SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
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)
Registrants telephone number, including area code (212)477-9400
------------
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 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 the latest practicable
date.
Outstanding as of
Class November 30, 1998
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Common Shares,
$.01 par value 2,594,827
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Pages
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at October 31, 1998
and January 31, 1998 2
Consolidated Statements of Operations
for the three month and nine month periods ended
October 31, 1998 and November 1, 1997, respectively. 3
Consolidated Statements of Cash Flows
for the nine month period ended October 31, 1998
and November 1, 1997, respectively. 4
Notes to Consolidated Financial Statements. 5-7
Item 2. Management's Discussion and Analysis
of Operations 8-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Default Upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security
Holders 17-18
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 19-21
* Not applicable in this filing
<PAGE 2>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts) Unaudited
<TABLE>
<CAPTION>
<S> <C> <C>
October 31, 1998 January 31, 1998
---------------- ----------------
ASSETS
Current Assets
Cash $ 3,084 $ 3,296
Accounts receivable, net of allowances
of $1,066 and $1,075, respectively 4,806 4,518
Merchandise inventory 40,781 37,332
Prepaid expenses and other 1,606 1,292
-------- --------
Total current assets 50,277 46,438
Property, fixtures and equipment, net 4,901 4,795
Video rental inventory, net 1,515 1,972
Other assets 1,048 487
-------- --------
Total assets $57,741 $53,692
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 3,542 $ 4,647
Accounts payable 22,564 20,713
Provision for store closure - 284
Accrued expenses and other
current liabilities 2,708 2,628
-------- --------
Total current liabilities 28,814 28,272
Long-term debt, net of current portion 25,213 19,154
Other liabilities 1,132 1,372
-------- --------
Total liabilities 55,159 48,798
-------- --------
COMMITMENTS AND CONTIGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par; authorized
and unissued 2,500,000 shares
Common stock, $.01 par; authorized
25,000,000 shares; issued 2,594,833
and 2,594,841 shares, respectively 26 26
Additional paid-in capital 21,728 21,728
Accumulated deficit (19,171) (16,859)
-------- --------
2,583 4,895
Treasury stock, at cost 1 1
-------- --------
Total shareholders' equity 2,582 4,894
-------- --------
Total liabilities and shareholders' equity $57,741 $53,692
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE 3>
PHARMHOUSE CORP. AND SUBSIDIARIES CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Unaudited
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Ended Three Months Ended
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenues:
Net sales $130,530 $142,089 $ 42,840 $ 45,517
Video rental, service
and other income 3,758 4,692 1,164 1,504
-------- -------- -------- --------
134,288 146,781 44,004 47,021
-------- -------- -------- --------
Costs and Expenses:
Cost of merchandise and
services sold 102,509 111,573 33,833 35,949
Selling, general and
administrative expenses 33,501 34,534 11,158 11,496
-------- -------- -------- --------
136,010 146,107 44,991 47,445
-------- -------- -------- --------
Operating income (loss) (1,722) 674 (987) (424)
Interest expense 2,101 2,317 776 736
-------- -------- -------- --------
Loss before extraordinary gains (3,823) (1,643) (1,763) (1,160)
Extraordinary gains, net 1,511 - 1,124 _
-------- -------- -------- --------
Net loss $(2,312) $(1,643) $ (639) $(1,160)
========= ======== ======== ========
Basic earnings (loss) per share:
Loss before extraordinary gains $ (1.48) $ (0.67) $ (0.68) $ (0.45)
Extraordinary gains, net 0.58 - 0.43 -
--------- -------- -------- --------
Net loss per Common Share $ (0.90) $ (0.67) $ (0.25) $ (0.45)
========= ======== ======== ========
Average shares outstanding 2,578 2,463 2,578 2,575
========= ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE 4>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Unaudited
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Months Ended
October 31, November 1,
1998 1997
----------- -----------
Cash Flows provided (used) by Operating Activities:
Net loss (2,312) (1,643)
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization 1,934 2,406
Decrease in deferred rent (50) (133)
Increase (decrease) in deferred revenue (190) 1,352
Extraordinary items (911) -
Changes in operating assets and liabilities:
(Increase)decrease in:
Accounts receivable, net (288) 3,917
Merchandise inventory (3,449) 2,383
Prepaid expenses and other current assets (352) (470)
Other assets (561) (238)
Increase (decrease) in:
Accounts payable 1,851 (92)
Provision for store closure (284) (1,507)
Accrued expenses and other liabilities (212) (764)
---------- ----------
Net cash flows provided (used) by Operating Activities (4,824) 5,211
---------- ----------
Cash Flows used by Investing Activities:
Purchase of property and equipment, net (903) (369)
Purchase of video rental inventory, net (439) (958)
---------- ----------
Net Cash Flows used by Investing Activities (1,342) (1,327)
---------- ----------
Cash Flows provided (used) by Financing Activities:
Net borrowings from New Senior Credit Facility 26,745 -
Pay-off of Prior Senior Credit Facility (21,401) -
Net borrowings from Prior Senior Credit Facility - (3,386)
Proceeds from Subordinated Loan 1,000 -
Pay-down of Subordinated Loan (390) (450)
Proceeds from exercise of stock options and warrants - 232
---------- ----------
Net Cash Flows provided (used) by Financing Activities 5,954 (3,604)
---------- ----------
Net (decrease) increase in cash (212) 280
Cash, beginning of period 3,296 2,915
---------- ----------
Cash, end of period $3,084 $3,195
========== ==========
Supplemental information:
Interest payments $2,094 $2,323
Income taxes paid $ 15 $ -
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE 5>
PHARMHOUSE CORP. AND SUSUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Three
and Nine Months Ended October 31, 1998
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements of
Pharmhouse Corp. (the "Company") have been prepared in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation SX
and, therefore, omit or condense certain footnotes and other
information normally included in financial statements prepared in
conformity with generally accepted accounting principles. The
accounting policies followed for interim financial reporting are
the same as those disclosed in Note 1 of the Notes to
Consolidated Financial Statements included in the Company's
audited Consolidated Financial Statements for the fiscal year
ended January 31, 1998 ("fiscal 1998") which are included in the
Company's Annual Report (the "1998 Form 10-K") heretofore filed
with the Securities and Exchange Commission. In the opinion of
management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation of the
financial information for the interim periods reported have been
made. Results of operations for the 13 week and 39 week periods
ended October 31, 1998 are not necessarily indicative of the
results to be expected for the entire fiscal year ending January
30, 1999 ("fiscal 1999"). These Consolidated Financial Statements
should be read in conjunction with the Company's fiscal 1998
audited Consolidated Financial Statements and Notes thereto.
Certain amounts in the fiscal 1998 third quarter financial
statements have been reclassified to be consistent with the
fiscal 1999 third quarter presentation.
NOTE 2 - CONCLUSION OF THE WOOLWORTH SETTLEMENT
On January 31, 1997, the Company and F. W. Woolworth Co., a
subsidiary of Woolworth Corporation, (collectively "Woolworth")
entered into a Mutual Release and Settlement Agreement,
subsequently amended on June 24, 1997 (collectively, the
"Woolworth Settlement"), resolving all outstanding disputes and
settling all legal proceedings arising out of the Company's
purchase of 24 Rx Place discount drug stores (the "Acquisition")
from Woolworth in April 1995. The major aspects of the Woolworth
Settlement included:
Debt and interest cancellation of $9.5 million, $8.5 million
of which amount was forgiven by Woolworth during fiscal 1997 and
$1 million of which amount was converted into a Contingent Note
obligation and subsequently forgiven by Woolworth as of July 30,
1998. (The Company recorded a $1 million extraordinary gain in
its fiscal 1999 second quarter related to the latter debt
cancellation).
An option to return to Woolworth up to seven of the Rx
Stores purchased in the Acquisition (the "Affected Stores"),
including receiving rent and occupancy subsidies for such stores
through stipulated dates. During fiscal 1998, the Company closed
five of the Affected Stores and reassigned to Woolworth the
leases for such stores. The lease for a sixth Affected Store,
which expired during fiscal 1998, was re-negotiated by the
Company with the landlord of the property and the Company has
continued to operate such store without any further subsidy or
other obligation from Woolworth. During fiscal 1999, Woolworth
exercised its option to require the Company to return to
Woolworth the premises for the last Affected Store, pursuant to
which the Company vacated the premises of such store at the end
of July 1998 and reassigned the store lease to Woolworth. (The
Company transferred the merchandise inventory, equipment and
certain fixtures of this store to another location within the
same mall under a new lease with the landlord of the property and
re-opened the store in late August 1998).
<PAGE 6>
As a result of the cancellation of the Contingent Note and the
return of the last Affected Store to Woolworth, substantially all
of the terms of the Woolworth Settlement have been performed by
the parties.
For further information concerning the Woolworth Settlement,
reference is made to Item 1 and Note 2 of Notes to the
Consolidated Financial Statements included in the Company's 1998
Form 10-K.
NOTE 3 - BORROWINGS
A summary of the Company's borrowings at October 31, 1998 and
January 31, 1998 is as follows (000's omitted):
October 31, 1998 January 31, 1998
--------------------------- -------------------------
Current Non-current Current Non-current
Total portion portion Total portion portion
--------------------------- -------------------------
New Senior Credit
Facility (i):
Revolver $23,755 $3,000(*) $20,755 $ - $ - $ -
Term Loan 2,990 120(**) 2,870 - - -
--------------------------- -------------------------
26,745 3,120 23,625 - - -
Subordinated Loan (ii) 2,010 422 1,588 1,400 1,400 -
Prior Senior Credit
Facility (iii) - - - 21,401 2,247 19,154
Contingent Note (iv) - - - 1,000 1,000 -
--------------------------- -------------------------
$28,755 $3,542 $25,213 $23,801 $4,647 $19,154
=========================== =========================
(*) This amount is classified as "current" for financial
reporting purposes and is subject to the same terms and
conditions as the portion which is classified as "non-current".
(**) This amount is being paid over a 12 month period at the rate
of $10,000 (000's not omitted) per month.
(i) New Senior Credit Facility
On May 14, 1998, the Company and Foothill Capital Corporation
("Foothill") entered into a Loan and Security Agreement (the "New
Senior Credit Facility" or "New Facility") providing for
aggregate credit to the Company of up to $40 million. The New
Facility consists of: (i) a Term Loan up to $3 million; and (ii)
revolving advances equal to the lesser of: (a) 65% of eligible
inventory (at cost) or (b) $35 million (which may be increased to
$40 million upon certain conditions), less the outstanding
principal amount of the Term Loan. Under the New Facility,
subject to the foregoing formula, the maximum revolving advances
could increase up to an aggregate of $35 million ($40 million
upon certain conditions) as the outstanding principal amount of
the Term Loan is reduced. The revolving and term loans under the
New Senior Credit Facility have a five year term, subject to
minor amortization of the Term Loan during that period. The
initial funds advanced to the Company under the New Facility were
used to pay outstanding borrowings, charges, fees and a temporary
$1 million cash collateral account, aggregating $22.6 million
owing by the Company to its prior senior secured lender ("Prior
Lender"). The $1 million cash collateral was subsequently
returned to the Company by the Prior Lender. In addition, the
Company incurred other transaction fees of approximately $1
million.
<PAGE 7>
Indebtedness under the New Senior Credit Facility is secured by a
first priority lien on substantially all of the Company's assets
and, among other conditions, restricts the payment of dividends
and requires that the Company maintain specified quarterly
minimum tangible net worth and EBITDA levels. The Company was in
compliance with amended minimum tangible net worth and EBITDA
levels under the New Senior Credit Facility at the end of the
fiscal 1999 third quarter. The borrowing rates for the New
Facility are prime plus 1.125% for the revolving advances
(subject to decrease if the Company reaches certain EBITDA levels
during the term of the facility) and 11.75% for the Term Loan.
(ii) Subordinated Loan
During the fiscal 1999 second quarter, the Company and the
subordinated lender negotiated an extension of the payment terms
for the balloon payment that was due on August 1, 1998 and to
provide additional financing to the Company as follows: (i) the
Company received an additional $1 million subordinated loan; and
(ii) such additional $1 million plus the then existing balloon
payment of $1.1 million due on August 1, 1998, totaling $2.1
million in the aggregate, is to be paid by the Company to the
subordinated lender at the rate of $35,282 per month, plus
interest, for a period of 60 months commencing in August 1998.
The subordinated lender has been granted a second priority lien
on substantially all of the Company's assets.
(iii) Prior Senior Credit Facility
The borrowing availability under the Prior Senior Credit Facility
was based on the lesser of 60% of eligible inventory (at cost) or
$45 million. On May 14, 1998, the Company repaid all outstanding
indebtedness to the Prior Lender from the proceeds of the New
Senior Credit Facility.
(iv) Contingent Note
In connection with the Woolworth Settlement, a Contingent Note in
the amount of $1 million was surrendered by Woolworth for
cancellation as of July 30, 1998 pursuant to which the Company
recorded a $1 million extraordinary gain in its fiscal 1999
second quarter. For further information concerning the Woolworth
Settlement, see "Conclusion of the Woolworth Settlement" in Note
2.
NOTE 4 - EXTRAORDINARY GAINS, NET
During fiscal 1999, the Company recorded three extraordinary
items aggregating $1.5 million in net gains as described below:
Fiscal 1999 Third Quarter
During the fiscal 1999 third quarter, the Company recorded an
extraordinary gain amounting to $1.1 million in connection with a
partial settlement of certain Brand-Name Prescription Drug
Antitrust Litigation. This class action suit was brought by
certain drug retailers (including the Company as a member of the
class) against certain name-brand drug manufacturers and
wholesalers pertaining to purchases made by the Company from
these suppliers during the period from October 1, 1989 to
December 31, 1994. The Company received its $1.1 million pro
rata share of the partial settlement during the fiscal 1999
fourth quarter. Additional extraordinary gain may be recorded by
the Company in the future as a result of this pending class
action; however, the amount of additional gain and timing of
payments related thereto, if any, is not presently determinable.
Fiscal 1999 second quarter
During the fiscal 1999 second quarter, the Company recorded a $1
million extraordinary gain related to Woolworth's cancellation of
a Contingent Note in connection with the Woolworth Settlement
(see Note 2 for a further discussion of the conclusion of the
<PAGE 8>
Woolworth Settlement) and a $.6 million extraordinary charge for
costs incurred in connection with the Company's early termination
of the Prior Senior Credit Facility.
ITEM 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition
General
The Company currently operates a chain of 32 discount drug stores
located in eight states in the mid-Atlantic and New England
regions of the United States, 13 of which operate under the name
Pharmhouse and 19 of which operate under the name The Rx Place
(the "Rx Stores"), the latter stores having been acquired from F.
W. Woolworth Co., a subsidiary of Woolworth Corporation,
(collectively "Woolworth") in April 1995. In January 1997, the
Company and Woolworth entered into a settlement agreement,
amended in June 1997 (collectively, the "Woolworth Settlement"),
resolving all outstanding disputes arising out of the Company's
purchase of 24 Rx Stores from Woolworth. Pursuant to this
agreement, the Company has closed and returned six Rx Stores to
Woolworth, including one store that was closed and returned to
Woolworth during fiscal 1999. (The Company relocated this store
to a new space in the same mall under a new lease with the
landlord of the property and re-opened the store in late August
1998). In connection with the Woolworth Settlement, Woolworth
also surrendered for cancellation, as of July 30, 1998, a $1
million Contingent Note pursuant to which the Company recorded a
$1 million extraordinary gain in its fiscal 1999 second quarter.
Substantially all of the major terms of the Woolworth Settlement
have now been performed by the parties.
In prior years, the Company has characterized its stores as "deep
discount stores", but management has recently determined that the
term "discount stores" more accurately describes its current
store operations. The Company's stores emphasize a pricing
policy of everyday discount prices on all merchandise, which
includes health and beauty care products, cosmetics, prescription
drugs, stationery, housewares, pet supplies, greeting cards,
food, snacks, beverages and other merchandise, including seasonal
products. The Pharmhouse Stores average approximately 35,000 sq.
ft. in size and the Rx Stores average approximately 25,000 sq.
ft. in size.
Results of Operations
The following table sets forth, as a percentage of revenues, the
Company's Consolidated Statements of Operations for the nine
month and three month periods ended October 31, 1998 and November
1, 1997, respectively:
Nine Months Ended Three Months Ended
---------------- ------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
--------- --------- --------- ---------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of merchandise and
services sold 76.3 76.0 76.9 76.4
--------- --------- --------- ---------
Gross profit 23.7 24.0 23.1 23.6
Selling, general and
administrative expenses 25.0 23.5 25.3 24.5
--------- --------- --------- ---------
Operating income (loss) (1.3) 0.5 (2.2) (0.9)
Interest expense (1.5) (1.6) (1.8) (1.6)
--------- --------- --------- ---------
Loss before extraordinary gains (2.8) (1.1) (4.0)% (2.5)
Extraordinary gains, net 1.1 - 2.6 -
--------- --------- --------- ---------
Net loss (1.7)% (1.1)% (1.4)% (2.5)%
========= ========= ========= =========
<PAGE 9>
THIRD QUARTER OF FISCAL 1999 VS. THIRD QUARTER OF FISCAL 1998
Overall Quarterly Results
The Company reported a net loss of $.6 million, or $.25 per
share, in the fiscal 1999 third quarter compared with a net loss
of $1.2 million, or $.45 per share, in the fiscal 1998 third
quarter. Results for the fiscal 1999 third quarter include a
$1.1 million extraordinary gain in connection with a partial
settlement of certain class action antitrust litigation. (For
further information regarding this litigation, see Note 4 of
Notes to Consolidated Financial Statements and discussion under
Extraordinary Gain). Excluding this extraordinary gain, the
Company reported a fiscal 1999 third quarter loss of $1.8
million. The current quarter's results were adversely affected
by a 2.1% same-store revenue decrease, a .5% decrease in gross
profit percentage (which reflects an increased inventory shrink
accrual) and the loss of profit from three stores previously
subject to the Woolworth rental reimbursement which were closed
and returned to Woolworth.
Significant Line Items
Revenues
Fiscal 1999 third quarter revenues decreased $3 million, or 6.4%,
to $44 million compared with revenues of $47 million in the third
quarter of fiscal 1998. This decrease resulted from the
operation of a reduced number of stores in the current quarter
and a 2.1% same-store revenue decline (based on 30 comparable
stores). Although the Company's fiscal 1999 third quarter same
store revenues decreased 2.1%, it represents the second
consecutive quarter of improved same-store revenues (quarterly
same-store revenues during fiscal 1999 are as follows: 6.3%
decrease in the first fiscal quarter; 4.1% decrease in the second
fiscal quarter; and 2.1% decrease in the third fiscal quarter).
Management attributes the favorable trend in same-store revenues
during the fiscal 1999 third quarter compared with same-store
revenues generated during the first and second fiscal quarters to
a substantial improvement in revenue performance by stores
previously completed under the Company's store renovation program
as well as better merchandise flow and more optimum stock levels
in all of the Company's stores. However, the Company's store
operations continue to be affected by inadequate merchandise
levels in certain general merchandise categories and increased
competition in certain markets.
Gross Profit
Fiscal 1999 third quarter gross profit (total revenues less costs
of merchandise and services sold and freight/distribution
services provided) decreased $.9 million to $10.2 million
compared with $11.1 million the prior year's third quarter. The
decrease in gross profit resulted from the operation of a reduced
number of stores in the current quarter compared with the same
quarter in the prior year (32 stores vs. 34 stores), a 2.1% same
store revenue decrease and a .5% decrease in the gross profit
percentage. The fiscal 1999 third quarter decreased gross profit
percentage reflects the effect of an increase in the Company's
monthly inventory shrink accrual rate (instituted during the
fiscal 1999 first quarter) and an increase in the proportion of
total Company revenues generated by the pharmacy department
compared with the fiscal 1998 third quarter (sales of
pharmaceuticals generate lower margins compared with general
merchandise categories). In an effort to improve the margin,
management has implemented various initiatives which include
modifying the product mix in general merchandise categories
<PAGE 10>
toward higher margin merchandise and selective price increases.
As the price increases are continuing to be phased-in, management
believes such increases, as well as other margin related
initiatives, may not be sufficient to fully offset the effect of
the increased monthly shrink accrual rate until, at the earliest,
the fiscal 1999 fourth quarter.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses declined
$.3 million to $11.2 million in the fiscal 1999 third quarter
compared with $11.5 million in the prior year's third quarter
resulting primarily from the operation of a reduced number of
stores. As a percentage of revenues, SG&A expenses increased .8%
to 25.3% during the fiscal 1999 third quarter resulting from
lower revenues from which to absorb certain SG&A expenses and to
reduced rental reimbursements received from Woolworth for certain
Rx Stores which were subject to Woolworth rental reimbursement
during the comparable quarter in fiscal 1998. During the fiscal
1998 third quarter, the Company operated three of such stores
with the assistance of such reimbursement from Woolworth whereas,
during the fiscal 1999 third quarter, the Company was no longer
eligible for the reimbursement as the related Woolworth
Settlement provisions had expired.
Operating Income (Loss)
The Company reported an operating loss of $1 million during the
fiscal 1999 third quarter compared with an operating loss of $.4
million during the fiscal 1998 third quarter, a decrease of $.6
million. Results for the fiscal 1999 third quarter were
negatively affected by a 2.1% decrease in same-store revenues, a
.5% decrease in the gross profit percentage and reduced profit
from three stores (previously subject to the rental reimbursement
provisions of the Woolworth Settlement) which were closed and
returned to Woolworth.
Extraordinary Gain
During the fiscal 1999 third quarter, the Company recorded a $1.1
extraordinary gain in connection with a partial settlement of
certain Brand-Name Prescription Drug Antitrust Litigation. This
class action legal proceeding was brought by certain drug
retailers (including the Company as a member of the class)
against certain name-brand drug manufacturers and wholesalers
pertaining to purchases made by the Company from these suppliers
during the period from October 1, 1989 to December 31, 1994. The
amount received by the Company represents its pro-rata share of
the partial settlement. Additional extraordinary gain may be
recorded by the Company in the future related to the pending
class action; however, the amount of additional gain and timing
of the payment(s) related thereto, if any, is not presently
determinable.
Interest Expense
Interest expense during the fiscal 1999 third quarter decreased
$.1 million compared to the fiscal 1998 third quarter resulting
primarily from lower borrowing requirements related to the
operation of a reduced number of stores and to lower average
store inventory levels during the current quarter compared with
the third quarter of fiscal 1998.
FIRST NINE MONTHS OF FISCAL 1999 VS. FIRST NINE MONTHS OF FISCAL 1998
Overall Results
The Company reported a net loss of $2.3 million, or $.90 per
share, during the first nine months of fiscal 1999 compared with a
net loss of $1.6 million, or $.67 per share, during the first nine
months of fiscal 1998. Results for the first nine months of fiscal
1999 include extraordinary items aggregating $1.5 million in net
<PAGE 11>
extraordinary gains. (For further information, see
Extraordinary Gains, Net, below). Exclusive of extraordinary
items, the Company reported a loss of $3.8 million during the
first nine months of fiscal 1999 compared with a loss of $1.6
million during the comparable period in fiscal 1998. Results
during the first nine months of fiscal 1999 were negatively
affected by a 4.2% decrease in same-store revenues, a .3%
decrease in the gross profit percentage (which includes the
effect of an increased shrink accrual) and the loss of profit
from five stores (previously subject to the rental reimbursement
provisions of the Woolworth Settlement) which were closed and
returned to Woolworth.
Significant Line Items
Revenues
Revenues during the first nine months of fiscal 1999 decreased
$12.5 million, or 8.5%, to $134.3 million compared with revenues
of $146.8 million during the first nine months of fiscal 1998.
This decrease resulted primarily from the operation of a reduced
number of stores and a 4.2% same-store revenue decrease (based on
30 comparable stores). Although the Company's same-store
revenues decreased 4.2% during the first nine months of fiscal
1999, the Company has experienced an improved trend in same-store
revenues in each of the second and third quarters of fiscal 1999
(same-store revenues during fiscal 1999 decreased: 6.3% in the
first fiscal quarter; 4.1% in the second fiscal quarter; and 2.1%
in the third fiscal quarter). The sequential improvement in
quarterly same-store revenues during the first nine months of
fiscal 1999 is attributed by management to improved revenues
generated by stores previously completed under the Company's
store renovation program as well as from better merchandise flow
and more optimum stock levels in all of the Company's stores
commencing during the fiscal 1999 second quarter. However, the
Company's store operations continue to be affected by inadequate
inventory levels in certain general merchandise categories and
increased competition in certain markets.
During the first six months of the current fiscal year, same
store revenues and general merchandise inventory levels were
negatively affected by the combination of: (i) the effect on the
vendor community of the delayed release of the Company's 1998
Form 10-K in connection with the May 1998 refinancing of the
senior debt facility with Foothill and (ii) the previous
unresolved status of a $1.1 million balloon payment to the
subordinated lender which was originally due on April 28, 1998.
By virtue of the financing transactions with Foothill in May 1998
and the subordinated lender in June 1998, and the dissemination
of this information to the vendor community, the flow of
merchandise into the Company's stores began to improve during
July 1998.
Gross Profit
During the first nine months of fiscal 1999, the gross profit
(total revenues less costs of merchandise and services sold and
freight/distribution services provided) was $31.8 million
compared to $35.2 million in the prior year's comparable period, a
decrease of $3.4 million, resulting from a decline in same-store
revenues and the operation of a reduced number of stores. The
gross profit, as a percentage of revenues, decreased .3% to
23.7% during the first nine months of fiscal 1999 from 24.0% in
the prior year's comparable period. The gross profit percentage
during fiscal 1999 was negatively affected by an increase in the
inventory shrink accrual rate (effective commencing in the fiscal
1999 first quarter) and an increase in the proportion of total
Company revenues generated by the pharmacy department compared
with the first nine months of fiscal 1998 (sales of
pharmaceuticals generate lower margins compared with general
merchandise categories). Management is continuing its efforts to
improve the gross profit margin through measures which include
modifying the product mix within general merchandise categories
toward higher margin merchandise and selective price increases.
<PAGE 12>
As the price increases are being phased-in over a several month
period, management believes such increases, as well as other
initiatives to improve the margin, may not be sufficient to fully
offset the effect of the increased monthly shrink accrual rate
until, at the earliest, the fiscal 1999 fourth quarter.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses decreased
$1 million to $33.5 million during the first nine months of
fiscal 1999 from $34.5 million in the prior year's comparable
period resulting primarily from the operation of a reduced number
of stores and certain cost savings. As a percentage of revenues,
SG&A expenses increased 1.5% during the current nine month period
to 25%. This increase is attributable to lower revenues from
which to absorb certain SG&A expenses and to reduced rental and
occupancy reimbursements received from Woolworth for certain Rx
Stores which were subject to the provisions of the Woolworth
Settlement. During the first nine months of fiscal 1998, the
Company operated five of such Rx Stores with the assistance of
either a full or partial reimbursement from Woolworth, whereas
during the first nine months of fiscal 1999, the Company received
only a partial reimbursement for one such Rx Store. As of July
30, 1998, six of the seven stores which were previously eligible
for the rental reimbursement were closed and returned to
Woolworth. (The lease for the seventh Rx Store subject to the
Woolworth Settlement, which expired during fiscal 1998, was re-
negotiated by the Company with the landlord of the property for
this store and the Company is operating such store without any
further subsidy or other obligation from Woolworth).
Operating Income (Loss)
The Company reported an operating loss of $1.7 million during the
first nine months of fiscal 1999 compared with operating income
of $.7 million during the first nine months of fiscal 1998, a
decrease of $2.4 million. Operating results for the current nine
month period were negatively affected by a 4.2% decrease in same-
store revenues, a .3% increase in the gross profit percentage and
reduced profit from certain Rx Stores (previously subject to
either a full or partial rental reimbursement under the Woolworth
Settlement provisions during the comparable period in fiscal
1998) which were closed and returned to Woolworth.
Interest Expense
Interest expense during the first nine months of fiscal 1999
decreased $.2 million compared with the first nine months of
fiscal 1998 resulting primarily from lower borrowing requirements
related to the operation of a reduced number of stores and to
lower average store inventory levels during the first nine months
of fiscal 1999 compared with the prior year's comparable period.
Extraordinary Gains, Net
Extraordinary gains, net amounting to $1.5 million include the
following items: a $1 million gain related to Woolworth's
cancellation of a Contingent Note in connection with the
Woolworth Settlement and a $.6 million charge for costs incurred
in connection with the Company's early termination of the Prior
Senior Credit Facility, both of which items were recorded in the
fiscal 1999 second quarter; and a $1.1 million gain recorded
during the fiscal 1999 third quarter, relating to the partial
settlement of certain Brand-Name Prescription Drug Antitrust
Litigation. This class action legal proceeding was brought by
certain drug retailers (including the Company as a member of the
class) against certain name-brand drug manufacturers and
wholesalers pertaining to purchases made by the Company from
these suppliers during the period from October 1, 1989 to
December 31, 1994. Additional extraordinary gain may be recorded
<PAGE 13>
by the Company in the future related to the pending litigation;
however, the amount of additional gain and timing of the
payment(s) related thereto, if any, is not presently
determinable.
Liquidity and Capital Resources
Operating Activities
During the first nine months of fiscal 1999, operating activities
used cash amounting to $4.8 million which included the following:
an increase in inventory of $3.4 million related to the normal
build-up of stock levels in anticipation of the holiday selling
season; transaction fees related to the early termination of the
Prior Senior Credit Facility and closing fees in connection with
the New Senior Credit Facility aggregating $1 million; and the
funding of the net loss of $2.3 million, all of which was
partially offset by $1.9 million in depreciation and amortization
charges and an increase in accounts payable of $1.8 million.
Investing Activities
During the first nine months of fiscal 1999, net expenditures for
property and equipment of $.9 million were made primarily in
connection with the Company's store renovation program, including
$.3 million for the relocation of one store. The Company
completed eleven stores under its store renovation program.
Financing Activities
Outstanding borrowings under the Company's New Senior Credit
Facility at October 31, 1998 were $26.7 million. The New Senior
Credit Facility became effective during May 1998 and the initial
proceeds from this credit facility, amounting to $22.6 million,
were used to repay in full the borrowings outstanding under the
Prior Senior Credit Facility, including a $1 million temporary
cash collateral (subsequently returned to the Company by the
Prior Lender) and $1 million in fees related to the closing of
the refinancing transaction. During the fiscal 1999 second
quarter, the Company received an additional $1 million loan from
the subordinated lender and negotiated a revised payment schedule
for the total outstanding $2.1 million balance of that
subordinated loan. Under the amended subordinated loan
agreement, commencing on August 1, 1998, the Company is required
to make sixty monthly principal payments of $35,000, plus
interest, as compared with monthly payments of $50,000, plus
interest, which were required previously (see Summary of
Borrowings, (ii) Subordinated Loan, below).
Summary of Borrowings
(i) New Senior Credit Facility
On May 14, 1998, the Company and Foothill Capital Corporation
("Foothill") entered into a Loan and Security Agreement (the "New
Senior Credit Facility" or "New Facility"). The New Facility
consists of: (i) a Term Loan up to $3 million and (ii) revolving
advances equal to the lesser of: (a) 65% of eligible inventory
(at cost) or (b) $35 million (which may be increased to $40
million under certain conditions), less the outstanding principal
amount of the Term Loan. Under the New Facility, subject to the
foregoing formula, the maximum revolving advances could increase
up to an aggregate of $35 million ($40 million under certain
conditions) as the outstanding principal amount of the term loan
is reduced. The revolving and term loans under the New Senior
Credit Facility have a five year term, subject to minor
amortization of the Term Loan during that period. The initial
funds advanced under the New Facility were used to pay
outstanding borrowings, charges, fees and a temporary $1 million
cash collateral account aggregating $22.6 million owing by the
Company to its Prior Lender. The $1 million cash collateral was
<PAGE 14>
subsequently returned to the Company by the Prior Lender. In
addition, the Company incurred other transaction fees of
approximately $1 million.
Indebtedness under the New Senior Credit Facility is secured by a
first priority lien on substantially all of the Company's assets
and, among other conditions, restricts the payment of dividends
and requires that the Company maintain specified minimum tangible
net worth and EBITDA (earnings before interest, taxes,
depreciation and amortization) levels. The Company was in
compliance with amended minimum tangible net worth and EBITDA
levels under the New Senior Credit Facility at the end of the
fiscal 1999 third quarter. The borrowing rates for the New
Facility are prime plus 1.125% for the revolving advances
(subject to decrease if the Company reaches certain EBITDA levels
during the term of the facility) and 11.75% for the Term Loan.
(ii) Subordinated Loan
Pursuant to an agreement between the Company and the Subordinated
Lender which was consummated during the fiscal 1999 second
quarter: (i) the Company received an additional $1 million
subordinated loan from the subordinated lender and (ii) such
additional $1 million plus the then existing balloon payment of
$1.1 million which was due on August 1, 1998, totaling $2.1
million in the aggregate, will be paid by the Company to the
subordinated lender at the rate of $35,282 per month, plus
interest, for a period of 60 months commencing in August 1998.
The subordinated lender has been granted a second priority lien
on substantially all of the Company's assets.
(iii) Prior Senior Credit Facility
The borrowing availability with the Company's Prior Lender under
the Prior Senior Credit Facility was based on the lesser of 60%
of eligible inventory (at cost) or $45 million. On May 14, 1998,
the Company repaid all outstanding indebtedness to the Prior
Lender from the proceeds of the New Senior Credit Facility.
(iv) Contingent Note
Pursuant to the terms of the Woolworth Settlement, a Contingent
Note in the amount of $1 million was surrendered by Woolworth for
cancellation as of July 30, 1998. Accordingly, the Company
recorded a $1 million extraordinary gain in its fiscal 1999
second quarter with respect to such cancellation.
Working Capital and Current Ratio
Working capital increased $3.3 million to $21.5 million during
the first nine months of fiscal 1999 and the ratio of current
assets to current liabilities was 1.7 at the end of the fiscal
1999 third quarter compared with 1.6 at the end of fiscal 1998.
The increase in both working capital and the current ratio during
the first nine months of fiscal 1999 resulted primarily from the
following items: Woolworth's cancellation of a $1 million
Contingent Note; an agreement consummated with the subordinated
lender which provided an additional $1 million loan and revised
the payment terms of the outstanding subordinated loan balance,
as reported above (see Summary of Borrowings,(ii) Subordinated
Loan and (iv) Contingent Note, respectively); and $1.1 million
received in connection with a partial settlement of certain
antitrust litigation (see Extraordinary Gains, Net).
Assuming (i) the continuing availability of trade credit at the
current level and (ii) the combination of the additional
borrowing availability made available through the New Senior
Credit Facility and the additional loan from the Subordinated
Lender (including the revised payment terms for the outstanding
subordinated loan balance) and cash generated by the Company's
operations, in the opinion of management, the Company will be
<PAGE 15>
able to meet its estimated working capital requirements for at
least the forthcoming twelve months.
Year 2000 Compliance
Many currently installed computer systems are not capable of
distinguishing 21st century dates from 20th century dates. As a
result, in approximately one year, computer systems and/or
software used by many companies in a very wide variety of
applications will experience operating difficulties unless they
are modified or upgraded to adequately process information
involving, related to or dependent upon the century change.
Significant uncertainty exists concerning the scope and magnitude
of problems associated with the century change.
The Company recognizes the need to ensure its operations will not
be adversely impacted by Year 2000 software failures and has
established a project team to address Year 2000 risks. The
project team has coordinated the identification of and will
coordinate the implementation of changes to computer hardware and
software applications that will attempt to ensure availability
and integrity of the Company's information systems and the
reliability of its operational systems. The Company is also
assessing the potential overall impact of the impending century
changes on its business, results of operations and financial
position.
The Company has further reviewed its information and operational
systems in order to identify those services or systems that are
not Year 2000 compliant. As a result of this further review, the
Company has determined that it will be required to modify or
replace certain information and operational systems so they will
be Year 2000 compliant. These modifications and replacements are
being, and will continue to be, made in conjunction with the
Company's overall systems initiatives. The total cost of these
Year 2000 compliance activities is currently estimated to be
$400,000 - $500,000. The Company expects to complete its Year
2000 project during the first half of calendar year 1999. Based
on available information, the Company does not believe any
material exposure to significant business interruption exist as a
result of Year 2000 compliance issues. Accordingly, the Company
has not adopted any formal contingency plan in the event its Year
2000 project is not completed in a timely manner. These costs
and the timing in which the Company plans to complete its Year
2000 modification and testing processes are based on management's
best estimates. However, there can be no assurance that the
Company will timely identify and remediate all significant Year
2000 problems, that remedial efforts will not involve significant
time and expense or that such problems will not have a material
adverse effect on the Company's business results of operation or
financial position.
The Company also faces risk to the extent that suppliers of
merchandise inventory, services and systems purchased by the
Company and others with whom the Company transacts business
domestically, and to a lesser extent on a worldwide basis, do not
comply with Year 2000 requirements. The Company has initiated
formal communications with significant suppliers and customers to
determine the extent to which the Company is vulnerable to these
third parties failure to remediate their own Year 2000 issues.
In the event any such third parties cannot provide the Company
with merchandise inventory, services or systems that meet the
Year 2000 requirements on a timely basis, or in the event Year
2000 issues prevent such third parties from timely delivery of
merchandise inventory or services required by the Company, the
Company's results of operations could be materially adversely
affected. To the extent Year 2000 issues cause significant
delays in, or cancellation of, decisions to purchase the
<PAGE 16>
Company's products or services, the Company's business, results
of operations and financial position would be materially
adversely affected.
Forward-Looking Statements
This Report contains certain "forward-looking statements", which
are based largely on the Company's expectations and are subject
to risks and uncertainties, certain of which are beyond the
Company's control. Discussion of factors that could cause the
Company's actual results or performance to differ materially from
those set forth in such statements, estimates and expectations is
contained in the 1998 Form 10-K including, among others,
competitive, regulatory and economic influences and product
acceptance and availability. In light of these risks and
uncertainties, there can be no assurance that the forward-looking
information contained in this Report will in fact transpire. The
Company assumes no obligation to update publicly any forward
looking statements, whether as a result of new information,
future events or otherwise.
<PAGE 17>
PART II.
Item 4. Submission of Matters to a Vote of Security Holders
On October 15, 1998, the Company, in lieu of an annual
meeting, held a special meeting of shareholders (the "Special
Meeting"). At the Special Meeting the shareholders (i) re-elected
all of the members of the Board of Directors of the Corporation;
(ii) ratified and confirmed the second amendment to the Company's
1992 Equity Compensation Plan for Non-Employee Directors; and (iii)
ratified and confirmed the appointment of PricewaterhouseCoopers LLP
to serve as the Company's independent accountants for the fiscal
year of the Company ending January 30, 1999.
Under the 1992 Equity Compensation Plan for Non-Employee
Directors, as first amended in fiscal 1996, (the "Directors Plan"),
a total of 50,000 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 Directors Plan provides that
each Independent Director elected by shareholders, shall be
entitled to an award of 2,500 Common Shares upon his or her
election or re-election to the Board of Directors of the Company.
The second amendment to the Directors Plan (the "Second
Amendment"), was adopted by the Board of Directors (subject to
shareholder approval) and became effective as of the date of the
Board of Directors Meeting held on January 22, 1998. The Second
Amendment proposed to increase the number of shares reserved under
such plan to 80,000 and to provide that each Independent Director,
at his or her election, may receive, in lieu of cash fees of $500
per Board Meeting, and in lieu of cash fees of $250 per Committee
Meeting, Common Shares of the Company for each Board Meeting and
Committee Meeting attended by such Independent Director during each
year of his or her incumbency as a Director. Under the proposed
Second Amendment, the number of such Common Shares per Board
Meeting and per Committee Meeting attended is to be determined by
dividing the sum of $500 (or $250 for Committee Meetings) by the
closing price of the Common Shares on the NASDAQ SmallCap Market on
the trading day immediately preceding each such Meeting.
Furthermore, the Second Amendment proposed to extend the
termination date of the Directors Plan to the date immediately
preceding the date of the Shareholders' meeting of the Company in
the year 2001 in which directors are elected.
<PAGE 18>
The following table sets forth the vote totals with respect to
each of the three items voted on by the shareholders at the Special
Meeting.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Proposal Total Votes Cast For Against Withheld
Election of Manfred Brecker 2,352,519 2,320,669 n/a 31,858
Election of Kenneth A. Davis 2,352,519 2,320,843 n/a 31,676
Election of Joseph Keller 2,352,519 2,320,843 n/a 31,676
Election of Melvin Katz 2,352,519 2,320,873 n/a 31,646
Election of Raymond L. Steele 2,352,519 2,320,873 n/a 31,646
Election of Marcie B. Davis 2,352,519 2,320,825 n/a 31,694
Election of Michael A. Feder 2,352,519 2,320,873 n/a 31,646
Election of Peter Gerard 2,352,519 2,320,873 n/a 31,646
Ratification and Approval
of Second Amendment to the
Company's 1992 Equity
Compensation Plan for
Non-Employee Directors 2,352,519 2,286,804 63,917 1,798
Ratification and Approval
of the appointment of
PricewaterhouseCoopers LLP
as the Company's
independent accountants for
the fiscal year ending
January 30, 1999 2.352.519 2,348,921 2,404 1,194
<PAGE 19>
Item 6. Exhibits and Reports on Form 8-K - 1992 Equity
Compensation Plan for Non-Employee Directors dated as of January
22, 1998
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)
Date: December 15, 1998 By: /s/ Kenneth A. Davis
Kenneth A. Davis
President, Chief Executive
Officer and Chief Operating Officer
Date: December 15, 1998 By: /s/ Richard A. Davis
Richard A. Davis
Senior Vice President-Finance
and Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 3084
<SECURITIES> 0
<RECEIVABLES> 4806
<ALLOWANCES> 0
<INVENTORY> 40781
<CURRENT-ASSETS> 50277
<PP&E> 6416
<DEPRECIATION> 1934
<TOTAL-ASSETS> 57741
<CURRENT-LIABILITIES> 28814
<BONDS> 0
0
0
<COMMON> 26
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 57741
<SALES> 44004
<TOTAL-REVENUES> 44004
<CGS> 33833
<TOTAL-COSTS> 44991
<OTHER-EXPENSES> 11158
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 776
<INCOME-PRETAX> (987)
<INCOME-TAX> 0
<INCOME-CONTINUING> (987)
<DISCONTINUED> 0
<EXTRAORDINARY> 1124
<CHANGES> 0
<NET-INCOME> (639)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
Exhibit 10.16 Second Amendment to the Pharmhouse Corp. 1992
Equity Compensation Plan for Non-Employee
Directors
SECOND AMENDMENT
TO
PHARMHOUSE CORP.
(formerly S.E. Nichols Inc.)
1992 EQUITY COMPENSATION PLAN FOR
NON-EMPLOYEE DIRECTORS
Dated: As of January 22, 1998
_____________________________
A. Background
On April 22, 1992, Pharmhouse Corp. (the "Company") adopted
its 1992 Equity Compensation Plan for Non-Employee Directors (the
"Plan") providing for annual grants of restricted stock awards to
Directors of the Company who are not officers or employees (as
defined in the Plan) of the Company. The Plan originally
authorized the grant of an aggregate of 11,494 Shares to non-
employee Directors of the Company. The Plan was first amended on
July 14, 1995 to increase the authorization of Shares to 50,000.
Pursuant to the Plan, as amended, each such Director is entitled
to receive an Annual Grant of 2,500 Shares upon being elected as
a member of the Board at a Shareholders Meeting, through the 1998
Shareholders Meeting. All references herein to numbers of Shares
reflect the one for 4.35 reverse split of the Company's Shares
effected by the Company in April 1993.
The amendments to the Plan set forth herein (collectively,
the "Second Amendment") were adopted by the Board as of January
22, 1998, subject to approval by the Company's shareholders.
Capitalized terms used herein which are defined in the Plan
shall have the respective meanings ascribed thereto in the Plan.
B. Amendments to the Plan
Pursuant to Section 10 of the Plan, the Plan is hereby
amended as follows:
1. The first sentence of Section 4.1 of the Plan is hereby
deleted in its entirety and the following sentence shall be
inserted in its place:
"Eighty Thousand (80,000) Shares are authorized for
issuance under the Plan in accordance with the
provisions of the Plan and subject to such restrictions
or other provisions as the Committee may from time to
time deem necessary."
2. Section 6.1 of the Plan is hereby deleted in its
entirety and the following new Section 6.1 shall be inserted in
its place:
"6.1 Grant of Share Awards; Date of Grant; Computation of Amount;
(a) In consideration for such person's services
as a member of the Board during each Annual Term of
Service as a member of the Board, each Director shall
be entitled to receive a Share Award of 2,500 Shares
upon being elected as a member of the Board at the
relevant Shareholders Meeting (an "Annual Grant"),
commencing with the 1995 Shareholders Meeting. Each
Annual Grant shall be made as of the first business day
following the date on which such Director is elected a
member of the Board at the relevant Shareholders'
Meeting and share certificates evidencing the Shares
included in each such Annual Grant shall be issued and
delivered by the Company to each Director as soon as
practicable thereafter.
(b) (i) In addition to, and not in lieu of, the
Share Awards described in Section 6.1(a) of the Plan,
in consideration for such person's attendance at
Meetings of the Board of Directors and/or any Committee
thereof, commencing and effective as of January 22,
1998, each Director, at his election, may receive, in
lieu of cash fees of $500 per Board Meeting or $250 per
Committee Meeting, Shares of the Company for each such
Board Meeting or Committee Meeting attended by such
Director during each year of his incumbency as a
Director. Such election by a Director to receive
Shares of the Company in lieu of cash fees for
attendance at Meetings of the Board and/or any
Committee thereof shall be effective for the duration
of such Director's incumbency as a Director of the
Company up until the date of termination of the Plan
unless and until such Director notifies the Secretary
of the Company in writing of his or her desire to again
receive cash fees for attendance at any such Meetings.
(ii) The number of such Shares to be awarded
per Board Meeting and/or per Committee Meeting attended
by such Director during the period of his or her
incumbency through the date of the most recent
Shareholders' Meeting of the Company shall be
determined by dividing the sum of $500 and/or $250, as
the case may be, by the closing price of the Common
Shares of the Company on the NASDAQ SmallCap Market on
the trading day immediately preceding each such Board
or Committee Meeting or, if there is no trading in the
Company's Common Shares on the NASDAQ SmallCap Market
on such date, by the mean between the quoted closing
bid and asked price for the Common Shares of the
Company on such date. The total number of such Shares
so issuable to such Directors for their attendance at
Board or Committee Meetings during the preceding year
shall be determined and granted within ten (10) days
after the date of each Annual Meeting of the Board of
Directors and share certificates evidencing the Shares
included in each such grant shall be issued and
delivered by the Company to each Director as soon as
practicable thereafter."
3. Section 12 of the Plan shall be deleted in its entirety
and the following new Section 12 shall be inserted in its place:
"Section 12
Duration of the Plan
The Plan shall terminate immediately prior to the
election of Directors at any Shareholders Meeting of
the Company held in 2001or at such earlier time as may
be determined by the Board, and no Share Award shall be
granted under the Plan after the date of its
termination."
C. Effective Date
This Second Amendment was adopted by the Board as of January
22, 1998 and became effective as of such date when it was
ratified and approved by the holders of record of a majority of
outstanding Shares of the Company at a Special Meeting of
Shareholders of the Company held on October 15, 1998.
