five Affected Stores and to require reassignment of their
leases by the Registrant to Woolworth. In either such event, the
Registrant will be required to surrender possession of the premises of
any one or more these five Affected Stores within a stipulated period
following the exercise by the Registrant of such option or by Woolworth
of the right of
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assignment.
(iii) Woolworth further agreed to pay the rental and other
fixed monthly charges payable to the landlords under each of the leases
governing the seven Affected Stores as well as to reimburse the
Registrant for such occupancy costs payable to such landlords
commencing January 15, 1997 through the date of the reassignment or
redelivery of the leases governing such stores or, in the case of the
five Affected Stores referred to in clause (ii) of this paragraph
(a)(i)(C), through July 31, 1997.
(iv) During the period that the Registrant remains in
possession of any of the seven Affected Stores, the Woolworth
Settlement permits the Registrant to retain all proceeds from the sale
of inventory and other assets effected during the Registrant's
occupancy of such stores.
(v) Registrant agreed to pay Woolworth certain prior
outstanding rentals and other charges through January 31, 1997 (which
were previously accrued in the Registrant's financial statements),
subject to certain offsets in the Registrant's favor which, after
giving effect to such offsets, equal approximately $195,000. Such
amount is required to be paid by the Registrant by May 31, 1997.
For further information concerning the seven Affected Stores and their
current status, see Item 2 "Properties" in this Report.
(D) Pursuant to the Woolworth Settlement, Woolworth extended the
Registrant's license to use the service mark "The Rx Place" for an additional
three year period beyond that set forth in the Asset Purchase Agreement and the
Trademark License Agreement executed by the parties in connection with the
Acquisition. As so extended, the duration of the Registrant's license to the
service mark "The Rx Place" will extend to April 28, 2001, subject to the right
of the Registrant to extend such license for one additional year on written
notice to Woolworth prior to the expiration of the extended license term.
For further information concerning the provisions of the Woolworth Settlement,
reference is hereby made to the Registrant's Current Report on Form 8-K dated
February 6, 1997 and to a copy of the Woolworth Settlement filed as Exhibit
10.13 to this Report.
(ii) Fiscal 1997 net income of $1.3 million (including an extraordinary
gain of $7.1 million).
Reference is made to the Selected Financial Data, in Item 6 of this
Report, Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A"), in Item 7 of this Report, and the Registrant's
Consolidated Financial Statements contained in Part IV of this Report,
concerning the Registrant's net income of $1.3 million (including an
extraordinary gain of $7.1 million) in fiscal 1997.
(iii) Financing
In connection with the Acquisition, the Registrant entered into new
secured financing
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arrangements with Congress Financial Corp. ("Congress"), pursuant to which
Congress provided the Registrant with a senior secured credit facility (the
"Senior Credit Facility") equal to the lesser of $45 million or 60% of its
eligible inventory. The Registrant also received a $3 million Subordinated Loan
(the "Subordinated Loan") from one of its unaffiliated suppliers. The proceeds
of the Senior Credit Facility and the Subordinated Loan were devoted to fund
part of the cost of the Acquisition by the Registrant of the assets of the Rx
Stores, including the transaction costs thereof, to repay certain previously
outstanding indebtedness and to furnish the Registrant with increased financing
to meet its increased working capital requirements incurred in connection with
the operation of 38 deep discount drug stores. For further information
concerning the terms of these financing arrangements, reference is made to item
1(a)(iii) of the Registrant's Report on Form 10-K for its fiscal year ended
February 3, 1996 ("1996 Form 10-K").
After commencing the Legal Proceedings against Woolworth, and prior to
the execution of the Woolworth Settlement, the Registrant elected to withhold
payment of further installments of principal and interest under the outstanding
promissory notes held by Woolworth pending resolution of claims therein. The
Registrant received waivers under the Senior Credit Facility and the
Subordinated Loan agreements by reason of the withholding of such installment
payments due and owing on such notes which, as described in paragraph (a)(i) of
this Item 1, were canceled and modified under the Woolworth Settlement.
During the fiscal 1997 third and fourth quarters, the Registrant's net
worth fell below the minimum levels established under the Senior Credit
Facility. The Registrant's senior secured lender waived the Registrant's
non-compliance with such minimum net worth requirements to February 1, 1997 and
has agreed to a new minimum net worth requirement of $6 million (determined at
the close of each fiscal quarter) effective February 2, 1997, as more fully
described in MD&A-"Liquidity and Capital Resources" in this Report.
For further information concerning the foregoing matters, reference is
hereby made to "Legal Proceedings" in Item 3 of this Report, Note 6 to the
Registrant's Consolidated Financial Statements included in the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended November 2, 1996 and
MD&A "Liquidity and Capital Resources" in Item 7 of this Report.
(b) Financial Information About Line 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. Merchandise is sold primarily on a
cash-and-carry basis although certain credit cards and checks are accepted.
Eleven Pharmhouse stores are located in smaller communities (rather than major
metropolitan
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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 its operations into such markets. The Pharmhouse
Stores are located in single-story, air conditioned facilities and occupy on
average 35,000 square feet. The Rx Stores are located in more densely populated
areas than the older Pharmhouse Stores and occupy approximately 25,000 square
feet each.
The Registrant's stores have pharmacies staffed by licensed pharmacists and are
open seven days per week. However, subsequent to the end of fiscal 1997, the
Registrant closed the pharmacies in five stores. These include, pharmacies in
one Pharmhouse store and two Affected Stores being closed, as well as the
pharmacies in two additional Affected Stores. For further information concerning
the Affected Stores, see paragraph (a)(i)(C) of this Item 1.
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.
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The following table sets forth information concerning the approximate
percentages of the Company's revenues attributable to major merchandise
categories:
<TABLE>
<CAPTION>
Fiscal Fiscal
Merchandise Category 1997 1996(*)
- --------------------------- ----- ------
<S> <C> <C>
Pharmacy 28.5% 28.7%
Health & Beauty Care
and Related Items 24.3% 26.1%
----- -----
52.8% 54.8%
Other Merchandise
Categories (no one
category accounting
for more than 10%) 47.2% 45.2%
----- -----
Total 100.0% 100.0%
===== =====
</TABLE>
(*) Certain percentages in fiscal 1996 were reclassified to conform with the
fiscal 1997 presentation.
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. 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 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.
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 1997, the Registrant
purchased approximately 30% of its total merchandise from McKesson Drug Company
("McKesson"), a leading wholesale distributor of pharmaceutical and health and
beauty care products. No other supplier accounted for more than 10% percent of
the Registrant's total merchandise purchases during fiscal 1997.
In late April 1995, 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 (all of such deferred
payments were made during fiscal 1997). The Supply Agreement provides that the
Registrant will purchase a minimum of 90% of its pharmaceutical and certain
other merchandise from McKesson.
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COMPETITION
The Registrant's deep discount drug stores currently compete in their markets
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. 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, has 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. During fiscal 1997, the Registrant
spent approximately $3.3 million for advertising and promotion, net of amounts
contributed by suppliers through advertising allowances.
EMPLOYEES
As of April 18, 1997, the Registrant employed approximately 2,000 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.
Item 2. Properties
(a) Stores
Of the Registrant's 38 stores currently in operation, 37 are located in leased
premises and one is located in premises owned by the Registrant in Winchester,
Virginia. One Pharmhouse store, which is leased on a month-to-month basis, and
two of the Affected Stores are currently being
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closed. Pursuant to the Woolworth Settlement, these two Affected Stores are
being returned to Woolworth and the Registrant has the option, exercisable by
July 31, 1997, subject to the terms of the Woolworth Settlement, to reassign to
Woolworth the leases for five remaining Affected Stores. For further information
concerning terms of the Woolworth Settlement with respect to the leases of the
Affected Stores, see Item 1(a)(i) of this Report.
The Registrant operates a distribution facility in Pottstown, Pennsylvania in
leased premises occupying approximately 100,000 square feet at an annual rental
of approximately $336,000. This facility became operational in February 1996.
Prior thereto, the Registrant operated a distribution facility in leased
premises in Annville, Pennsylvania occupying approximately 80,000 square feet.
The lease for the prior distribution facility expired in fiscal 1996 without
further lease obligation.
The following table sets forth the number of Pharmhouse stores and Rx stores in
operation in each of the following states as of the date of this Report:
<TABLE>
<CAPTION>
Number of Number of
Pharmhouse stores Rx stores Total stores
----------------- --------- ------------
<S> <C> <C> <C>
Maryland 1 -- 1
New Jersey(*) 2 9 11
New York(*) 5 5 10
Pennsylvania 2 3 5
Virginia 3 -- 3
Connecticut -- 1 1
Massachusetts -- 2 2
Rhode Island -- 2 2
---- ---- ----
Total Stores 13 22 35
==== ==== ====
</TABLE>
(*) Gives effect to the closing of three stores which include: in New Jersey -
one Rx Store; in New York - one Pharmhouse Store and one Rx Store. Does not give
effect to up to five additional Affected Stores which may be closed in the near
future.
Twenty-six (26) leases governing the Registrant's store properties expire during
the period from 1997 through 2001 and eight (8) such leases expire during the
period from 2002 through 2006. 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
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varying rates of up to a maximum of two percent, subject to minimum revenue
levels and other conditions. During fiscal 1997, rentals (including contingent
rentals of $93,000) paid by the Registrant for all of its leased store locations
aggregated approximately $7,655,000, net of sublease revenue of $904,000.
(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 through 1990. Approximately 66% of the
unoccupied space not being used in the operation of the Pharmhouse Stores was
sublet or licensed during fiscal 1997 to a total of 30 unaffiliated tenants for
aggregate annual rent revenue of approximately $904,000, which produced rental
income, net of expenses, of $265,000 in fiscal 1997.
(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 at
an annual base rental of $150,000. The lease for the premises expires on June
30, 1998.
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 the Legal Proceedings were 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 was damaged as a result thereof.
Pending resolution of the Registrant's claims in the Legal Proceedings, the
Registrant withheld payment of all further installments of principal and
interest owing to Woolworth with respect to three promissory notes evidencing
the deferred portion of the Acquisition purchase price (the "Purchase Money
Notes") after commencement of the lawsuit. The Registrant's senior secured and
subordinated secured lenders consented to the withholding by the Registrant of
payment of the January 1996 installments of principal and interest under the
Purchase Money Notes and granted waivers of the relevant cross-default
provisions of the agreements evidencing the Senior Credit Facility and the
Subordinated Loan. The initial waivers granted by the Company's senior secured
and subordinated secured lenders were effective through April 28, 1996. The
Company's senior secured and subordinated secured lenders subsequently granted
periodic extensions of these waivers which were effective through February 1,
1997.
On January 31, 1997, the Registrant and Woolworth entered into a Woolworth
Settlement pursuant to which the Registrant and Woolworth resolved their
outstanding disputes arising out of the April 1995 Acquisition. For further
information, reference is made to Item 1(a), MD&A
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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 fiscal 1997 to a vote of
the Registrant's security holders.
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 following table sets forth the high and low bid and asked quotations
of the Registrant's Common Shares for each quarterly period during the last two
fiscal years as reported on the Nasdaq SmallCap Market.
Bid and Asked Quotations
<TABLE>
<CAPTION>
Fiscal
Quarter Bid Ask
Ending High Low High Low
------ ---- --- ---- ---
<S> <C> <C> <C> <C>
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
5/04/96 3 3/8 2 1/4 4 2 5/8
8/03/96 5 3 5 3/8 3
11/02/96 5 3/8 3 5 7/8 3 3/8
2/01/97 8 3/4 4 1/2 9 1/4 4 3/4
</TABLE>
On April 18, 1997, the last reported sale price for the Company's Common Stock
on the Nasdaq SmallCap Market was $7.50 per share.
(b) Holders of Common Shares
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<PAGE> 14
The approximate number of holders of record of Common Shares of the Registrant
as of April 18, 1997 was 2,367.
(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 restrictions against the payment of cash dividends under its
agreements with its senior and subordinated lenders.
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Item 6. Selected Financial Data
The selected financial data presented below should be read in conjunction with
the Consolidated Financial Statements and Related Notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included elsewhere in this Report. The data as of
February 1, 1997 and February 3, 1996 and for each of fiscal 1997, fiscal 1996
and fiscal 1995 are derived from the Registrant's audited Consolidated Financial
Statements included elsewhere in this Report. The data as of January 28, 1995,
January 29, 1994 and January 30, 1993 and for fiscal 1994 and fiscal 1993 are
derived from the Registrant's audited Consolidated Financial Statements not
included in this Report.
(all amounts in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL
---------------------------------------------------------------------------------
1997 1996(1)(2) 1995 1994 1993
------------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues $ 231,729 $ 209,529 $ 89,602 $ 98,241 $ 97,301
Income (loss) from operations $ (1,005)(3) $ 419 $ (1,037) $ (2,769)(3) $ (1,149)
Interest expense $ 4,230 $ 3,544 $ 960 $ 861 $ 708
Extraordinary gain, net $ 7,142 (4) $ 618(4) $ -- $ -- $ --
Net income (loss) $ 1,334 $ ( 2,507) $ (1,997) $ (3,386) $ (757)
Net income (loss) per share $ 0.59 $ (1.13) $ ( 0.90) $ (1.60)(6) $ (0.37)(6)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------------------
February 1, February 3, January 28, January 29, January 30,
1997 1996(1)(2) 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $24,882 $24,741 $ 4,732 $ 6,983 $ 9,611
Total assets $70,503 $73,210 $26,677 $30,465 $33,903
Long-term borrowings $24,400(5) $25,950 $ 300 $ 800 $ 1,000
Stockholders' equity $ 8,351 $ 6,824 $ 9,004 $10,781 $13,200
Dividends declared None None None None None
</TABLE>
(1) Includes operations of 38 stores effective April 28, 1995.
(2) Fifty-three week fiscal year.
(3) Excludes provision for store closure of $573 in fiscal 1997 and $(244) in
fiscal 1994.
(4) The fiscal 1996 amount represents gain from a June 1995 prepayment, at a
discount, of a portion of the Purchase Money Note due in January 1996. The
Registrant withheld payment of further principal and interest obligations
arising from the Purchase Money Notes after the Registrant commenced Legal
Proceedings against Woolworth in January 1996. The fiscal 1997 amount represents
Woolworth's forgiveness of $7.4 million of the Purchase Money Notes and $1.1
million of accrued interest, net of a provision for store closure for two
closing Rx Stores, litigation settlement expenses and a related provision for
income taxes, in connection with the Woolworth Settlement consummated between
the Registrant and Woolworth on January 31, 1997. The Woolworth Settlement
resolved all outstanding disputes which arose in connection with the
Registrant's purchase of 24 Rx Stores in April 1995. For further information
concerning disputes arising out of the Acquisition and other provisions of the
Woolworth Settlement, reference is made to paragraph (a)(i) in Item 1 of this
Report.
(5) Amount includes a $1.0 million contingent obligation expiring in July 1998
pursuant to the Woolworth Settlement. For further information concerning
Woolworth's debt forgiveness, reference is made to paragraph (a)(i)(B) in Item 1
of this Report.
(6) All per share amounts have been restated to reflect the one for 4.35 reverse
stock split effected April 1993.
15
<PAGE> 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the selected
financial data presented in Item 6 of this Report and the Consolidated Financial
Statements and the Notes to the Consolidated Financial Statements appearing in
Item 8 of this Report.
BACKGROUND
The most significant event affecting the Registrant in fiscal 1997 was the
Woolworth Settlement of the Legal Proceedings initiated by the Registrant
against Woolworth in January 1996 in connection with the Registrant's purchase
of the Rx Stores in late April 1995. The major aspects of the Woolworth
Settlement include debt and interest forgiveness, the right of the Registrant to
return up to seven under-performing Rx Stores (the Affected Stores) to Woolworth
and Woolworth's obligation to reimburse the Registrant for occupancy costs for
the Affected Stores for specified periods.
The provisions of the Woolworth Settlement have improved the Registrant's
balance sheet at February 1, 1997 as a result of Woolworth's forgiveness of $7.4
million in interest-bearing Purchase Money Notes and Woolworth's release of the
Registrant's $1.1 million accrued interest obligation thereon. Further, the
remaining $1 million portion of the Purchase Money Notes was converted to a $1
million non-interest bearing contingent note which will be forgiven by Woolworth
in July 1998, subject to certain conditions. The provisions of the Woolworth
Settlement should also enhance the Registrant's future operating results through
the return of up to seven of the Affected Stores to Woolworth during the current
fiscal year. Relative to the Registrant's other stores, the Affected Stores have
generated low revenues and have high occupancy costs (certain of which costs
escalated significantly during fiscal 1997). The Affected Stores sustained a $.7
million store operating loss during fiscal 1997 and a $.3 million store
operating loss during fiscal 1996, both amounts being exclusive of corporate
expense and financing allocations. Finally, Woolworth is reimbursing the
Registrant for occupancy costs of the Affected Stores for a period of up to six
and one-half months, commencing January 15, 1997, which represents an indirect
cash infusion over such period. For further information concerning the terms of
the Woolworth Settlement, reference is made to Item 1(a)(i) of this Report.
During the fourth quarter of fiscal 1997, by reason of the Woolworth Settlement,
the Registrant recorded an extraordinary gain of $7.1 million, resulting from
Woolworth's debt forgiveness, as previously described, net of a store closure
provision for two Rx Stores being closed, litigation settlement expenses and
related income taxes. A provision for store closure costs of $.6 million was
also recorded by the Registrant during its fiscal 1997 fourth quarter related to
one Pharmhouse store being closed. The Registrant has not yet made a
determination as to whether any or all of the remaining five Affected Stores
will be returned to Woolworth.
The Registrant reported fiscal 1997 net income of $1.3 million compared with a
net loss of $2.5 million in fiscal 1996, an improvement of $3.8 million which
resulted from the extraordinary gain realized in connection with the Woolworth
Settlement amounting to $7.1 million less a store
16
<PAGE> 17
closure provision for one Pharmhouse store of $.6 million, a decrease in
operating income (exclusive of the store closure provision) of $1.4 million and
increased interest expense of $.7 million. Fiscal 1996 also included an
extraordinary gain of $.6 million related to the early retirement of a portion
of the Purchase Money Notes.
During fiscal 1997, the Registrant achieved several operational objectives which
included the February 1996 relocation of its distribution function to a new
facility located in Pottstown, PA, the relocation of the Registrant's invoice
processing function from its New York City headquarters to the new distribution
facility and the installation of an automated damage and returned goods
reclamation center for all of the Registrant's stores.
For further information with respect to the operations of and other developments
affecting the Registrant during fiscal 1997, the disputes arising out of the
Acquisition and the related Woolworth Settlement, reference is made to Item
1(a)(i), and Item 3 and to the Notes to the Consolidated Financial Statements
included in Part IV, of this Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected data
appearing in the Company's Consolidated Statements of Operations expressed as a
percentage of revenues:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of merchandise sold 76.1 76.1 76.4
----- ----- -----
Gross profit 23.9 23.9 23.6
Operating expenses:
Selling, general and administrative 24.3 23.7 24.8
Reserve for store closure 0.3 -- --
----- ----- -----
Income (loss) from operations (0.7) 0.2 (1.2)
Interest expense 1.8 1.7 1.0
----- ----- -----
Loss before extraordinary gain (2.5) (1.5) (2.2)
Extraordinary gain, net 3.1 0.3 --
----- ----- -----
Net income (loss) 0.6% (1.2)% (2.2)%
===== ===== =====
</TABLE>
17
<PAGE> 18
RESULTS OF OPERATIONS - FISCAL YEAR ENDED FEBRUARY 1, 1997 ("FISCAL 1997")
COMPARED TO FISCAL YEAR ENDED FEBRUARY 3, 1996 ("FISCAL 1996")
Revenues
Fiscal 1997 revenues (including video rental, service and other income) were
$231.7 million compared with $209.5 million in fiscal 1996, an increase of $22.2
million, or 10.6%. The revenue growth is attributable to the Company's operation
of the Rx Stores for a full year in fiscal 1997 compared to operating these
stores for nine months during the prior fiscal year (the Rx Stores were acquired
on April 28, 1995, one day prior to the end of the Company's fiscal 1996 first
quarter).
During fiscal 1997 (a 52 week fiscal year), same-store revenues (stores open for
a full year in both fiscal years - consisting of 14 Pharmhouse stores) decreased
$2.8 million, or 3.3%, compared to fiscal 1996 (a 53 week fiscal year).
Management estimates that, after adjustment for a shorter fiscal year, fiscal
1997 same-store revenues decreased approximately $1.1 million, or 1.3%, compared
with fiscal 1996. (Despite the decline in same-store store revenues, the fiscal
1997 gross profit generated by the Pharmhouse Stores remained unchanged from the
prior year resulting from an improved gross profit percentage (described
below)). Excluding one Pharmhouse store being closed, fiscal 1997 same-store
revenues for 13 Pharmhouse stores decreased $1.4 million, or 1.7%, compared with
fiscal 1996. Management estimates that, after adjustment for a shorter fiscal
year, fiscal 1997 same-store revenues for the 13 continuing Pharmhouse stores
increased approximately 0.2% compared with fiscal 1996.
Same-store revenues for the 24 Rx Stores during the fiscal 1997 second, third
and fourth quarters decreased 9.0% compared with the comparable nine month
period during fiscal 1996 consisting of a 12.6% same-store revenue decrease for
the seven Affected Stores and a same-store revenue decrease of 7.9% for the
remaining 17 Rx Stores. Management estimates that, after adjustment for a
shorter fiscal period, same-store revenues decreased 5.6% for 17 Rx Stores
(excluding the seven Affected Stores).
Gross Profit
The fiscal 1997 gross profit (total revenues less costs of merchandise and
services sold and freight/distribution services provided) was $55.3 million
compared to $50.0 million in the prior year, an increase of $5.3 million, or
10.6%. The increase in gross profit is attributable to the contribution made by
the Rx Stores which the Company operated for all of fiscal 1997 compared with
approximately nine months during fiscal 1996. As a percentage of revenues, the
Company's fiscal 1997 gross profit remained unchanged compared with fiscal 1996
at 23.9%. Improved gross margin generated by the Pharmhouse Stores (26.3% in
fiscal 1997 versus 25.5% in fiscal 1996) was offset by lower gross margin
generated by the Rx Stores (21.9% in fiscal 1997 versus 22.8% in fiscal 1996).
During the fourth quarter of fiscal 1997, the Company recorded an adjustment to
inventory of $.9 million, primarily related to the Rx Stores, to reflect
inventory shrinkage in excess of amounts previously accrued. The shrinkage
accrual rate used in fiscal 1997 was consistent with the Company's historical
accrual rate.
18
<PAGE> 19
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense was $56.3 million during
fiscal 1997 compared to $49.6 million in the prior year, an increase of $6.7
million, or 13.5%. The increase in SG&A expense is primarily attributable to
store expenses incurred in connection with operating 24 additional stores for
the full year during fiscal 1997 compared with operating these stores for
approximately nine months during fiscal 1996.
As a percentage of revenues, SG&A expense increased to 24.3% in fiscal 1997
compared with 23.7% in fiscal 1996, resulting primarily from a .6% increase in
occupancy costs for the Rx Stores and, in particular, the Affected Stores. Other
items impacting SG&A expense include a .3% increase in costs to operate the
Company's new distribution facility (primarily increased occupancy costs and
warehouse payroll, a portion of which is attributable to the start-up of this
facility during the fiscal 1997 first quarter as well as to this facility
performing additional functions such as the operation of a break-pack
department) and a .3% increase in general and administrative salaries, primarily
to fill two senior level executive positions which were vacant prior to November
1995. Partially offsetting the SG&A expense increase was a .4% reduction in
advertising expense which resulted from a significant increase in coop-
advertising allowances received from vendors.
The Company phased-in store payroll expense reductions during fiscal 1997. By
the end of the fiscal 1997 fourth quarter, as a percentage of revenues, the
Company's store payroll was reduced approximately .5% compared with the
percentage in the fourth quarter of fiscal 1996. Management believes that
additional favorable store payroll comparisons will be realized during fiscal
1998.
Operating Income(Loss)
In fiscal 1997, the Company sustained an operating loss of $1.6 million compared
with operating income of $.4 million in the prior year. The fiscal 1997
operating loss includes a provision for store closure of $.6 million for one
Pharmhouse store being closed, $.7 million in operating loss sustained by the
seven Affected Stores (attributable to a significant increase in occupancy costs
and a decrease in same-store revenue in these stores) and increases in certain
SG&A expenses as noted in the above discussion. For further information
concerning the Affected Stores and other provisions of the Woolworth Settlement,
reference is made to Woolworth Settlement in Item 1(a)(i) of this Report.
Interest Expense
Interest expense in fiscal 1997 was $4.2 million compared with $3.5 million in
fiscal 1996, an increase of $ 0.7 million. The increased interest expense in
fiscal 1997 compared with fiscal 1996 resulted from higher levels of borrowing
to fund the increased working capital requirements for the operation of 24
additional stores for all of fiscal 1997 versus operating these stores for
approximately nine months during fiscal 1996 (the Rx Stores were acquired in
late April 1995) and interest accrued at the default rates for the Purchase
Money Notes.
19
<PAGE> 20
Extraordinary Gain
By reason of the Woolworth Settlement, the Company realized an extraordinary
gain of $7.1 million which resulted from Woolworth's debt forgiveness totaling
$8.5 million (such amount includes $7.4 million in Purchase Money Notes arising
out of the Acquisition and $1.1 million in accrued interest thereon), net of a
store closure provision of $1 million for two closing Rx Stores, litigation
settlement expenses of $.3 million and a related provision for income taxes of
$.1 million. For further information concerning the Woolworth Settlement,
reference is made to Item 1(a)(i) of this Report.
Provision for Income Taxes
Although the Company has net operating loss carryforwards (See Note 5 in the
"Notes to the Consolidated Financial Statements") which are in amounts
sufficient to offset the Company's fiscal 1997 net income, a portion of the
extraordinary gain realized in connection with the Woolworth Settlement is
subject to an alternative minimum tax ("AMT"). Accordingly, the Company has
accrued income taxes of $.1 million in connection with the AMT and such amount
has been netted in the extraordinary gain. State and local income taxes, which
are computed on a basis other than income (e.g., capital stock, etc.), are not
material and such amounts are included in SG&A expense.
Net Loss
The Company reported net income in fiscal 1997 of $1.3 million, or $0.59 per
share, compared with a net loss of $2.5 million, or $1.13 per share, in fiscal
1996. The Company reported a loss before extraordinary gain in fiscal 1997 of
$5.8 million, or $(2.56) per share, compared with a loss before extraordinary
gain of $3.1 million, or $(1.41) per share, in fiscal 1996.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED FEBRUARY 3, 1996 ("FISCAL 1996")
COMPARED TO FISCAL YEAR ENDED JANUARY 28, 1995 ("FISCAL 1995")
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 was primarily attributable to the Company's operation of the
Rx Stores for approximately nine months during fiscal 1996 (the Rx Stores were
acquired on April 28, 1995, one day prior to the end of the Company's first
quarter of fiscal 1996). Subsequent to the Acquisition, 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 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 $.3 million, or 1.5% of revenues,
compared with the prior year).
20
<PAGE> 21
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 was primarily attributable to the
contribution made by the Rx 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 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 was 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 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, clerical positions at the corporate office and 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 was 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 was
primarily attributable to a larger revenue base generated by the Rx Stores from
which to absorb total SG&A expense.
Interest Expense
Interest expense in fiscal 1996 was $3.5 million compared with $1 million in
fiscal 1995, an increase of $2.5 million. The increased interest expense in
fiscal 1996 compared with 1995 resulted from increased 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 $.6
million.
21
<PAGE> 22
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 million in fiscal 1995. As previously indicated, although fiscal 1996
operating income improved by $1.5 million over fiscal 1995, increased interest
expense related to the Acquisition and increased working capital requirements to
operate the Rx Stores more than offset the added operating income generated by
these stores.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash flows provided by operating activities were $2 million in fiscal 1997
resulting primarily from a $4 million decrease in inventory (reflecting the
Company's efforts to reduce inventory levels) and an increase in accounts
payable (vendor trade credit) of $2.3 million. These amounts were partially
offset by, among other items, an increase in accounts receivable of $1.8 million
(primarily the result of a greater proportion of pharmacy revenues being
generated through third party insurance plans).
Investing Activities
During fiscal 1997, cash used by investing activities included expenditures for
property and equipment totaling $1 million, primarily for upgrading to existing
receiving and management information systems, leasehold improvements and certain
store repairs such as HVAC, roofs and parking lots. Management put a temporary
freeze on major capital expenditures during the first quarter of fiscal 1997
until such time as the Company attains operating profitability.
Financing Activities
Additions to borrowings of $1.6 million primarily relate to additional net
borrowing under the Senior Credit Facility which was used to support the
operation of the Company's store base.
Summary of Borrowings
In late April 1995, the Company entered into the Senior Credit Facility with
Congress Financial Corp. 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 restricts the payment of
cash dividends and requires that the Company maintain minimum net worth levels.
22
<PAGE> 23
In connection with the Acquisition, the Company received a $3 million
Subordinated Loan from an unaffiliated supplier and $1 million in extended
dating of certain accounts payable for 12 to 18 months (the Company paid the
extended accounts payable in full during fiscal 1997 consisting of three
installments of $333,333 paid in April 1996, July 1996 and October 1996,
respectively). Furthermore, 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, for which the Company recorded an
extraordinary gain of $.6 million. In light of its then pending legal action
against Woolworth, the Company subsequently withheld payment of further
installments of principal and interest payable under the Purchase Money Notes
pending resolution of the Company's claims in such action. The Company's senior
secured and subordinated secured lenders 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 granted waivers of the relevant
cross-default provisions of the agreements evidencing the Company's indebtedness
to such lenders initially through April 28, 1996, and subsequently extended to
July 28, 1996, October 28, 1996 and February 1, 1997, respectively.
For further information concerning disputes arising out of the Acquisition, the
waivers under the Company's Senior Credit Facility and Subordinated Loan
agreements, and the Woolworth Settlement, reference is hereby made to "Legal
Proceedings", in Items 1(a)(i) and 3 of this Report.
During the fiscal 1997 third and fourth quarters, the Registrant's net worth
fell below the minimum levels established under the Senior Credit Facility. The
Registrant's senior secured lender waived the Registrant's non-compliance with
such minimum net worth requirements to February 1, 1997 and has agreed to a new
minimum net worth requirement of $6 million (determined at the close of each
fiscal quarter) effective February 2, 1997, which will increase to $7 million
upon cancellation of the remaining $1 million contingent obligation to Woolworth
described in Item 1(a)(i)(B) of this Report.
Working Capital
Working capital amounted to $24.9 million at February 1, 1997 compared to $24.7
million at February 3, 1996.
The ratio of current assets to current liabilities at the end of fiscal 1997 and
fiscal 1996 was 1.7 and 1.6, respectively.
The combination of the financing made available through the Senior Credit
Facility, assuming the continuing availability of trade credit at current
levels, 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 1998.
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 competitors would likely be similarly affected.
23
<PAGE> 24
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses for
each fiscal period. Actual results could differ from those estimated.
Forward-Looking Statements
This Report contains certain "forward-looking statements" that are subject to
certain risks and uncertainties which could cause the Company's actual results
or performance to differ materially from those set forth in such statements. In
addition to general economic conditions and their effect upon levels of consumer
spending, these risks and uncertainties include the extent of competition in the
markets served by the Company's stores, the competitive pricing environment in
the drug store industry generally, changes in the health-care regulatory
environment affecting the Company, significant changes in the level of interest
and finance charges borne by the Company and the success of its cost-cutting and
planned merchandising and advertising programs. The Company assumes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
Recently Issued Accounting Standards
The Company continues to follow the accounting prescribed by Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which
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. The application of SFAS No.121 during
fiscal 1997 did not have a material affect on the Company's financial position,
results of operations and cash flows. With respect to the five remaining
Affected Stores which may be returned to Woolworth, in the event that such
stores are returned to Woolworth, the impact of SFAS No.121 related to these
five stores on the Company's financial position, results of operations and cash
flows is not expected to be material.
During fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Awards of
Stock-Based Compensation to Employees", which sets forth standards for
accounting for stock-based compensation. The Company has continued to account
for stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25 and has provided the additional disclosure required under SFAS
No. 123 in the Notes to the Consolidated Financial Statements in Part IV of this
Report.
24
<PAGE> 25
Item 8. Financial Statements and Supplementary Data
The following documents are filed on the pages listed below as a part of this
report.
1. Consolidated Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets at
February 1, 1997 and
February 3, 1996 F-2
Consolidated Statements of Operations
for each of the three years in the
period ended February 1, 1997 F-3
Consolidated Statements of Shareholders'
Equity for each of the three years
in the period ended February 1, 1997 F-4
Consolidated Statements of Cash Flows
for each of the three years in the
period ended February 1, 1997 F-5
Notes to Consolidated Financial Statements F-6
2. Consolidated Financial Statement Schedule
Report of Independent Accountants on Consolidated
Financial Statement Schedule F-20
VIII. Valuation and Qualifying Accounts F-21
All other schedules have been omitted because either they are not applicable or
the required information is shown in the Consolidated 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.
25
<PAGE> 26
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 Period Served
Registrant; Principal as a Director
Occupation(s) or of the
Name Age Employment Registrant
- ---- --- ------------------ ----------
<S> <C> <C> <C>
Manfred Brecker 70 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 47 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
of the Registrant; an employee of the
Registrant since 1979.
Joseph Keller 51 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 44 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 65 Partner, law firm of Maloney, Mehlman Since 1972
& Katz since April 1994; prior thereto
practicing attorney in New York City
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C> <C> <C>
for more than 35 years and served
as a partner in various firms.
Raymond L. Steele 62 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 51 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
brokerage organization.
Michael A. Feder 45 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.
</TABLE>
Arrangements or Understandings With Regard to Selection
of Directors or Nominees
None.
27
<PAGE> 28
(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 (70) Chairman of the Board
Kenneth A. Davis (47) President, Chief Executive Officer,
Chief Operating Officer and a director
Marcie B. Davis (44) Executive Vice President, Secretary,
Treasurer and a director
Joseph Keller (51) Senior Vice President-Administration
and Operations and a director
Richard A. Davis (44) Senior Vice President-Finance and
Chief Financial Officer
Michael Stock (43) Vice President-Management Information Services
Eileen Abbate (49) Vice President-Advertising
Amparo Castro (40) Vice President-Controller and Assistant Treasurer
Daniel Thigpen (46) Vice President-Store Operations
</TABLE>
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 1987 to 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. 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, other than
during a brief period while she was employed elsewhere. 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. Ms.
Abbate 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
28
<PAGE> 29
period while she was employed elsewhere. She was elected Vice President and
Assistant Treasurer of the Registrant in 1996 and Controller 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.
Mr. Thigpen has been an employee of the Registrant since 1972. He was elected
Vice President of Store Operations of the Registrant in April 1995. Prior
thereto, he held various management positions of the Registrant including
Director of Store Special Projects from 1992 to 1995 and District Manager from
1985 to 1992. Mr. Thigpen held various store level positions of the Registrant
from 1972 to 1985.
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 Manfred Brecker; Mrs. Davis is the
daughter of Mr. Brecker and the wife of Kenneth A. Davis; Mr. Richard A. Davis
is the brother of Kenneth A. Davis.
(e) Business Experience
See Items 10(a) and 10(b) above.
(f) Involvement in Certain Legal Proceedings
None.
29
<PAGE> 30
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 annual and
long-term compensation paid or accrued on behalf of the Chairman of the Board,
the Chief Executive Officer and the three other most highly compensated
Executive Officers (the "Named Executive Officers") for each of the Registrant's
last three completed fiscal years
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------- ---------------------------------------
NAME AND RESTRICTED OPTIONS ALL
PRINCIPAL FISCAL STOCK (# OF LTIP OTHER
POSITION YEAR SALARY BONUS AWARDS SHARES) PAYOUTS COMP
---- -------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth 1997 $225,000 $ 0 $ 0 125,000 $ 0 $ 1,164
Davis 1996 225,000 0 48,772 0 0 1,171
President 1995 135,000 0 5,468 0 0 1,115
CEO, COO
Manfred 1997 175,000 25,000 0 75,000 0 1,164
Brecker 1996 153,845 25,000 0 0 0 1,254
Chairman 1995 125,000 0 0 0 0 985
of the Board
Marcie 1997 143,750 0 0 50,000 0 732
B. Davis 1996 92,500 15,000 19,791 0 0 743
Executive VP 1995 59,200 0 2,219 0 0 656
Sec,Treas
Joseph 1997 108,243 0 0 15,000 0 864
Keller 1996 108,270 7,500 24,739 0 0 875
S VP- 1995 100,000 0 2,774 0 0 1,067
Admin &
Operations
Gerald (*) 1997 125,000 10,000 0 0 0 29,473
Katz 1996 12,500 0 0 0 0 0
S VP- 1995 0 0 0 0 0 0
Merch &
GMM
</TABLE>
(*) Mr. Katz commenced his employment with the Registrant in January 1996.
During fiscal 1997, in addition to the compensation amounts listed in the
foregoing table, he received 45,000 restricted Common Shares at a nominal
purchase price, subject to certain vesting and forfeiture provisions,
30
<PAGE> 31
and was granted incentive stock options to purchase additional Common Shares of
the Registrant. In December 1996, Mr. Katz's employment with the Registrant was
terminated. For information concerning the terms of Mr. Katz's employment
termination agreement, reference is made to paragraph (h) of this Item 11.
YEAR - Refers to fiscal years ended February 1, 1997, February 3, 1996 and
January 28, 1995, 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 Named Executive Officer.
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 certain of 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 - During fiscal 1997, the Registrant granted options to certain of the
Named Executive Officers pursuant to the 1991 Incentive Stock Option Plan and
the 1995 Stock Option Plan. For further information concerning the options
granted during fiscal 1997, reference is made to paragraph (c) of this Item 11.
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. For Mr. Katz, the amount
represents moving expense reimbursements received during fiscal 1997 in
connection with his employment by the Registrant in fiscal 1996.
31
<PAGE> 32
(c) Fiscal 1997 Option and Stock Appreciation Right ("SAR") Grants
The following table sets forth certain information concerning stock options and
SARs granted during fiscal 1997 by the Company to the Named Executive Officers:
<TABLE>
<CAPTION>
% of Total
Options Exercise Price
Granted to --------------
1991 Employees 1991
Incentive 1995 Stock During Fiscal Incentive 1995 Stock Expiration
Name Plan Option Plan(4) Total(2) Year(1)(2) Plan Option Plan Date
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth A. Davis 15,415 109,585 125,000 23.0% $3.1875 $3.5063 3/06/06
Manfred Brecker -- 75,000 75,000 13.8% -- 3.5063 3/06/06
Marcie B. Davis -- 50,000 50,000 9.2% -- 3.5063 3/06/06
Joseph Keller -- 15,000 15,000 2.8% -- 3.1875 3/06/06
Gerald Katz 30,000(3) -- 30,000 5.5% 3.7500 -- 3/31/97
</TABLE>
(1) Options were granted during fiscal 1997 to purchase a total of 543,000
shares.
(2) During fiscal 1997, the Registrant did not grant stock appreciation
rights.
(3) Pursuant to an employment termination agreement between the Registrant
and Mr. Katz dated January 31, 1997, 20,000 options granted to Mr. Katz
under the 1991 Incentive Plan were treated as vested and his remaining
10,000 options under such plan were forfeited as of such date.
(4) Options granted under the 1995 Stock Option Plan vest as follows
(cumulative percentage at end of period is indicated): Years 1 through
3 - 0%; Year 4 - 20%; Year 5 - 50%; Years 6 through 10 - 100%.
(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 1, 1997 held by the Named Executive
Officers.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Shares Acquired Value Underlying Unexercised In-The-Money Options/
Name on Exercise Realized $ Options/SARs at 2/1/97 SARs at 2/1/97 (4)
- ----------------------------------------------------------------------------------------------------------------
Exercisable(1) Unexercisable(2) Exercisable(1) Unexercisable(2)
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth A. Davis -- -- 208,077 125,000 $1,580,913 $ 629,127
Manfred Brecker -- -- -- 75,000 -- 374,528
Marcie B. Davis -- -- 59,678 50,000 450,989 249,685
Joseph Keller -- -- 38,874 15,000 273,662 79,688
Gerald Katz -- -- 20,000(3) -- 95,000 --
</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 exercise price
for Mr. Katz's options was $3.75 per share.
(2) The unexercisable options were granted pursuant to the Registrant's
1995 Stock Option Plan at varying exercise prices (including 15,415
options granted to Mr. Davis under the 1991 Incentive Plan at an
exercise price of $3.1875). For information regarding the exercise
price, vesting requirement and expiration date of options granted under
the 1995 Stock Option Plan, see paragraph (c) of this Item 11.
(3) In March 1997, Mr. Katz exercised options under the 1991 Stock Option
Plan to purchase 10,000 Common Shares and his remaining 10,000 options
under that Plan lapsed.
32
<PAGE> 33
(4) The options have been valued at the average of the high and low bid
price on February 1, 1997 (i.e., $8.75 per share).
(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 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 or her
election or re-election. Each annual award of Common Shares under the
Independent Directors Plan is effected automatically on the business day next
succeeding each of the annual meetings of shareholders (or special meetings 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 is 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 is to be paid 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
33
<PAGE> 34
sum amount equal to the discounted present value of such three years of base
salary.
In December 1995, the Registrant entered into an employment agreement with
Gerald Katz, who commenced employment in January 1996 as its Senior Vice
President - Merchandise Manager. Under that employment agreement, Mr. Katz (a)
received an annual base salary of $130,000 (subject to certain adjustments)
during the first year of his employment by the Registrant and (b) was sold
45,000 Common Shares of the Registrant at a nominal purchase price and was
granted options to purchase 30,000 Common Shares at an exercise price of $3.75
per share (equal to their fair market value at the date of their grant). The
Common Shares sold to Mr. Katz were subject to ratable vesting and forfeiture
provisions during a three year period and his options vested ratably over the
same three year period. For further information concerning the terms of Mr.
Katz's employment agreement, reference is made to Item 11(h) of the Registrant's
1996 Form 10-K.
On December 30, 1996, Mr. Katz's employment with the Registrant was terminated
and, pursuant to the terms of his employment termination agreement, he is
currently receiving severance pay through December 1997 (all of which is
included in the Registrant's fiscal 1997 SG&A expense, subject to reduction if
he receives compensation from other sources after June 1997) and the Registrant
has issued to him 15,000 of the 45,000 Common Shares referred to above.
Subsequent to the end of fiscal 1997, Mr. Katz exercised options to purchase
10,000 Common Shares at the above-noted exercise price and his remaining 20,000
options were either forfeited or have lapsed.
(i) Re-pricing of options
None.
(j) Additional information with respect to compensation committee interlocks
and insider participation in compensation decisions. See Item 13(b) of this
Report.
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. In
addition, during fiscal 1997, the Compensation Committee reviewed the
Registrant's recommendations concerning the grant of incentive options to
executive officers and key employees of the Registrant and determined the number
of options granted to executive officers and key employees and the terms of the
vesting thereof.
(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.
34
<PAGE> 35
Item 12. Security Ownership of Certain
Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The following table provides information as of April 18, 1997, 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 562,136(1) 16.1%
860 Broadway
New York, New York 10003
Kenneth A. Davis 512,381(2) 14.6%
860 Broadway
New York, New York 10003
Hemisphere Trading Co., Inc. 260,000(3) 7.4%
5796 Shelby Oaks Drive
Memphis, TN 38134-7333
WisdomTree Associates, LP 229,000(4) 6.5%
1633 Broadway
New York, New York 10019
Rosenthal & Rosenthal 209,195(5) 6.0%
1370 Broadway
New York, New York 10018
</TABLE>
*Calculation based upon 3,499,708 Common Shares outstanding as of April
18, 1997 (including total non-qualified options of 218,583, total incentive
options of 697,587 (of which 471,085 of such options are not currently
exercisable) and total warrants of 209,195).
(1) Includes 556,342 shares owned by Mrs. Brecker and 5,794 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 76,281 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 153,663 shares subject to options granted to Mr. Davis pursuant to
Registrant's 1991
35
<PAGE> 36
Non-Qualified Stock Option Plan (the "Non-Qualified Plan"), 54,414 shares
subject to options granted pursuant to the Registrant's 1991 Incentive Stock
Option Plan (the "Incentive Option Plan"), all of which are exercisable within
60 days, and 15,415 options granted pursuant to the Incentive Option Plan and
109,585 shares subject to options pursuant to the 1995 Stock Option Plan (the
"1995 Option Plan"), none of which is currently excercisable. Does not include
182,472 shares beneficially owned by Mr. Davis' wife. Mr. Davis disclaims
beneficial ownership of the shares held by his wife.
(3) As reported on Amendment #1 to Schedule 13D filed by Hemisphere Trading Co.
Inc. ("Hemisphere") on April 7, 1997. According to such Schedule 13D, Hemisphere
has shared voting power and shared dispositive power with respect to all 260,000
of these shares.
(4) As reported on Schedule 13D filed by WisdomTree Capital Management, Inc.
("WisdomTree") on January 13, 1997. According to Schedule 13D, WisdomTree has
shared voting power and shared dispositive power with respect to all 229,000 of
these shares.
(5) Consists of 209,195 shares beneficially owned by Rosenthal & Rosenthal, Inc.
("Rosenthal") which Rosenthal has the right to acquire pursuant to warrants
currently exercisable.
36
<PAGE> 37
(b) Security Ownership of Management
The following table sets forth certain information as of April 18, 1997 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 of Amount and Nature Percentage
Beneficial Owner of Beneficial Ownership of Class *
- ---------------- ----------------------- ----------
<S> <C> <C>
Manfred Brecker 76,281(1) 2.2%
Kenneth A. Davis 512,381(2) 14.6%
Joseph Keller 131,153(3) 3.7%
Marcie B. Davis 182,472(4) 5.2%
Richard A. Davis 75,000(5) 2.1%
Melvin Katz 5,460 *
Michael A. Feder 5,000 *
Peter Gerard 5,000 *
Raymond L. Steele 6,379 *
Officers and directors as a
group (consisting of 13 persons) 1,125,860(6) 32.1%
</TABLE>
* Less than 1%
(1) Does not include 556,342 shares owned by Mr. Brecker's wife, Anne Brecker,
or 5,794 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 153,663 shares subject to options granted to Mr. Davis pursuant to
the Registrant's Non-Qualified Plan, 54,414 shares subject to options granted
pursuant to the Registrant's Incentive Option Plan, all of which are exercisable
within 60 days, and 15,415 shares subject to options granted under the Incentive
Option Plan and 109,585 shares subject to options granted under the 1995 Option
Plan, none of which is currently exercisable. Does not include 182,472 shares
beneficially owned by Mr. Davis' wife. Mr. Davis disclaims beneficial ownership
of the shares held by his wife.
(3) Includes 12,874 shares subject to options granted to Mr. Keller under the
Non-Qualified Plan and 26,000 shares subject to options granted under the
Incentive Option Plan, all of which are
37
<PAGE> 38
exercisable within 60 days, and 15,000 shares subject to options granted under
the 1995 Option Plan, none of which is currently exercisable.
(4) Includes 42,299 shares subject to options granted to Ms. Davis pursuant to
the Registrant's Non-Qualified Plan, 17,379 shares subject to options granted
under the Incentive Option Plan, all of which are exercisable within 60 days,
and 50,000 shares subject to options granted under the 1995 Option Plan, none of
which is currently exercisable. Does not include 512,381 shares beneficially
owned by Ms. Davis' husband. Ms. Davis disclaims beneficial ownership of the
shares held by her husband.
(5) Includes 50,000 shares subject to options granted to Mr. Richard A. Davis
pursuant to the Registrant's Incentive Option Plan, 16,667 of which are
currently exercisable, and 25,000 shares subject to options granted under the
1995 Option Plan, none of which is currently exercisable.
(6) Includes an aggregate of 218,583 shares subject to options granted under the
Registrant's Non-Qualified Plan and 181,657 shares subject to options granted
under the Incentive Option Plan, all of which are exercisable within 60 days,
and 342,585 shares subject to options granted under the Registrant's 1995 Option
Plan, none of which is currently exercisable.
(c) Changes in Control
None
Item 13. Certain Relationships and Related Transactions
(a) Transactions with Management and Others
None.
(b) Certain Business Relationships
Maloney, 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 1997 totaling approximately $71,000.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
Pursuant to the instructions for this Item, no response is required.
38
<PAGE> 39
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:
1. Consolidated Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets at
February 1, 1997 and February 3, 1996 F-2
Consolidated Statements of Operations
for each of the three years in the
period ended February 1, 1997 F-3
Consolidated Statements of Shareholders'
Equity for each of the three years
in the period ended February 1, 1997 F-4
Consolidated Statements of Cash Flows
for each of the three years in the
period ended February 1, 1997 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedule
Report of independent accountants on consolidated
financial statement schedule F-20
VIII. Valuation and Qualifying Accounts F-21
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
39
<PAGE> 40
(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 Exhibits 10.6 through 10.12 were filed
as Exhibits 10.6 through 10.12, respectively, to the Registrant's 1996 Form 10-K
Report dated May 3, 1996, Commission File Number 1-7090, both which 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 Mutual Release and Woolworth Settlement dated January 31, 1997 between
the Registrant and Woolworth
40
<PAGE> 41
Unless otherwise noted, all references to the "Commission" in this index shall
mean the Securities and Exchange Commission.
41
<PAGE> 42
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 2, 1997
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 2, 1997
- -------------------------
Manfred Brecker
/s/ Kenneth A. Davis President, Chief Executive May 2, 1997
- ------------------------- Officer, Chief Operating
Kenneth A. Davis Officer and a Director
/s/ Marcie B. Davis Executive Vice President, May 2, 1997
- ------------------------- Secretary, Treasurer and
Marcie B. Davis a Director
/s/ Joseph Keller Senior Vice President- May 2, 1997
- ------------------------- Administration & Operations
Joseph Keller and a Director
/s/ Melvin Katz Director May 2, 1997
- -------------------------
Melvin Katz
/s/Michael A. Feder Director May 2, 1997
- -------------------------
</TABLE>
42
<PAGE> 43
<TABLE>
<S> <C> <C>
Michael A. Feder
/s/Peter Gerard Director May 2, 1997
- -------------------------
Peter Gerard
/s/ Raymond L. Steele Director May 2, 1996
- -------------------------
Raymond L. Steele
</TABLE>
43
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
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 1, 1997 and February 3, 1996, and the
results of their operations and their cash flows for each of the three fiscal
years ended February 1, 1997, February 3, 1996 and January 28, 1995 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
May 2, 1997
F-1
<PAGE> 45
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash $ 2,915 $ 2,884
Receivables, net of allowances
of $987 and $918, respectively 7,564 5,837
Merchandise inventory 49,796 53,778
Prepaid expenses and other 1,861 1,650
-------- --------
Total current assets 62,136 64,149
Property, fixtures and equipment, net 5,580 5,733
Video inventory held for rental, net 2,531 2,123
Other assets 256 1,205
-------- --------
Total assets $ 70,503 $ 73,210
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 7,640 $ 12,510
Accounts payable 24,412 22,149
Accrued expenses and other liabilities 3,586 4,749
Provision for store closure 1,615 --
-------- --------
Total current liabilities 37,253 39,408
Long-term debt, net of current portion 24,400 25,950
Other liabilities 498 1,028
-------- --------
Total liabilities 62,151 66,386
-------- --------
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 2,359,064
and 2,245,715, respectively 23 22
Additional paid-in capital 21,498 21,305
Accumulated deficit (13,168) (14,502)
-------- --------
8,353 6,825
Treasury stock, at cost 1 1
-------- --------
Total shareholders' equity 8,352 6,824
-------- --------
Total liabilities and shareholders' equity $ 70,503 $ 73,210
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F - 2
<PAGE> 46
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------
February 1, February 3, January 28,
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Revenues:
Net sales $ 224,292 $ 203,130 $ 86,838
Video rental, service
and other income 7,437 6,399 2,764
------------------------------------------
231,729 209,529 89,602
------------------------------------------
Costs and Expenses:
Cost of merchandise sold 176,390 159,528 68,377
Selling, general and
administrative expense 56,344 49,582 22,262
Provision for store closure 573 -- --
------------------------------------------
233,307 209,110 90,639
------------------------------------------
Income (loss) from operations (1,578) 419 (1,037)
Interest expense 4,230 3,544 960
------------------------------------------
Loss before extraordinary gain (5,808) (3,125) (1,997)
Extraordinary gain, net 7,142 618 --
------------------------------------------
Net income (loss) $ 1,334 $ (2,507) $ (1,997)
==========================================
Per Common Share:
Loss before extraordinary gain $ (2.56) $ (1.41) $ (0.90)
Extraordinary gain, net 3.15 0.28 --
------------------------------------------
Net income (loss) $ 0.59 $ (1.13) $ (0.90)
==========================================
Average shares outstanding 2,266,895 2,217,377 2,225,767
==========================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F - 3
<PAGE> 47
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 29,1994 2,230,162 $ 22 $ 20,757 -- $-- $ (9,998) $10,781
Fiscal 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
Fiscal 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
Fiscal 1997:
Exercise of warrants 85,867 1 80 81
Share grants to directors 10,000 38 38
Restricted share awards 17,500 75 75
Purchase of fractional shares (18) --
Net income for the year 1,334 1,334
--------------------------------------------------------------------------------------------------
Balance, February 1, 1997 2,359,064 $ 23 $ 21,498 (16,734) $(1) $(13,168) $ 8,352
==================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 48
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------
February 1, February 3, January 28,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash Flows provided by Operating Activities:
Net income (loss) $ 1,334 $ (2,507) $(1,997)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Depreciation and amortization 2,775 2,013 1,563
Provision for store closure 573 -- (208)
Decrease in deferred rent (27) (86) (72)
Share grants to directors and restricted share awards 113 78 7
Gain on early extinguishment of debt -- (618) --
Gain on forgiveness of debt, net (7,142) -- --
Changes in operating assets and liabilities exclusive of
amounts arising from Acquisition:
(Increase) decrease in:
Accounts receivable, net (1,727) (3,409) (246)
Merchandise inventory 3,982 1,389 4,137
Prepaid expenses and other (211) (833) (124)
Other assets 949 (1,086) --
Increase (decrease) in:
Accounts payable 2,263 14,549 (1,286)
Accrued expenses and other liabilities (905) 3,270 (597)
Reserve for store closure costs -- -- (105)
------- ------- -------
Net Cash Flows provided by Operating Activities 1,977 12,760 1,072
------- ------- -------
Cash Flows used by Investing Activities:
Acquired business, net of store cash acquired -- (39,538) --
Purchase of property and equipment, net (993) (1,868) (804)
Purchase of video inventory held for rental, net (2,036) (1,555) --
------- ------- -------
Net Cash Flows used by Investing Activities (3,029) (42,961) (804)
------- ------- -------
Cash Flows provided by Financing Activities:
Revolver borrowings, net 1,552 8,568 407
Borrowings to finance acquisition -- 34,460 --
Retirement of debt -- (7,481) --
Prepayment of Purchase Money Note -- (3,951) --
Paydown of Subordinated Loan (550) -- --
Proceeds from issuance of common stock
and exercise of stock options and warrants 81 176 126
------- ------- -------
Net Cash Flows provided by Financing Activities 1,083 31,772 533
------- ------- -------
Net increase in cash 31 1,571 801
Cash, beginning of year 2,884 1,313 512
------- ------- -------
Cash, end of year $ 2,915 $ 2,884 1,313
======= ======= =======
Supplemental information:
Income tax refunds, net $ -- $ -- $ 203
Interest payments 3,381 3,329 960
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F - 5
<PAGE> 49
PHARMHOUSE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Background
Pharmhouse Corp. (the "Company" or "Pharmhouse") 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, 14 of which operate under the name Pharmhouse (the
"Pharmhouse Stores") and 24 of which operate under the name Rx Place (the "Rx
Stores"), the latter stores having been acquired from F. W. Woolworth Co., a
subsidiary of Woolworth Corporation (collectively "Woolworth"), in late April
1995. Pursuant to the terms of a recent settlement of certain litigation between
Pharmhouse and Woolworth (the "Woolworth Settlement"), it is anticipated that
the Company will cease to operate up to seven (the "Affected Stores") of the Rx
Stores purchased from Woolworth. Two of the seven Affected Stores specified in
the Woolworth Settlement and one Pharmhouse store are currently being closed,
thereby resulting in the operation by the Company of a total of 35 deep discount
drug stores. Assuming that the Company exercises its option, subject to the
conditions of the Woolworth Settlement, to reassign the leases for the five
remaining Affected Stores to Woolworth by July 31, 1997, the Company will be
operating a total of 30 deep discount drug stores thereafter.
During the last three fiscal years, the Company has not opened new stores,
except for stores acquired from Woolworth in fiscal 1996, and has not closed
stores, except for one store located in Hanover, Pennsylvania which was closed
in fiscal 1995 and the three above-noted stores which are currently being
closed.
For further information concerning the Affected Stores, as well as other
provisions of the Woolworth Settlement, see "Settlement of Woolworth Litigation"
in Note 12.
Fiscal Year
The fiscal year is the 52 or 53 week reporting period ending on the Saturday
closest to January 31 of each year. References to fiscal 1997, 1996 and 1995
refer to the fiscal years ended February 1, 1997, February 3, 1996 and January
28, 1995, respectively. Fiscal 1996 had a 53 week reporting period whereas
fiscal 1997 and 1995 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 1996 and fiscal 1995 consolidated financial
statements have been reclassified to conform with the presentation used in
fiscal 1997.
F-6
<PAGE> 50
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 Consolidated
Financial Statements and accompanying Notes. Actual results could differ from
these estimates. During the fourth quarter of fiscal 1997, the Company recorded
an adjustment to inventory of $.9 million, primarily related to the Rx Stores,
to reflect inventory shrinkage in excess of amounts previously accrued. The
shrinkage accrual rate used in fiscal 1997 was consistent with the Company's
historical accrual rate.
Name Change and Reverse Stock Split
Prior to fiscal 1995, 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 reference to 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.
Receivables
Receivables are primarily generated by third party pharmacy revenues (i.e.,
Medicare, Medicaid and health insurance plans). Receivables also include vendor
coupons and advertising and promotional allowances receivable.
Merchandise Inventory
Merchandise inventory is carried at the lower of cost or market, with cost
determined on the first-in first-out 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 estimated useful lives of 5 to 25 years using the straight-line method.
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 two years.
Long-Lived Assets
The Company continues to follow the accounting prescribed by Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which
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. The Company considers a history of
operating losses to be its primary indicator of potential impairment and, in
certain situations, an impairment loss would be recognized. The application of
SFAS No.121 during fiscal 1997 did not have a material affect on the Company's
financial position, results of
F-7
<PAGE> 51
operations and cash flows.
Provision for Store Closure
Provision is made for net costs and expenses associated with store closures when
a decision is made to close the store.
Stock-Based Compensation
The Company continues to account for stock-based compensation under the
requirements of Accounting Principles Board Opinion No. 25 and, in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting for Awards
of Stock-Based Compensation to Employees", which was adopted by the Company
during fiscal 1997, has provided the additional required disclosures in the
Notes to the Consolidated Financial Statements (Note 6).
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". 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. Where appropriate, valuation
reserves are recorded.
Primary and Fully Diluted Earnings (Loss) per Common Share
Primary income (loss) per common share for fiscal 1997, fiscal 1996 and fiscal
1995 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 in each of the fiscal years 1996 and 1995 because such amount
is anti-dilutive and in fiscal 1997 because such amount is not considered
meaningful.
Leased Department Revenues
Leased department revenues of $229,000, $103,000 and $135,000 in fiscal 1997,
1996 and 1995, respectively, is included in other income.
Significant Supplier
Approximately 30%, 28% and 29% of the Company's total purchases in each of the
fiscal years 1997, 1996 and 1995, respectively, represented purchases from one
unaffiliated supplier.
NOTE 2 - ACQUISITION
On April 28, 1995, the Company acquired, and accounted for as a purchase, the
assets and business of the Rx Stores (the "Acquisition"). The total acquisition
cost, net of store cash acquired, amounted to approximately $39.5 million and
consisted of $23.5 million in cash, notes issued to Woolworth amounting to $12.5
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 consisted 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 Stores. The operations of the acquired business were included in the
Company's Consolidated Financial Statements from the date of acquisition.
F-8
<PAGE> 52
At the date of the Acquisition, the property, fixtures and equipment located in
the Rx Stores were recorded at a zero value in the Company's Consolidated
Financial Statements pursuant to the purchase method of accounting which
requires allocation of the total acquisition cost to estimated fair values of
assets acquired. Substantially all of the cost of the Acquisition was allocated
by the Company 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 operations of
the Rx 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 operations were furnished to the Company by
Woolworth. In January 1996, the Company instituted legal proceedings against
Woolworth which pertained, among other matters, to the results of operations and
certain assets of the Rx Stores, acquired by the Company from Woolworth and
reported upon and referred to in such financial statements. On January 31, 1997,
the Company and Woolworth entered into the Woolworth Settlement which resolved
all disputes arising out of the April 1995 Acquisition by the Company of the
assets and business of the Rx Stores, the provisions of which are discussed
under "Settlement of Woolworth Litigation" 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 at
February 1, 1997 and February 3, 1996 follows (000's omitted):
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
------- -------
<S> <C> <C>
Property, fixtures and equipment $11,690 $10,697
Less accumulated depreciation
and amortization 6,110 4,964
------- -------
$ 5,580 $ 5,733
======= =======
</TABLE>
F-9
<PAGE> 53
<TABLE>
<S> <C> <C>
Video inventory held for rental $ 5,441 $ 4,102
Less accumulated amortization 2,910 1,979
------- -------
$ 2,531 $ 2,123
======= =======
</TABLE>
Total depreciation and amortization expense of property, fixtures and equipment
and video inventory held for rental was $2,775,000, $1,940,000 and $1,223,000 in
fiscal 1997, 1996 and 1995, respectively. Included in these amounts is
amortization expense of video inventory held for rental of $1,629,000, $997,000
and $316,000 in fiscal 1997, 1996 and 1995, respectively.
In accordance with applying the asset valuation guidelines under the purchase
method of accounting, the property, fixtures and equipment located in the Rx
Stores at the date of Acquisition were recorded at zero value in the Company's
Consolidated Financial Statements (see discussion in Note 2).
For information concerning the return of stores to Woolworth and other
provisions of the Woolworth Settlement, see the discussion under "Settlement of
Woolworth Litigation" in Note 12.
NOTE 4 - BORROWINGS
A summary of the Company's borrowings at February 1, 1997 and February 3, 1996
is set forth below (000's omitted):
<TABLE>
<CAPTION>
February 1, 1997 February 3, 1996
----------------------------------------- ------------------------------------------
Current Non-current Current Non-current
Total portion portion Total portion portion
------- -------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Senior Credit Facility $29,040 $7,040(i) $22,000 $27,488 $ 3,488(i) $24,000
Subordinated Loan 2,000 600 1,400 2,550 600 1,950
Purchase Money Notes 1,000 -- 1,000 8,422 8,422 --
------- ------ ------- ------- ------- -------
Total $32,040 $7,640 $24,400 $38,460 $12,510 $25,950
======= ====== ======= ======= ======= =======
</TABLE>
(i) The current portion of the Senior Credit Facility was determined based on
the amount of the potential pay-down of the facility from the fiscal year-end
level based on estimated borrowing base availability during the subsequent
fiscal year. The estimated increase in the amount classified as current at
February 1, 1997 compared with the balance at February 3, 1996 is primarily due
to the anticipated inventory reduction related to three stores being closed. The
current portion of the Senior Credit Facility is not required to be paid prior
to April 28, 1998, the expiration date of such borrowing facility.
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 prohibits 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 1, 1997, the LIBOR interest rate was 5.75% and
the prime interest rate was 8.25%. During fiscal 1997, the highest borrowing
level under the Senior Credit Facility was $33.1 million, which borrowing
occurred in November 1996, and the lowest borrowing level was $25.4 million,
which borrowing occurred in December 1996.
F-10
<PAGE> 54
During the fiscal 1997 third and fourth quarters, the Company's net worth fell
below the minimum levels established under the Senior Credit Facility. The
Company's senior secured lender waived the Company's non-compliance with such
minimum net worth requirements to February 1, 1997 and has agreed to a new
minimum net worth requirement of $6 million (determined at the close of each
fiscal quarter) effective February 2, 1997, which will increase to $7 million
upon cancellation of the remaining $1 million contingent obligation to Woolworth
described in Note 12.
Subordinated Loan
The Subordinated Loan payable to an unaffiliated trade supplier, originally in
the amount of $3.0 million, is being repaid in monthly installments of $50,000
plus interest, 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
In connection with the acquisition of the Rx Stores, the Company issued Purchase
Money Notes to Woolworth aggregating $12.5 million at interest rates ranging
from 9% to 11% with maturity dates from January 1996 through April 1998. In June
1995, the Company prepaid, at a discount, approximately $4.1 million of the
Purchase Money Note due in January 1996 and recorded an extraordinary gain of
$618,000.
In January 1996, the Company instituted legal proceedings against Woolworth in
connection with the Acquisition. In light of its then pending legal action, the
Company withheld payment of all further installments of principal and interest
arising under the Purchase Money Notes pending resolution of the legal
proceedings.
On January 31, 1997, the Company and Woolworth resolved their outstanding
disputes arising out of the Acquisition pursuant to the Woolworth Settlement
whereby Woolworth surrendered for cancellation two of the three outstanding
Purchase Money Notes in the aggregate amount of $5.5 million and modified the
third Note (in the original principal amount of $2.9 million and originally due
in April 1998) so that such Note constitutes a contingent non-interest bearing
obligation of $1 million which will be surrendered by Woolworth for cancellation
on July 30, 1998, subject to certain contingencies. Woolworth has also released
the Company from its obligation to pay interest accrued on the canceled Purchase
Money Notes. As a result of Woolworth's cancellation of the Purchase Money Notes
(less $1 million remaining as a contingent note obligation) and Woolworth's
release of the Company's accrued interest obligation, the Company recorded
during the fourth quarter of fiscal 1997 an extraordinary gain of $7.1 million
resulting from debt and accrued interest forgiveness amounting to $8.5 million,
partially offset by a store closure provision for two closing Rx Stores,
litigation settlement expenses and a related provision for income taxes,
referred to and reported upon in these Consolidated Financial Statements (Notes
2, 10 and 13). For further information concerning the terms of the Woolworth
Settlement, see discussion under "Settlement of Woolworth Litigation" in Note
12.
NOTE 5 - INCOME TAXES
Provision for Income Taxes
F-11
<PAGE> 55
Although the Company has net operating loss carryforwards (see following
discussion) which are in amounts sufficient to offset the Company's fiscal 1997
net income, a portion of the extraordinary gain realized in connection with the
Woolworth Settlement is subject to an alternative minimum tax ("AMT").
Accordingly, the Company has accrued income taxes of $.1 million in connection
with the AMT and such amount has been netted in the extraordinary gain. State
and local income taxes, which are computed on a basis other than income (e.g.,
capital stock, etc.), are not material and such amounts are included in SG&A
expense.
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 1, 1997 amounts to approximately
$2.8 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 1, 1997 amounts to
approximately $6.9 million.
Deferred Income Taxes
Deferred income tax temporary differences are determined in accordance with SFAS
No. 109. At February 1, 1997 and 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 AND COMPENSATION PLANS
The Company has three stock option plans (a 1991 Non-Qualified Stock Option
Plan; a 1991 Incentive Stock Option Plan; and a 1995 Stock Option Plan
(collectively the "Stock Option Plans")) and one equity compensation plan in
effect, all of which have been approved by the Company's shareholders.
1991 Non-Qualified Stock Option Plan
Under the 1991 Non-Qualified Stock Option Plan (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 received 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
F-12
<PAGE> 56
1/36 for each full month of employment completed by the employee during the
salary reduction period. However, none of the options was 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 were reduced by an
aggregate of $126,000 in fiscal 1995. As of February 1, 1997, 218,583 of these
options were exercisable and 34,942 were forfeited.
1991 Incentive Stock Option Plan
Under the 1991 Incentive Stock Option Plan (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 exercise price of $1.914 per Common Share, of which 92,149
of such options were subsequently canceled. During fiscal 1997, 70,415 options
under the Incentive Plan were granted at exercise prices per Common Share
ranging from $3.19 to $3.75, such amounts being equal to or above the fair
market values on the dates of the respective grants. As of February 1, 1997,
102,149 of the options granted under the Incentive Plan lapsed owing to
terminations of optionees' employment, 3,287 were exercised and 251,881 remain
exercisable.
1995 Stock Option Plan
Under the 1995 Stock Option Plan (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 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
F-13
<PAGE> 57
agreement governing the surrendered SAR's or options.
As of February 1, 1997, 472,585 options had been issued under the 1995 Option
Plan.
The combined activity in the Stock Option Plans for the three years in the
period ended February 1, 1997 was as follows:
<TABLE>
<CAPTION>
Number of
shares Exercise price per share
--------- ------------------------
<S> <C> <C>
Outstanding at January 29, 1994 508,588 $0.544 - $1.914
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
Fiscal 1997 Activity:
Granted 543,000 $3.188 - $5.875
Exercised -
Canceled (16,724) $0.544 - $1.914
-------
Outstanding at February 1, 1997 943,049 $0.544 - $5.875
=======
Available for grant at
February 1, 1997 127,119
=======
</TABLE>
1992 Equity Compensation Plan for Non-Employee Directors
Under the 1992 Equity Compensation Plan for Non-Employee Directors (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 Independent Directors Plan was amended whereby a
total of 75,000 Common Shares were reserved for issuance to Independent
Directors. The Independent
F-14
<PAGE> 58
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 or her
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. In July 1996, 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.
Pursuant to an employment termination agreement, dated January 31, 1997, the
Company issued 15,000 Common Shares at a nominal price to a former executive.
The remaining 30,000 Common Shares, which were issued and sold to him upon
commencement of his employment by the Company in January 1996, were forfeited
pursuant to the vesting provisions governing their issuance. In addition, the
Company issued 2,500 Common Shares to a former director for past services
rendered to the Company. All of these Shares were issued subject to customary
restrictions under the Securities Act of 1933 and the Company recorded
compensation expense with respect to the issuance of such Shares.
Application of SFAS No. 123 - Pro Forma Net Income and Net Income Per Common
Share SFAS No. 123 requires the Company to disclose pro forma net income and net
income per share determined as if the Company had accounted for stock-based
compensation awards granted after December 31, 1994 under the fair value method
of that Statement. The fair values of options under SFAS No. 123 were estimated
at each grant date using a Black-Scholes option pricing model with the following
assumptions: a risk-free interest rate of 6.1%, a dividend yield of zero, a
volatility factor of the expected market price of the Company's common stock of
1.05 and an expected option life of seven and one-half years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For these pro forma disclosures, the estimated fair value of options and other
stock-based awards is amortized to expense over the award's vesting period. The
Company's fiscal 1997 reported and pro forma information is as follows:
<TABLE>
<CAPTION>
Fiscal 1997
-----------
<S> <C>
Net income, as reported $1,334,000
Pro forma net income $1,007,000
Net income per share, as reported $0.59
Pro forma net income per share $0.44
</TABLE>
In fiscal 1996, there were no stock-based compensation awards granted under the
Stock
F-15
<PAGE> 59
Option Plans. Accordingly, no adjustment to the Company's fiscal 1996 pro forma
results is required under SFAS No. 123.
NOTE 7 - WARRANTS
In April 1995, in connection with the Acquisition, the Company issued 85,867
warrants to purchase the Company's Common Shares to its financial advisor (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 was included in the acquisition cost of the Rx Stores
(see Note 2). All of such warrants were exercised during fiscal 1997.
In December 1991, the Company issued warrants to a secured lender to purchase
209,195 of its Common Shares at varying exercise prices ranging from $.19 to
$1.91. All of such warrants are outstanding at February 1, 1997 and expire in
December 1997.
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 $105,000, $81,000 and
$60,000 in fiscal 1997, 1996 and 1995, 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 $71,000, $328,000
and $81,000 in fiscal 1997, 1996 and 1995, respectively.
NOTE 10 - STORE CLOSURE COSTS
During the fiscal 1997 fourth quarter, the Company recorded a $1.6 million
provision for store closure costs in connection with three stores being closed
($1 million of this amount is netted in the extraordinary gain related to two
closing Rx Stores in connection with the Woolworth Settlement - See Note 13).
For further information relating to the two Rx Stores being closed, as well as
to the five additional Rx Stores which may be closed, see discussion under
"Settlement of Litigation" in Note 12.
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.
F-16
<PAGE> 60
Under the provisions of the Plan, the Company completed the distribution of $3.1
million in cash and 2.6 million of the Company's Reorganization Common Shares to
its Allowed Secured Creditors (as defined under the Plan) as payment in full of
their claims and 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. During December 1996, the Company made the final pre-petition
priority sales and use tax liability payments amounting to $407,000 and, as a
result, the Plan has been fully consummated.
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 was
amortized over the forfeiture period. In fiscal 1997, 1996 and 1995, $0, $73,000
and $81,000, 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 1, 1997, 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, is set forth below (000's):
<TABLE>
<CAPTION>
Thirty-five Five
Fiscal Year stores Rx stores (*)
----------- ------------ ------------
<S> <C> <C>
1998 $8,316 $1,271
1999 8,087 1,271
2000 7,444 1,145
2001 6,600 1,034
2002 4,090 389
Thereafter 8,451 -
</TABLE>
(*) Represents the five remaining Affected Stores which may be returned to
Woolworth in connection with the Woolworth Settlement. For further information
concerning the Affected Stores and other provisions of the Woolworth Settlement,
see "Settlement of Woolworth Litigation" discussion below.
Rent expense, excluding certain real estate tax and maintenance costs, for all
operating leases
F-17
<PAGE> 61
is comprised of the following (000's):
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Minimum rentals $ 8,466 $ 6,781 $ 2,454
Contingent rentals 93 117 112
Sublease revenue (904) (927) (719)
------- ------- -------
$ 7,655 $ 5,971 $ 1,847
======= ======= =======
</TABLE>
In fiscal 1995, the Company recorded income of $300,000 related to payments
received from Masters, Inc. ("Masters"), a major subtenant of the Company which
had filed for bankruptcy in 1991. The payments received by the Company included
$200,000 in full settlement of the remaining $300,000 balance then owing by
Masters.
Settlement of Woolworth Litigation
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 covenants, representations and warranties made by Woolworth in
connection with the Acquisition. Pending resolution of the Company's claims in
such action, the Company withheld payment of all further installments of
principal and interest arising out of the Purchase Money Notes held by
Woolworth. The Company's Senior Secured and Subordinated Secured Lenders
consented to the withholding by the Company of payment of the installments of
principal and interest under the Purchase Money Notes due in January 1996, and
subsequently granted periodic waivers of the relevant cross-default provisions
of the agreements evidencing its indebtedness to such lenders during fiscal
1997.
On January 31, 1997, the Registrant and Woolworth entered into the Woolworth
Settlement pursuant to which Woolworth surrendered for cancellation two of the
three outstanding Purchase Money Notes totaling $5.5 million and modified the
third such Note (in the original principal amount of $2.9 million, and
originally due April 1998) so that such Note constitutes a non-interest bearing
contingent note obligation of $1 million which will be surrendered by Woolworth
for cancellation on July 30, 1998, subject to certain conditions. Furthermore,
Woolworth released the Company from its obligation to pay interest accrued on
the Purchase Money Notes. As a result of Woolworth's cancellation of two of the
three Purchase Money Notes, the modification of the third such Note and the
release of the Company's accrued interest obligation thereon, the Company
recorded in its fiscal 1997 fourth quarter an extraordinary gain of $7.1 million
resulting from $8.5 million in debt and interest forgiveness, reduced by a
provision for store closure for two closing Rx Stores, litigation settlement
expenses and a related provision for income taxes, referred to and reported
upon elsewhere in these Consolidated Financial Statements (see Notes 2, 4, 10
and 13).
The Woolworth Settlement also gave the Company the right to reassign or
redeliver or have an option to terminate its occupancy and obligations under the
leases governing seven of the Rx Stores (the Affected Stores) subject to certain
conditions and within certain stipulated periods of time. The Company is
currently closing two of the Affected Stores and, upon completion of the
liquidation of inventory and disposal of property and equipment located in these
stores, the
F-18
<PAGE> 62
leases for such stores will be surrendered to Woolworth. The Company has not yet
made a determination as to whether any or all of the five remaining Affected
Stores will be returned to Woolworth. In addition, Woolworth has reserved the
right under the Woolworth Settlement to terminate the Company's possession of
the premises of any one of the Affected Stores and to require reassignment of
their leases to Woolworth. In such event, the Company will be required to
surrender possession of the premises of any one or more the five remaining
Affected Stores within a stipulated period following the exercise by Woolworth
of the right of assignment.
Woolworth has also agreed in the Woolworth Settlement to assume the Company's
rental and other occupancy costs under the leases governing the Affected Stores
during the period from January 15, 1997 through July 31, 1997 (or, assuming
these stores are returned to Woolworth through the exercise by the Company of
its option to return the Affected Stores, through the date such stores are
returned to Woolworth). Furthermore, the Company is entitled to retain the
proceeds from its sale of inventory and other assets in the Affected Stores
prior to the termination of its occupancy thereof. The Woolworth Settlement also
requires the Company to pay Woolworth the sum of $195,000 for certain previous
charges (subject of offsets in the Company's favor) by May 31, 1997.
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.
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.
Letters of Credit
The Company had letters of credit outstanding of approximately $1.1 million at
February 1, 1997.
NOTE 13 - EXTRAORDINARY GAIN, NET
In connection with the Woolworth Settlement, the Company realized an
extraordinary gain of $7.1 million. The extraordinary gain resulted from
Woolworth's debt forgiveness of $8.5 million (such amount includes $7.4 million
in Purchase Money Notes arising out of the Acquisition and $1.1 million in
accrued interest thereon) which was offset, in part, by a store closure
provision of $1 million related to two Rx Stores being closed, litigation
settlement expenses of $.3 million and related income taxes of $.1 million. For
further information concerning the provisions of the Woolworth Settlement, see
"Settlement of Woolworth Litigation" in Note 12.
F-19
<PAGE> 63
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 May 2, 1997 appearing on page F-1 of the 1997 Annual Report on Form
10-K of Pharmhouse Corp. for the year ended February 1, 1997 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
May 2, 1997
F-20
<PAGE> 64
PHARMHOUSE CORP. AND SUBSIDIARY Schedule VII
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
February 1, 1997:
Allowance for doubtfull accounts $918 $219 $(150) $ -- $987
===========================================================================
February 3, 1996:
Allowance for doubtfull accounts $618 $383 $ (37) $(46) $918
===========================================================================
January 28, 1995:
Allowance for doubtfull accounts $563 $168 $(100) $(13) $618
===========================================================================
</TABLE>
F - 21
<PAGE> 65
EXHIBIT INDEX
-------------
Exhibit
No. Description
- ------- -----------
10.13 Mutual Release and Woolworth Settlement dated January 31, 1997 between
the Registrant and Woolworth
21 Subsidiaries of the Registrant
27 Financial Data Schedule
<PAGE> 1
Exhibit 10.13
MUTUAL RELEASE AND SETTLEMENT AGREEMENT
This Mutual Release and Settlement Agreement (the "Settlement
Agreement") is entered into this 31st day of January 1997, between Pharmhouse
Corp. ("Pharmhouse"), Rx "Realty Corp. ("Rx Realty"), their respective
affiliates and successors (jointly and severally the "Pharmhouse Entities") and
F.W. Woolworth Co. and Woolworth Corporation and their respective affiliates and
successors (collectively "Woolworth").
WHEREAS, pursuant to an asset purchase agreement dated April 13, 1995,
as amended on April 28, 1995, (the "Asset Purchase Agreement"), Pharmhouse, as
of and on April 28, 1995, (the "Closing Date") acquired, inter alia, inventory,
fixtures and through the acquisition of the stock of Rx Realty, leases relating
to twenty-four "deep discount" drug stores which Woolworth had previously
operated under the name "The Rx Place"; and
WHEREAS, except as otherwise provided herein, the parties intend that
the Purchase Agreement shall continue in full force and effect; and
WHEREAS, on or about January 11, 1996, Pharmhouse filed a complaint
(the "Complaint") in the Supreme Court of the State of New York, County of New
York (the "Court") under Index No. 60021/96, styled Pharmhouse Corp. v.
Woolworth Corporation and F.W. Woolworth Co. (the "Action"); and
WHEREAS, in or about February 1996, Woolworth demanded and commenced
arbitration (the "Arbitration") of certain matters with Pharmhouse pursuant to
the Asset Purchase Agreement, before a partner of the accounting firm of Coopers
& Lybrand LLP pursuant to the Commercial Rules of the American Arbitration
Association; and
WHEREAS, pursuant to the terms of the Asset Purchase Agreement,
Pharmhouse issued to Woolworth three (3) notes (collectively, the "Notes"); the
First Note was payable within nine (9) months of the Closing Date (and was
prepaid in part); the Second Note is payable within twenty-four (24) months of
the Closing Date; and the Third Note is payable within thirty-six (36) months of
the Closing Date. As of December 28, 1996, there was due under the Notes the
principal amount of $8,234,954 ("Outstanding Principle") and accrued interest in
the amount of $1,586,384 ("Outstanding Interest"); and
WHEREAS, Pharmhouse and Woolworth deny any and all claims asserted
against them by the other; and
WHEREAS, Pharmhouse and Woolworth wish to resolve all of the
differences between and among them without the need for further litigation or
1
<PAGE> 2
arbitration and without such settlement constituting any admission of wrongdoing
by any party;
NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, the
parties hereto agree as follows:
1. Pharmhouse Releases
As material consideration for the execution of this Settlement
Agreement and the transactions described herein, the Pharmhouse Entities hereby
release and forever discharge Woolworth in accordance with the terms and
provisions of the Release annexed hereto as Exhibit "A" hereof and incorporated
herein in its entirety (the "Pharmhouse Release") and subject to the terms and
conditions of this Settlement Agreement, and Kenneth A. Davis, Marcie B. Davis,
and Manfred Brecker hereby release and forever discharge Woolworth in accordance
with the terms and provisions of the Release annexed hereto as Exhibit "B"
hereof and incorporated herein in its entirety (the "Individual Releases") and
subject to the terms and conditions of this Settlement Agreement. The Pharmhouse
Release and the Individual Releases shall be executed simultaneously with the
execution of this Settlement Agreement.
2. Woolworth Release
As material consideration for the execution of this Settlement
Agreement and the transactions described herein, Woolworth hereby releases and
forever discharges the Pharmhouse Entities, including Kenneth A. Davis, Marcie
B. Davis and Manfred Brecker, in accordance with terms and provision of the
Release annexed hereto as Exhibit "C" and incorporated herein in its entirety
(the "Woolworth Release") and subject to the terms and conditions of this
Settlement Agreement. The Woolworth release shall be executed by Woolworth
simultaneously with the execution of this Settlement Agreement.
3. Settlement
Upon receipt by Woolworth of the executed Pharmhouse Release, the
executed Individual Releases of Kenneth A. Davis, Marcie B. Davis and Manfred
Brecker in favor of Woolworth, and a copy of the Stipulation of Discontinuance
with Prejudice, executed by counsel of record, Woolworth will immediately
deliver to Pharmhouse the Woolworth Release and the letter discontinuing the
Arbitration and the First Note and Second Note marked cancelled (however, the
First Note and the Second Note shall be delivered to Pharmhouse on or before
February 4, 1997). Notwithstanding that the Woolworth Release releases, among
other matters, certain of the obligations of Pharmhouse with respect to
Outstanding Principle and all of the Outstanding Interest, one million dollars
($1,000,000) of outstanding principle of the Third Note (the "Remaining
Outstanding Principle") shall remain an obligation of Pharmhouse. In connection
therewith, the terms and conditions of payment of the
2
<PAGE> 3
Third Note are modified as follows: The Third Note shall not bear any interest,
premium, penalty or other finance charge payable by Pharmhouse to Woolworth from
and after the execution of this Settlement Agreement. The payment of the
Remaining Outstanding Principle shall be subject to the express condition that
if Pharmhouse does not: (a) liquidate substantially all of its assets or (b)
cease to conduct substantially all of its operations (other than by reason of
any merger, consolidation or sale of all or substantially all of its assets with
or to any other affiliated third party) or (c) file for bankruptcy (any one or
more of which events constitute a "Default Event") on or before eighteen (18)
months from the date of this Settlement Agreement, i.e. July 30, 1998 (the
"Forgiveness Date"), Woolworth shall be deemed to have irrevocably forgiven the
obligation of Pharmhouse to pay all or any portion of the Remaining Outstanding
Principle evidenced by the Third Note, and provided, further, that pending the
Forgiveness Date and absent the occurrence of an intervening Default Event,
Woolworth hereby covenants to stand still and not sue Pharmhouse or otherwise
take any action to collect or enforce or pursue Woolworth's rights or claim with
regard to the Remaining Outstanding Principle on the Third Note and that,
assuming no Default Event prior to the Forgiveness Date, Woolworth will
surrender the Third Note to Pharmhouse for cancellation on the close of business
of the Forgiveness Date. Upon the occurrence of a Default Event, the Remaining
Outstanding Principle shall be paid to Woolworth within ten (10) days without
further demand by Woolworth.
4. Lease Assignment
The Pharmhouse Entities hereby agree to reassign to Woolworth and
Woolworth hereby agrees to accept said reassignment from the Pharmhouse Entities
of Store #3015, Colonie Plaza Shopping Center, Albany, New York (the "Reassigned
Lease"), upon the following terms and conditions:
(a) The reassignment of said Reassigned Lease to Woolworth shall become
effective upon the surrender of possession by the Pharmhouse Entities to
Woolworth of the demised premises which are the subject of the Reassigned Lease,
said surrender of possession by the Pharmhouse Entities to take place not later
that May 31, 1997. The foregoing reassignment shall be automatic and without the
need for any further documentation to evidence such reassignment; provided,
however, that at the request of either party hereto, Woolworth and the
Pharmhouse Entities shall execute and deliver to the other a declaration or
letter confirming the same. With respect to the Reassigned Lease, the parties
agree that in addition to the terms and conditions herein, the Terms and
Conditions to the Lease Assignment set forth in Exhibit "D" hereto are
incorporated herein and made a part of this reassignment;
(b) Effective as of February 1, 1997 and continuing until surrender of
the premises which is the subject of the Reassigned Lease, Woolworth shall make
payments to accommodate the payment of current rent and other fixed monthly sums
payable to landlord in accordance with the attached schedule set forth in
Exhibit "E" hereto by wire transfer or other method directly to the landlord. In
3
<PAGE> 4
addition to the accommodation payment of current rent and other fixed monthly
sums payable to landlord as set forth in Exhibit "E", Woolworth shall reimburse
the Pharmhouse Entities for additional occupancy costs with respect to the
demised premises relating to periods on or before February 1, 1997 and up to May
31, 1997 as set forth on Exhibit "F" hereto. Woolworth will reimburse such costs
upon receipt by Woolworth of reasonable third-party invoices rendered in the
ordinary course of business received from the Pharmhouse Entities.
Notwithstanding the foregoing to the contrary, Woolworth shall have no
obligation to reimburse the Pharmhouse Entities for any utility payments made or
to be made by the Pharmhouse Entities directly to the utility company serving
the demised premises;
(c) With respect to the payment of percentage rent, the percentage rent
breakpoint shall be adjusted by multiplying the breakpoint by a fraction, the
numerator of which shall be the number of days of the lease year in which the
Pharmhouse Entities are in occupancy and the denominator of which shall be 365
days. If the Pharmhouse Entity's sales are in excess of the adjusted breakpoint,
the Pharmhouse Entities shall pay percentage rent to Woolworth at the surrender
date of possession. The Pharmhouse Entities agree to retain all records in their
possession relevant to the determination of such percentage rent and to make the
same available for inspection by Woolworth and/or landlord under the Reassigned
Lease until such time as the records are no longer required to be maintained
under the terms of the lease. In this regard, the Pharmhouse Entities shall
deliver to Woolworth within ten (10) days of the surrender date of the premises,
all of the documentation required under the applicable lease with respect to any
tenant's obligation to pay percentage rent.
(d) If a party hereto makes a payment on account of any item for which
it is entitled to reimbursement by the other party under this paragraph 4, such
reimbursement shall be made within thirty (30) days after the reimbursing
party's receipt of a reasonable third-party invoices rendered in the ordinary
course of business (which includes mutually satisfactory evidence of payment)
from the other party for such amount. If a party receives a credit or payment on
account of any such item to which the other party is entitled, the receiving
party shall pay to the other party the amount of such credit or payment within
thirty (30) days after the receiving party's receipt thereof;
(e) As and when premises are surrendered, the Pharmhouse Entities shall
surrender and vacate the demised premises of the Reassigned Lease to Woolworth
in broom clean condition. At their expense, the Pharmhouse Entities shall remove
from the demised premises of the Reassigned Lease all signs, inventory,
equipment, merchandise and fixtures and shall repair all damage caused by the
removal. The Pharmhouse Entities shall not remove leasehold alterations,
additions or improvements made to the demised premises or any other items which
are the property of the landlord, unless required to be removed pursuant to the
terms of the Reassigned Lease. At their expense, the Pharmhouse Entities shall
4
<PAGE> 5
perform prior to the surrender of the premises all repairs and maintenance
required by tenant under the terms of the Reassigned Lease;
(f) The Pharmhouse Entities shall permit Woolworth and its
representatives, upon notice to the Pharmhouse Entities, to have reasonable
access to the demised premises at all times from the period February 1, 1997
through the surrender date of the premises;
(g) Upon Woolworth's request, and only upon Woolworth's request, and
following the full execution and delivery of this Settlement Agreement, the
Pharmhouse Entities shall deliver to the landlord under the Reassigned Lease,
not withstanding that the giving of such notice may constitute a default under
the Reassigned Lease, a notice stating that the Pharmhouse Entities intend to
(i) discontinue operations at the demised premises; and (ii) reassign the
Reassigned Lease to Woolworth;
(h) The Pharmhouse Entities, while in possession of each of the demised
premises hereunder, shall be permitted to retain all proceeds of inventory and
asset sales received in connection therewith;
5. Redelivered Lease
With respect to store #3044, Essex Green Shopping Center, West Orange,
New Jersey (hereinafter referred to as the "Redelivered Lease"), the parties
hereby agree as follows:
(a) The Redelivered Lease will be tendered and redelivery will become
effective simultaneously with the execution of this Settlement Agreement, and
the Pharmhouse Entities will thereby quit claim all their right, title and
interest with respect to the Redelivered Lease and the premises. With respect to
the Redelivered Lease the parties agree that in addition to the terms and
conditions herein, the Terms and Conditions of the Lease Assignment set forth in
Exhibit "D" hereto are incorporated herein and made a part of this redelivery of
lease;
(b) With respect to that certain litigation pending in the Superior
Court of New Jersey, Chancery Division, Essex County, Docket No. C-243-96,
styled The Mutual Life Insurance Company of New York v. F.W. Woolworth Co. and
Pharmhouse Corp. (the "Lease Litigation"), commencing simultaneously with the
execution of this Settlement Agreement, Woolworth shall appoint Kelley, Drye and
Warren LLP, at Woolworth's expense, to defend the Pharmhouse Entities in the
Lease Litigation. The Pharmhouse Entities agree to cooperate with Woolworth in
defending said Lease Litigation;
(c) The Pharmhouse Entities agree to surrender the premises under the
terms and conditions set forth in Section 4(e) and 4(f) above on the earlier of
the (i) 65 days of this Settlement Agreement or (ii) a court order. From and
after February
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1, 1997, the Pharmhouse Entities shall have no obligation to pay, or reimburse
Woolworth for any rent or other occupancy costs payable to landlord under the
Lease;
(d) After the effective date of the redelivery, and during the period
of the Pharmhouse Entities' occupancy, the Pharmhouse Entities agree to abide by
all terms and conditions of the lease and shall indemnify and hold Woolworth
harmless from and against any and all liabilities, losses, damages, claims,
costs and expenses (including, without limitation, reasonable fees and expenses
of counsel) suffered or incurred by Woolworth (except for claims advanced by the
landlord of the Redelivered Leasehold premises that the Pharmhouse Entities were
not properly in possession of the premises and except as set forth in the second
sentence of paragraph 5 (c) above) arising as a result of the Pharmhouse
Entities' occupancy after the date hereof, and
(e) If Woolworth makes a payment to the landlord of store #3044
relating to occupancy costs relating to the period of May 1, 1995 through
January 31, 1997, the Pharmhouse Entities shall reimburse Woolworth for such
payment within thirty (30) days in accordance with paragraph 4(d) of this
Settlement Agreement.
(f) The Pharmhouse Entities, while in possession of each of the demised
premises hereunder, shall be permitted to retain all proceeds of inventory and
asset sales received in connection therewith;
6 Option Leases
With respect to stores #3014, Capital City Plaza, Camp Hill,
Pennsylvania; #3019, Colonial Common Shopping Center, Harrisburg, Pennsylvania;
#3025, Marketfair North Shopping Center, Clay, New York; #3026, Hills Plaza,
DeWitt, New York; and #3035, Carousel Commons, Syracuse, New York, (individually
an "Option Lease" and collectively the "Option Leases"), the Pharmhouse Entities
and Woolworth hereby agree that the Pharmhouse Entities shall continue to
operate each of the demised premises in accordance with the terms of the leases
referenced in this paragraph 6, upon the following terms and conditions:
(a) Effective as of February 1, 1997 and continuing through and
including July 31, 1997, Woolworth shall make payments to accommodate the
payment of current rent and other fixed monthly sums payable to landlord for
each of the Option Leases in accordance with the attached schedule set forth in
Exhibit "E" hereto. In addition to the accommodation of rent and other fixed
monthly sums payable to landlord as set forth in Exhibit "E", Woolworth shall
reimburse the Pharmhouse Entities for additional occupancy costs relating to
periods on or after February 1, 1997 and up to July 31, 1997 as set forth on
Exhibit "F" hereto. Woolworth will reimburse such costs upon receipt by
Woolworth of reasonable third-party invoices rendered in the ordinary course of
business received from the Pharmhouse Entities. Notwithstanding the foregoing to
the contrary, Woolworth shall have no obligation to
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<PAGE> 7
reimburse the Pharmhouse Entities for any utility payments made or to be made by
the Pharmhouse Entities directly to the utility company serving any of the
demised premises;
(b) After May 31, 1997, the Pharmhouse Entities shall have the option
to surrender possession and reassign an Option Lease to Woolworth if the store
did not show a store operating a profit during the four (4) month period ending
May 31, 1997 as calculated by the Pharmhouse Entities (the "Profitability
Test"). In such a case, the Pharmhouse Entities will provide to Woolworth a
statement and breakdown of the Pharmhouse Entities' calculation of
profitability. If the Profitability Test has not been satisfied with respect to
one or all of the Option Leases, the Pharmhouse Entities shall have the option
to surrender possession and reassign such Option Lease to Woolworth. The option
to surrender shall be exercisable up to and including July 31, 1997;
(c) Notwithstanding anything contained in paragraph 6(b) to the
contrary, Woolworth shall, at any time and for any reason whatsoever, have the
right to terminate the Pharmhouse Entities' possession and require a
reassignment of any or all of the Option Leases, by giving the Pharmhouse
Entities written notice of its desire that the Pharmhouse Entities surrender
possession and reassign the lease(s) and the Pharmhouse Entities shall reassign
as provided herein;
(d) If either the Pharmhouse Entities, pursuant to paragraph 6(b), or
Woolworth, pursuant to paragraph 6(c), elects to terminate the Pharmhouse
Entities' possession of the demised premises under an Option Lease and reassign
said lease to Woolworth, the reassignment shall be effective upon surrender of
possession by the Pharmhouse Entities ninety (90) days from the date the
Pharmhouse Entities give notice pursuant to paragraph 6(b) above or one hundred
twenty (120) days after Woolworth gives a notice pursuant to paragraph 6(c)
above. With respect to each such assignment, such reassignment shall be
automatic and without the need for any further documentation to evidence such
reassignment; provided, however, that at the request of either party hereto,
Woolworth and the Pharmhouse Entities shall execute and deliver to the other a
declaration or letter confirming the same. The parties agree that, in addition
to the terms and conditions herein, the Terms and Conditions of the Lease
Assignment set forth in Exhibit "D" hereto are incorporated herein and made a
part hereof;
(e) As and when the premises are surrendered, the Pharmhouse Entities
shall surrender and vacate the demised premises of the Option Leases to
Woolworth in broom clean condition. At their expense, the Pharmhouse Entities
shall remove from the demised premises of each Option Lease all signs,
inventory, equipment, merchandise and fixtures and shall repair all damage
caused by the removal. The Pharmhouse Entities shall not remove leasehold
alterations, additions or improvements made to the demised premises or any other
items which are the property of the landlord, unless required to be removed
pursuant to the terms of the
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<PAGE> 8
Option Lease. At their expense, the Pharmhouse Entities shall perform prior to
the surrender date all repairs and maintenance required by tenant under the
terms of the Option Lease;
(f) The Pharmhouse Entities, while in possession of each of the demised
premises hereunder, shall be permitted to retain all proceeds of inventory and
asset sales received in connection therewith;
(g) Paragraphs 4(c), 4(d) and 4(f) above, as pertaining to the
reassignment of the Reassigned Lease, shall apply with the same force and effect
to the Option Leases; and
(h) Upon Woolworth's request, and only upon Woolworth's request, and
following the full execution and delivery of this Settlement Agreement , the
Pharmhouse Entities shall deliver to any or all of the landlords under an Option
Lease, if applicable, notwithstanding that the giving of such notice may
constitute a default under the respective Option Lease, a notice stating that
the Pharmhouse Entities intend to (i) discontinue operations at such demised
premises; and (ii) reassign such Option Lease to Woolworth.
7. Delivered Leases
As of the date hereof, all of the twenty-four (24) leases acquired by
the Pharmhouse Entities from Woolworth, shall each be individually deemed a
"Delivered Lease" as defined in Section "8.3(d)" of the Asset Purchase Agreement
and collectively, the "Delivered Leases". As to stores #3012 and #3039, the
Pharmhouse Entities will execute subleases from Woolworth to the Pharmhouse
Entities in form and substance mutually acceptable to Woolworth and the
Pharmhouse Entities will cooperate with Woolworth in obtaining the consent of
each landlord. Woolworth shall have no further obligation pursuant to section
"8.3" to indemnify the Pharmhouse Entities with respect to the Delivered Leases.
8. Notice of Default - Right to Cure
The Pharmhouse Entities hereby agree that in the event that they
default in the performance of any obligation under the remaining seventeen (17)
leases acquired by the Pharmhouse Entities, the Pharmhouse Entities will
promptly notify Woolworth of any default in which case Woolworth shall have the
right to cure said default pursuant to the terms and conditions of the
respective lease. Following Woolworth's cure of such default, which shall occur
only following 3 business days notice to Pharmhouse of its intent to cure the
Pharmhouse Entities' default, the Pharmhouse Entities may reimburse Woolworth
for the amounts paid to the landlord on account of the cure, and the Pharmhouse
Entities' right to occupancy of the premises shall be unaffected. In the event
the Pharmhouse Entities fail to reimburse Woolworth within ten (10) days of a
demand, the Pharmhouse Entities shall immediately, upon demand, reassign such
lease to Woolworth and vacate and surrender possession of the premises
attributable to such lease to Woolworth
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<PAGE> 9
pursuant to sections 4(f), 6(d) and 6(e) and the Terms and Conditions set forth
in Exhibit D hereto. In this regard, the Pharmhouse Entities acknowledge that
Woolworth will suffer irreparable injury for which there would be no adequate
remedy at law; that Woolworth would be entitled to an injunction to compel the
reassignment of the lease and the restitution of the premises to Woolworth; and
that the Pharmhouse Entities will not oppose a motion for such injunctive
relief. Notwithstanding anything to the contrary above, if the Pharmhouse
Entities advise Woolworth that they dispute a claimed default and commence
litigation against landlord re: same, Woolworth shall not be entitled to cure
the default if the Pharmhouse Entities obtain a court order enjoining
termination of the lease during the pendency of the litigation.
9. Rental Payments Reconciliation
The Pharmhouse Entities shall pay to Woolworth all unpaid rents, less
offsets, as set forth in Exhibit "G" within one hundred and twenty days (120) of
the execution of the Settlement Agreement. If the Pharmhouse Entities fail to
pay to Woolworth any portion of the unpaid rents provided for in this paragraph,
Woolworth shall have the right to set-off such unpaid amounts against any
payments undertaken by Woolworth and provided for in this Settlement Agreement
including any rent or occupancy costs set forth in Exhibits E and F hereto.
10. No Admission of Liability
Nothing contained in this Settlement Agreement shall be construed as to
constitute an admission by any party hereto of liability or of the truth or
falsity of any of the allegation or any claims or defenses alleged or set forth
in the Complaint or subsequent pleadings filed by any party to the Action or the
Arbitration commenced by Woolworth, nor shall any provision or statement in any
such pleading in the Action or Arbitration be construed as to constitute an
admission that any party has violated any of the laws of the United States, the
State of New York, or any other state. To the contrary, Woolworth and Pharmhouse
expressly deny each and all of the allegations and claims made against each of
them in the Action or Arbitration.
11. (a) Dismissal of the Pending Action. In order to dismiss the
above-described litigation, Woolworth and Pharmhouse will direct their
respective attorneys of record to execute a Stipulation of Discontinuance in the
form annexed hereto as Exhibit "H" hereof, which execution shall occur.
Contemporaneously with the execution of the Settlement Agreement, Pharmhouse's
attorneys will cause the Stipulation of Discontinuance to be filed with the New
York Supreme Court and will thereafter promptly notify the Appellate Division,
First Department, in which a related appeal is pending, of the settlement.
(b) Dismissal of the Pending Arbitration. Contemporaneously
with execution of this Settlement Agreement, Woolworth shall deliver to the
American Arbitration Association a letter and such other documentation as the
American
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<PAGE> 10
Arbitration Association shall require withdrawing, with prejudice, all claims
asserted in its demands for arbitration or which were directed to be arbitrated
per court order.
12. Service Mark. Woolworth hereby extends the term of Pharmhouse's
license to use of the service mark "THE RX PLACE", U.S. Service Mark
Registration Number 1,408,996, for a period of three (3) years from the
expiration date set forth in the Asset Purchase Agreement pursuant to the terms
and conditions thereof. Pharmhouse has the right to extend the term for an
additional one year period upon ninety (90) days written notice prior to the
expiration of the term as extended herein.
13. Amendment and No Oral Modification. This Settlement Agreement may
not be changed orally but only by a written agreement signed by each party
against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
14. Waiver. Compliance with any provision hereof my be waived only by a
written document signed by the parties to this Settlement Agreement. No exercise
of, or failure to exercise any right hereunder, and no partial or single
exercise of any such right, shall operate as a waiver or otherwise affect such
exercise or any other exercise, of that or any other right, it being understood,
except as otherwise specifically provided herein, that all such rights and all
remedies therefore are intended to be cumulative and not exclusive.
15. Consent to Jurisdiction and Specific Performance. The parties
hereto acknowledge and agree that irreparable damage would result in the event
any of the provisions of this Settlement Agreement were not performed in
accordance with their specific terms or were otherwise breached. Accordingly,
each party to the Settlement Agreement shall be entitled to seek an injunction
to prevent breaches of this Settlement Agreement and to specifically enforce the
terms and provisions hereof in an action instituted in the Supreme Court of the
State of New York, County of New York, in addition to any other remedy to which
such party may be entitled, at law or in equity.
16. Voluntary and Knowing Execution. Each of the parties to this
Settlement Agreement acknowledges that is has received independent legal advice
from its attorneys with respect to the advisability of entering into this
Settlement Agreement. Each of the parties to this Settlement Agreement
acknowledges that this Settlement Agreement is made and executed by and of its
own free will; that it knows all of the relevant facts and its rights in
connection therewith; and that it has not been improperly influenced or induced
to make this settlement as a result of any act or action on the party of any
party or employee, agent, attorney or representative of any party to this
Settlement Agreement.
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17. Confidentiality. The provisions of this Settlement Agreement shall
not be disclosed to any third party, except in the ordinary course of business
and except to the extent required by applicable laws including, without
limitation, applicable federal securities laws, and except as necessary to
implement an effectuate the terms and provisions of this Settlement Agreement.
Nothing contained herein shall affect the obligation of any party hereto to
respond to any disclosure compelled by subpoena or other such legal process or
compulsion. The parties agree that beyond the issuance of the press release by
Pharmhouse attached as Exhibit "I" hereof or as mutually agreed upon, neither
party shall issue a press release concerning the fact of or the terms and
conditions of this Settlement Agreement.
18. Ownership of Claims. The parties hereto each represent and warrant
that they are the owners of all of the claims set forth in the Complaint and the
subsequent pleadings filed in Action or Arbitration that no other person has or
has had any interest in said claims, and that they each have the sole right to
execute this Settlement Agreement as the owner of said claims contained in the
Complaint and in the subsequent pleadings of the Action and Arbitration.
19. Construction. All words used in this Settlement Agreement shall be
construed to include the plural, as well as the singular number, and words used
in the present tense shall include the future as well as the present, and words
used in the masculine gender shall include the feminine and neuter gender. As
all parties have participated in the preparation of this Settlement Agreement,
should any provision in the Settlement Agreement require judicial
interpretation, the court interpreting or construing such provision shall not
apply a presumption that such provision shall be more strictly construed against
the party who drafted such provision. Captions to paragraphs and sections of
this Settlement Agreement have been included solely for the sake of convenient
reference and are not intended to control the significance of the respective
paragraphs and sections.
20. Notice. All notices, requests and other communications in
connection herewith shall be in writing (including fax) and delivered or faxed
to the following address (notice shall be effective upon fax or delivery):
(1) if to Woolworth:
Woolworth Corporation
233 Broadway
New York, NY 10279
Attn: Gary M Bahler, Esq.
General Counsel
Fax No: (212)553-2152
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with a copy to:
Kelley Drye & Warren LLP
101 Park Avenue
New York, NY 10178
Attn: John M. Callagy, Esq.
Fax No: (212)808-7897
(2) if to Pharmhouse:
Pharmhouse Corp.
860 Broadway
New York, NY 10003
Attn: Kenneth A. Davis, President
Fax No: (212)477-2900
with a copy to:
Herrick Feinstein LLP
Two Park Avenue
New York, NY 10016
Attn: Stephen M. Rathkopf, Esq.
Fax No. (212)889-7577
21. Entire Agreement. This Settlement Agreement and the Releases and
Exhibits set forth the entire understanding of the parties with respect to the
subject matter hereto; provided, however, that, except as expressly set forth in
this Settlement Agreement and such Releases and exhibits, all of the provisions
of the Asset Purchase Agreement shall remain in full force and effect.
22. Severability. If any provision of this Settlement Agreement shall
be determined to be prohibited or unenforceable, such prohibition or
unenforceability shall not invalidate or render unenforceable any other
provision of this Settlement Agreement except to the extent that any such
prohibition or determination of enforceability shall materially alter or affect
the substantive provisions hereof in favor or against any of the parties hereto.
23.Governing Law. This Settlement Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York without
reference to New York choice of law principles.
24. Successors and Assigns. This Settlement Agreement, and the exhibits
annexed hereto, shall be binding on the parties, their successors in interest,
administrators or assigns.
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<PAGE> 13
25. Counterparts. This Settlement Agreement may be executed in
counterparts, each of which shall be considered to be an original instrument.
ENTERED into as of the date set forth above:
PHARMHOUSE CORP. F.W. WOOLWORTH CO.
By: _________________ By: _________________
Title: Title:
RX REALTY CORP. WOOLWORTH CORPORATION
By: _________________ By: __________________
Title: Title:
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<PAGE> 14
EXHIBIT A
RELEASE
TO ALL PERSONS TO WHOM THESE PRESENTS SHALL COME OR MAY CONCERN, KNOW THAT:
Pharmhouse Corp. and Rx Realty Corp., on behalf of each of them and
their respective officers, directors and agents, and their respective affiliates
and subsidiaries, as RELEASORS, in consideration of the sum of TEN DOLLARS
($10.00), and other good and valuable consideration received from F.W. Woolworth
Co. and Woolworth Corporation as RELEASEES, receipt of which is hereby
acknowledged, releases and discharges the RELEASEES, the RELEASEES' parents,
subsidiaries, affiliates, predecessors, successors, and assigns or their
officers, directors, employees, agents and representatives from all actions,
causes or actions, suits, debts, dues, sums of money accounts, reckonings,
bonds, bills, specialties, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, judgments, extents, executions, claims
and demands whatsoever, in law, admiralty or equity which against the RELEASEES,
the RELEASORS, the RELEASORS' parents, subsidiaries, affiliates, predecessors,
successors and assigns, and their officers, directors, shareholders,
administrators, servants, employees, attorneys, agents, heirs, executors,
administrators, partners, joint ventures, or any committee or other arrangement
of creditors organized with respect to the affairs of RELEASORS ever had, now
have, or hereafter can, shall, or may have, including but not limited to, claims
which were asserted or claims and defenses which could have been asserted, in an
action in the Supreme Court of the State of New York, County of New York, under
Index No. 600121/96, styled Pharmhouse Corp. v. Woolworth Corporation and F.W.
Woolworth Co., from the beginning of the world to the day of the date of this
RELEASE. Nothing in this RELEASE shall affect or release the obligations created
in the MUTUAL RELEASE AND SETTLEMENT AGREEMENT.
Except as modified by the MUTUAL RELEASE AND SETTLEMENT AGREEMENT, all
the provisions of the Asset Purchase Agreement between the parties dated April
13, 1995 shall remain in full force and effect and this RELEASE shall not effect
the parties' obligations thereunder.
Whenever the text hereof requires, the use of the singular number shall
include the appropriate plural number as the text of the within instrument may
require.
This RELEASE may not be changed orally.
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<PAGE> 15
IN WITNESS WHEREOF, the RELEASORS has hereunder set RELEASORS' hand and
seal on this, the _____ day of __________ 199_.
PHARMHOUSE CORP.
By: __________________
Title:
RX REALTY CORP.
By: ___________________
Title:
Sworn to me before this
_____ day of ___________, 199_
______________________________
Notary Public
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<PAGE> 16
EXHIBIT B
RELEASE
TO ALL PERSONS TO WHOM THESE PRESENTS SHALL COME OR MAY CONCERN, KNOW THAT:
Kenneth A. Davis, Marcie B. Davis and Manfred Brecker, individually and
jointly, as RELEASORS, in consideration of the sum of TEN DOLLARS ($10.00), and
other good and valuable consideration received from F.W. Woolworth Co. and
Woolworth Corporation as RELEASEES, receipt of which is hereby acknowledged,
releases and discharges the RELEASEES, the RELEASEES' parents, subsidiaries,
affiliates, predecessors, successors and assigns, and their officers, directors,
employees, agents and representatives from all actions, causes or actions,
suits, debts, dues, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements, promises,
variances, trespasses, damages, judgments, extents, executions, claims and
demands whatsoever, in law, admiralty or equity which against the RELEASEES, the
RELEASORS', the RELEASORS' parents, subsidiaries, affiliates, predecessors,
successors and assigns, and their officers, directors, shareholders,
administrators, servants, employees, attorneys, agents, heirs, executors,
administrators, partners, joint ventures, or any committee or other arrangement
of creditors organized with respect to the affairs of RELEASORS ever had, now
have, or hereafter can, shall, or may have, including but not limited to, claims
which were asserted or claims and defenses which could have been asserted, in an
action in the Supreme Court of the State of New York, County of New York, under
Index No. 600121/96, styled Pharmhouse Corp. v. Woolworth Corporation and F.W.
Woolworth Co. from the beginning of the world to the day of the date of this
RELEASE. Nothing in this RELEASE shall affect or release the obligations created
in the MUTUAL RELEASE AND SETTLEMENT AGREEMENT.
Except as modified by the MUTUAL RELEASE AND SETTLEMENT AGREEMENT, all
the provisions of the Asset Purchase Agreement dated April 13, 1995 shall remain
in full force and effect and this RELEASE shall not affect the parties'
obligations thereunder.
Whenever the text hereof, requires, the use of the singular number
shall include the appropriate plural number as the text of the within instrument
may require.
This RELEASE may not be changed orally.
IT WITNESS WHEREOF, the RELEASORS have hereunder set RELEASORS' hand
and seal on this, the _____ day of ______________, 199 _.
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<PAGE> 17
KENNETH A. DAVIS
______________________
MARCIE B. DAVIS
_______________________
MANFRED BRECKER
________________________
Sworn to before me this
_____ day of ______________, 199_
__________________________
Notary Public
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<PAGE> 18
EXHIBIT C
RELEASE
TO ALL PERSONS TO WHOM PRESENTS SHALL COME OR MAY CONCERN, KNOW THAT:
F.W. Woolworth Co. and Woolworth Corporation, on behalf of themselves,
their respective parents, affiliates and subsidiaries, as RELEASORS, in
consideration of the sum of TEN DOLLARS ($10.00), and other good and valuable
consideration received from Pharmhouse Corp., Rx Realty Corp., Kenneth A. Davis,
Marcie B. Davis and Manfred Brecker as RELEASEES, receipt of which is hereby
acknowledged, releases and discharges the RELEASEES, the RELEASEES' parents,
subsidiaries, affiliates, predecessors, successors and assigns, and their
officers, directors, employees, agents and representatives from all actions,
causes of actions, suits, debts, dues, sums of money, accounts, reckonings,
bonds, bills, specialties, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, judgments, extents, executions, claims
and demands whatsoever, in law, admiralty, or equity, which against the
RELEASEES, the RELEASORS, the RELEASORS' parents, subsidiaries, affiliates,
predecessors, successors and assigns, and their officers, directors,
shareholders, administrators, servants, employees, attorneys, agents, heirs,
executors, administrators, partners, joint ventures, or any committee or other
arrangement of creditors organized with respect to the affairs of RELEASORS ever
had, now have, or hereafter can, shall, or may have relating to (i) the
arbitration commenced by RELEASORS before the American Arbitration Association
in New York City, (ii) the action commenced by Pharmhouse in the Supreme Court
of the State of New York, County of New York under Index No. 60021/96, styled
Pharmhouse Corp. v. Woolworth Corporation and F.W. Woolworth Co. and (iii) the
outstanding principal and interest due and owing pursuant to the Notes (except
as to the Third Note and the Remaining Outstanding Principal thereof as set
forth in the MUTUAL RELEASE AND SETTLEMENT AGREEMENT) from the beginning of the
world to the day of the date of this RELEASE except here shall be no limitation
and this is intended as and shall be a general release as to Kenneth A. Davis,
Marcie B. Davis, and Manfred Brecker. Nothing in this RELEASE shall affect or
release the obligations created in the MUTUAL RELEASE AND SETTLEMENT AGREEMENT.
Except as modified by this RELEASE and the MUTUAL RELEASE AND
SETTLEMENT AGREEMENT, all of the provisions of the Asset Purchase Agreement
among the parties, dated April 13, 1995 shall remain in full force and effect
until the RELEASE shall not affect the parties' obligations thereunder.
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<PAGE> 19
Whenever the text hereof requires, the use of the singular number shall
include the appropriate plural number as the text of the within instrument may
require.
This RELEASE may not be changed orally.
IN WITNESS WHEREOF, the RELEASORS have hereunder set RELEASORS' hand
and seal on this , the _____ day of _____________, 199_.
F.W. WOOLWORTH CO.
By: _________________
Title:
WOOLWORTH CORPORATION
By: __________________
Title:
Sworn to before me this
_____ day of _________, 199_
_______________________
Notary Public
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<PAGE> 20
EXHIBIT D
TERMS AND CONDITIONS OF ASSIGNMENT OF LEASE UNDER MUTUAL RELEASE AND
SETTLEMENT AGREEMENT
1. Pharmhouse or Rx Realty (together "Assignor") re-assigns and transfers to
F.W. Woolworth Co. ("Woolworth") all of its right, title and interest as the
tenant under the Leases pursuant to and described in the Mutual Release and
Settlement Agreement.
2. For each lease assignment that becomes effective, Woolworth accepts said
re-assignment and transfers and agrees to pay, perform and observe all of the
obligations of the tenant under the Lease accruing from and after the effective
date of the Assignment as determined under the Mutual Release and Settlement
Agreement.
3. Assignor hereby represents and warrants to Woolworth that (i) Assignor is the
sole owner of the interest of the tenant under the Leases, free and clear of all
liens, encumbrances and other matters, with the exception of liens or other
encumbrances by Congress Financial Corporation and McKesson Corporation as their
interests exist, (ii) the Leases have not been amended, supplemented, or
otherwise changed by Pharmhouse (except as expressly set forth above), (iii) to
the best of Assignor's knowledge , the Leases are in full force and effect, (iv)
to the best of Assignor's knowledge, Assignor is not in default in the
performance of any of the obligations of the tenant under the Leases, (v)
Assignor has not received any notice from Landlord that they are in default
under the Leases with the exceptions of locations 3044 (W.Orange), 3026 (DeWitt)
and 3035 (Syracuse), locations where landlords have not accepted lease
assignments to Assignor, and (vi) to the best of Assignor's knowledge, landlord
is not in default in the performance of any of their obligations under the
Leases.
4. Assignor shall indemnify and hold Woolworth harmless from and against any all
liabilities, losses, damages, claims, costs and expenses (including, without
limitation, reasonable fees and expenses of counsel) suffered or incurred by
Woolworth (except to the extent they are suffered or incurred as a result of
Woolworth's direction to deliver a notice as set forth in paragraph 4(g) or 6(h)
or failure to direct the Assignor to give notice to be delivered pursuant to
paragraph 4(g) or 6(h) arising out of resulting from a material breach by
Assignor or any of the representations and warranties set forth in paragraph 3
above and for any obligations of the tenant under the Leases relating to periods
on or before the day immediately preceding the date of the effective date of the
assignment as intended by the Settlement Agreement, and for any additional
percentage rent, if any, due under the appropriate lease for periods of
Assignor's occupancy.
20
<PAGE> 21
5. Woolworth shall indemnify and hold Assignor harmless from and against any all
liabilities, losses, damages, claims, costs and expenses (including, without
limitation, reasonable fees and expenses of counsel) suffered or incurred by
Assignor and arising out of or resulting from any obligations of the tenant
under the Leases relating to periods on or after the effective date of the
assignment as intended by the Settlement Agreement, including without
limitation, any claim by landlord that any assignment of lease is not permitted,
and including any damage sustained by the Pharmhouse Entities as the result of a
notice directed to be sent by Woolworth pursuant to paragraph 4(g) of 6(h) or
which Woolworth failed to direct the Assignor to give notice pursuant to
paragraph 4(g) or 6(h) except if the same, in whole or in part, arises out of or
results from a material breach by Assignor of any of the representations and
warranties set forth in paragraph 3 above.
21
<PAGE> 22
Exhibit E
Monthly Fixed Payments
<TABLE>
<CAPTION>
Store Monthly Fixed Payments
<S> <C>
1 Store #3014
Camp Hill, PA $23,308.00
2 Store #3015
Albany, NY $17,360.00
3 Store #3019
Colonial Commons, PA $23,790.75
4 Store #3025
Clay, NY $23,168.29
5 Store #3026
DeWitt, NY $23,706.08
6 Store #3035
Syracuse, NY $48,432.00
</TABLE>
22
<PAGE> 23
EXHIBIT F
ADDITIONAL OCCUPANCY COSTS(1)
<TABLE>
<CAPTION>
Store Additional Occupancy Costs
<S> <C>
1. Store #3014
Camp Hill, PA $ 3,538.00
2. Store #3015
Albany, NY $11,437.00
3. Store #3019
Colonial Commons, PA $ 3,975.25
4. Store #3025
Clay, NY $ 6,338.21
5. Store #3026
Dewitt, NY $ 7,761.92
6. Store #3035
Syracuse, NY $ 0
</TABLE>
(1) Additional Occupancy Costs are stated in approximate amount and subject to
adjustment based on actual and reasonable third-party invoices prepared in the
ordinary course of business and received by Woolworth. Additional Occupancy
Costs are: real estate taxes, water and sewer charges, landlord's, insurance,
merchant dues and common area maintenance charges.
23
<PAGE> 24
EXHIBIT G
AMOUNTS DUE WOOLWORTH RELATED TO RENTS AND OTHER OFFSETS(1)
RENTAL/OTHER PAYMENTS DUE TO WOOLWORTH THROUGH 1/31/97:
<TABLE>
<S> <C> <C>
STORE #3012 - LEVITTOWN, PA 86,577.50
STORE #3039 - NEWBURGH, NY 253,012.77
STORE #3044 - W.ORANGE, NJ 109,145.79 448,736.06
----------
RENT ACCOMMODATION:
STORE #3014 - CAMP HILL, PA (11,653.99)
STORE #3015 - ALBANY, NY (8,680.00)
STORE #3019 - HARRISBURG, NY (11,895.38)
STORE #3025 - CLAY, NY (11,589.15)
STORE #3026 - DEWITT, NY (11,853.04)
STORE #3035 - SYRACUSE, NY (24,216.23) (79,887.77)
----------
SCHOOL TAXES DUE TO PHARMHOUSE(2)
STORE #3015 - ALBANY, NY (16,239.74)
STORE #3029 - HARRISBURG, NY (5,098.74)
STORE #3025 - CLAY, NY (9,841.21) (31,179.70)
-----------
CAM CREDITS DUE PHARMHOUSE (3,185.10)
US HEALTHCARE CHECKS DUE TO WOOLWORTH 24,285.18
US HEALTHCARE CHECKS DUE TO PHARMHOUSE (16,064.44)
VIDEO COUPON REDEMPTION DUE PHARMHOUSE (147,843.40)
-----------
TOTAL AMOUNT DUE WOOLWORTH THROUGH 1/31/97 $194,860.83
===========
</TABLE>
- ----------------
(1) Preliminary settlement amount - subject to current audit and future video
coupon redemptions by Pharmhouse to be agreed upon at a future date.
(2) Represents school tax expenses prepaid by Pharmhouse related to the period
1/15/97 through 6/30/97.
24
<PAGE> 25
EXHIBIT H
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
PHARMHOUSE CORP., INDEX NO: 600121/96
Plaintiff,
-against - STIPULATION OF
DISCONTINUANCE WITH
WOOLWORTH CORPORATION and F.W. PREJUDICE
WOOLWORTH CO.
Defendants
IT IS HEREBY STIPULATED AND AGREED by and between the undersigned, the
attorneys of record for all parties to the above entitled action, that whereas
no party hereto is an infant, incompetent person for whom a committee has been
appointed or conservatee and no person not a party has an interest in the
subject matter of the action, the above entitled action be, and the same hereby
is discontinued with prejudice, and without costs to either party as against the
other. This stipulation may be filed without further notice with the Clerk of
the Court.
Dated: New York, New York
January 31, 1997
HERRICK, FEINSTEIN LLP KELLEY DRYE & WARREN LLP
- ---------------------- --------------------------
Attorneys for Plaintiff Attorneys for Defendants
2 Park Avenue 101 Park Avenue
New York, NY 10016 New York, NY 10178
(212)592-1400 (212)808-7800
25
<PAGE> 26
EXHIBIT I
PHARMHOUSE PRESS RELEASE
PHARMHOUSE AND WOOLWORTH SETTLE ACTION
Pharmhouse Corp. and Woolworth Corporation have resolved all claims between them
arising from the sale of certain assets of the Rx Place division of Woolworth to
Pharmhouse in April 1995.
As part of the agreement, Woolworth has forgiven certain debt and agreed to
accommodate Pharmhouse with respect to certain stores.
This was a negotiated agreement and no party conceded any claims asserted
against the other.
26
<PAGE> 27
with a copy to:
Kelley Drye & Warren LLP
101 Park Avenue
New York, NY 10178
Attn: John M. Callagy, Esq.
Fax No: (212)808-7897
(2) if to Pharmhouse:
Pharmhouse Corp.
860 Broadway
New York, NY 10003
Attn: Kenneth A. Davis, President
Fax No: (212)477-2900
with a copy to:
Herrick Feinstein LLP
Two Park Avenue
New York, NY 10016
Attn: Stephen M. Rathkopf, Esq.
Fax No. (212)889-7577
21. Entire Agreement. This Settlement Agreement and the Releases and
Exhibits set forth the entire understanding of the parties with respect to the
subject matter hereto; provided, however, that, except as expressly set forth in
this Settlement Agreement and such Releases and exhibits, all of the provisions
of the Asset Purchase Agreement shall remain in full force and effect.
22. Severability. If any provision of this Settlement Agreement shall
be determined to be prohibited or unenforceable, such prohibition or
unenforceability shall not invalidate or render unenforceable any other
provision of this Settlement Agreement except to the extent that any such
prohibition or determination of enforceability shall materially alter or affect
the substantive provisions hereof in favor or against any of the parties hereto.
23.Governing Law. This Settlement Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York without
reference to New York choice of law principles.
24. Successors and Assigns. This Settlement Agreement, and the exhibits
annexed hereto, shall be binding on the parties, their successors in interest,
administrators or assigns.
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Name State of Incorporation
- ---- ----------------------
<S> <C>
Nichols Realty, Inc. Pennsylvania
Rx Realty Corp. Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> FEB-01-1997
<CASH> 2,915
<SECURITIES> 0
<RECEIVABLES> 7,564
<ALLOWANCES> 0
<INVENTORY> 49,796
<CURRENT-ASSETS> 62,136
<PP&E> 8,881
<DEPRECIATION> 0
<TOTAL-ASSETS> 70,503
<CURRENT-LIABILITIES> 37,254
<BONDS> 0
0
(1)
<COMMON> 22
<OTHER-SE> (13,168)
<TOTAL-LIABILITY-AND-EQUITY> 70,503
<SALES> 224,292
<TOTAL-REVENUES> 231,729
<CGS> 176,390
<TOTAL-COSTS> 233,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,230
<INCOME-PRETAX> (5,808)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 7,142
<CHANGES> 0
<NET-INCOME> 1,334
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
