SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
Commission File #1-7090
PHARMHOUSE CORP.
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(Exact name of registrant as specified in its charter)
New York 13-2634868
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
860 Broadway, New York, New York 10003
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(Address of principal executive offices) (Zip Code)
(212) 477-9400
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(Registrant's 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
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None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Shares,
par value $.01 per share
-------------------------
(Title of Class)
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 15, 1998, was
approximately $7,834,307.
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 15, 1998.
Class Number of Shares
---------------------- ----------------
Common Shares
par value $.01 per share 2,594,841
Documents incorporated by Reference:
The Registrant's Annual Report on Form 10-K for the fiscal year
ended February 3, 1996.
The Registrant's Annual Report on Form 10-K for the fiscal year
ended February 1, 1997.
The Registrant's Current Report on Form 8-K dated February 6,
1997.
The Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended November 1, 1997.
PART I
Item 1. Business
Pharmhouse Corp. (the "Registrant" or the "Company") operates a
chain of 32 discount drug stores, 13 of which are operated under
the name Pharmhouse (the "Pharmhouse Stores") and 19 of which are
operated under the name The Rx Place (the "Rx Stores"). The
Registrant's stores are located primarily in the mid-Atlantic and
New England states and emphasize a pricing policy of everyday
discount prices on all merchandise. The Pharmhouse Stores
average approximately 35,000 square feet in size and the Rx
Stores average approximately 25,000 square feet. The Registrant
maintains one distribution center in Pennsylvania to support its
store operations. In prior years, the Registrant characterized
its stores as "deep discount stores", but management has recently
determined that the term "discount stores" more accurately
describes its current operations.
(a) General Development of the Registrant's Business Since
Commencement of the Fiscal Year Ended January 31, 1998
("fiscal 1998")
Since the commencement of fiscal 1998, the following significant
events have occurred with respect to the Registrant and its
business:
(i) Final Disposition of the Woolworth Dispute
On January 31, 1997, the Registrant and Woolworth entered
into a Mutual Release and Settlement Agreement resolving all
outstanding disputes and settling all legal proceedings arising
out of the acquisition by the Registrant of 24 Rx Stores from
Woolworth. (For information concerning the acquisition of the 24
Rx Stores see Item 1 of the Registrant's Annual Report on Form 10-
K for the fiscal year ended February 3, 1996 (the "1996 Form 10-
K")). On June 24, 1997, the Registrant and Woolworth amended the
Mutual Release and Settlement Agreement (such agreement and
amendment are collectively referred to herein as the "Woolworth
Settlement") to provide for the final disposition of seven of the
Rx Stores (the "Affected Stores") that were part of the dispute.
A summary of the principal terms of the Woolworth Settlement
is as follows:
(A) Woolworth surrendered for cancellation two of the three
outstanding Purchase Money Notes in principal amounts 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, unless the
Registrant either liquidates substantially all of its assets,
ceases to conduct substantially all of its operations (except in
the event of a merger, consolidation or sale of assets with or to
third parties) or files for bankruptcy prior to that date.
Woolworth also released the Registrant from its $1.1 million
accrued interest obligation under the Purchase Money Notes.
(B) The Registrant received an option to terminate its
occupancy and obligations under the leases governing the
Affected Stores, subject to certain conditions. Woolworth
further agreed to pay the rental and other fixed monthly
charges and occupancy costs for the Affected Stores through
stipulated dates. Pursuant to the Woolworth Settlement, the
Registrant has closed five of the Affected Stores and
reassigned to Woolworth the leases for these stores. (Prior
to returning these five stores to Woolworth, the Registrant
liquidated and/or transferred to its other stores the
inventory and other assets located therein). Of the two
remaining Affected Stores, the Registrant operated one such
store with the assistance of the Woolworth rent and
occupancy subsidy until September 1997, at which time the
Registrant negotiated a new lease with the landlord of the
property and has continued to operate this store without any
further subsidy or other obligation from Woolworth. With
respect to the remaining Affected Store, the Registrant
continues to operate this store for which Woolworth is
providing a subsidy for the rent and other occupancy costs.
Pursuant to the Woolworth Settlement, either party has the
option to terminate this arrangement under certain notice
provisions until the lease governing such store expires in
fiscal 2001. (In addition, during fiscal 1998, the
Registrant closed one under-performing Pharmhouse store that
was not part of the Woolworth Settlement).
For further information concerning the Woolworth Settlement,
reference is made to (i) Item 1 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended February 1, 1997 ("fiscal
1997") (the "1997 Form 10-K"); (ii) the Registrant's Current
Report on Form 8-K dated February 6, 1997; and (iii) the
Registrant's Quarterly Report on Form on 10-Q for the quarterly
period ended November 1, 1997, all incorporated herein by
reference. See also Item 2 "Properties" in this Report.
(ii) Fiscal 1998 net loss of $3.7 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 loss of $3.7 million in fiscal 1998.
(iii) Financing
On May 14, 1998, the Registrant 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 Registrant of up to $35
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 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 as the
outstanding principal amount of the term loan is reduced. The
duration of both the revolving and term loans under the New
Senior Credit Facility is five years. The total loans which may
be advanced by Foothill to the Registrant is subject to an
increase to an aggregate of $40 million upon the satisfaction of
certain conditions. The initial funds advanced under the New
Facility were used to pay outstanding borrowings, charges, fees
and temporary cash collateral account aggregating $22.6 million
owing by the Registrant to its prior secured lender ("Prior
Lender"). The cash collateral of $1 million, less any potential
draw-downs, will be returned to the Registrant within thirty
days.
Indebtedness under the New Senior Credit Facility is secured
by a first priority lien on substantially all of the Registrant's
assets and, among other conditions, restricts the payment of
dividends and requires that the Registrant maintain specified
minimum tangible net worth and EBITDA (earnings before interest,
taxes, depreciation and amortization) levels.
For further information concerning the terms of the New
Senior Credit Facility, reference is made to Exhibit 10.15.
The Registrant is also the borrower under a subordinated
loan in the original amount of $3 million, payable to an
unaffiliated trade supplier, which is being repaid in monthly
installments of $50,000 and a balloon payment of $1.25 million
due on April 28, 1998. Pursuant to an agreement dated April 24,
1998 between the Registrant and the subordinated lender, the
terms for the balloon payment have been amended as follows: the
Registrant will make three consecutive monthly installments of
$50,000 commencing on May 1, 1998 and a final installment of $1.1
million on August 1, 1998. The parties are currently negotiating
to have the August 1, 1998 due date for the balloon payment
extended further; however, there can be no assurance that the
Registrant will be successful in that regard. The subordinated
lender has been granted a second priority lien on substantially
all of the Registrant's assets.
During the third quarter of fiscal 1998, the Registrant and
McKesson Corporation ("McKesson") consummated an agreement
whereby, effective September 4, 1997, McKesson purchased a major
portion of the Registrant's pharmaceutical third party plan
receivables outstanding as of such date and the ongoing third
party plan receivables generated by the Registrant subsequent to
such date. The funding by McKesson under this agreement is made
available to the Registrant two business days after the third
party plan receivables are generated. The funding provided under
this agreement is subject to recourse with respect to third party
plan receivables not collected within 90 days.
For further information concerning the foregoing matters,
reference is hereby made to Note 4 to the Registrant's
Consolidated Financial Statements included in this Report 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
(i) Retail Operations
The Registrant's discount drug stores focus on offering
various types of merchandise at everyday discount prices.
Merchandise is sold primarily on a cash-and-carry basis although
certain credit cards and checks are accepted.
Ten Pharmhouse stores are located in smaller communities
(rather than major metropolitan centers) in small strip shopping
centers or free-standing facilities on major thoroughfares with
substantial parking facilities. (For further information
concerning the premises occupied by these ten 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 its
other ten 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 per store.
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, during
fiscal 1998, the Registrant closed the pharmacy in one of its
Pharmhouse stores due to the relatively low volume of pharmacy
revenues generated in this location.
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.
(ii) 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, Easter and Christmas items. Such merchandise is
sold at everyday discount prices. Except as described below, all
merchandise is sold or, in the case of video rentals, rented
through departments operated by the Registrant.
The following table sets forth information concerning the
approximate percentages of the Company's revenues attributable to
major merchandise categories:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Fiscal Fiscal Fiscal
Merchandise Category 1998 1997 1996
- --------------------- ------ ------ ------
Pharmacy 32.3% 28.5% 28.7%
Health & Beauty Care
and Related Items 23.2% 24.3% 26.1%
------ ------ ------
55.5% 52.8% 54.8%
Other Merchandise Categories
(no one category
accounting for more than 10%) 44.5% 47.2% 45.2%
------ ------ ------
Total 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
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 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.
(iii) 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 1998, the Registrant purchased approximately 39.8%
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 1998.
In 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. The Registrant and McKesson are currently in
negotiations to extend the Supply Agreement. However, there can
be no assurance that the Registrant will be successful in such
efforts.
The Registrant has several other long-term contracts with
unaffiliated suppliers, none of which accounted for more than 5%
of total purchases during fiscal 1998.
(iv) Competition
The Registrant's discount drug stores currently compete in
their markets with local and discount drug chains, discount
department stores, local pharmacies, supermarkets and other food
stores, wholesale clubs and other retail outlets which offer
similar merchandise. Certain of the Registrant's competitors
have far greater financial resources and a far greater number of
retail outlets than the Registrant currently has or expects to
have in the foreseeable future. Management believes that the
competitive factors which affect the business of the Registrant's
stores primarily consist of price, depth of merchandise in
certain categories, store location and store environment.
(v) Advertising and Marketing
Advertising for the Registrant's stores consists primarily
of direct-mail circulars or newspaper inserts distributed monthly
except during the third and fourth quarter when they are
distributed bi-weekly. The Registrant stresses the everyday
nature of its 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 its multi-colored
circulars. The 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 1998, the Registrant spent
approximately $2.9 million for advertising and promotion, net of
amounts contributed by suppliers through advertising allowances.
During the third and fourth quarters of fiscal 1998,
management of the Registrant implemented several new marketing
and sales programs which were designed to increase customer
counts and revenues. Among these programs was the re-
merchandising of stores. As of the date of this Report, the
Registrant has completed the re-merchandising of two stores and
has expanded its re-merchandising efforts to four additional
stores.
(vi) Employees
As of April 10, 1998, the Registrant employed 1,686 persons,
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.
(vii) Financial Information about Foreign and Domestic
Operations and Export Sales
Not applicable.
Item 2. Properties
(a) Stores
The following table sets forth the number of Pharmhouse
stores and Rx stores in operation in each of the following states
as of April 15, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Pharmhouse Rx Total
stores stores stores
------ ------ ------
Maryland 1 - 1
New Jersey 2 9 11
New York 5 3 8
Pennsylvania 2 2 4
Virginia 3 - 3
Connecticut - 1 1
Massachusetts - 2 2
Rhode Island - 2 2
------ ------ ------
Total Stores 13 19 32
====== ====== ======
</TABLE>
Of the Registrant's thirty-two stores currently in
operation, thirty-one are located in leased premises and one is
located in premises owned by the Registrant in Winchester,
Virginia.
With respect to the leases governing the Registrant's store
properties, twenty-seven expire during the five year period from
fiscal 1999 through fiscal 2003, three expire during the period
from fiscal 2004 through fiscal 2008 and one is operated on a
month-to-month basis. In addition, one lease, originally due to
expire during fiscal 1999, will be converted to a month-to-month
lease effective in May 1998 in connection with the settlement of
certain litigation related to this store, as more fully described
in Item 3 and Note 12 to the Consolidated Financial Statements
contained in Part IV of this Report. Twenty-nine of the
Registrant's store leases have one or more renewal options for
periods totaling from five to twenty years.
Existing store leases provide for contingent rental payments
based on a percentage of revenues at varying rates of up to a
maximum of two percent, subject to minimum revenue levels and
other conditions. During fiscal 1998, rentals (including
contingent rentals of $34,000) paid by the Registrant for all of
its leased store locations aggregated approximately $6,444,000,
net of sublease revenue of $788,000.
(b) Unoccupied Space in Pharmhouse Stores
Eight Pharmhouse stores currently occupy only a portion of
the space under lease. A substantial portion of the space not
being used in the operation of the Pharmhouse Stores was sublet
or licensed during fiscal 1998 to a total of 23 unaffiliated
tenants for aggregate annual rent revenue of approximately
$788,000.
(c) Executive Office
The Registrant's principal executive office is located in
leased premises at 860 Broadway, New York, New York and occupies
approximately 12,000 square feet at an annual base rental of
$150,000. The lease for the premises expires on June 30, 1998.
The Company is currently negotiating with the landlord for an
extension of this lease.
(d) Distribution Facility
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. The lease for this facility expires in
April 2001.
Item 3. Legal Proceedings
On January 31, 1997, the Registrant and Woolworth entered
into the Woolworth Settlement (subsequently amended on June 24,
1997) pursuant to which the Registrant and Woolworth resolved
their outstanding disputes arising out of the April 1995
acquisition of 24 Rx Stores from Woolworth. For further
information, reference is made to Item 1(a), MD&A Item 7 and
Notes to the Consolidated Financial Statements contained in Part
IV of the Registrant's 1997 Form 10-K, incorporated herein by
reference.
On January 31, 1998, the Registrant and a landlord of one of
the Registrant's Pharmhouse stores reached an out-of-court
settlement of certain litigation related to the lease for such
store. Under the terms of the settlement agreement with the
landlord, as amended on May 1, 1998, the Registrant will receive
the sum of $1,675,000 ($200,000 of which was paid by the landlord
on May 1, 1998 and $1,475,000 of which is payable on May 31,
1998), plus accrued interest on the outstanding balance since
January 31, 1998, in exchange for waiving its exclusive right to
use its space to operate a discount drugstore or discount
pharmacy, thereby permitting the landlord to lease out space in
the shopping center to any other tenant who operates a drugstore
or pharmacy, discount or otherwise. The terms of the agreement
also provide for the following: effective on May 1, 1998, the
Registrant's present fixed monthly rent obligation for this store
will convert to a percentage rent calculation; and effective on
September 30, 1998, the Registrant has the right to terminate the
lease for this store upon 90 days prior notice to the landlord
and the landlord has the right to recapture the premises for this
store upon 120 days prior notice to the Registrant. In
connection with this transaction, the Registrant has recorded in
its fiscal 1998 fourth quarter other income, net of related legal
expenses, amounting to $1,346,000.
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 to a vote of the Registrant's
security holders during the fourth quarter of fiscal 1998.
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 on 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>
<S> <C> <C> <C> <C>
Fiscal Bid Asked
Quarter ---------------- -----------------
Ending High Low High Low
------ ---- ---- ---- ----
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
5/03/97 8 1/2 6 1/4 9 1/4 6 3/4
8/02/97 9 1/8 6 9 1/4 6 7/8
11/01/97 7 5/8 4 3/4 7 7/8 5 1/4
1/31/98 6 1/2 4 7/8 6 3/4 5 1/2
</TABLE>
On April 15, 1998, the last reported sale price for the Company's
Common Stock on the Nasdaq SmallCap Market was $4.50 per share.
(b) Holders of Common Shares
The approximate number of holders of record of Common Shares
of the Registrant as of January 31, 1998 was 2,312.
(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.
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
January 31, 1998 and February 1, 1997 and for each of fiscal
1998, fiscal 1997 and fiscal 1996 are derived from the
Registrant's audited consolidated financial statements included
elsewhere in this Report. The data as of February 3, 1996,
January 28, 1995 and January 29, 1994 and for each of fiscal 1995
and fiscal 1994 are derived from the Registrant's audited
consolidated financial statements not included in this Report.
<TABLE>
<CAPTION>
(all amounts in thousands, except per share data)
FISCAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996(1)(2) 1995 1994
------ ------ ---------- ------ ------
Income Statement Data:
Revenues $200,751 $231,729 $209,529 $ 89,602 $ 98,241
Operating income(loss) $ (2,190)(3) $ (1,005)(3) $ 419 $ (1,037) $ (2,769)(3)
Interest expense $ 3,032 $ 4,230 $ 3,544 $ 960 $ 861
Other income $ 1,346(4) $ 7,142(4) $ - $ - $ -
Extraordinary gain $ - $ - $ 618(5) $ - $ -
Net income (loss) $ (3,691) $ 1,334 $ (2,507) $ (1,997) $ (3,386)
Basic earnings (loss)
per common share $ (1.48) $ 0.59 $ (1.13) $ (0.90) $ (1.60)
January 31, February 1, February 3, January 28, January 29,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Working capital $ 18,166(6) $ 24,882 $ 24,741 $ 4,732 $ 6,983
Total assets $ 53,692 $ 70,503 $ 73,210 $ 26,677 $ 30,465
Long-term borrowings $ 19,154 $ 24,400(6) $ 25,950 $ 300 $ 800
Stockholders' equity $ 4,894 $ 8,351 $ 6,824 $ 9,004 $ 10,781
Dividends declared None None None None None
Store Data (# of stores operating at year-end):
Pharmhouse Stores 13 13 14 14 14
Rx Stores 19 22 24 - -
</TABLE>
(1)Includes operations of 38 stores effective April 28, 1995.
(2)Fifty-three week fiscal year.
(3)Excludes provision for store closure of $(185) in fiscal 1998,
$573 in fiscal 1997 and $(244) in fiscal 1994.
(4)Other income represents in fiscal 1998 income from a settlement of litigation
related to a lease of one of the Registrant's Pharmhouse stores
(for further information, reference is made to Item
3 and to Note 12 in the Notes to the Consolidated Financial Statements
included in this Report) and in fiscal 1997 income from debt and interest
cancellation, net of related costs and provisions, in connection
with the Woolworth Settlement.
(5)Extraordinary gain resulted from early retirement of debt.
(6)Amount includes a $1 million contingent obligation which is
scheduled to be canceled by Woolworth in July 1998 in connection
with the Woolworth Settlement.
For further information concerning the provisions of the
Woolworth Settlement, reference is made to paragraph (a)(i) in
Item 1 of this Report and Note 2 in the Notes to the Consolidated
Financial Statements included in Part IV of this Report.
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.
Overview
The Registrant (or the "Company") reported a net loss of $3.7
million in fiscal 1998 compared with net income of $1.3 million
in fiscal 1997. The results for both fiscal years were favorably
affected by non-recurring items, including other income of $1.3
million in fiscal 1998 related to a settlement of litigation for
one of the Registrant's stores and of $7.1 million in fiscal
1997 related to the Woolworth Settlement. Exclusive of
non-recurring items, the Registrant's financial
performance during fiscal 1998 improved $.8 million compared with
the prior year. Overall fiscal 1998 results were favorably
affected by a $1.2 million reduction in interest expense in
connection with Woolworth's debt forgiveness at the end of fiscal
1997 and by lower borrowing requirements related to the closing
of six stores during the last twelve months. On an operating
basis, the Registrant reported an operating loss of $2 million in
fiscal 1998 compared with an operating loss of $1.6 million in
fiscal 1997. Fiscal 1998 operating results were negatively
impacted by a decrease in gross profit, which resulted from a
5.7% same-store revenue decline and a 1.3% decrease in the gross
profit percentage, attributable to factors described under
Results of Operations pertaining to fiscal 1998 set forth under
this Item. Reduced selling, general and administrative expenses
(as a percentage of revenues) during fiscal 1998 compared with
fiscal 1997 mitigated a substantial portion of the decline in
gross profit.
The significant remaining aspects of the Woolworth Settlement
include the cancellation by Woolworth of a $1 million Contingent
Note obligation which is scheduled to occur on July 30, 1998. As
of January 31, 1998, such amount was included in the current
portion of long-term debt. Upon the scheduled cancellation of
the Contingent Note, the Registrant will report other income
of $1 million in its second quarter of fiscal 1999. In
addition, the Registrant continues to receive a rent subsidy for
one Rx store being operated by the Registrant which remains
subject to the Woolworth Settlement.
The Registrant generated $10.1 million in operating cash flow
during fiscal 1998 (representing an increase of $8.1 million in
operating cash flow compared with fiscal 1997) which is primarily
attributable to the liquidation of inventory in stores closed, a
reduction in average per store inventory levels and the sale of
third party plan receivables. A significant portion of cash
generated from operations during fiscal 1998 was used to reduce
borrowings under the Senior Credit Facility.
For further information with respect to the operations of and
other developments affecting the Registrant during fiscal 1998
and the Woolworth Settlement, reference is made to Item 1(a)(i)
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:
Fiscal Fiscal Fiscal
1998 1997 1996
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Cost of merchandise sold 77.4 76.1 76.1
------ ------ ------
Gross profit 22.6 23.9 23.9
Operating expenses:
Selling, general and administrative 23.7 24.3 23.7
Provision for store closure (0.1) 0.3 -
------ ------ ------
Operating income (loss) (1.0) (0.7) 0.2
Interest expense 1.5 1.8 1.7
Other income (0.7) 3.1 -
------ ------ ------
Income (loss) before
extraordinary gain (1.8) 0.6 (1.5)
Extraordinary gain - - 0.3
------ ------ ------
Net income (loss) (1.8)% 0.6% (1.2)%
====== ====== ======
Results of Operations - Fiscal Year Ended January 31, 1998
("fiscal 1998") Compared To Fiscal Year Ended February 1, 1997
("fiscal 1997")
Revenues
Fiscal 1998 revenues (including video rental, service and other
income) were $200.8 million compared with $231.7 million in
fiscal 1997, a decrease of $30.9 million. The reduction
primarily resulted from the operation of a reduced number of
stores and pharmacies (32 stores were in operation at the end of
fiscal 1998 compared with 38 stores at the end of fiscal 1997; in
addition, one pharmacy was closed in a store which the Company
continues to operate). On a same store basis (consisting of 32
stores which were open for both full fiscal years) revenues
decreased 5.7% compared with fiscal 1997. Management attributes
the same-store revenue decrease to several factors including:
increased competition; supply interruptions for certain non-
pharmacy merchandise categories; price deflation in generic
pharmacy and grocery merchandise product; and other factors.
Management has responded to the decrease in revenues by
implementing programs to stimulate an increase in customer
traffic and revenues. These programs include the re-merchandising
of stores, more fully described in Item 1 (c)(5) of this Report.
Gross Profit
The fiscal 1998 gross profit (total revenues less costs of
merchandise and services sold and freight/distribution services
provided) was $45.3 million compared with $55.3 million in the
prior year, a decrease of $10 million. The reduction primarily
resulted from the operation of a reduced number of stores and
pharmacies and, to a lesser extent, from a decrease in the
Company's gross profit percentage. The Company's fiscal 1998
gross profit as a percentage of revenues was 22.6% compared with
23.9% in fiscal 1997, a decrease of 1.3%. The gross profit
margin was negatively impacted by several factors including:
reduced reimbursement rates from third party insurance plans
which comprise an increasing proportion of the Company's pharmacy
business; and, during the fourth quarter of fiscal 1998, the
Company recorded an adjustment to inventory of $1.7 million to
reflect inventory shrink in excess of amounts previously accrued.
As a result of shrink in excess of amounts previously accrued
during fiscal 1998, the Company has increased its shrink accrual
rate effective in fiscal 1999.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense decreased
$8.8 million, or 15.6%, to $47.5 million during fiscal 1998 from
$56.3 million during fiscal 1997, resulting from the operation of
a reduced number of stores and pharmacies and cost reductions
achieved throughout the Company.
SG&A expense as a percentage of revenues decreased to 23.7% in
fiscal 1998 from 24.3% during fiscal 1997. The decline in SG&A
expense is attributed to continued cost reduction, the closing of
six under-performing stores during the last twelve months (all of
which had high occupancy costs relative to revenues) and rental
subsidies received from Woolworth in connection with the
Woolworth Settlement. The Company continues to receive a rent
subsidy for one Rx store which remains subject to the Woolworth
Settlement. The percentage decrease in SG&A expense in fiscal
1998 was achieved despite the decrease in same-store revenues
described above.
Operating Income(Loss)
The Company sustained an operating loss of $2 million during
fiscal 1998 compared with an operating loss of $1.6 million in
the prior year. The increase in the Company's operating loss
resulted from a decrease in gross profit attributable to
decreases in same-store revenues and the gross profit percentage
partially offset by reduced SG&A expenses.
Interest Expense
Interest expense in fiscal 1998 decreased to $3 million from $4.2
million in fiscal 1997. The interest expense reduction resulted
primarily from the effects of the Woolworth Settlement which
provided for the cancellation of $8.4 million in interest-bearing
debt ($1 million of which was converted to a non-interest bearing
Contingent Note). Also contributing to the reduction in interest
expense were lower inventory levels and borrowing requirements
resulting from the operation of a reduced number of stores during
fiscal 1998 compared with fiscal 1997.
Provision for Income Taxes
The Company is not subject to federal income taxes in fiscal 1998
as the Company did not generate taxable earnings. The Company
has significant net operating loss carryforwards (See Note 5 in
the "Notes to the Consolidated Financial Statements") which are
available to offset future taxable income. 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 a net loss in fiscal 1998 of $3.7 million,
or $1.48 per share, compared with net income of $1.3 million, or
$0.59 per share, in fiscal 1997, which amount included a gain of
$7.1 million in connection with the Woolworth Settlement.
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 of
23.9% remained unchanged compared with fiscal 1996. 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 shrink
in excess of amounts previously accrued. The shrink accrual rate
used in fiscal 1997 was consistent with the Company's historical
accrual rate for prior fiscal years.
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.
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, $.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.
Other Income
By reason of the Woolworth Settlement, the Company realized
other income 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 other income 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 against such other income.
State and local income taxes, which are computed on a basis other
than income (e.g., capital stock, etc.)and are similarly not
material, 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, which amount included the above noted
other income of $7.1 million, compared with a net loss of $2.5
million, or $1.13 per share, in fiscal 1996.
Liquidity and Capital Resources
Operating Activities
During fiscal 1998, the Company generated $10.1 million in cash
flows from operating activities resulting primarily from
reductions in inventory of $12.5 million and accounts receivable
of $2.8 million which were partially offset by reductions in
accounts payable, accrued expenses and provision for store
closure aggregating $5.8 million. The reduction in inventory
resulted primarily from store closings described elsewhere
herein. A substantial portion of the reduction in accounts
receivable resulted from the sale of a significant portion of the
Company's third-party plan receivables, as more fully described
below.
During the third quarter of fiscal 1998, the Company and McKesson
Corporation ("McKesson") consummated an agreement whereby,
effective September 4, 1997, McKesson purchased a major portion
of the Company's pharmaceutical third party plan receivables
outstanding as of such date, amounting to approximately $2
million, and the ongoing third party plan receivables generated
by the Company subsequent to such date. The funding by McKesson
under this agreement is made available to the Company two
business days after the third party plan receivables are
generated. The funding provided under this agreement is subject
to recourse with respect to third party plan receivables not
collected within 90 days.
Capital Expenditures
Additions to property and equipment totaled $.4 million in fiscal
1998, $.2 million of which was devoted to the restructuring of
two stores in conjunction with the Company's re-merchandising
program. Expenditures for video rental inventory during fiscal
1998 decreased $.5 million to $1.3 million compared with
expenditures of $1.8 million in fiscal 1997. The decrease
primarily resulted from the closing of the video departments in
the six stores which were closed during the last twelve months
and from the closing of two video departments in stores which the
Company continues to operate. The Company has continued to defer
other major capital improvements until such time as the Company
achieves operating profitability.
Financing Activities
Net borrowings under the Senior Credit Facility decreased $7.6
million during fiscal 1998, primarily resulting from reduced
borrowing requirements related to the operation of a reduced
number of stores.
Summary of Borrowings
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 $35 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 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 as
the outstanding principal amount of the term loan is reduced.
The duration of both the revolving and term loans under the New
Senior Credit Facility is five years. The total loans which may
be advanced by Foothill to the Company is subject to an
increase to an aggregate of $40 million upon the satisfaction of
certain conditions. The initial funds advanced under the New
Facility were used to pay outstanding borrowings, charges,
fees and temporary cash collateral account aggregating $22.6
million owing by the Company to its Prior Lender. The cash
collateral of $1 million, less any potential draw-downs, will be
returned by the Prior Lender to the Company within thirty days.
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 New Facility is at a
borrowing rate of prime plus 1.125%, subject to decrease if the
Company reaches certain EBITDA levels during the term of the
facility.
For further information concerning the terms of the New Senior
Credit Facility, reference is made to Exhibit 10.15 to this
Report.
Senior Credit Facility
The borrowing availability with the Company's Prior Lender was
based on the lesser of 60% of eligible inventory at cost or $45
million. The weighted average interest rate under the prior
senior credit facility during fiscal 1998, including the effect
of facility fees, was 11.2%. During fiscal 1998, the highest
borrowing level under this facility was $30 million, which
borrowing occurred in February 1997, and the lowest borrowing
level was $18.8 million, which borrowing occurred in January
1998. During the fourth quarter of fiscal 1998, the Company's net
worth fell below the minimum level established under the prior
senior credit facility. The Company was advised by its Prior
Lender that it would amend such minimum net worth requirement
as of January 31, 1998 and subsequent periods. By that time,
however, the Company had elected to enter into the New Senior
Credit Facility with Foothill on May 14, 1998 and thereby
repaid all outstanding indebtedness to the Prior Lender
because, among other considerations, the New Facility provides
the Company with greater borrowing availability.
During the first quarter of fiscal 1999, the Company's Prior
Lender extended an over-advance to the Company in the amount of
$1.4 million, the outstanding balance of which was fully repaid
out of the proceeds of the New Senior Credit Facility on May 15,
1998.
Subordinated Loan
The Subordinated Loan, payable to an unaffiliated supplier, is
being repaid in monthly installments of $50,000 and a balloon
payment of $1.25 million due on April 28, 1998. Pursuant to an
agreement dated April 24, 1998 between the Company and the
subordinated lender, the terms for the balloon payment have been
amended as follows: the Company will make three consecutive
monthly installments of $50,000 commencing on May 1, 1998 and a
final installment of $1.1 million on August 1, 1998. The parties
are currently negotiating to have the August 1, 1998 due date for
the balloon payment extended further; however, there can be no
assurance that the Registrant will be successful in that regard.
The subordinated lender has been granted a second priority lien
on substantially all of the Company's assets.
Contingent Note
In connection with the Woolworth Settlement, the Purchase Money
Note due in April 1998 (in the original principal amount of $2.9
million) was modified so that such Note constitutes a $1 million
non-interest bearing contingent obligation which is to be
forgiven by Woolworth on July 30, 1998, unless the Registrant
either liquidates substantially all of its assets, ceases to
conduct substantially all of its operations (except in the event
of a merger, consolidation or sale of assets with or to third
parties) or files for bankruptcy prior to that date. For
further information concerning the Woolworth Settlement,
reference is made to "Final Disposition of the Woolworth
Dispute", in Item 1(a)(i) of this Report.
Working Capital
Working capital amounted to $18.2 million at January 31, 1998
compared to $24.9 million at February 1, 1997. For a discussion
of items affecting working capital at January 31, 1998, reference
is made to Overview in this Item 7.
The ratio of current assets to current liabilities at the end of
fiscal 1998 and fiscal 1997 was 1.6 and 1.7, respectively.
Assuming the continuing availability of (a) trade credit at
current levels and (b) the combination of greater borrowing
availability under the Company's New Senior Credit Facility
(which facility became effective on May 14, 1998) and cash
generated by the Company's operations, in the opinion of
management, the Company will be able to meet its estimated
working capital requirements for at least the forthcoming twelve
months.
For further information concerning the terms of the New Senior
Credit Facility, see Item 1(a)(iii) of this Report.
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.
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, costs 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,
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.
Year 2000
The Company has taken action to understand the nature and extent
of the work required to make its systems and infrastructure Year
2000 compliant. In addition, the Company is communicating with
its major suppliers and service providers to determine whether
they are actively involved in projects to ensure that their
products and business systems will be Year 2000 compliant. The
Company anticipates that its Year 2000 issues will be addressed
on a timely basis and at a cost that will not be material to the
Company's operations or financial condition. However, in the
event that the Year 2000 issues of the Company and/or third
parties with whom the Company transacts business are not
addressed on a timely basis, it is possible that such issues
could have an adverse impact on the Company's operations and/or
financial condition.
Recently Issued Accounting Standards
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. It is calculated
as net income available to common shareholders divided by the
weighted average number of common shares outstanding. All
earnings (loss) per share amounts for all periods have been
presented to conform to SFAS No. 128 requirements. Diluted
earnings (loss) per share is not reported because such amounts
are anti-dilutive.
In February 1997, the FASB issued SFAS No. 129, "Disclosure about
Capital Structure". This Statement, which established standards
for disclosing information about an entity's capital structure,
had no effect on the disclosures in the Company's fiscal 1998
consolidated financial statements as the Company's capital
structure is not complex.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which is effective for the Company's
fiscal 1998 consolidated financial statements. This Statement
established standards for reporting and display of comprehensive
income and its components in a full set of general-purpose
financial statements. SFAS No. 130 had no effect on the Company's
fiscal 1998 financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which is
effective for the Company's fiscal 1998 consolidated financial
statements. This Statement requires enterprises to report
certain financial information on segments that would be
determined based on the Company's internal reporting. As the
Company has only one business segment, retail, SFAS No. 131 did
not have an effect on disclosures in the notes to the fiscal 1998
financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits".
This Statement, which revises disclosures about pensions and
other post-retirement benefit plans, is effective for financial
statements with periods beginning after December 15, 1997.
Restatement of disclosures for earlier periods is required upon
adoption. The Company anticipates that the adoption of SFAS No.
132 will not have a significant effect on its 1999 financial
statements.
Item 8. Financial Statements and Supplementary Data
The following documents are filed on the pages listed below as a
part of this report.
1. Financial Statements
Report of Independent Accountants F-1
Consolidated Statements of Operations
for each of the three years in the
period ended January 31, 1998 F-2
Consolidated Balance Sheets at
January 31, 1998 and
February 1, 1997 F-3
Consolidated Statements of Cash Flows
for each of the three years in the
period ended January 31, 1998 F-4
Consolidated Statements of Shareholders'
Equity for each of the three years
in the period ended January 31, 1998 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedule
Report of Independent Accountants on
Financial Statement Schedule F- 20
I. 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 or
practices or financial statement disclosure.
PART III.
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors
The following table contains information regarding all current
directors of the Registrant.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Other Positions with the Period Served
Registrant; as a Director
Occupation(s) or of the
Name Age Employment Registrant
- ---------------------------------------------------------------------------------
Manfred Brecker 71 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 49 President, Chief Executive Officer Since 1979
and 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 52 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 45 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 66 Partner, law firm of Maloney, Mehlman Since 1972
& Katz since April 1994; prior thereto
practicing attorney in New York City
for more than 35 years and served
as a partner in various firms.
Raymond L. Steele 63 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 52 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 46 Managing Director in the Investment Since 1995
Banking Department of Credit Suisse 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.
(b) Identification of Executive Officers
The executive officers of the Registrant and their ages and
offices with the Registrant are as follows:
Name and Age Positions with Registrant
------------------- ---------------------------------
Manfred Brecker (71) Chairman of the Board
Kenneth A. Davis (49) President, Chief Executive
Officer, Chief Operating Officer
and a director
Marcie B. Davis (45) Executive Vice President,
Secretary, Treasurer and a director
Joseph Keller (52) Senior Vice President-Administration
and Operations and a director
Richard A. Davis (45) Senior Vice President-Finance and
Chief Financial Officer
Eileen Abbate (50) Vice President-Advertising
Amparo Castro (41) Vice President-Controller and
Assistant Treasurer
Daniel Thigpen (47) Vice President-Store Operations
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. Mr. Davis is a Certified Public Accountant.
Eileen 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.
Amparo Castro has been an employee of the Registrant since June
1989, other than during a brief 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.
Daniel 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
Kenneth A. Davis is the son-in-law of Manfred Brecker; Marcie B.
Davis is the daughter of Manfred Brecker and the wife of Kenneth
A. Davis; 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.
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:
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------------ -------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
NAME AND RESTRICTED OPTIONS ALL
PRINCIPAL FISCAL STOCK (# OF LTIP OTHER
POSITION YEAR SALARY BONUS AWARDS SHARES) PAYOUTS COMP
- ------------------------------------------------------------------------------
Kenneth 1998 $311,539 $118,000 $ - - $ - $1,118
Davis 1997 225,000 - - 125,000 - 1,164
President 1996 225,000 - 48,772 - - 1,171
CEO, COO
Manfred 1998 175,000 25,000 - - - 1,041
Brecker 1997 175,000 25,000 - 75,000 - 1,164
Chairman 1996 153,845 25,000 - - - 1,254
of the Board
Marcie 1998 125,000 - - - - 703
B.Davis 1997 143,750 - - 50,000 - 732
Executive VP 1996 92,500 15,000 19,791 - - 743
Sec, Treas
Joseph 1998 120,000 - - - - 821
Keller 1997 108,243 - - 15,000 - 864
S VP 1996 108,270 7,500 24,739 - - 875
Admin &
Operations
Richard 1998 122,307 - - - - 910
A. Davis 1997 110,000 - - 25,000 - -
S VP 1996 25,384(*) - - 50,000 - -
Finance &
CFO
</TABLE>
(*) Employment of Richard A. Davis commenced on November 5, 1995.
The foregoing table does not include severance compensation of
$110,000 paid to a former executive officer of the Registrant
whose employment with the Registrant terminated in 1996, all of
which was accrued in the Registrant's 1997 fiscal year. For
further information concerning the compensation and prior
employment arrangements of this former officer, reference is made
to Item 11 of the Registrant's 1997 Form 10-K.
YEAR - Refers to fiscal years ended January 31, 1998, February 1,
1997 and February 3, 1996, 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. A
portion of the shares purchased by each such officer vested over
the subsequent four year period.
LTIP PAYOUTS - None paid. No plan in place.
ALL OTHER COMPENSATION - Includes contributions made by the
Registrant to its 401(k) plan on behalf of the Named Executive
Officers.
(c) Fiscal 1998 Option and Stock Appreciation Right ("SAR")
Grants
No options or Stock Appreciation Rights were granted by the
Registrant to the Named Executive Officers during fiscal 1998.
(d) Options Exercised and Fiscal Year-End Option Values
The following table sets forth certain information concerning
options exercised and the options outstanding at January 31, 1998
held by the Named Executive Officers:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Shares
Acquired Number of Securities Value of Unexercised
on Value Underlying Unexercised In-The-Money
Name Exercise Realized Options/SARs Options/SARs (*)
- ------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
---------- ----------- ---------- ---------
Kenneth A. Davis - - 213,215 119,862 $968,564 $242,245
Manfred Brecker - - - 75,000 - 149,528
Marcie B. Davis - - 59,678 50,000 271,955 99,685
Joseph Keller - - 38,874 15,000 157,040 34,688
Richard A. Davis - - 33,333 41,667 - 57,813
</TABLE>
(*) Market value of securities underlying in-the-money
options at the end of fiscal 1998 (based on $5.50 per share,
the closing price of Common Shares on the Nasdaq SmallCap
Market on 1/30/98) minus the exercise price.
(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 certain remuneration for services
rendered.
Pursuant to the Independent Directors Plan, as amended, a total
of 50,000 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.
The Board of Directors of the Registrant further amended the
Directors Plan 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 Registrant for each
Board Meeting and Committee Meeting attended by such Independent
Director during each year of his incumbency as a Director. The
number of such Common Shares per Board Meeting and per Committee
Meeting attended shall be determined by dividing the sum of $500
($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. The total number of
such Common Shares so issuable to each Independent Director shall
be determined within ten days after the date of each Annual
Meeting of the Board of Directors. This amendment, which is
subject to shareholder ratification, became effective as of the
date of the Board of Directors Meeting held on January 22, 1998.
All of the Independent Directors of the Registrant elected to
accept Common Shares in lieu of cash fees for attendance at that
Board Meeting and for all subsequent Board Meetings and Committee
Meetings to be held during their current terms as Directors.
Pursuant to such amendment, the termination date of the Directors
Plan was extended to the date immediately preceding the date of
the Shareholder's Meeting of the Registrant in the year 2001 in
which directors are 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 Registrant. 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,
such executive shall be entitled to continue to be paid his base
salary then in effect for a period of three years from the date
of termination of employment or, in lieu thereof, a lump sum
amount equal to the discounted present value of such three years
of base salary.
In November 1995, the Registrant entered into an Executive
Employment Agreement with Richard A. Davis with respect to
his employment as the Registrant's Senior Vice President-Finance
and Chief Financial Officer continuing through January 30, 1999.
Pursuant to this employment agreement, Mr. Davis: (a) currently
receives an annual base salary of $132,300, which reflects
increases from his initial base salary of $110,000 plus annual
increases based on cost of living adjustments; and (b) was
granted options to purchase 50,000 Common Shares of the
Registrant at an exercise price equal to the fair market value of
such shares as of the date of their grant. The options granted to
Mr. Davis vest ratably over a three year period commencing with
the first anniversary date of Mr. Davis' employment with the
Registrant. The employment agreement with Mr. Davis also
provides for one year's additional compensation based on similar
termination provisions as are described in the preceding
paragraph with respect to Mr. Brecker's and Mr. Kenneth Davis'
employment agreements.
(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.
(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.
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 15, 1998
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:
Name and Address Amount and Nature Percentage
of Beneficial Owner of Beneficial Ownership of Class *
- ---------------------- ---------------------- ---------
Anne Brecker 487,336 (1) 16.3%
860 Broadway
New York, New York 10003
Kenneth A. Davis 392,519 (2) 13.1%
860 Broadway
New York, New York 10003
Hemisphere Trading Co., Inc. 260,000 (3) 8.7%
5796 Shelby Oaks Drive
Memphis, TN 38134-7333
*Calculation based upon 2,997,263 Common Shares and Common
Share Equivalents outstanding as of April 15, 1998 (including
total non-qualified options of 215,273 and total incentive
options of 187,149, all of which are exercisable within 60 days).
(1) Includes 481,542 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
1,281 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 Non-Qualified Stock Option
Plan (the "Non-Qualified Plan") and 59,552 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. Does not include 122,472 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.
(b) Security Ownership of Management
The following table sets forth certain information as of April
15, 1998 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.
Name of Amount and Nature Percentage
Beneficial Owner of Beneficial Ownership of Class
- ----------------- ------------------------- ----------
Manfred Brecker 1,281 (1) *
Kenneth A. Davis 392,519 (2) 13.1%
Joseph Keller 108,153 (3) 3.6%
Marcie B. Davis 122,472 (4) 4.1%
Richard A. Davis 33,333 (5) 1.1%
Melvin Katz 7,960 *
Michael A. Feder 7,500 *
Peter Gerard 7,500 *
Raymond L. Steele 8,879 *
Officers and directors as a
group (consisting of 12
persons) 726,745 (6) 24.2%
* Less than 1%
(1) Does not include 481,542 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.
Mr. Brecker disclaims beneficial ownership of the shares held by
his wife and shares held by the trusts.
(2) Includes 153,663 shares subject to options granted to Mr.
Davis pursuant to the Registrant's Non-Qualified Plan and 59,552
shares subject to options granted pursuant to the Registrant's
Incentive Option Plan, all of which are exercisable within 60
days. Does not include 122,472 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
exercisable within 60 days.
(4) Includes 42,299 shares subject to options granted to Ms.
Davis pursuant to the Registrant's Non-Qualified Plan and 17,379
shares subject to options granted under the Incentive Option
Plan, all of which are exercisable within 60 days. Does not
include 392,519 shares beneficially owned by Ms. Davis' husband.
Ms. Davis disclaims beneficial ownership of the shares held by
her husband.
(5) Includes 33,333 shares subject to options granted to Mr.
Richard A. Davis pursuant to the Registrant's Incentive Option
Plan, all of which are exercisable within 60 days.
(6) Includes an aggregate of 215,273 shares subject to options
granted under the Registrant's Non-Qualified Plan and 152,724
options granted under the Incentive Option Plan, all of which are
exercisable within 60 days.
(c) Changes in Control
None
Item 13. Certain Relationships and Related Transactions
(a) Transactions with Management and Others
None.
(b) Certain Business Relationships
Maloney, 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 1998 totaling
approximately $79,000.
(c) Indebtedness of Management
None.
(d) Transactions with Promoters
Pursuant to the instructions for this Item, no response is
required.
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. Financial Statements
Report of Independent Accountants F-1
Consolidated Statements of Operations
for each of the three years in the
period ended January 31, 1998 F-2
Consolidated Balance Sheets at
January 31, 1998 and February 1, 1997 F-3
Consolidated Statements of Cash Flows
for each of the three years in the
period ended January 31, 1998 F-4
Consolidated Statements of Shareholders'
Equity for each of the three years
in the period ended January 31, 1998 F-5
Notes to Consolidated Financial Statements F-6
2.Financial Statement Schedule
Report of independent accountants on
financial statement schedule F-20
I. 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 (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, 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 and
Exhibit 10.13 was filed as Exhibit 10.13 to the Registrant's 1997
Form 10-K Report dated May 2, 1997, Commission File Number 1-
7090, all of 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.
10.14 Amendment to Mutual Release and Settlement Agreement
dated June 24, 1997 between the Registrant and Woolworth.
10.15 $40,000,000 Loan and Security Agreement dated May 14,
1998 between the Registrant and Foothill Capital Corporation.
Unless otherwise noted, all references to the "Commission" in
this index shall mean the Securities and Exchange Commission.
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 18, 1998
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.
Signature Title Date
/s/ Manfred Brecker Chairman of the Board of Directors May 13, 1998
- -------------------
Manfred Brecker
/s/ Kenneth A. Davis President, Chief Executive May 13, 1998
- ------------------- Officer, Chief Operating
Kenneth A. Davis Officer and a Director
/s/ Marcie B. Davis Executive Vice President, May 13, 1998
- ------------------- Secretary, Treasurer and
Marcie B. Davis a Director
/s/ Joseph Keller Senior Vice President- May 13, 1998
- ------------------- Administration & Operations
Joseph Keller and a Director
/s/ Melvin Katz Director May 13, 1998
- ------------------
Melvin Katz
/s/Michael A. Feder Director May 13, 1998
- --------------------
Michael A. Feder
/s/Peter Gerard Director May 13, 1998
- --------------------
Peter Gerard
/s/ Raymond L. Steele Director May 13, 1998
- --------------------
Raymond L. Steele
EXHIBIT 22.1
Subsidiaries of the Registrant
Name State of Incorporation
- --------------------- ----------------------
Nichols Realty, Inc. Pennsylvania
Rx Realty Corp. Delaware
<Page F-1>
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 January 31, 1998 and February 1,
1997 and the results of their operations and their cash flows for each of
the fiscal years ended January 31, 1998, February 1, 1997 and February 3,
1996 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.
As indicated in Note 14, the presentation of a litigation settlement during
the year ended February 1, 1997 has been revised.
PRICE WATERHOUSE LLP
New York, New York
April 24, 1998, except as to Note 4 and Note 13 which are as of May 14, 1998
and Note 14 which is as of February 3, 1999
<Page F-2>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
---------------------------------------
Revenues:
Net sales $ 194,658 $ 224,292 $ 203,130
Video rental, service
and other income 6,093 7,437 6,399
---------------------------------------
200,751 231,729 209,529
---------------------------------------
Costs and Expenses:
Cost of merchandise sold 155,393 176,390 159,528
Selling, general and
administrative expense 47,548 56,344 49,582
Provision for store closure (185) 573 -
---------------------------------------
202,756 233,307 209,110
---------------------------------------
Operating income (loss) (2,005) (1,578) 419
Interest expense (3,032) (4,230) (3,544)
Other income, net 1,346 7,142 -
---------------------------------------
Earnings (loss) before
extraordinary gain (3,691) 1,334 (3,125)
Extraordinary gain - - 618
---------------------------------------
Net earnings (loss) $(3,691) $ 1,334 $(2,507)
=======================================
Basic earnings (loss) per share:
Loss before extraordinary gain$ (1.48) $ 0.59 $ (1.41)
Extraordinary gain - - 0.28
---------------------------------------
Net earnings (loss) $ (1.48) $ 0.59 $ (1.13)
=======================================
Average number of shares 2,491 2,267 2,217
=======================================
See accompanying Notes to Consolidated Financial Statements.
<Page F-3>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
January 31, February 1,
1998 1997
------- -------
ASSETS
Current assets
Cash $ 3,296 $ 2,915
Receivables, net of allowances
of $1,075 and $987, respectively 4,518 7,307
Merchandise inventory 37,332 49,796
Prepaid expenses and other 1,292 1,861
------- -------
Total current assets 46,438 61,879
Property, fixtures and equipment, net 4,795 5,580
Video rental inventory, net 1,972 2,531
Other assets 487 256
------- -------
Total assets $53,692 $70,246
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 4,647 $ 7,640
Accounts payable 20,713 24,155
Provision for store closure 284 1,615
Accrued expenses and other liabilities 2,628 3,586
------- -------
Total current liabilities 28,272 36,966
Long-term debt, net of current portion 19,154 24,400
Other liabilities 1,372 498
------- -------
Total liabilities 48,798 61,894
------- -------
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 2,594,841
and 2,359,064 shares, respectively 26 23
Additional paid-in capital 21,728 21,498
Accumulated deficit (16,859) (13,168)
------- -------
4,895 8,353
Treasury stock, at cost 1 1
------- -------
Total shareholders' equity 4,894 8,352
------- -------
Total liabilities and shareholders' equity $53,692 $70,246
======= =======
See accompanying Notes to Consolidated Financial Statements
<Page F-4>
<TABLE>
<CAPTION>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<S> <C> <C> <C>
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
-----------------------------------
Cash Flows provided by Operating Activities:
Net earnings(loss) $ (3,691) $ 1,334 $ (2,507)
Adjustments to reconcile net earnings (loss) to
net cash flows from operating activities:
Depreciation and amortization 3,135 2,775 2,013
Provision for store closure (185) 573 -
Increase (decrease)in deferred liabilities 1,128 (27) (86)
Share grants to directors and restricted
share awards 69 113 78
Gain on early retirement of debt - - (618)
Gain from litigation settlement - (7,142) -
Changes in operating assets and liabilities
exclusive of amounts arising from Acquisition:
Decrease (increase) in:
Accounts receivable, net 2,788 (1,470) (3,409)
Merchandise inventory 12,464 3,982 1,389
Prepaid expenses and other 419 (211) (833)
Other assets (231) 949 (1,086)
(Decrease) increase in:
Accounts Payable (3,442) 2,006 14,549
Accrued expenses and other liabilities (1,212) (905) 3,270
Provision for store closure (1,146) - -
-----------------------------
Net Cash Flows provided by Operating Activities 10,096 1,977 12,760
-----------------------------
Cash Flows used by Investing Activities:
Acquired business, net of store cash acquired - - (39,538)
Capital expenditures (373) (993) (1,868)
Purchase of video rental inventory, net of
disposals (1,268) (2,036) (1,555)
-----------------------------
Net Cash Flows used by Investing Activities (1,641) (3,029) (42,961)
-----------------------------
Cash Flows (used) provided by Financing Activities:
Revolver borrowings, net (7,639) 1,552 8,568
Pay-down of Subordinated Loan (600) (550) -
Borrowings to finance acquisition - - 34,460
Retirement of debt - - (7,481)
Prepayment of Purchase Money Note - - (3,951)
Proceeds from issuance of common stock and
exercise of stock options and warrants 165 81 176
-----------------------------
Net Cash Flows (used) provided by Financing
Activities (8,074) 1,083 31,772
-----------------------------
Net increase in cash 381 31 1,571
Cash, beginning of year 2,915 2,884 1,313
-----------------------------
Cash, end of year 3,296 2,915 2,884
=============================
Supplemental information:
Income taxes paid - - -
Interest payments 3,038 3,381 3,329
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<Page F-5>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued Additional Treasury Stock
Number of paid-in Number of Accumulated
shares Par value capital shares Cost deficit Total
-----------------------------------------------------------------------------
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 dire 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 director 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
Fiscal 1998:
Exercise of warrants 209,195 2 111 113
Share grants to directors 10,000 69 69
Exercise of stock options 16,592 1 50 51
Purchase of fractional shares (10) -
Net loss for the year (3,691) (3,691)
-------------------------------------------------------------------------
Balance, January 31, 1998 2,594,841 $ 26 $ 21,728 (16,734) $(1) $(16,859) $4,894
======================================================================================================
</TABLE>
<Page F-6>
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 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 (the "Pharmhouse
Stores") and 19 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
settlement terms of certain litigation between Pharmhouse and
Woolworth, the Company has ceased operating and has returned to
Woolworth five of the 24 Rx Stores purchased from Woolworth.
The Company presently has an option to reassign to Woolworth
the lease for one Rx Store which remains subject to the
settlement agreement. 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.
During the last three fiscal years, except for 24 stores
acquired from Woolworth during fiscal 1996, the Company has not
opened new stores. The Company closed six stores during fiscal
1998. Five of such six closed stores were returned to
Woolworth in connection with the settlement agreement with
Woolworth. One of the closed stores was a Pharmhouse store
(such closing was unrelated to the settlement agreement). For
further information concerning the settlement agreement with
Woolworth, see "Final Disposition of the Woolworth Dispute" in
Note 2.
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 1998, 1997 and 1996 refer to the fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996,
respectively. Fiscal 1996 comprised a 53 week reporting period
whereas fiscal 1998 and 1997 each comprised 52 weeks.
Principles of Consolidation
These 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 inter-company transactions
and balances have been eliminated.
Reclassification
Certain fiscal 1997 and fiscal 1996 amounts have been
reclassified to conform with the presentation used in fiscal
1998.
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. Actual results could differ from these estimates.
During the fourth quarter of fiscal 1998, the Company recorded
an adjustment to inventory of $1.7 million, primarily related
to the Rx Stores, to reflect inventory shrinkage in excess of
amounts previously accrued. The shrinkage accrual rate used in
fiscal 1998 was consistent with the Company's historical
accrual experience. The Company has increased its shrinkage
accrual rate beginning in fiscal 1999.
Receivables
Receivables are primarily generated by third party pharmacy
revenues (i.e., Medicare, Medicaid and health insurance plans).
Reference is made to Item 1 (a) (iii) of this Report for
information concerning the sale by the Company of such third
party receivable. Receivables also include vendor coupons and
advertising and promotional allowances receivable and, at
January 31, 1998, a receivable arising from the settlement of
litigation (see Note 12).
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 Rental Inventory,
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 rental inventory is
amortized over two years.
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 accounts for stock-based compensation under the
requirements of Accounting Principles Board Opinion No. 25 and,
in accordance with Statement of Financial Accounting Standards
("SFAS") 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 SFAS 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.
Basic and Diluted Earnings (Loss) per Share
In 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share". SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible
securities. It is calculated as net income available to common
shareholders divided by the weighted average number of common
shares outstanding. All earnings (loss) per share amounts for
all periods have been presented to conform to SFAS 128
requirements. Diluted earnings (loss) per share has not been
presented because such amounts are anti-dilutive.
Leased Department Revenues
Leased department revenues of $27,000, $229,000, and $103,000
in fiscal 1998, 1997 and 1996, respectively, is included in
other income.
Significant Supplier
Approximately 40%, 30% and 28% of the Company's total purchases
in fiscal years 1998, 1997 and 1996, respectively, represented
purchases from one unaffiliated supplier.
Recently Issued Accounting Standards
In February 1997, the FASB issued SFAS No. 129, "Disclosure
about Capital Structure". This Statement, which established
standards for disclosing information about an entity's capital
structure, had no effect on the disclosures in the Company's
fiscal 1998 financial statements as the Company's capital
structure is not complex.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which is effective for the Company's
fiscal 1998 consolidated financial statements. This Statement
established standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. SFAS No. 130 had no
effect on the Company's fiscal 1998 financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which is
effective for the Company's fiscal 1998 consolidated financial
statements. The Statement requires enterprises to report
certain financial information on segments that would be
determined based on the Company's internal reporting. As the
Company has only one business segment, retail, SFAS No. 131 did
not have an effect on disclosures in the notes to the fiscal
1998 financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits".
This Statement, which revises disclosures about pensions and
other post-retirement benefit plans, is effective for financial
statements with periods beginning after December 15, 1997.
Restatement of disclosures for earlier periods is required upon
adoption. The Company anticipates that the adoption of SFAS
No. 132 will not have a significant effect on its 1999
financial statements.
NOTE 2 - ACQUISITION, LITIGATION AND FINAL DISPOSITION OF THE
WOOLWORTH DISPUTE
Acquisition
On April 28, 1995, the Company acquired, and accounted for as a
purchase, the assets and business of the 24 Rx Place discount
drug stores (the "Acquisition") from Woolworth. The total cost
of the Acquisition was $39.5 million, including $23.5 million
in cash, $12.5 million in notes issued to Woolworth (the
"Purchase Money Notes") and $2.9 million for the related costs
of acquisition (includes cost of issuance of warrants to the
Company's financial advisor, see Note 7). The Company also
assumed Woolworth's obligations under the leases of the
acquired stores. The Acquisition, consisting primarily of
merchandise inventory and store property and equipment, was
financed through a senior secured revolving credit facility
(the "Senior Credit Facility") provided by a financial
institution, a $3 million secured subordinated term loan (the
"Subordinated Loan") provided by an unaffiliated trade supplier
and the Purchase Money Notes.
Litigation
In January 1996, the Company instituted legal action 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, the Company withheld payment of all further
installments of principal and interest arising out of the
Purchase Money Notes held by Woolworth.
Final Disposition of the Woolworth Dispute
On January 31, 1997, the Company and Woolworth entered into a
Mutual Release and Settlement Agreement resolving all
outstanding disputes and settling all legal proceedings arising
out of the Acquisition. On June 24, 1997, the Company and
Woolworth amended the Mutual Release and Settlement Agreement
(such agreement and amendment are collectively referred to
herein as the "Woolworth Settlement") to provide for a final
disposition of the seven Rx Stores (the "Affected Stores") that
were part of the dispute. The major aspects of the Woolworth
Settlement include:
Debt and Interest Forgiveness - Woolworth surrendered for
cancellation two of the three outstanding Purchase Money
Notes in principal amounts 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, unless the Registrant either liquidates substantially
all of its assets, ceases to conduct substantially all of
its operations (except in the event of a merger, consolidation
or sale of assets with or to third parties) or files for
bankruptcy prior to that date. Woolworth also
released the Company from its $1.1 million accrued
interest obligation on the Purchase Money Notes. In
fiscal 1997, by reason of the foregoing, the Company
recorded other income of $7.1 million consisting
of $8.5 million in debt and interest forgiveness less
certain costs and provisions (including a $1 million store
closure provision related to two Affected Stores).
Return of Stores and Reimbursement of Rental and Occupancy
Costs - The Company received an option to terminate its
occupancy and obligations under the leases governing the
Affected Stores, subject to certain conditions. Woolworth
further agreed to pay the rent and other fixed monthly
charges and occupancy costs for the Affected Stores
through stipulated dates. Pursuant to the Woolworth
Settlement, the Company has closed five of the Affected
Stores and reassigned to Woolworth the leases for these
stores. (Prior to returning such five stores to
Woolworth, the Company liquidated and/or transferred to
its other stores the inventory and other assets located
therein). Of the two remaining Affected Stores, the
Company operated one such store with the assistance of the
Woolworth subsidy until September 1997, at which time the
Company negotiated a new lease with the landlord of the
property and has continued to operate this store without
any further subsidy or other obligation from Woolworth.
With respect to the last remaining Affected Store, the
Company has continued to operate such store for which
Woolworth is providing a subsidy for the rent and
occupancy costs. Pursuant to the Woolworth Settlement,
either party has the option to terminate this arrangement
under certain notice provisions until the lease governing
such store expires in January 2001.
Use of "The Rx Place" Name - Woolworth agreed to extend
the Company's license to use the service mark "The Rx
Place" for an additional three year period through April
28, 2001, subject to the Company's right to extend such
license for one additional year upon proper notification,
as defined in the agreement.
NOTE 3-PROPERTY, FIXTURES AND EQUIPMENT AND VIDEO RENTAL
INVENTORY, NET
A summary of property, fixtures and equipment and video rental
inventory, net at January 31, 1998 and February 1, 1997 follows
(000's omitted):
January 31, February 1,
1998 1997
---------- ----------
Property, fixtures and equipment $ 11,874 $ 11,690
Less accumulated depreciation
and amortization 7,079 6,110
---------- ----------
$ 4,795 $ 5,580
========== ==========
January 31, February 1,
1998 1997
---------- ----------
Video rental inventory $ 6,435 $ 5,441
Less accumulated amortization 4,463 2,910
---------- ----------
$ 1,972 $ 2,531
========== ==========
Total depreciation and amortization expense of property,
fixtures and equipment and video rental inventory was
$2,985,000, $2,775,000 and $1,940,000 in fiscal 1998, 1997 and
1996, respectively. Included in these amounts is amortization
expense of video rental inventory of $1,827,000, $1,629,000 and
$997,000 in fiscal 1998, 1997 and 1996, respectively.
For information concerning the return of stores to Woolworth
and other provisions of the Woolworth Settlement, see Note 2.
NOTE 4 - BORROWINGS
A summary of the Company's borrowings at January 31, 1998 and
February 1, 1997 is set forth below (000's omitted):
January 31, 1998 February 1, 1997
---------------------------- ---------------------------
Current Non-current Current Non-current
Total portion portion Total portion portion
---------------------------- ---------------------------
Senior Credit
Facility (*) $21,401 $2,247 $19,154 $29,040 $7,040 $22,000
Subordinated Loan 1,400 1,400 - 2,000 600 1,400
Contingent Note 1,000 1,000 - 1,000 - 1,000
------------------------ -----------------------
Total $23,801 $4,647 $19,154 $32,040 $7,640 $24,400
======================== =======================
(*) Effective May 14, 1998, this Senior Credit Facility was
replaced and refinanced by the New Senior Credit Facility whose
provisions are described below.
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 $35 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 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 as the outstanding principal amount of the term loan is
reduced. The duration of both the revolving and term loans
under the New Senior Credit Facility is five years. The total
loans which may be advanced by Foothill to the Company is
subject to an increase to an aggregate of $40 million upon
the satisfaction of certain conditions. The initial funds
advanced under the New Facility were used to pay outstanding
borrowings, charges, fees and temporary cash collateral
account aggregating $22.6 million owing by the Company to its
prior senior secured lender ("Prior Lender"). The cash
collateral of $1 million, less any potential draw-downs,
will be returned by the Prior Lender to the Company within
thirty days. 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
New Facility is at a borrowing rate of prime plus 1.125%,
subject to decrease if the Company reaches certain EBITDA
levels during the term of the facility.
Senior Credit Facility
The borrowing availability with the Company's Prior Lender was
based on the lesser of 60% of eligible inventory at cost or $45
million. The weighted average interest rate under the Senior
Credit Facility during fiscal 1998, including the effect of
facility fees, was 11.2%. During fiscal 1998, the highest
borrowing level under the Senior Credit Facility was $30
million, which borrowing occurred in February 1997, and the
lowest borrowing level was $18.8 million, which borrowing
occurred in January 1998. During the fourth quarter of fiscal
1998, the Company's net worth fell below the minimum level
established under the Senior Credit Facility. The Company was
advised by its Prior Lender that it would amend such minimum
net worth requirement as of January 31, 1998 and subsequent
periods. By that time, however, the Company had elected to
enter into the New Senior Credit Facility with Foothill on
May 14, 1998 and thereby repaid all outstanding indebtedness
to the Prior Lender because, among other considerations,
the New Facility provides the Company with greater borrowing
availability.
During the first quarter of fiscal 1999, the Company's Prior
Lender extended an over-advance to the Company in the amount of
$1.4 million, the outstanding balance of which was fully repaid
out of the proceeds of the New Senior Credit Facility on May
15, 1998.
Subordinated Loan
The Subordinated Loan payable to an unaffiliated trade supplier
is being repaid in monthly installments of $50,000 with a $1.25
million balloon payment due on April 28, 1998. Pursuant to an
agreement dated April 24, 1998 between the Company and the
subordinated lender, the terms for the balloon payment have
been amended as follows: the Company will make three
consecutive monthly installments of $50,000 commencing on May
1, 1998 and a final installment of $1.1 million on August 1,
1998. The parties are currently negotiating to have the amended
August 1, 1998 due date for the balloon payment extended
further; however, there can be no assurance that the Company
will be successful in that regard. The subordinated lender has
been granted a second priority lien on substantially all of the
Company's assets. The loan has a borrowing rate of prime plus
3%.
Contingent Note
In connection with the Woolworth Settlement, Woolworth
surrendered for cancellation two of the three then 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, unless the Registrant either
liquidates substantially all of its assets, ceases to conduct
substantially all of its operations (except in the event of a
merger, consolidation or sale of assets with or to third
parties) or files for bankruptcy prior to that date.
For further information concerning the Woolworth Settlement,
see discussion under "Acquisition, Litigation and Final
Disposition of the Woolworth Dispute" in Note 2.
NOTE 5 - INCOME TAXES
The Company is not subject to federal income taxes in fiscal
1998 as the Company did not generate taxable earnings. The
Company has significant net operating loss carryforwards which
are available to offset future taxable income. 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.
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 the Company). 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 (which, at January 31, 1998, was $442,000).
The total available NOL Class #1 at January 31, 1998 amounts to
approximately $2.7 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 January 31, 1998 amounts to approximately $12.7
million.
Deferred income tax temporary differences are determined in
accordance with SFAS No. 109. The temporary differences giving
rise to deferred taxes primarily relate to property and
equipment, employee stock options and allowances for doubtful
accounts. At January 31, 1998 and February 1, 1997, 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.
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 was voluntary but an
election to participate was irrevocable. Seven employees of the
Company elected to participate (two such employees are no
longer employed by the Company), each of whom specified the
dollar amount by which his or her respective annual salary was
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 to
purchase Common Shares at 25% of the fair market value of such
common shares on the date of grant of the options. 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 (equal to 25% of the fair market value on the date
of grant), of which 34,942 were subsequently forfeited.
During fiscal 1997, 45,000 restricted Common Shares were
granted to an executive at a nominal purchase price. As a
result of the termination of this executive's employment,
15,000 of such shares were issued to him and 30,000 were
forfeited pursuant to vesting provisions governing their
issuance. As of January 31, 1998, 64,942 of the options
granted under the Non-Qualified Plan were forfeited, 15,000
were exercised and 218,583 remain exercisable.
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 of the Common Shares 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 January 31, 1998,
113,804 of the options granted under the Incentive Plan lapsed
owing to the termination of optionees' employment, 19,879 were
exercised and 223,634 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 agreement
governing the surrendered SAR's or options.
As of January 31, 1998, 472,585 options had been issued under
the 1995 Option Plan, at exercise prices of $3.1875 to $3.5063
(such amounts being equal to the fair market values on the date
of grant), 21,000 lapsed owing to the termination of optionees'
employment resulting in 451,585 options outstanding.
The combined activity in the Stock Option Plans for the three
fiscal years ended January 31, 1998 was as follows:
Number of
shares Exercise price per share
-------- ------------------------
Outstanding at January 28, 1995 422,549 $0.544 - $1.914
Fiscal 1996 Activity:
Granted -
Exercised -
Canceled (5,776) $0.544 - $1.914
---------
Outstanding at February 3, 1996 416,773
Fiscal 1997 Activity:
Granted 588,000 $3.188 - $5.875
Exercised -
Canceled (16,724) $0.544 - $1.914
--------
Outstanding at February 1, 1997 988,049
Fiscal 1998 Activity:
Granted -
Exercised 31,592) $1.914 - $3.750
Canceled (62,655) $1.914 - $3.750
--------
Available for grant at January 31, 1998 893,802
========
1992 Equity Compensation Plan for Non-Employee Directors
Under the 1992 Equity Compensation Plan for Non-Employee
Directors, as amended in fiscal 1996, (the "Independent
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 Independent Directors Plan provides that each
Independent Director elected by shareholders, commencing with
the shareholders meeting held June 30, 1992 through the 1998
shareholders' meeting, shall be entitled to an award of 2,000
Common Shares (2,500 effective in fiscal 1996) upon his or her
election or re-election. The fair market value of such shares
is expensed upon issuance and added to Additional Paid-in
Capital.
The Board of Directors further amended the Directors Plan 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. The
number of such Common Shares per Board Meeting and per
Committee Meeting attended shall be determined by dividing the
sum of $500 ($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. This
amendment, which is subject to shareholder ratification, became
effective as of the date of the Board of Directors Meeting held
on January 22, 1998. All of the Independent Directors of the
Company elected to accept Common Shares in lieu of cash fees
for attendance at that Board Meeting and for all subsequent
Board Meetings and Committee Meetings to be held during their
current terms as Directors. Pursuant to such amendment, the
termination date of the Directors Plan was extended to the date
immediately preceding the date of the Shareholders' meeting of
the Company in the year 2001 in which directors are elected.
During fiscal 1997, the Company issued 2,500 Common Shares to a
former director for past services rendered to the Company.
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 1998 and
fiscal 1997 reported and pro forma information is as follows:
Fiscal 1998 Fiscal 1997
----------- -----------
Net income (loss), as reported $(3,691,000) $1,334,000
Pro forma net income (loss) $(4,027,000) $1,007,000
Net income (loss) per share,
as reported $ (1.48) $ 0.59
Pro forma net income(loss)
per share $ (1.61) $ 0.44
In fiscal 1996, there were no stock-based compensation awards
granted under the Stock 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 its previous
secured lender to purchase 209,195 of its Common Shares at
varying exercise prices ranging from $.19 to $1.91. In June
1997, the Company filed a Registration Statement under the
Securities Act of 1933 relating to the offer and sale of such
securities by that lender. As of August 2, 1997, all of such
warrants had been exercised. The exercise of the warrants
resulted in an increase to paid-in capital of $111,127, net of
related expenses.
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 $111,000, $105,000 and $81,000
in fiscal 1998, 1997 and 1996, 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 $79,000, $71,000 and $328,000 in
fiscal 1998, 1997 and 1996, respectively.
NOTE 10 - PROVISION FOR STORE CLOSURE
During fiscal 1997, the Company recorded a $1.6 million
provision for estimated costs related to the closing of three
stores, including two Rx stores which were returned to
Woolworth in connection with the Woolworth Settlement. During
fiscal 1998, the Company closed three additional Rx stores in
connection with the Woolworth Settlement. No additional
provision for store closure was provided for these stores as
the unused provision remaining from fiscal 1997 is estimated to
be sufficient to cover the anticipated closure costs for these
three Rx stores. The provision for store closure primarily
includes costs for inventory mark-downs, employee severance and
miscellaneous wind-down expenses.
The following table summarizes activity during the last three
fiscal years with respect to the provision for store closure
(000's):
1998 1997 1996
------ ------- ------
Balance, beginning of year $1,615 $ - $ -
Activity:
Provision - 1,615 -
Amounts charged against accrual (1,146) - -
Reversal of prior year
over-accrual (185) - -
------ ------- ------
Balance, end of year $ 284 $ 1,615 $ -
====== ======= ======
For further information concerning the return of stores to
Woolworth and other provisions of the Woolworth Settlement, see
Note 2.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company's operating leases are principally for retail store
locations, a distribution facility and the executive offices.
At January 31, 1998, future minimum rental payments required
under operating leases that have initial or remaining non-
cancelable lease terms in excess of one year, without regard to
potential sublease revenue, is set forth below (000's):
Fiscal Year Amount
----------- ---------
1999 $ 6,657
2000 6,433
2001 6,304
2002 6,598
2003 6,251
Thereafter 51,553
Rent expense, excluding certain real estate tax and maintenance
costs, for all operating leases is comprised of the following
(000's):
Fiscal Fiscal Fiscal
1998 1997 1996
------ ------ ------
Minimum rentals $7,198 $8,466 $6,781
Contingent rentals 34 93 117
Sublease revenue (788) (904) (927)
------- ------- -------
$6,444 $7,655 $ 5,971
======= ======= =======
Legal Matters
For information concerning the terms of a recent settlement of
litigation between the Company and one of its landlords for a
leased store, see Note 12.
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 million at January 31, 1998.
NOTE 12 - OTHER INCOME, NET
On January 31, 1998, the Company and a landlord for one of the
Company's Pharmhouse stores reached an out-of-court settlement
of certain litigation related to a lease for such store. Under
the terms of the settlement agreement with the landlord, as
amended on May 1, 1998, the Company will receive the sum of
$1,675,000 ($200,000 of which was paid by the landlord on May
1, 1998 and $1,475,000 of which is payable on May 31, 1998)
plus accrued interest on the outstanding balance since January
31, 1998, in exchange for waiving its exclusive right to use
its space to operate a discount drugstore or discount pharmacy,
thereby permitting the landlord to lease out space in the
shopping center to any other tenant who operates a drugstore or
pharmacy, discount or otherwise. The terms of the agreement
also provide for the following: effective on May 1, 1998, the
Company's present fixed monthly rent obligation for this store
will convert to a percentage rent calculation; and effective on
September 30, 1998, the Company has the right to terminate the
lease upon 90 days prior notice to the landlord and the
landlord has the right to recapture the premises for this store
upon 120 days prior notice to the Company. In connection with
this transaction, the Company has recorded in its fiscal 1998
fourth quarter other income, net of related legal expenses,
of $1,346,000.
In fiscal 1997, the Company recorded other income net, of
$7.1 million (see Note 2).
NOTE 13 - SUBSEQUENT EVENT
On May 14, 1998, the Company and Foothill entered into the New
Senior Credit Facility providing for aggregate credit to the
Company of up to $35 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 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 as the outstanding principal amount of
the term loan is reduced. The duration of both the revolving
and term loans under the New Senior Credit Facility is five
years. The total loans which may be advanced by Foothill to
the Company is subject to an increase to an aggregate of $40
million upon the satisfaction of certain conditions. The
initial funds advanced under the New Facility were used to
repay outstanding borrowings, charges, transaction fees and
temporary cash collateral account aggregating $22.6 million
owing by the Company to its Prior Lender. The cash collateral
of $1 million, less any potential draw-downs, will be returned
to the Company within thirty days. 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 Registrant's
assets and, among other conditions, restricts the payment of
dividends and requires that the Registrant maintain specified
minimum tangible net worth and EBITDA levels. The New Facility
is at a borrowing rate of prime plus 1.125%, subject to
decrease if the Company reaches certain EBITDA levels during
the term of the facility.
NOTE 14 - REVISION TO CONSOLIDATED STATEMENT OF OPERATIONS
As a result of a review of these financial statements by the
Securities and Exchange Commission, the Company has revised the
fiscal 1997 presentation of a litigation settlement, which
resulted in income in the amount of $7,142,000 from
extraordinary item, as originally reported, to other income,
as reported herein.
<Page F-20>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors and
Shareholders of Pharmhouse Corp.
Our audits of the consolidated financial statements referred to
in our report dated April 24, 1998, May 14, 1998, and
February 3, 1999 appearing on page F-1 of the 1998 Annual
Report on Form 10-K of Pharmhouse Corp. for the year
ended January 31, 1998 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
February 3, 1999
<Page F-21>
PHARMHOUSE CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions Deductions
Balance at Charged to Balance
beginning costs and Bad debt Bad debt at end of
of period expenses write offs recoveries period
Reserves deducted in
balance sheet
January 31, 1998:
Allowance for
doubtful accounts $ 987 $ 281 $ (193) $ - $1,075
February 1, 1997:
Allowance for
doubtful accounts $ 918 $ 219 $ (150) $ - $ 987
February 3, 1996:
Allowance for
doubtful accounts $ 618 $ 383 $ (37) $ (46) $ 918
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 3,296
<SECURITIES> 0
<RECEIVABLES> 4,518
<ALLOWANCES> 0
<INVENTORY> 37,332
<CURRENT-ASSETS> 46,438
<PP&E> 6,767
<DEPRECIATION> 3,135
<TOTAL-ASSETS> 53,692
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0
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<COMMON> 26
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<TOTAL-LIABILITY-AND-EQUITY> 53,692
<SALES> 194,658
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<CGS> 155,393
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