SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934 For the fiscal year ended June 28, 1997 Commission
File Number 0-27050
Transition report pursuant to Section 13 or 15(d) of the
- ------- Securities Exchange Act of 1934
For the transition period from ______ to _______
PHAR-MOR, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1466309
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Federal Plaza West, Youngstown, Ohio 44501-0400
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (330) 746-6641
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, Par Value $0.01 per share NASDAQ
Warrants to purchase Common Stock NASDAQ
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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES No X
------ ------
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
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
------ ------
The aggregate market value of voting stock held by non-affiliates of the
registrant as of September 10, 1997 was $91,953,942 (based on the last reported
sale price of the Registrant's Common Stock on the NASDAQ National Market System
on such date).
As of close of business on September 10, 1997, 12,159,199 shares of the
Registrant's Common Stock were outstanding.
<PAGE>
PART I
Item 1. Business
Introduction
Phar-Mor, Inc., a Pennsylvania corporation ("Phar-Mor" or the
"Company"), operates a chain of discount retail drugstores devoted to the sale
of prescription and over-the-counter drugs, health and beauty care products,
baby products, pet supplies, cosmetics, greeting cards, groceries, beer, wine,
tobacco, soft drinks, video rental and seasonal and other general merchandise.
As of June 28, 1997, the Company operated 103 stores in 22 metropolitan markets
in 18 states under the name of Phar-Moru. Approximately 51% of Phar-Mor's stores
are located in Pennsylvania, Ohio and West Virginia, and approximately 23% are
located in Virginia, North Carolina and South Carolina. The Company's principal
executive offices are located at 20 Federal Plaza West, Youngstown, Ohio
44501-0400. Unless otherwise stated, all statistics in this Item were compiled
as of June 28, 1997.
Except for historical information contained herein, the matters
discussed in this annual report are forward-looking statements as defined by the
Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those projected as a result of certain risks and uncertainties
including, but not limited to, economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices and other factors discussed in the Company's filings with
the Securities and Exchange Commission ("SEC").
History
Phar-Mor was founded in 1982 as a division of a subsidiary of the Giant
Eagle, Inc. supermarket chain. The initial Phar-Mor concept was built on the
premise that a drugstore offering additional, and at times unexpected,
categories of merchandise could attract customers by featuring low prices made
possible by acquiring inventory at relatively low cost through deal purchases of
overstock, odd lot, discontinued, large unit size or slow-moving merchandise
from manufacturers and distributors. The Company grew, rapidly expanding from 12
stores in August 1985 to 311 stores in August 1992. Store size also grew
dramatically, increasing from an average of approximately 31,000 square feet in
fiscal 1986 to approximately 58,500 square feet in 1992. Phar-Mor's rapid growth
was mirrored by apparent extraordinary financial success.
However, in early August 1992, Phar-Mor publicly disclosed that it had
discovered a scheme by certain senior executives to falsify certain financial
results and divert funds to unrelated enterprises and for personal expenses. The
officers involved, including Phar-Mor's former President and Chief Operating
Officer, former Chief Financial Officer, former Vice President of Finance and
former Controller were promptly dismissed. In an effort to restore support from
its vendors and lenders and to implement a business turnaround plan, Phar-Mor
and its fifteen wholly-owned subsidiaries filed petitions for protection under
Chapter 11 of the United States Bankruptcy Code on August 17, 1992 (the
"Petition Date"). A new management team, hired by the Board of Directors,
assumed day-to-day management of Phar-Mor.
Upon discovery of the fraud, it became apparent that Phar-Mor's
explosive growth during the preceding several years had been fueled in part by a
systematic scheme to falsify Phar-Mor's financial results and to conceal
Phar-Mor's true financial condition. The fraud which was perpetrated by the
manipulation of information and overriding the system of internal controls by
certain of its senior executives, as well as a lack of systems and surrounding
controls, masked very substantial losses, created in part by low margins, slow
moving merchandise categories, high rentals for the newer and larger stores and
operational inefficiencies. By the time Phar-Mor concluded its investigation
into the size of the fraud, it determined that cumulative earnings had been
overstated by approximately $500 million. Additional charges to cumulative
earnings of approximately $500 million resulted from changes in accounting
policies and restructuring costs which were recorded as of September 26, 1992.
See "Notes to Consolidated Financial Statements."
The new management of Phar-Mor faced the task of restructuring its
accounting records and strengthening the control systems. New management
developed and implemented a strict internal control regimen, buttressed by
<PAGE>
frequent and widely distributed internal management reports, designed
specifically to avoid a situation in which a member of management could override
controls and avoid detection.
In particular, management (i) implemented three major information
system improvements, each of which supports the accurate reporting of inventory
and facilitates stricter accounting controls: point-of-sale ("POS") scanning
equipment, a pharmacy software system and a Distribution Control System ("DCS")
warehousing system (these systems provide greater merchandising data, facilitate
pharmacy processing and track and coordinate inventory purchasing and warehouse
volume), (ii) undertook a review of various existing systems which included an
operations and control enhancement project on the accounts payable system and a
vendor correspondence and relations review and (iii) enhanced an internal audit
department that assembled extensive protocols to follow in conducting audits of
internal controls.
In order to further enhance the control process, new management
regularly generates numerous internal reports which are distributed to a wide
variety of senior, middle and lower level management on a daily, weekly and
monthly basis. In addition, operational and financial planning meetings are now
attended by members of all levels of management.
The Company emerged from bankruptcy on September 11, 1995 with a new
President and Chief Operating Officer, Chief Financial Officer and Vice
President and Corporate Controller hired after the Petition Date to replace
those responsible for the fraud.
During the pendency of the Chapter 11 bankruptcy cases of
pre-reorganized Phar-Mor and its subsidiaries (the "Chapter 11 Cases"), new
management analyzed the performance and prospects of each store to identify a
core group of high volume, profitable and geographically concentrated stores
that would serve as the basis of reorganized Phar-Mor. Based on this analysis,
Phar-Mor closed 209 stores (not including separate liquor stores which were
closed at various times) in five stages: 54 stores between October 1992 and
December 1992, 34 stores between March 1993 and June 1993, 55 stores in July
1993, 25 stores in October 1994 and 41 stores in July 1995, thereby reducing the
number of stores from 311 in September 1992 to 102 stores as of September 11,
1995, the effective date (the "Effective Date") of Phar-Mor's Chapter 11 plan of
reorganization (the "Plan of Reorganization").
The Company also implemented a series of fundamental changes designed
to achieve operating profitability and to position Phar-Mor for future growth.
Following the Petition Date, Phar-Mor reduced the number of warehouses and
increased outsourcing of product distribution; reduced the average size of
several stores by approximately 19,000 square feet; introduced POS scanning in
all stores; installed a new pharmacy software system; installed the DCS
warehouse logistics system; and reduced the number of corporate personnel by
75%.
In connection with the Company's Plan of Reorganization and its
emergence from bankruptcy, the Company restructured its debt obligations and
converted approximately $855 million of debt into equity. The Company also
entered into a three-year, $100 million revolving credit facility (the
"Revolving Credit Facility"). As of June 28, 1997, no borrowings were
outstanding under the Revolving Credit Facility, other than standby letters of
credit totaling approximately $4.9 million.
Operations
Typically, stores are open 95 hours per week; pharmacies are typically
open 77 hours per week. The average store has approximately 50 employees,
including a store manager and department managers, a pharmacy manager and
pharmacists, and office and cashier supervision. Overall, the Company had 5,540
employees at June 28, 1997. Approximately 208 warehouse and distribution center
employees in Youngstown are members of the Teamsters Union under a contract
which expires March 1, 2000. Fifty-three employees at the Company's Niles, Ohio
store are members of the United Food and Commercial Workers Union under a
contract which expires October 12, 1997.
The Company is committed to customer service and encourages employees
to be responsive to customer needs and concerns. The remerchandising and
remodeling of stores (discussed below) is designed to further ease and make the
customer's shopping experience pleasurable. The number of open checkout lanes is
<PAGE>
closely monitored to facilitate the efficient and comfortable checkout of
customers. These philosophies are regularly communicated and reinforced by the
Company to its employees.
Thorough education and training in store operations is provided to
employees at every level. Computer-based training, on and off-site training,
video training, and teleconferences are a few of the training methods used. The
Company believes that such training enables efficiency and understanding within
store operations.
The typical trade area for a Company store includes approximately
105,000 people in 41,000 households within a radius of between five and seven
miles. On average during the fiscal year ended June 28, 1997 ("Fiscal Year
1997"), each store served approximately 11,800 customers per week. The Company's
customers are approximately 52% female, with a median age of 35.5 years, and a
median household income of approximately $33,000. Approximately 24% of customer
households have children 17 years old and under.
Company stores accept payment in cash, check, credit cards and payment
from third-party providers of prescription services.
The Company's purchasing, pricing, advertising, merchandising,
accounting and supervisory activities are centrally directed from Phar-Mor's
corporate headquarters. The Company purchases substantially all of its
merchandise either directly from manufacturers or from wholesalers under various
types of purchase arrangements. McKesson Drug Company ("McKesson"), a
pharmaceutical distributor, accounted for approximately 15%, FoxMeyer Drug
Company, a pharmaceutical distributor and an affiliate of the Company from the
Effective Date until it was acquired by McKesson in late 1996, accounted for
approximately 8%, and Riser Foods, Inc., a grocery wholesaler, accounted for
approximately 8% of the Company's purchases during Fiscal Year 1997. During
Fiscal Year 1997, no other single vendor accounted for more than 5% of the
Company's purchases. Substantially all of the products the Company sells are
purchased from approximately 1,200 outside vendors. Alternative sources of
supply are generally available for all products sold by the Company.
Marketing and Merchandising
Phar-Mor's overall merchandising strategy is to offer (i) value to
consumers by pricing its products below the prices charged by conventional
drugstores and supermarkets and (ii) a broader array of products in each of its
major product categories than is offered by mass merchant discounters.
Phar-Mor's product strategy is focused on the traditional drugstore lines of
prescription and over-the-counter drugs, health and beauty care products and
cosmetics. Phar-Mor's stores also typically feature other product categories,
including groceries, snacks and beverages, pet food and supplies, beer, wine and
liquor (where permitted by law), tobacco, baby products, general merchandise,
video and music sales and video rentals. Phar-Mor is one of the leading
retailers of film, vitamins, soft drinks and batteries in the United States.
Ninety-five percent of the Company's advertising is print advertising,
through circulars, newspapers, and POS materials. Newspaper advertisements and
circulars appear in major newspapers in most market areas. The Company presently
advertises through 75 newspapers and mailers.
In conjunction with its remodeling of five stores, Phar-Mor introduced
the "Warehouse District" concept during Fiscal Year 1997. In approximately
10,000 to 15,000 square feet, each "Warehouse District" offers a variety of
grocery items, including fresh, frozen, and refrigerated foods. The concept has
been well received by customers and has improved overall sales in each such
store. The Company plans to incorporate the "Warehouse District" concept in 13
stores scheduled to be remodeled during the fiscal year ending June 27, 1998
("Fiscal Year 1998").
Sales
The retail sale of traditional drugstore lines is a highly fragmented
business, consisting of thousands of chain drugstores and independent drugstores
that sell such products as well as mass merchandisers who sell such products as
part of their overall product lines. In Fiscal Year 1997, revenues from sales of
the Company's traditional drugstore products (i.e., prescription drugs,
over-the-counter drugs, health and beauty care products, cosmetics and greeting
cards) averaged approximately $5.6 million per store in its 103 stores. In
<PAGE>
addition to the approximately $574.6 million in traditional drugstore product
revenues in Fiscal Year 1997, the Company generated approximately $500.2 million
in revenues from the sale of groceries and general merchandise.
Set forth below is the percentage of sales by principal category of
products for the continuing stores for the last three fiscal years.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
(103 Stores) (102 Stores) (102 Stores)
------------ ------------ ------------
June 28, 1997 June 29, 1996 July 1, 1995
Category (52 Weeks) (52 Weeks) (52 Weeks)
- -------- ---------- ---------- ----------
<S> <C> <C> <C>
Prescription, Health and
Beauty Care Products,
Cosmetics and Greeting Cards 57.0% 56.0% 55.7%
All Other Merchandise 43.0% 44.0% 44.3%
</TABLE>
The Company's business is seasonal to a certain extent. The highest
volume of sales and net income usually occurs in the second fiscal quarter
(generally October, November and December). The following table summarizes the
Company's sales by quarter during Fiscal Year 1997.
Sales by Quarter During Fiscal Year 1997
Percentage of
Total Sales
-----------
First Quarter 24.6%
Second Quarter 27.1
Third Quarter 24.6
Fourth Quarter 23.7
-----
100.0%
Competition
Phar-Mor's stores compete primarily with conventional drugstores,
supermarkets and mass merchant discounters. Among these competitors, many have
greater financial resources than Phar-Mor. Phar-Mor's strategy for competing
with conventional drugstores is through its broader product selection and
generally lower prices than traditional drugstore lines. Phar-Mor believes it
has these same competitive advantages against most supermarkets for non-grocery
items. Phar-Mor's strategy for competing with supermarkets in grocery product
lines where Phar-Mor does not have a broader selection, is to carry an often
changing mix of items priced lower than most supermarkets.
Phar-Mor does not attempt to compete against mass merchant discounters
solely on the basis of price. In traditional drugstore lines, particularly
health and beauty care products and greeting cards, Phar-Mor offers broader
product selection than mass merchant discounters. Mass merchant discounters
generally are unwilling to allocate as much display space as Phar-Mor devotes to
these categories. The merchandising changes Phar-Mor has implemented, including
the creation of "signature" departments in dedicated aisle space with
distinguishing signage, such as health and beauty care products, cosmetics,
video rentals and "The Card Shop," "Pet Place," "One Stop Baby Shop," and
"Vitamin Shoppe," are designed in part to distinguish Phar-Mor from mass
merchant discounters and to increase its strength in areas in which Phar-Mor's
management believes such merchants do not excel.
<PAGE>
Capital Expenditures
The Company's most significant capital needs are for seasonal buildup
of inventories, technological improvements and remerchandising and remodeling of
existing stores.
The Company's capital expenditures totaled $18.5 million in Fiscal Year
1997, including $2.9 million for the construction of new stores and $8.1 million
for rightsizing and remodeling existing stores. The Company anticipates spending
approximately $19.1 million for capital expenditures in Fiscal Year 1998,
including costs of remodeling 13 additional stores and opening two new stores.
Real Estate and Growth
The Company opened one new store in Fiscal Year 1997, one new store in
July 1997 and plans to open one more new store in Fiscal Year 1998. Expansion in
the near future is expected to be minimal and in existing or contiguous markets
in its core areas of Pennsylvania, Ohio and West Virginia. Expansion in existing
markets improves the Company's operating margins by decreasing advertising costs
on a per store basis, permitting more efficient distribution of products to
stores and increasing utilization of existing supervisory and managerial staff.
The aggregate cost of any future expansion is dependent upon the method
utilized to finance new stores. Build to suit (i.e., landlord constructed)
leases cost approximately $750,000 per store for furniture, fixtures, and
equipment and each new store requires approximately $1.3 million in inventory.
Company-funded conversion of existing buildings is another possible method of
expansion; however the cost of such expansion per store varies significantly
depending upon the age, condition and configuration of such buildings.
Phar-Mor has reduced store occupancy costs through negotiated rent
concessions and store rightsizings. As of June 28, 1997, Phar-Mor's stores
ranged in size from approximately 30,000 to 70,000 square feet, with an average
store size of approximately 51,000 square feet. Since June 1993, the Company has
"rightsized" 14 stores, reducing the average size of such stores by
approximately 19,000 square feet and the average annual occupancy costs of such
stores by over $152,000 per store.
Trademarks and Service Marks
The Company believes that its registered "Phar-Mor" trademark is well
recognized by its customer base and the public at large in the markets where it
has been advertised. The Company believes that the existing customer and public
recognition of its trademark and related operational philosophy will be
beneficial to its strategic plans to expand merchandise categories and add new
stores. The Company has also introduced a number of private label brands of
products under various registered trademarks and trademarks pending
registration.
Regulation
The Company is subject to the Fair Labor Standards Act, which governs
such matters as minimum wages, overtime, and other working conditions. To the
extent that pay scales for a portion of the Company's personnel relate to the
federal minimum wage, the scheduled increase in the minimum wage will increase
the Company's labor costs.
The prescription drug business is subject to the federal Food, Drug and
Cosmetic Act, Drug Abuse Prevention and Control Act and Fair Packaging and
Labeling Act relating to the content and labeling of drug products, comparable
state statutes and state regulation regarding recordkeeping and licensing
matters with civil and criminal penalties for violations.
Proposed Business Combination
The Company had entered into an Agreement and Plan of Reorganization
dated as of September 7, 1996, (amended as of October 9, 1996) with ShopKo
Stores, Inc. ("ShopKo"), a retailer specializing in prescription and vision
benefit management and health decision support services, to combine the two
companies under Cabot Noble, Inc. ("Cabot Noble"), a Delaware holding company
(the "Proposed Transaction").
<PAGE>
On April 1, 1997, the Company, ShopKo and Cabot Noble entered into a
Termination Agreement mutually terminating the Agreement and Plan of
Reorganization effective as of April 1, 1997.
Item 2. Properties.
As of June 28, 1997, the Company operated 103 stores in 18 states.
Approximately 51% of Phar-Mor's stores are located in Pennsylvania, Ohio and
West Virginia, and approximately 23% are located in Virginia, North Carolina and
South Carolina. The following is a breakdown by state of the locations of the
Company's stores.
Alabama................... 1 Missouri....................... 1
Colorado.................. 2 North Carolina................. 9
Florida................... 5 Ohio........................... 15
Georgia................... 3 Oklahoma....................... 1
Illinois.................. 4 Pennsylvania................... 34
Indiana................... 3 South Carolina................. 4
Iowa...................... 2 Virginia....................... 11
Kansas.................... 2 West Virginia.................. 4
Kentucky.................. 1 Wisconsin...................... 1
As of June 28, 1997, all of the Company's stores were leased. All store
leases are long-term; the original terms of 76 leases and the original terms
with options of four leases expire on or before December 31, 2006. The remaining
stores have longer lease terms. Most stores are located adjacent to or near
shopping centers or are part of strip centers. Some stores are free standing.
Depending on the location of a store, the sites may vary, with averages by type
of location as follows: free-standing stores are located on sites averaging 2.84
acres; stores located in strip centers are found on sites averaging 23.7 acres;
and stores in malls are on sites averaging 46.8 acres. A proto-typical store now
includes approximately 40,000 square feet of sales space and 10,000 square feet
of storage area and ample off-street parking. The stores are designed in a
"supermarket" format familiar to customers and shopping is done with carts in
wide aisles with attractive displays. Traffic design is intended to enhance the
opportunity for impulse purchases.
The Company operates a distribution center in Youngstown, Ohio which it
leases. This center delivered approximately 39% of all merchandise to the stores
in Fiscal Year 1997, primarily using contract carriers. The balance of the
products were delivered directly to the Company's stores by vendors.
The Company and a wholly-owned subsidiary of the Company are partners
in an Ohio limited partnership, which owns the office building in which the
Company occupies approximately 141,000 square feet of space for its corporate
offices in Youngstown, Ohio.
Item 3. Legal Proceedings
In the normal course of business, the Company is subject to various
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, cash flows or the consolidated financial position of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of Fiscal Year 1997, through the solicitation of proxies or
otherwise.
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock, par value $.01 per share (the "Common
Stock"), was issued to creditors on the Effective Date, pursuant to the terms of
the Plan of Reorganization. From the Effective Date through October 31, 1995,
the only market activity in the Common Stock of which the Company is aware was
trading on a limited basis, primarily through inter-dealer quotations. From
October 31, 1995 to February 7, 1996, the Common Stock was included for
quotation on the NASDAQ SmallCap Market under the symbol "PMOR." Since February
8, 1996, the Common Stock has been included for quotation on the NASDAQ National
Market under the symbol "PMOR." Prior to the Effective Date there was no
established public trading market for the Common Stock. High and low prices of
the Common Stock from the Effective Date are shown in the table below:
Fiscal Year 1997 Fiscal Year 1996
---------------- ----------------
High Low High Low
---- --- ---- ---
1st Quarter............... $8 3/4 $6 1/8 $9 1/4 $6 13/16
2nd Quarter............... 6 1/4 5 5/16 9 3/4 6 3/8
3rd Quarter............... 5 11/16 4 5/8 8 1/4 6 7/8
4th Quarter............... 6 3/8 4 3/4 8 5/8 7
As of September 10, 1997, there were 2,777 holders of record of the
Common Stock. The Company has not declared or paid any cash dividends on the
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. The Company currently intends to retain earnings for future operations
and expansion of its business. In addition, the indenture pursuant to which the
Company's senior notes were issued and the Revolving Credit Facility restrict
the payment of cash dividends on the Company's capital stock. See "Notes to
Consolidated Financial Statements."
Item 6. Selected Financial Data.
The following selected consolidated financial data of Phar-Mor and its
subsidiaries should be read in conjunction with the consolidated financial
statements and related footnotes appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
(In thousands except per share data)
---------------------------------------------------------------------------------------------
52 Weeks 43 Weeks 9 Weeks 52 Weeks 53 Weeks 39 Weeks
Ended Ended Ended Ended Ended Ended
June 28, June 29, September 2, July 1, July 2, June 26,
1997 1996 1995 1995(b) 1994 1993
---- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 1,074,828 $ 874,284 || $ 181,968 $ 1,412,661 $ 1,852,244 $ 1,434,256
||
(Loss) income from ||
continuing operations (2,281) 2,526 || (10,389)(a) (53,144)(c) (142,763)(d) (82,179)(e)
||
(Loss) income per share ||
from continuing operations (.19) .21 || (.19) (.98) (2.64) (1.52)
As of As of As of || As of As of As of
June 28, June 29, September 2, || July 1, July 2, June 26,
1997 1996 1995 || 1995 1994 1993
---- ---- ---- || ---- ---- ----
Total assets 362,605 363,463 390,207 || 531,332 680,105 860,953
Long-term debt & capital ||
leases 140,213 149,163 151,047 || - - -
Liabilities subject to ||
settlement - - - || 1,154,959 1,182,145 1,252,981
</TABLE>
Note: In accordance with fresh-start reporting, reorganization value was used to
record the assets and liabilities of the Company at September 2, 1995.
Accordingly, the selected consolidated financial data as of September 2, 1995,
June 29, 1996 and June 28, 1997 and for the 43 weeks ended June 29, 1996 and the
52 weeks ended June 28, 1997, are not comparable in material respects to such
data for prior periods. Furthermore, the Company's results of operations for
<PAGE>
periods prior to the Effective Date are not necessarily indicative of results of
operations that may be achieved in the future.
(a) Excludes extraordinary gain of $775 million on debt
discharged pursuant to the Plan of Reorganization; and
includes the gain for revaluation of assets and liabilities
under fresh-start reporting of $8 million and reorganization
costs of $16.8 million.
(b) Excludes the results of 25 stores after July 2, 1994 and the
results of 41 stores after May 6, 1995, closed as part of
the Company's restructuring prior to emergence from the
Chapter 11 Cases.
(c) Includes reorganization costs of $51.2 million, including
$53.7 million for costs of downsizing, less $7.6 million
gain on sale of assets held for sale.
(d) Includes reorganization costs of $106.5 million, including
$43 million for costs of downsizing and $53.2 million to
write-down property and equipment to the lower of appraised
or net book value.
(e) Includes reorganization costs of $16.7 million.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Introduction
The discussion of results of operations that follows is based upon the
Company's consolidated financial statements set forth on pages F-1 to F-26. The
discussion of liquidity and capital resources is based upon the Company's
current financial position. The accompanying financial review reflects the
significant impact of the events leading up to and following the Company's
emergence from bankruptcy. Certain information regarding the Chapter 11 Cases
and the Plan of Reorganization is set forth in Note 1 to the Consolidated
Financial Statements.
Upon the Company's emergence from bankruptcy, the Company adopted the
principles of fresh-start reporting as of the Effective Date to reflect the
impact of the reorganization. As a result of the application of fresh-start
reporting, the financial condition and results of operations of the Company for
dates and periods subsequent to the Effective Date will not necessarily be
comparable to those prior to the Effective Date.
Recent Developments and Outlook
The Company's results of operations and financial condition reflect the
impact of the recapitalization effected pursuant to the Plan of Reorganization
and the consolidation of operations following the Petition Date.
The Company significantly restructured its debt obligations at the
Effective Date. As part of the Plan of Reorganization, the Company converted
approximately $855 million of debt obligations to equity, obtained a $9.5
million net cash equity infusion, and entered into the Revolving Credit
Facility. See "Financial Condition and Liquidity" below.
In addition, since August 1992, the Company has put in place a series
of programs that are designed to reduce its expense structure and improve its
operations. These programs resulted in the closing of 209 stores and three
warehouses, the elimination of 75% of corporate level staff and the
implementation of three major information system improvements. See "Item 1.
Business."
Management believes that the recapitalization and the specific steps
taken to streamline the Company's business operations since the Petition Date
have yielded a significant improvement in the operating and financial profile of
the Company. The restructuring of the Company's debt obligations has
significantly reduced interest expense and enhanced financial flexibility. As a
result of the consolidation program, the Company has significantly reduced the
fixed cost elements of cost of sales and selling, general and administrative
expenses partially offset by declines in sales and gross margin dollars.
<PAGE>
Although there can be no assurance, management believes that the
Company is now well-positioned to enhance future profitability as economic and
competitive conditions improve in its markets. Management also believes that
additional gains may be realized through further reduction of expenses and
refinement of the Company's business operations, such as expansion of the
"Warehouse District" concept.
Changes in the federal minimum wage will increase the Company's future
labor costs. See "Item 1. Business - Regulation."
Results of Operations
The following table sets forth the number of retail stores operated each fiscal
year:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
June 28, 1997 June 29, 1996(a) July 1, 1995
------------- ---------------- ------------
<S> <C> <C> <C>
Stores, beginning of period 102 143 168
Stores opened 1 - -
Stores closed - (41) (25)
--- --- ---
Stores, end of period 103 102 143(b)
=== === ===
</TABLE>
(a) Includes the nine weeks ended September 2, 1995
(Predecessor) and the forty-three weeks ended June 29, 1996
(Successor).
(b) Includes 41 stores in the process of closing at July 1,
1995.
The historical results of operations exclude the results of the 25
stores closed in the fiscal year ended July 1, 1995 ("Fiscal Year 1995") (as
part of the Company's restructuring) after the date their closing was decided
(July 2, 1994) and the results of 41 stores closed in the fiscal year ended June
29, 1996 ("Fiscal Year 1996") (also part of the Company's restructuring) after
the date their closing was decided (May 6, 1995).
The Company's results of operations for the fifty-two weeks ended June
28, 1997 and the forty-three weeks ended June 29, 1996 are not comparable to its
results of operations for prior periods due to the Company's adoption of
fresh-start reporting as of September 2, 1995 (see Note 2 to the Consolidated
Financial Statements). For the purposes of the following discussion, the
following pro forma results of operations for Fiscal Year 1996 and Fiscal Year
1995 will be compared.
<PAGE>
Unaudited Pro Forma Statements of Operations
The following unaudited pro forma statements of operations present
consolidated results of operations of Phar-Mor and its subsidiaries for Fiscal
Year 1996 and Fiscal Year 1995 as if the Plan of Reorganization was effective
July 2, 1994 and includes adjustments to reflect the implementation of
fresh-start reporting as of July 2, 1994; the elimination of the 41 stores
closed in July 1995 from the results of Fiscal Year 1995; the effects of
non-recurring transactions resulting from the Plan of Reorganization; and
certain payments to creditors pursuant to the Plan of Reorganization as of July
2, 1994 (see Notes 1 and 2 to the Consolidated Financial Statements).
<TABLE>
<CAPTION>
(000's)
--------------------------------------------------
Fiscal Year 1996 Fiscal Year 1995
----------------------- -----------------------
<S> <C> <C> <C> <C>
Sales $ 1,056,252 100.00% $ 1,107,222 100.00%
Less:
Cost of goods sold, including occupancy and
distribution costs 869,237 82.30% 897,214 81.03%
---------- ----------
Gross Profit 187,015 17.70% 210,008 18.97%
Selling, general and administrative expenses 155,369 14.71 161,609 14.60%
Chapter 11 professional fee accrual adjustment (1,530) (0.15) -- --
Depreciation and amortization 18,319 1.73% 18,725 1.69%
---------- ----------
Income from operations before interest and
income taxes 14,857 1.41% 29,674 2.68%
Interest expense 17,465 1.65% 16,990 1.53%
Interest income 8,614 0.81% -- --
---------- ----------
Income before income taxes 6,006 0.57% 12,684 1.15%
Income tax provision 2,676 0.25% 5,074 0.46%
---------- ----------
Net income $ 3,330 0.32 $ 7,610 0.69%
========== ==========
</TABLE>
52 weeks ended June 28, 1997 (Fiscal Year 1997) compared to pro forma results
for the 52 weeks ended June 29, 1996 (Fiscal Year 1996) (all dollar amounts in
thousands)
<TABLE>
<CAPTION>
(000's)
Fiscal Year 1997
-----------------------
<S> <C> <C>
Sales $ 1,074,828 100.00%
Less:
Cost of goods sold, including occupancy and
distribution costs 873,095 81.23%
----------
Gross Profit 201,733 18.77%
Selling, general and administrative 168,218 15.65%
expenses
Terminated business combination expenses 3,076 0.29%
Depreciation and amortization 20,982 1.95%
----------
Income from operations before interest and
income taxes 9,457 0.88%
Interest expense 17,175 1.60%
Interest income 5,437 0.51%
----------
Loss before taxes (2,281) (0.21)%
Income tax provision --
----------
Net loss $ (2,281) (0.21)%
==========
</TABLE>
<PAGE>
Comparable store sales for Fiscal Year 1997 increased $14,000, or 1.3%,
from Fiscal Year 1996. This increase was due to the continued success of the
Company's new marketing approach begun in Fiscal Year 1996 and the success of
the Company's store remodel program. The increase in comparable store sales
achieved by the new marketing approach and the store remodel program was
partially offset by a reduced level of promotional activity in the second half
of the year and the discontinuance of certain promotional discounts.
Sales improved significantly in the five stores that were remodeled during
Fiscal Year 1997 with sales increasing 20.6% in the 13 weeks ended June 28, 1997
over the comparable period in Fiscal Year 1996.
Gross profit for Fiscal Year 1997 was 1.07% of sales higher than for Fiscal
Year 1996. Reductions in inventory shrink expense, promotional discount expense
and increases in vendor income were partially offset by a .06% of sales
reduction in product gross margins. Inventory shrink expense was reduced by .61%
of sales due to the success of several shrink reduction initiatives begun in
Fiscal Year 1996. Promotional discount expense was reduced .20% of sales due to
the discontinuance of certain promotional discount programs.
Selling, general and administrative expenses for Fiscal Year 1997 were .94%
of sales higher than for Fiscal Year 1996. Increases in store payroll and
corporate overhead costs were partially offset by lower advertising expenses.
Interest income decreased $3,177 in Fiscal Year 1997 from Fiscal Year 1996.
Fiscal Year 1996 included $3,135 in interest income received on federal income
tax refunds.
Pro forma results for the 52 weeks ended June 29, 1996 (Fiscal Year 1996)
compared to the pro forma results for the 52 weeks ended July 1, 1995 (Fiscal
Year 1995) (all dollar amounts in thousands)
Comparable store sales for Fiscal Year 1996 were down $50,970, or 4.6%,
from Fiscal Year 1995. This was due to the fact that (i) the Company had not
opened a new store since September 1992, while competitors opened a significant
number of new stores in the markets where the Company operates, and (ii) the
negative impact of penetration of third-party prescription plans and its impact
on the Company's pharmacy business. Sales improved over the last two quarters of
Fiscal Year 1996 as a result of the Company's new marketing approach, which was
launched January 14, 1996. Comparable store sales increased .04% in the fourth
quarter of Fiscal Year 1996 compared with the same period of the prior year with
June increasing 2.96%. The new marketing approach included retail price
reductions on over 3,000 items and additional advertising.
Gross profit for Fiscal Year 1996 was 1.27% of sales lower than Fiscal
Year 1995. The Company's new marketing approach resulted in a lower product
gross margin. Vendor rebate income was .39% of sales lower than Fiscal Year 1995
due primarily to the company's lower sales level in Fiscal Year 1996. Inventory
shrink and damage expenses were reduced by .42% of sales in Fiscal Year 1996
compared with Fiscal Year 1995.
Selling, general and administrative expenses for Fiscal Year 1996 were
0.11% of sales higher than Fiscal Year 1995. A 16.8% reduction in corporate
overhead cost was more than offset by increases in advertising expenses to
support the new marketing approach.
Fiscal Year 1996 included $5,479 in interest income on invested cash
and also included $3,135 in interest income received on federal income tax
refunds. The pro forma Fiscal Year 1995 results assumed the Company would not
have earned any interest income.
Financial Condition and Liquidity (all dollar amounts in thousands)
The Company's cash position as of June 28, 1997 was $79,847.
On September 11, 1995, the Company entered into a Revolving Credit
Facility (the "Facility") with BankAmerica Business Credit, Inc. ("BABC"), as
agent, and other financial institutions (collectively, the "Lenders"), that
established a credit facility in the maximum amount of $100,000.
<PAGE>
Borrowings under the Revolving Credit Facility may be used for working
capital needs and general corporate purposes. Up to $50,000 of the Facility at
any time may be used for standby and documentary letters of credit. The Facility
includes restrictions on, among other things, additional debt, capital
expenditures, investments, dividends and other distributions, mergers and
acquisitions, and contains covenants requiring the Company to meet a specified
quarterly minimum EBITDA Coverage Ratio (the sum of earnings before interest,
taxes, depreciation and amortization, as defined, divided by interest expense),
calculated on a rolling four quarter basis, and a monthly minimum net worth
test. As of the date hereof, the Company is in compliance with all such
financial covenants.
Credit availability under the Revolving Credit Facility at any time is
the lesser of the Aggregate Availability (as defined in the Facility) or
$100,000. The Revolving Credit Facility establishes a first priority lien and
security interest in the current assets of the Company, including, among other
items, cash, accounts receivable and inventory.
Advances made under the Revolving Credit Facility bear interest at the
BankAmerica reference rate plus 1/2% or London Interbank Offered Rate ("LIBOR")
plus the applicable margin (as defined in the Facility), which ranges between
1.50% and 2.00%. Under the terms of the Revolving Credit Facility, the Company
is required to pay a commitment fee of 0.28125% per annum on the unused portion
of the facility, letter of credit fees and certain other fees.
As of June 28, 1997, there were no outstanding advances and letters of
credit in the amount of $4,924 were outstanding under the Revolving Credit
Facility. The Revolving Credit Facility expires on September 10, 1998.
Pursuant to the Plan of Reorganization, the Company and its lenders
agreed to a restructuring of the Company's obligations. The resulting new debts
are discussed in Notes 8 and 9 to the Consolidated Financial Statements.
The Company's cash position decreased $24,418 during Fiscal Year 1997
as cash provided by operating activities of $11,460 was offset by $27,161 in
cash used for investing activities and $8,717 in cash used for financing
activities.
Merchandise inventories increased $16,258 during Fiscal Year 1997 due
to the opening of one new store, the stocking of an additional store that opened
in early July 1997 and increases in warehouse inventory levels as a result of
deal purchases that were made in June 1997.
The Company's cash position decreased $3,665 during the 43 weeks ended
June 29, 1996 as cash provided by operating activities of $16,021 was offset by
$13,829 in cash used for investing activities and $5,857 in cash used for
financing activities.
The Company generated cash from operations of $16,021 after payments of
Chapter 11 professional fees of $19,476. Inventories declined $15,534 during the
43 weeks ending June 29, 1996 due to continued emphasis on inventory control and
review of product category profitability. As part of this review the Company
determined that the music category of goods was not providing an adequate return
on the inventory invested and decided to exit the music category of goods. The
liquidation of this inventory resulted in a $5,713 reduction in inventory during
the 43 weeks ended June 29, 1996.
The Company increased its cash position by $5,606 from operating and
investing activities during the 9 weeks ended September 2, 1995 and used
$121,933 for reorganization activities including cash distributions pursuant to
the Plan of Reorganization. Consequently, the net decrease in cash position
during the 9 week period ended September 2, 1995 was $116,327.
The Company generated $8,129 from operations after net interest expense
(including adequate protection payments) and professional fees actually paid
that were associated with the Chapter 11 Cases, which totaled $6,479. The
Company invested $649 in property and equipment and $1,874 in rental video
tapes. The Company generated $11,951 in net proceeds from going out of business
("GOB") sales. The Company paid $1,079 of equipment capital leases obligations.
<PAGE>
During the 52 week period ended July 1, 1995, the Company's cash
position increased $29,056. The significant sources and uses of cash for the
period were as follows:
The Company generated $84,164 of cash from operations after net
interest expense (including adequate protection payments) and professional fees
actually paid that were associated with the Chapter 11 Cases, which together
totaled $32,592.
The Company generated $78,323 from GOB sales and sale of real property
in Boardman, Ohio and Jacksonville, Florida. Of this amount $46,330 was paid to
reduce principal on the Company's prepetition revolving credit facility debt and
prepetition senior notes. The Company also received $3,194 from the sale of
leasehold interests in 13 of the closed stores.
The Company invested $9,088 in property and equipment. The investments
were primarily for store "rightsizing," merchandising fixtures and financial
systems. The Company invested $11,925 in video rental tapes.
Trends, Demands, Commitments, Events or Uncertainties (all dollar amounts in
thousands)
Management believes the availability of the Revolving Credit Facility,
together with the Company's current cash position and expected cash flows from
operations for Fiscal Year 1998 will enable the Company to fund its working
capital needs and capital expenditures. Achievement of expected cash flows from
operations is dependent upon, among other things, the Company's attainment of
sales, gross profit and expense levels that are consistent with its financial
projections, and there can be no assurance that the Company will achieve its
expected cash flows.
Investment activities for Fiscal Year 1998 are expected to total
$27,400. The major expenditures are expected to be (i) video rental tapes
($8,300), (ii) rightsizing and remodeling of existing stores ($9,400), (iii)
systems and technology ($5,500) and (iv) new stores ($1,000). The Company
expects to finance and meet its obligations for these capital expenditures
through internally generated funds and the use of the Company's current cash
position.
Item 8. Financial Statements and Supplementary Data.
See Index to Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Under the terms of the Plan of Reorganization and Phar-Mor's Amended
and Restated Articles of Incorporation, each of the initial directors commenced
service as directors on September 11, 1995 and each will serve until the 1997
annual meeting of shareholders or until their successors are elected and duly
qualified.
The executive officers and directors of the Company as of the date
hereof are listed below:
Name Age Position(s)
- ---- --- -----------
M. David Schwartz 52 President and Chief Operating Officer
Sankar Krishnan 50 Senior Vice President and Chief Financial Officer
Warren E. Jeffery 48 Senior Vice President of Operations and Pharmacy
John R. Ficarro 45 Senior Vice President, Chief Administrative Officer,
General Counsel and Secretary
Michael K. Spear 52 Senior Vice President of Marketing and Merchandising
Abbey J. Butler 60 Director
Melvyn J. Estrin 55 Director
Malcolm T. Hopkins 69 Director
Richard M. McCarthy 60 Director
M. David Schwartz has served as President and Chief Operating Officer
of the Company since February 1993. From 1991 to 1993, he was a Director and the
President and Chief Executive Officer of Smitty's Super Valu, Inc., a food and
general merchandising retailer, and between 1987 and 1991 Mr. Schwartz served as
a Director and the President and Chief Operating Officer of Perry Drug Stores
Inc., a regional chain of 200 drug stores. Mr. Schwartz was Vice President of
Drug/General Manager for the Kroger Company between 1985 and 1987 and, between
1971 and 1985, held positions with Albertson's Inc. including Senior Vice
President of Marketing, Senior Vice President of Non-Foods Merchandising,
Distribution and Procurement, Vice President of Merchandising, and Non-Foods
Merchandise Manager. Mr. Schwartz attended Arizona State University.
Sankar Krishnan has served as Senior Vice President and Chief Financial
Officer of the Company since June 1997. From August 1993 to June 1997, Mr.
Krishnan served as Vice President - Corporate Controller of the Company. From
February until August 1993, Mr. Krishnan served as Pharmacy Business
Administrator of the Company. From 1991 until the time he joined Phar-Mor, Mr.
Krishnan served as Senior Vice President and Chief Financial Officer of Thrifty
Drug Stores. From 1988 to 1991, he served as Senior Vice President and Chief
Financial Officer of Lord & Taylor, a division of May Department Stores. He was
employed with Macy's from 1970 to 1988, serving as Senior Vice President and
Chief Financial Officer of Macy's New Jersey division from 1983 to 1988. Mr.
Krishnan received a Masters degree in Applied Science from the University of
Waterloo in Ontario, Canada, and a Bachelor of Technology degree from the
University of Madras, India.
<PAGE>
Warren E. Jeffery has served as Senior Vice President of Operations of
the Company since April 1996. Prior to that, Mr. Jeffery served as Vice
President of Operations, beginning February 1993. From 1992 to 1993, he served
as Regional Director - Store Operations for Revco D.S., Inc., operator of one of
the country's largest retail drug store chains. Mr. Jeffery was employed by
Perry Drug Stores from 1976 until 1992, holding various management positions,
including Vice President of Store Operations from 1988 to 1992. Mr. Jeffery
received a B.S. degree in pharmacy from Ferris State University.
John R. Ficarro has served as Senior Vice President and Chief
Administrative Officer in addition to his existing duties as General Counsel and
Secretary of the Company since June 1997. Prior to that, Mr. Ficarro served as
Vice President, General Counsel and Secretary of the Company beginning in
February 1995. From 1981 to 1995, Mr. Ficarro was employed by General Host
Corporation where he served as Vice President, General Counsel and Secretary
since 1989 and prior to that time served as Counsel to several of its retail
businesses. Prior to 1981, Mr. Ficarro practiced law at Titone & Roarke in Ft.
Lauderdale, Florida. Mr. Ficarro received a B.A. from the Maxwell School at
Syracuse University and a J.D. from its College of Law.
Michael K. Spear has served as Senior Vice President of Marketing and
Merchandising of the Company since July 1996. From 1995 to 1996, Mr. Spear
served as Executive Vice President Merchandising, Marketing, Information Systems
at Fred's, Inc., a regional grocery retailer located in Memphis, Tennessee.
Prior to that, Mr. Spear served in a number of positions with Wal-Mart from 1973
to 1995, beginning as store manager until his most recent position as Vice
President, Divisional Merchandise Manager Hardlines at Wal-Mart's Sam's Club.
Abbey J. Butler is Co-Chairman of the Board and Co-Chief Executive
Officer of Avatex Corporation ("Avatex"), formerly known as FoxMeyer Health
Corporation. Mr. Butler also serves as managing partner of Centaur Partners,
L.P., an investment partnership with ownership interests in Avatex, and as
President and a director of C.B. Equities Corp., a private investment company.
Mr. Butler presently serves as a director and a member of the Executive
Committee of FWB Bancorporation, the holding company of Grand Bank; and as a
director of Carson, Inc., a global manufacturer of ethnic hair care products for
African-Americans and persons of African descent, UroHealth Systems, Inc., a
developer, manufacturer and distributor for the urology, minimally invasive and
general surgery, and gynecology markets, and Cyclone, Incorporated, a
distributor and installer of chain link fence systems, highway guard rails and
industrial gates and posts. Mr. Butler is a trustee and a member of the
Executive Committee of the Board of Trustees of the American University, and a
director of the Starlight Foundation, a charitable organization. He was
appointed by President George Bush to serve on the President's Advisory
Committee on the Arts, and he now serves as a member of the Executive Committee
of the National Committee for the Performing Arts, John F. Kennedy Center,
Washington, D.C.
Melvyn J. Estrin is Co-Chairman of the Board and Co-Chief Executive
Officer of Avatex. Mr. Estrin also serves as managing partner of Centaur
Partners, L.P., an investment partnership, and as Chairman of the Board and
Chief Executive Officer of Human Service Group, Inc., a private management and
investment firm, and of University Research Corporation, a consulting firm. Mr.
Estrin presently serves as a director and member of the Executive Committee of
FWB Bancorporation, the holding company of Grand Bank; and as a director of
Washington Gas Light Company, Carson, Inc., a global manufacturer of ethnic hair
care products for African-Americans and persons of African descent, and
UroHealth Systems, Inc., a developer, manufacturer and distributor for the
urology, minimally invasive and general surgery, and gynecology markets. Mr.
Estrin has served as a Trustee of the University of Pennsylvania and was
appointed by President George Bush to serve as Commissioner of the National
Capital Planning Commission.
Malcolm T. Hopkins, a private investor and consultant since 1984, was
Vice Chairman, Chief Financial Officer, a member of the Board of Directors, and
a member of the three-man Senior Operating Committee of the St. Regis
Corporation until, in 1984, St. Regis was acquired by Champion International. In
addition to his corporate financial and administrative responsibilities at St.
Regis, Mr. Hopkins was the senior officer in charge of strategic planning,
international financial policy, and special government relations. He also had
senior operating responsibility for St. Regis' chemical and insurance
operations. Mr. Hopkins has served on the Board of Directors of the following
companies since the dates indicated: the Columbia Gas System, Inc. (1982),
MAPCO, Inc. (1986), the Metropolitan Series Funds (1985), various mutual funds
of State Street Research and Management Company (1997), EMCOR Group, Inc.
(1994), and U.S. Home Corporation (1993). He received an A. B. degree from Union
College and an L.L.B. degree from Albany Law School.
<PAGE>
Richard M. McCarthy has over thirty-years experience in credit and risk
management. From 1962 until his retirement in 1994, Mr. McCarthy held various
credit related position with Procter & Gamble Distributing Company, including
Manager of Systems Operations (1987), Manager of Credit and Accounts Receivable
(1989), and Manager of Credit and Risk Management (1991 to 1994). In this last
capacity, he was responsible for all of Procter & Gamble's domestic accounts
receivable. Mr. McCarthy was a member of the Board of Directors of the National
Association of Credit Management, the Cincinnati Association of Credit
Management, the National Health & Beauty Aids Credit Association, and the
National Food Manufacturers Credit Association. He holds a B.S. from Cornell
University and served as an officer in the United States Marine Corps from 1958
to 1961.
Committees of the Board of Directors; Meetings
The Board met seventeen times during Fiscal Year 1997. During Fiscal
Year 1997, each director attended all Board meetings during the time such person
was a member of the Board.
On August 27, 1996, FoxMeyer Drug Company filed a petition under
Chapter 11 of the United States Bankruptcy Code. At the time of the filing
Messrs. Butler and Estrin were executive officers and directors of FoxMeyer Drug
Company. On July 26, 1996, Ben Franklin Retail Stores, Inc. filed a petition for
protection under Chapter 11 of the United States Bankruptcy Code. At the time of
the filing, Messrs. Butler and Estrin were directors of Ben Franklin Retail
Stores, Inc.
The Board has a standing Audit Committee and a standing Compensation
Committee.
Audit Committee. The Audit Committee of the Board provides the Board
with an independent review of the Company's accounting policies, the adequacy of
financial controls and the reliability of financial information reported to the
public. The Audit Committee also conducts examinations of the affairs of the
Company as required by law or as directed by the Board, supervises the
activities of the internal audit department and reviews the services provided by
the independent auditors. For Fiscal Year 1997, the Audit Committee consisted of
Mr. Hopkins (the Committee Chairman) and Mr. McCarthy, and met three times. For
Fiscal Year 1998, the Audit Committee currently consists of Mr. Hopkins (the
Committee Chairman) and Mr. McCarthy.
Compensation Committee. The Compensation Committee of the Board
determines compensation and benefits for officers, reviews salary and benefit
changes for other senior officers, administers the Phar-Mor, Inc. 1995 Amended
and Restated Stock Incentive Plan (the "Phar-Mor Stock Incentive Plan"), the
Phar-Mor, Inc. 1995 Director Stock Plan (the "Phar-Mor Director Stock Plan"),
the Phar-Mor, Inc. 1996 Director Retirement Plan (the "Phar-Mor Director
Retirement Plan") and other employee benefits. For Fiscal Year 1997, the
Compensation Committee consisted of Ms. Linda Haft and Messrs. Butler (the
Committee Chairman), Estrin and Hopkins, and met one time. For Fiscal Year 1998,
the Compensation Committee currently consists of Messrs. Butler (the Committee
Chairman), Estrin and Hopkins.
Section 16(a) Beneficial Ownership Reporting Compliance. Pursuant to
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Company is required to identify any person who, at any time during
Fiscal Year 1997, was a director of the Company, an executive officer of the
Company or its subsidiaries or beneficial owner of more than 10% of the
Company's Common Stock or any other person who was subject to Section 16(a) of
the Exchange Act with respect to the Company that during Fiscal Year 1997 failed
to file on a timely basis with the S.E.C. any report required by Section 16(a)
of the Exchange Act, which are Form 3 (an initial report of beneficial ownership
of common stock) or on Form 4 or Form 5 (relating to changes in beneficial
ownership of common stock). Based solely on a review of such Forms 3, 4 and 5,
and amendments thereto, furnished to the Company by the reporting persons known
to it, as required by Rule 16a-3(e), except as set forth below, no reporting
person that was required during Fiscal Year 1997 to comply with Section 16(a) of
the Exchange Act failed to comply with such requirements. A Form 5 report was
not filed on a timely basis by directors Ms. Haft, and Messrs. Butler, Estrin,
Haft, Hopkins and McCarthy with respect to automatic grants of stock options of
5,000 shares each granted on October 1, 1996, and where applicable, with respect
to the automatic receipt of shares of Common Stock of the Company in lieu of all
or a portion of their annual retainer. A Form 4 report was not filed on a timely
basis by Mr. Spear with respect to options granted to him during Fiscal Year
1997 and a Form 3 initial filing report was not filed on a timely basis by Mr.
Krishnan during Fiscal Year 1997. All failures to timely file annual reports
were inadvertent and do not relate to the actual purchase of or sale of shares
of Common Stock of the Company.
<PAGE>
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth information concerning the compensation
of the Chief Executive Officer and the other four most highly compensated
executive officers of the Company who served in those capacities as of June 28,
1997 (the "Named Officers").
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
----------------------------------------------- ------------
Name and Fiscal Other Annual Stock All Other
Principal Position Year Salary ($) Bonus ($)(1) Compensation ($)(3) Options(#) Compensation ($)(4)
<S> <C> <C> <C> <C> <C> <C>
Robert M. Haft (5) 1997 972,000 583,200 -- 5,000 203,662
Former Chairman and CEO 1996 726,936 270,000 -- 256,250 66,637
M. David Schwartz 1997 620,076 620,076 -- -- 8,305
President and COO 1996 571,632 215,000 -- 175,000 505,548
1995 500,000 200,000 -- -- 2,602
Michael Spear 1997 275,000 325,000 -- 50,000 234,233
Senior Vice President -
Marketing and Merchandising
Warren E. Jeffery 1997 190,585 183,000 -- 50,000 6,671
Senior Vice President - Store 1996 176,265 50,000 -- 50,000 78,540
and Pharmacy Operations 1995 168,390 80,000 -- -- 875
John R. Ficarro 1997 186,791 173,000 -- -- 6,440
Senior Vice President, CAO 1996 155,016 50,000 -- 15,000 34,013
Secretary and General 1995 59,622 28,000 -- -- --
Counsel
<FN>
(1) Bonuses are shown for the fiscal year earned, but may be paid in the
following year.
(2) The $325,000 in bonus earned by Mr. Spear in Fiscal Year 1997 includes a
$100,000 "signing" bonus paid upon his acceptance of employment with the
Company and relocation of his residence to Youngstown, Ohio.
(3) No information is provided in the column labeled "Other Annual
Compensation" since the aggregate amount of perquisites and other personal
benefits for the periods indicated is less than the lesser of $50,000 or
10% of the total annual salary and bonus reported for each of the named
officers.
(4) Information provided in the column labeled "All Other Compensation" for
Fiscal Year 1997 includes the following: (i) the value of insurance
premiums paid by the Company for the benefit of each of the Named Officers
as follows: Mr. Haft, $183,941; Mr. Schwartz, $2,451; Mr. Spear, $2,451;
Mr. Jeffery, $2,455 and Mr. Ficarro, $2,451; (ii) matching contributions to
the Company's 401(k) Employee Savings and Retirement Plan to each of the
Named Officers as follows: Mr. Haft, $3,450; Mr. Schwartz, $5,854; Mr.
Jeffery, $4,216; and Mr. Ficarro, $3,989; (iii) moving expenses paid by the
Company for the benefit of each of the Named Officers as follows: Mr. Spear
$231,782; (iv) matching contributions to the Company's non-qualified
deferred compensation plan as follows: Mr. Haft, $16,271.
(5) Mr. Haft resigned as Chairman and CEO effective September 19, 1997.
</FN>
</TABLE>
<PAGE>
Option Grants in Fiscal Year 1997
Option Grants. The table below shows, for each of the Named Officers,
the number of options granted during Fiscal Year 1997. All of the options set
forth below were issued under the Phar-Mor Stock Incentive Plan, other than
options to purchase 5,000 shares granted to Mr. Haft (and each of the other
directors of the Company) under the Phar-Mor Director Stock Plan. As of June 28,
1997, no stock appreciation rights ("SARs") were outstanding.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Percent of Total Price Appreciation
Options Granted for Option Term (4)
Number of Securities to Employees (in thousands)
Name and Underlying Options Fiscal Year 1997 Exercise Expiration -------------------
Position Granted (#) (%) (3) Price ($/Sh) Date 5% ($) 10% ($)
- -------- ----------- ------- ------------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Robert Haft (1) 5,000 5.0 6.17 10/1/2001 9 19
M. David Schwartz - - - - - -
Michael Spear - - - - - -
Warren E. Jeffery (2) 50,000 50.0 5.44 6/5/2004 111 258
John R. Ficarro - - - - - -
<FN>
(1) The options issued to Mr. Haft under the Phar-Mor Director Stock Plan
vest immediately upon grant and have a term of 5 years.
(2) Options to purchase 50,000 shares granted to Mr. Jeffery under the
Phar-Mor Stock Incentive Plan vested with respect to 33 1/3% of the
underlying shares on the date of grant (June 5, 1997) and will vest in
additional increments of 33 1/3% of the underlying shares (subject to
adjustment) on each of the succeeding two anniversaries of such date.
(3) Based on a total of 100,000 options granted to employees of Phar-Mor.
(4) Annual growth-rate assumptions are prescribed by the rules of the SEC
and do not reflect actual or projected price appreciation of the
underlying Common Stock.
</FN>
</TABLE>
Excluded from this table are stock options to purchase a total of
300,000 shares that were granted as of June 5, 1997 to Mr. Haft (125,000
shares); Mr. Schwartz (100,000 shares); and Mr. Ficarro (75,000 shares). These
option grants were seven-year, non-qualified options at $5.4375 per share and
exercisable as to one-third on June 5, 1997 and as to one-third additionally on
the first and second anniversaries thereof. The grants of these options are
subject to shareholder approval of a proposed increase of available shares under
the Phar-Mor Stock Incentive Plan. See "-- Executive Compensation Plans -
Phar-Mor, Inc. 1995 Amended and Restated Stock Incentive Plan."
Option Exercises and Values
Except as otherwise indicated in the foregoing table, the options
granted under the Phar-Mor Stock Incentive Plan vested with respect to 20% of
the underlying shares on each of September 11, 1995, September 11, 1996 and
September 11, 1997, and will vest in additional increments of 20% of the
underlying shares (subject to adjustment) on September 11, 1998 and September
11, 1999. All options under the Phar-Mor Stock Incentive Plan (except for those
held by Mr. Haft) will be subject to early termination within periods of up to
one year (depending on the cause of a termination of service) after the
effective date of a termination of service under the Phar-Mor Stock Incentive
Plan or (if applicable) the expiration date under an applicable employment
agreement. Except for Mr. Haft, (i) to the extent then not vested, the options
will terminate and (ii) to the extent then vested, they may be exercised within
<PAGE>
one year following the death or disability of the holder of the option, and
within six months following any other termination event, except where a
termination by the Company is for cause, in which case the options then will
terminate.
Option Exercises and Values for Fiscal Year 1997
The following table sets forth certain information concerning the
exercise of stock options, the number of unexercised options, and the values of
unexercised options at June 28, 1997 for the Named Executive Officers. Value is
considered to be, in the case of exercised options, the difference between the
exercised price and the market price on the date of exercise and, in the case of
unexercised options, the difference between the exercise price and the market
price on June 28, 1997.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTIONS VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Acquired Options at June 28, 1997 June 28, 1997 ($)
Name On Exercise (#) Value Realized ($) (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- ---- --------------- ------------------ --------------------------- ---------------------------
<S> <C> <C> <C> <C>
Robert M. Haft -- -- 112,500/143,750 $391/$0
M. David Schwartz -- -- 70,000/105,000 --
Michael Spear -- -- 10,000/40,000 --
Warren E. Jeffery -- -- 36,667/63,333 $13,542/$27,083
John R. Ficarro -- -- 6,000/9,000 --
</TABLE>
Executive Compensation Plans
Phar-Mor, Inc. 1995 Amended and Restated Stock Incentive Plan. The
Phar-Mor Stock Incentive Plan was adopted in order to attract, reward and retain
key personnel (including officers, whether or not directors) of the Company and
its subsidiaries and certain other closely related eligible persons who provide
substantial services to such entities ("Eligible Persons") and to provide them
with long-term incentives that are linked to the Company's stock performance.
Approximately 9 officers and approximately 414 other employees of the Company
and its subsidiaries are currently eligible to participate under the Phar-Mor
Stock Incentive Plan.
The Phar-Mor Stock Incentive Plan is administered by the Compensation
Committee of the Board (the "Administrator"). A maximum of 913,333 shares of the
Company's Common Stock (subject to adjustment) may be issued upon the exercise
of awards granted under the Phar-Mor Stock Incentive Plan. As of June 28, 1997,
a total of 844,150 shares of the Company's Common Stock were subject to options
granted under the Phar-Mor Stock Incentive Plan.
The Phar-Mor Stock Incentive Plan authorizes the issuance of options
and (subject to plan limitations) certain stock appreciation rights ("SARs"). As
is customary in incentive plans of this nature, the number and kind of shares
available under the Phar-Mor Stock Incentive Plan, share limits, and shares
subject to outstanding awards are subject to adjustment in the event of certain
reorganizations, recapitalization's, stock splits, stock dividends, spin-offs,
property distributions or other similar extraordinary transactions or events in
respect of the Company or the shares of the Company. Shares relating to options
or SARs that are not exercised or that expire or are canceled will again become
available for grant purposes under the Phar-Mor Stock Incentive Plan to the
extent permitted by law and the plan. Awards may be repriced or otherwise
amended after grant, provided that the amendment does not adversely affect the
holder's rights without his or her consent. A maximum of 277,778 shares of the
Company's Common Stock may be subject to options that during any twelve month
period are granted to any Eligible Person under the Phar-Mor Stock Incentive
Plan.
The exercise price of the options granted under the Phar-Mor Stock
Incentive Plan generally may not be less than the fair market value of the
Company's Common Stock on the date of grant or such greater amount as may be
determined by the Administrator. An option may either be an incentive stock
<PAGE>
option, as defined in the Code, or a non-qualified stock option. All 844,150
options granted pursuant to the Phar-Mor Stock Incentive Plan as of June 28,
1997 are non-qualified stock options. The aggregate fair market value of the
Common Stock (determined at the time the option is granted) for which incentive
stock options may be first exercisable by an option holder during any calendar
year under the Phar-Mor Stock Incentive Plan or any other plan of the Company or
its subsidiaries may not exceed $100,000. A non-qualified stock option is not
subject to any of these limitations.
Subject to early termination or acceleration provisions (which are
summarized below), an option generally will be exercisable, in whole or in part,
from the date specified in the related award agreement until the expiration
date, all as determined by the Administrator. Earlier expiration may occur
following a termination of service. In no event, however, is an option under the
Phar-Mor Stock Incentive Plan exercisable more than seven years after its date
of grant.
Upon the occurrence of either (A) a Change in Control Event (as defined
in the Phar-Mor Stock Incentive Plan to include, but not be limited to, (i) the
approval by the shareholders of the Company of a dissolution or liquidation,
(ii) certain agreements of merger or consolidation resulting in the Company's
shareholders, or entities associated or affiliated with them, holding less than
50% of the voting stock of the surviving entity, (iii) the sale of substantially
all the assets of the Company as an entirety to a person that is not an
affiliated person of the Company, (iv) a person or group (other than Robert M.
Haft, Hamilton Morgan or other 25% owners as of September 11, 1995 and certain
related entities) acquiring beneficial ownership of over 50% of the voting
power, or (v) certain changes in the composition of the Board), or (B) under
other circumstances (such as a termination of service), the Administrator, in
its discretion, may provide for acceleration or extension of the exercisability
of awards, or provide for certain other limited benefits, which may include
SARs, under some or all awards and may determine the extent, duration and other
conditions of such additional rights by amendment to outstanding awards or
otherwise. The Board may terminate or amend the Phar-Mor Stock Incentive Plan,
subject to the rights of holders of outstanding options. If an amendment would
(i) materially increase the benefits accruing to Eligible Persons under the
Phar-Mor Stock Incentive Plan, (ii) materially increase the aggregate number of
shares that may be issued under the Phar-Mor Stock Incentive Plan, or (iii)
materially modify the eligibility requirements for participation under the
Phar-Mor Stock Incentive Plan, the amendment, to the extent deemed necessary by
the Board or the Administrator or then required by applicable law, must be
approved by the shareholders.
An amendment to the Phar-Mor Stock Incentive Plan increasing the number
of shares available under the Phar-Mor Stock Incentive Plan from 913,333 to 1.75
million has been approved by the Board, but has not yet been approved by the
shareholders. Options to purchase a total of 375,000 shares have been granted to
certain executive officers subject to the approval of this amendment by the
shareholders.
401(k) Employee Savings Plan. Employees of the Company are eligible to
participate in the 401(k) Employee Savings Plan (the "401(k) Plan"). The 401(k)
Plan is a tax-qualified profit sharing plan that provides for pre-tax deferrals
by employees and employer matching and profit-sharing contributions. In
addition, warehouse employees and drivers are eligible to participate in a
separate 401(k) savings plan.
Retirement Plan. The Company maintains a noncontributory retirement
plan (the "Retirement Plan") that provides benefits, following retirement at age
65 or older with one or more years of credited service (or age 55 with five or
more years of credited service), to salaried, non-union employees, including
officers of the Company. The Retirement Plan provides a monthly pension for life
to supplement personal savings and Social Security benefits. The following table
shows as of June 28, 1997 the estimated annual benefits payable upon retirement
at age 65 under the Retirement Plan by specified compensation and years of
service classification applicable to officers:
Average Annual 15 Years 20 Years 25 Years 30 or More
Compensation Service Service Service Years Service
------------ ------- ------- ------- -------------
$100,000 . . . . . . . . . . . $14,109 $18 182 $23,515 $28,218
$150,000 . . . . . . . . . . . $21,984 $29,312 $36,640 $43,968
The amounts shown in the table are based on an assumed continued
applicability of the $150,000 compensation limit for qualified plans under the
Code. Each year's accrued benefit under the Retirement Plan is 0.6% of final
average annual compensation not in excess of a rolling average of the last 35
years annual social security wage base, plus 1.05% of final average annual
<PAGE>
compensation in excess of such average wage base, multiplied by years of
credited service up to a maximum of 30 years. The estimated annual retirement
benefits, for the individuals named below, were developed based on 1995
compensation, projected covered compensation, and the respective dates of birth
and projected credited service at normal retirement age under the Retirement
Plan. The credited years of service as of June 29, 1997 for individuals named in
the Summary Compensation Table who are eligible to participate in the Retirement
Plan are as follows: Mr. Schwartz - 4 years; Mr. Jeffrey - 4 years; and Mr.
Ficarro - 2 years. The plan was frozen as of June 29, 1996. Assuming these
individuals remain employed until the vesting period is reached, their estimated
annual retirement benefits under the plan will be: Mr. Schwartz - $7,516; Mr.
Jeffrey - $5,585; and Mr. Ficarro - $2,934.
To the extent permitted by law, the minimum eligibility and vesting
provisions under these and other retirement, health and welfare benefit plans
were waived for Mr. Haft under the terms of his employment agreement.
Other Pension Plans. In addition to the Retirement Plan discussed
above, the Company maintains two other pension plans for various groups of
employees: (i) the Phar-Mor, Inc. Retirement Plan for Hourly Employees at Niles,
Ohio Store and (ii) Tamco Distributors Company Warehouse and Drivers Pension
Plan (collectively, the "Pension Plans"). The Pension Plans are defined benefit
plans subject to the Employee Retirement Income Security Act of 1974 (as
amended, "ERISA").
Corporate Executive Bonus Plan. Under the Company's Corporate Executive
Bonus Plan for Fiscal Year 1997 (the "1997 Bonus Plan"), certain executive
officers would be eligible to receive a cash bonus if the Company achieved a
pre-established level of performance for the fiscal year. The participating
executive would receive at least 60% of his or her individual targeted
percentage bonus ("target bonus") if this performance were at target, and 35% of
the target bonus (e.g., if the target bonus is 50%, 35% of 50%) if the Company's
performance were at entry level; the remaining amount (up to 40%) was subject to
the discretion of the Board. If the Company did not achieve the targeted level
of performance, but achieved an "entry level" or minimum performance threshold
for payment of bonuses established by the Board, the specific bonus amount
between minimum and target bonus levels would be extrapolated, pro rata, based
on the relationship of actual performance to the entry and target levels of
performance; 60% of such amount would be mandatory and up to 40% discretionary.
For Fiscal Year 1997, total bonuses of $3,209,000 were paid to 116 employees
under the 1997 Bonus Plan.
Mr. Haft's annual cash bonus rights under his employment agreement
(which are subject to each year's bonus plan, or otherwise provided for under
separate agreement with the Company) are fixed at a maximum of 60% of base
salary, but are not be subject to the 60/40 discretionary allocation applicable
to other executives. If the Company's performance reaches the target performance
level, the full 60% target bonus will be payable to him; if the Company's
performance reaches the entry level performance, a 21% minimum bonus will be
paid, with the actual bonus amount between 21% and 60% to be determined by the
extrapolation methodology described above. See "-- Employment Contracts and
Termination of Employment and Change-In-Control Arrangements - Mr. Robert Haft."
Compensation of Directors
Each director of the Company (other than Mr. Haft, who waived such fees
for as long as Mr. Haft was also an officer of the Company) receives an annual
retainer fee of $25,000 and an attendance fee of $1,000 ($2,000 in the case of a
committee chairman) for each meeting of the Board, and of each of the committees
of the Board attended, other than committee meetings occurring on a date on
which a Board meeting is scheduled. All directors are also reimbursed for travel
and other out-of-pocket expenses incurred by them in attending Board or
committee meetings.
Pursuant to the Phar-Mor Director Stock Plan, directors receive an
annual grant of options to purchase 5,000 shares of Common Stock, and may elect
to receive additional shares of Common Stock in lieu of all or a portion of
their annual retainer. Directors may elect to defer payment of all or a portion
of their annual retainer under a non-qualified, unfunded deferred compensation
plan. Deferred amounts are invested, at the election of the director, in an
interest-bearing account or a stock equivalent account. The amounts deferred,
plus any appreciation thereon, are paid in cash on the dates specified by the
director. The Phar-Mor Director Stock Plan has been approved by the Board, but
has not yet been approved by the shareholders.
<PAGE>
Pursuant to the Phar-Mor Director Retirement Plan, the Company credits
each director of the Company who is not an employee of the Company or a
subsidiary of the Company and who has served as director for at least three
years (an "Eligible Director") annually, commencing in October 1996, with that
number of shares of Common Stock whose aggregate fair market value on a date as
specified under the Phar-Mor Director Retirement Plan equals the amount of the
then current annual retainer payable to such Eligible Director, or such other
amount as may be determined by resolution of the Compensation Committee of the
Board. The award is not in the form of actual shares of Common Stock, and no
shares of Common Stock will be set aside for the benefit of Eligible Directors
under the Phar-Mor Director Retirement Plan. The number of shares of Common
Stock in each retirement share account is subject to adjustment for dilution or
otherwise as set forth in the Phar-Mor Director Retirement Plan. The Phar-Mor
Director Retirement Plan has been approved by the Board, but has not yet been
approved by the shareholders.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
The Company has entered into employment agreements with Messrs. Haft,
Schwartz, Spear, Jeffery and Ficarro each of which is described below.
Mr. Robert Haft. On September 19, 1997, in connection with the
consummation of the transactions contemplated by the HM Redemption Agreement (as
defined and discussed below under "Security Ownership of Certain Beneficial
Owners and Management -- Potential Change of Control"), the Company and Mr. Haft
entered into a severance agreement (the "Severance Agreement"), pursuant to
which Mr. Haft resigned as Chairman of the Board and Chief Executive Officer of
the Company and received a lump-sum cash payment of $4,417,000. In the event a
long-term performance payment becomes payable to Mr. Haft pursuant to his
employment agreement, it will be paid at 75% of the amount provided for in the
employment agreement. The terms of the long term performance payout provided for
in Mr. Haft's employment agreement were as follows: commencing with Fiscal Year
1998 and each third year thereafter during the term of the employment agreement,
Mr. Haft would receive a long-term performance payout in an amount (subject to
the offset referred to in the last sentence of this paragraph) equal to 3% of
any excess of (i) the aggregate market value of the publicly-traded shares of
Common Stock based on the average closing price for the thirty (30)-day period
ending on the last day of the subject period ( less the sum of (a) the proceeds
from the exercise during such period of any options or warrants plus (b) any
cash or property consideration actually received by the Company during such
period from the issuance of any shares of its Common Stock) over (ii) the
aggregate market value of the publicly-traded shares of Common Stock based on
the average closing price for the thirty (30)-day period ending on the last day
of the immediately prior subject period (provided that for the first day of the
period ending on June 30, 1998, such average closing price shall be deemed to be
$8.00 per share). One-half of the aggregate annual bonuses paid or payable in
respect of the applicable three-year period will be offset against the long-term
payout amount.
In addition, pursuant to the Severance Agreement, the Company agreed to
continue to provide benefits to Mr. Haft through September 19, 2000 and maintain
Mr. Haft's Washington, D.C. office and his current secretary through September
19, 1999. Mr. Haft has until February 2000, October 2000 and October 2001 to
exercise earlier granted options and 180 days from the approval by shareholders
of the increase in available shares under the Phar-Mor Stock Incentive Plan to
exercise his most recent options. The most recent grant was to purchase 125,000
shares at a price of $5.437 per share and is fully exercisable during the
180-day period. The Company also agreed to indemnify Mr. Haft and provide him
with tax reimbursement with respect to any payments that constitute excess
parachute payments under Federal income tax laws. The Company further agreed to
provide a letter of credit in the amount of approximately $2.9 million to secure
its contractual obligations under the Severance Agreement. Mr. Haft and the
Company released each other from all claims, except claims by Mr. Haft against
Messrs. Butler and Estrin other than in their capacities as members of the
Board. See "Certain Relationships and Related Transactions --Hamilton Morgan."
The principal terms of the employment agreement between the Company and
Mr. Haft, which was in effect prior to the execution and delivery of the
Severance Agreement are described below. The employment agreement with Mr. Haft
had a rolling three-year term commencing on September 11, 1995 that provided for
Mr. Haft to serve as Chief Executive Officer and Chairman of the Board. Mr.
Haft's initial annual base salary was $900,000 subject to annual cumulative
increases of 8%. The agreement provided for an annual incentive bonus under a
<PAGE>
Company-sponsored bonus plan (if a bonus plan were approved, or otherwise as
provided under a separate agreement between the Company and Mr. Haft), if
reasonable performance objectives approved by the Board were achieved, with a
maximum bonus of 60% and a minimum bonus of 21% of annual base salary,
commencing in Fiscal Year 1996.
Mr. Haft was also granted options to purchase 256,250 shares of Common
Stock at $8.00 per share under the Phar-Mor Stock Incentive Plan. Mr. Haft's
employment agreement provided for additional benefits in the future not less
favorable than those provided under options granted or to be granted to other
executives during the term of the employment agreement.
Pursuant to his employment agreement, Mr. Haft was permitted to engage
in activities, in addition to serving as Chief Executive Officer and Chairman of
the Board, and pursue other investments (including activities that were
competitive with the Company's business provided that they did not unreasonably
impede the performance of his duties for the Company and did not violate
applicable legal requirements). The Board had the authority to terminate Mr.
Haft's employment without compensation under certain circumstances. The
agreement did not require Mr. Haft to provide services at the Company's
principal locations. Mr. Haft could have resigned at any time without violating
the agreement, although his resignation without cause and without the Board's
consent would otherwise have been treated like a termination for cause by the
Company.
The employment agreement with Mr. Haft further provided for various
employee benefits and perquisites, including but not limited to payment, on a
tax reimbursed, "grossed up" basis, for a $3,000,000 whole life insurance policy
on Mr. Haft's life or, at Mr. Haft's election, a term policy requiring an
equivalent premium; disability insurance adequate to pay Mr. Haft 60% of base
salary until age 70; reimbursement of all medical and dental costs for Mr. Haft
and his family; the use of a company-owned car; and business expenses at
locations other than the Company's headquarters. The agreement with Mr. Haft
provided that, if it were terminated other than for cause, he would have been
entitled to the present value of his base salary, discounted at 5%, for the
remaining contract term, annual and long-term incentive payments payable for the
remaining contract term, annual and long-term incentive payments payable for the
remainder of the term, the accelerated vesting (and extended post-termination
exercise periods) of all outstanding stock options, continued health and other
benefits and tax reimbursement in respect of any termination payments that
constitute excess parachute payments under Federal income tax laws. A
termination for cause by the Company, under the agreement, was limited to death,
permanent disability (as defined), acts of moral turpitude concerning the
Company, voluntary resignation, or the entry of a felony conviction.
Mr. Haft's annual cash bonus rights under his employment agreement
(which were subject to each year's bonus plan, or otherwise provided for under
separate agreement with the Company) were fixed at a maximum of 60% of base
salary, but were not subject to the 60/40 discretionary allocation applicable to
other executives. If the Company's performance reached the target performance
level, the full 60% target bonus would have been payable to him; if the
Company's performance reached the entry level performance, a 21% minimum bonus
would have been payable to him, with the actual bonus amount between 21% and 60%
to be determined by the extrapolation methodology described above.
Mr. Haft's employment agreement provided for accelerated vesting and
exercisability of all options if Mr. Haft were terminated without cause or if he
was terminated for "good reason" because of certain unilateral material changes
to certain terms of his service or other events (as more fully defined in the
agreement). Mr. Haft's options in such circumstances were exercisable at any
time within 4 1/2 years after September 11, 1995.
Under the terms of Mr. Haft's employment agreement and grant of
options, the Company agreed to loan Mr. Haft an amount equal to the exercise
price of the options (upon exercise). No loans were ever made to Mr. Haft.
The employment agreement with Mr. Haft provided that upon a change in
control (as defined) Mr. Haft had the right for 90 days to terminate the
agreement without cause and realize the present value of the full (and certain
accelerated) benefits under the agreement for what would otherwise be the
remaining term, as in the case of a termination by the Company without cause. A
change in control under the agreement included (among other events) the removal
of or failure to elect Mr. Haft Chairman of the Board, his involuntary
<PAGE>
disassociation from Hamilton Morgan LLC under certain circumstances by reason of
the operation of the Hamilton Morgan LLC Operating Agreement buy-sell provision,
certain changes in ownership involving 50% or more of the voting stock (or
voting control) of the Company, the sale of all or substantially all of the
assets of the Company, certain fundamental changes in the nature of its business
approved by shareholders, certain changes affecting a majority of the Board, or
the acquisition by any person or group (other than existing 25% holders or
persons affiliated with Mr. Haft or FoxMeyer Corporation) of 50% or more control
of the assets or voting stock of the Company. Such a termination by Mr. Haft
would be deemed a termination without cause by the Company and entitle him to
the rights attendant thereto, in addition to certain reimbursement for any
excise taxes thereon on a "grossed-up" basis.
Mr. M. David Schwartz. Mr. Schwartz executed a new employment agreement
with the Company on June 5, 1997. The employment agreement with Mr. Schwartz has
a term of two years and provides for Mr. Schwartz to serve as the Company's
President and Chief Operating Officer. Mr. Schwartz's annual base salary is
$636,000 for the first year of the term, which increase is retroactive to
December 9, 1996, and then increases to $675,000 for the second year of the
term. The agreement provides for an annual incentive bonus if the Company
achieves certain performance objectives approved by the Board, with a target
bonus of not less than 60% of his annual base salary and a maximum of 100% of
annual base salary, as further described below. A target bonus of 60% of his
current annual base salary is guaranteed for Fiscal Year 1997. In addition to
the options to purchase 175,000 shares of Common Stock at $8.00 per share under
the Phar-Mor Stock Incentive Plan and a confirmation bonus of $450,000 plus
6,250 shares of Common Stock which Mr. Schwartz was previously granted, Mr.
Schwartz was granted options to purchase an additional 100,000 shares of Common
Stock at $ 5.4375 per share under the Phar-Mor Stock Incentive Plan (subject to
shareholder approval of an amendment to increase the number of shares available
under the plan from 933,333 to 1.75 million), which options vest with respect to
one-third of the underlying shares on each of the date of grant (June 5, 1997),
the first anniversary of the date of grant, and the second anniversary of the
date of grant. The term of the options are seven years.
Mr. Michael K. Spear. The employment agreement with Mr. Spear is
at-will, and provides for Mr. Spear to serve as Senior Vice President of
Merchandise and Marketing of the Company. Mr. Spear's annual base salary is
$275,000 for the first year of his employment, $325,000 for the second year of
his employment, $375,000 for the third year of his employment, and $400,000 for
the fourth year of his employment. The agreement provides for an annual
incentive bonus if the Company achieves certain performance objectives approved
by the Board, with a target bonus of 40% of his annual base salary and a maximum
of 100% of annual base salary, as further described below. A bonus of $115,000
is guaranteed for each of Fiscal Year 1997 and Fiscal Year 1998. A bonus of
$100,000 is guaranteed for Fiscal Year 1999 and a bonus of $60,000 is guaranteed
for Fiscal Year 2000. On May 14, 1996, Mr. Spear was granted an option to
purchase 50,000 shares of Common Stock at $7.625 per share under the Phar-Mor
Stock Incentive Plan. On July 8, 1997, Mr. Spear was awarded an additional
option to purchase 50,000 shares of Common Stock at $6.50 per share under the
Phar-Mor Stock Incentive Plan. This seven year option vested as to one third on
the grant date and vests as to an additional one third on each of the first and
second anniversaries of the grant date. Mr. Spear received a cash bonus of
$100,000 upon relocating his residence to the Youngstown, Ohio area in late
1996. If Mr. Spear voluntarily terminates his employment after being employed by
the Company for one year but prior to being employed by the Company for two
years, 50% of the bonus must be repaid.
Mr. Warren E. Jeffery. The employment agreement with Mr. Jeffrey is
at-will, and provides for Mr. Jeffery to serve as Senior Vice President-Store
and Pharmacy Operations of the Company. Mr. Jeffery's annual base salary is
$200,000. The agreement provides for an annual incentive bonus if the Company
achieves certain performance objectives approved by the Board, with a target
bonus of 40% of his annual base salary. In addition to the options that Mr.
Jeffery currently holds, he was granted an option to purchase an additional
50,000 shares of Common Stock at $5.4375 per share under the Phar-Mor Stock
Incentive Plan, which option vests with respect to one-third of the underlying
shares on each of June 5, 1997, June 5, 1998, and June 5, 1999. The term of the
options are seven years.
Mr. John R. Ficarro. The employment agreement with Mr. Ficarro has a
term of two years commencing on June 5, 1997 and terminating on June 5, 1999,
and provides for Mr. Ficarro to serve as Senior Vice President/ Chief
Administrative Officer and General Counsel of the Company. Mr. Ficarro's annual
base salary is $195,000 for the first year of the term, which increase is
retroactive to December 9, 1996, and then increases to $206,700 for the second
year of the term. The agreement provides for an annual incentive bonus if the
Company achieves certain performance objectives approved by the Board, with a
target bonus of not less than 40% of his annual base salary and a maximum of
<PAGE>
100% of annual base salary, as further described below. A target bonus of 35% of
his current annual base salary is guaranteed for Fiscal Year 1997. In addition
to the options to purchase 15,000 shares of Common Stock at $8.00 per share
under the Phar-Mor Stock Incentive Plan which Mr. Ficarro was previously
granted, Mr. Ficarro was granted options to purchase an additional 75,000 shares
of Common Stock at $5.4375 per share under the Phar-Mor Stock Incentive Plan
(subject to shareholder approval of an amendment to increase the number of
shares available under the plan from 933,333 to 1.75 million), which options
vest with respect to one-third of the underlying shares on each of the date of
grant (June 5, 1997), the first anniversary of the date of grant, and the second
anniversary of the date of grant. The term of the options are seven years.
The general terms of the options granted to Messrs. Haft, Schwartz,
Spear, Jeffery and Ficarro are summarized above. Each of the employment
agreements (except the employment agreements of Messrs. Jeffery and Spear)
provides for accelerated vesting and exercisability of all options if the
employee is terminated without cause or if he terminates for "good reason"
because of certain unilateral material changes to certain terms of his service
or other events (as more fully defined in the agreements).
Loans. The Phar-Mor Stock Incentive Plan authorizes the Administrator
to make loans to optionees to pay the exercise price of options, subject to
specified conditions. Mr. Spear's employment agreement specifically provides
that he will be entitled to receive loans from the Company to facilitate the
exercise of his options.
Severance Plan. The Company's current severance plan, as it applies to
officers generally, provides for payment of severance pay equal to salary at the
time of termination for a period of 26 weeks, plus one additional week for each
year of service, up to ten years. On March 27, 1997, the Company approved an
amendment to its existing severance plan, enhancing benefits to all employees,
including executive officers, whereby all such employees would receive
additional severance payments upon loss of employment due to certain "change of
control" events. Generally, executive officers would receive 18 months of pay in
such event.
The employment agreements for Messrs. Schwartz and Ficarro provide, in
the case of a termination by the Company during the first year of the agreement
without cause or by them "for good reason," for a severance payment equal to two
year's total compensation (which includes salary plus average bonus paid to them
over the previous two years), and in the case of a termination by the Company
after the first year of the agreement without cause or by them "for good
reason," for a severance payment equal to 1.5 times one year's total
compensation (which includes salary plus average bonus paid to them over the
previous two years).
The employment agreement for Mr. Jeffery provides, in the case of a
termination of the agreement by the Company within the period ending two years
from June 16, 1997 without cause, for a severance payment equal to the
continuation of Mr. Jeffery's base salary for a period of one year after the
date of termination and the continuation of all medical benefits during such
period. "Cause" is defined as a determination in good faith by the Company of
Mr. Jeffery's personal dishonesty, gross negligence, willful misconduct,
habitual use of alcoholic beverage or other substance abuse, or upon his
conviction of any offense punishable by imprisonment of one year or more.
The employment agreement for Mr. Spear provides, in the case of a
termination of the agreement by the Company within the period ending two years
from his employment commencement date without cause, for a severance payment
equal to the continuation of Mr. Spear's base salary (including any guaranteed
increases) for a period of one year after the date of termination and the
continuation of all medical benefits during such period. "Cause" is defined as a
determination in good faith by the Company of Mr. Spear's personal dishonesty,
gross negligence, willful misconduct, habitual use of alcoholic beverage or
other substance abuse, or upon his conviction of any offense punishable by
imprisonment of one year or more. After two years, Mr. Spear will be subject to
the Company's severance plan described above.
Change in Control Consequences for Messrs. Schwartz and Ficarro. The
employment agreements with Messrs. Schwartz and Ficarro provide that upon a
change of control (as defined) each named executive will have the right to
terminate the agreement for "good reason" and receive the full benefits
thereunder as in the case of a termination by the Company without cause. A
change of control under each agreement may include (among other events) (a) the
acquisition by any individual, entity or group of beneficial ownership of 20% or
<PAGE>
more of either (i) the then outstanding shares of Common Stock of the Company,
or (ii) the combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors of the
Company; or (b) individuals who, as of the date of the employment agreement,
constitute the Board of Directors of the Company, cease for any reason to
constitute at least a majority thereof; or (c) approval by the shareholders of
the Company of a reorganization, merger or consolidation which results in a
change of ownership and/or voting rights of 30% or more of (i) the then
outstanding shares of Common Stock of the Company, or (ii) the members of the
Board do not remain members of the Board of the entity resulting from such
reorganization, merger or consolidation; or (d) approval by the shareholders of
the Company of a liquidation or a dissolution of the Company, or the sale or
other disposition or substantially all of the assets of the Company. A change in
control does not include any change in ownership of the Company's common stock
resulting from any transaction among the principals of Hamilton Morgan.
Compensation Committee Interlocks and Insider Participation
Ms. Haft and Messrs. Butler (the Committee Chairman), Estrin and
Hopkins served as members of the Compensation Committee during Fiscal Year 1997.
Ms. Haft and Mr. Hopkins are independent directors. Messrs. Butler and Estrin
are co-Chief Executive Officers, Co-Chairmen of the Board, and major
shareholders of Avatex and FoxMeyer Corporation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Set forth in the table below is information, as of September 19, 1997,
with respect to the number of shares of Common Stock beneficially owned by (i)
each person or entity known by the Company to own more than five percent of the
outstanding Common Stock, (ii) each person who is a director of the Company and
(iii) each of the Named Officers (as defined in Item 11). A person or entity is
considered to "beneficially own" any shares (i) over which such person or entity
exercises sole or shared voting or investment power or (ii) which such person or
entity has the right to acquire at any time within 60 days (e.g., through the
exercise of options or warrants).
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature Percent Number of Shares Which May
Name and Address of of Beneficial of be Acquired
Beneficial Owner (1) Ownership (2) Class Within 60 Days (3)
-------------------- ------------- ----- ------------------
<S> <C> <C> <C>
Avatex Corporation 4,795,935(4) 39.1% 91,902(5)
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
Pioneering Management Corporation 1,256,200(6) 10.33% --
60 State Street
Boston MA 02109
The TCW Group, Inc. 878,300(6) 7.22% --
865 South Figueroa Street
Los Angeles, CA 90017
M. David Schwartz 111,250 * 105,000(7)
20 Federal Plaza West
Youngstown, Ohio 44501
Michael Spear 20,000 * 20,000(7)
20 Federal Plaza West
Youngstown, Ohio 44501
John R. Ficarro 9,000 * 9,000(7)
20 Federal Plaza West
Youngstown, Ohio 44501
Warren E. Jeffery 46,667 * 46,667(7)
20 Federal Plaza West
Youngstown, Ohio 44501
Sankar Krishnan 15,000 * 15,000(7)
20 Federal Plaza West
Youngstown, Ohio 44501
Abbey J. Butler 4,805,935(8) 39.2% 10,000(9)
c/o Avatex Corporation
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
Melvyn J. Estrin 4,805,935(8) 39.2% 10,000(9)
c/o Avatex Corporation
5910 North Central Expressway
Suite 1780
Dallas, Texas 75206
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature Percent Number of Shares Which May
Name and Address of of Beneficial of be Acquired
Beneficial Owner (1) Ownership (2) Class Within 60 Days (3)
-------------------- ------------- ----- ------------------
<S> <C> <C> <C>
Malcolm T. Hopkins 10,000 * 10,000(9)
14 Brookside Road
Asheville, NC 28803
Richard M. McCarthy 11,304 * 10,000(9)
1710 Cottontail Drive
Milford, Ohio 45150
All Directors and Executive Officers, 5,039,156 40.4% 327,569
including those named above, as a
Group (9) persons
<FN>
- -------------------------------------
(* less than 1%)
(1) No director or executive officer is the beneficial owner of the other
equity securities of the Company or any of its subsidiaries.
(2) Unless otherwise indicated, each person or entity has sole investment power
and sole voting power with respect to the Common Stock beneficially owned
by such person or entity.
(3) This column lists the number of shares of Common Stock which the names
person or entity has the right to acquire within 60 days after September
19, 1997, through the exercise of stock options and warrants. The shares
shown in this column are included in the Amount and Nature of Beneficial
Ownership column.
(4) Includes 4,704,033 shares held directly by Avatex and 91,902 shares subject
to purchase by Avatex within 60 days upon exercise of warrants.
(5) Includes 91,902 shares of Common Stock subject to purchase by Avatex within
60 days upon exercise of warrants.
(6) The information provided is based on reports on Schedule 13D and 13G filed
by the designated persons and entities with the SEC.
(7) All such shares of Common Stock are subject to purchase by the indicated
person within 60 days upon exercise of options awarded under the Phar-Mor
Stock Incentive Plan. The table excludes shares subject to options where
the grant of such options is subject to shareholder approval as set forth
under "-- Executive Compensation -- Phar-Mor, Inc. 1995 Amended and
Restated Stock Incentive Plan."
8) Messrs. Butler and Estrin are co-chairmen of the Board, co-chief executive
officers and major shareholders of Avatex.
(9) All such shares are subject to purchase within 60 days by the indicated
person upon exercise of options awarded under the Phar-Mor Director Stock
Plan.
</FN>
</TABLE>
Potential Changes in Control. As of September 19, 1997, and pursuant to
the terms of the Hamilton Morgan LLC Interest Redemption and Exchange Agreement
dated August 22, 1997 (the "HM Redemption Agreement"), Hamilton Morgan
transferred ownership of all 3,750,000 shares of Common Stock it owned to
Avatex. This transaction settled the outstanding disputes between Hamilton
Morgan and Avatex that were subject to a pending arbitration between the
parties. As part of the transaction, Hamilton Morgan and Avatex terminated their
joint proxy agreement with respect to these shares. Avatex has pledged 2,617,500
shares of Common Stock as partial collateral to Credit Lyonnais. In the event of
a default under the Credit Lyonnais pledge, Credit Lyonnais may acquire such
shares by foreclosing on its collateral.
<PAGE>
Avatex has sole voting power to vote 2,617,500 shares of Common Stock.
Pending approval of the Settlement (as hereinafter defined), the Chief Financial
Officer of Avatex and the Trustee (as hereinafter defined), acting as co-escrow
agents, share voting power over 1,132,500 of the shares, pursuant to the terms
of an escrow agreement. Following approval of the Settlement, Avatex will have
the sole power to vote all 3,750,000 shares of Common Stock.
Avatex also owns an additional 954,033 shares of Common Stock and
warrants to purchase 91,902 shares of Common Stock (collectively, the
"Securities"). On June 19, 1996, FoxMeyer Drug Company, an indirect subsidiary
of Avatex, conveyed the Securities to Avatex by way of dividend. On August 27,
1996, FoxMeyer Drug Company filed a petition for relief under the Bankruptcy
Code and, in late November 1996, the unsecured creditors' committee in the
bankruptcy case filed a lawsuit against Avatex seeking recovery of the
Securities and certain other assets. On July 25, 1997, Avatex and the bankruptcy
trustee (the "Trustee"), which had succeeded the unsecured creditors'
committee's interest in the lawsuit, executed a settlement agreement (the
"Settlement"). Pursuant to the Settlement, which is subject to the approval of
the bankruptcy court with jurisdiction over the FoxMeyer bankruptcy cases,
Avatex will retain ownership of the Securities and continue to have the sole
power to vote all of the Securities, and will pledge 1,132,500 shares as
collateral to the Trustee.
Certain Relationships and Related Transactions
Transactions with Hamilton Morgan. On August 22, 1997, Robert Haft and
Avatex entered into the HM Redemption Agreement, resolving issues stemming from
Avatex triggering a buy/sell mechanism in December 1996. In exchange for
3,750,000 shares of Common Stock and the return of a voting proxy on other
shares of Common Stock, Hamilton Morgan agreed to redeem the 69.8% Avatex
interest in Hamilton Morgan; re-pay certain indebtedness; and receive other
consideration. As a result of the consummation of the transaction, as of
September 19, 1997, Avatex beneficially holds 39.1% of the issued and
outstanding Common Stock. On September 19, 1997, in connection with the
consummation of the transaction contemplated by the HM Redemption Agreement, the
Company and Mr. Haft entered into the Severance Agreement. See Item 11,
"Executive Compensation -- Employment Contracts and Termination of Employment
and Change in Control Arrangements."
Transactions with Robert M. Haft. On September 19, 1997, the Company
and Mr. Haft entered into the Severance Agreement whereby Mr. Haft resigned as
Chairman and Chief Executive Officer of the Company and received certain
benefits.
Transactions with FoxMeyer Drug Company. Following the Petition Date,
the Company entered into a revised, long-term supply agreement with FoxMeyer
Drug Company (the "Supply Agreement") to become the Company's primary supplier
of prescription medications until the later of August 17, 1997 or the date on
which the Company's purchases equal an aggregate net minimum of $1.4 billion of
products. The Supply Agreement established certain minimum supply requirements,
specified events of default, and limited damages recoverable in the event of a
termination. Abbey J. Butler and Melvyn J. Estrin, directors of the Company, are
Co-Chairmen of the Board, Co-Chief Executive Officers and major shareholders of
Avatex. FoxMeyer Drug Company is a wholly owned subsidiary of Avatex.
On August 29, 1996, two days after FoxMeyer Drug Company and its
subsidiaries filed their bankruptcy petition, the Company notified FoxMeyer Drug
Company that the supply of products to the Company under the Supply Agreement
was insufficient and that, consequently, FoxMeyer Drug Company had committed a
material breach thereunder. On September 27, 1996, the Company received a
response from FoxMeyer Drug Company disputing the Company's notification. The
Company did not experience any material disruption to its business or supply of
pharmaceutical products because adequate alternative sources of supply were
readily available to the Company. In connection with McKesson Corp.'s purchase
of FoxMeyer Drug Company's assets on November 8, 1996, McKesson Corp.
assumed the Supply Agreement.
Transactions with Daniel J. O'Leary. On May 12, 1997 Daniel J.
O'Leary, the Company's Chief Financial Officer since December 1995, tendered his
resignation effective June 13, 1997. In connection therewith, the Company paid
Mr. O'Leary $225,000 and transferred title to him of a Company-leased vehicle
valued at approximately $10,000.
<PAGE>
PART IV
ITEM 14 Financial Statements, Financial Statement Schedule, Exhibits and
Reports on Form 8-K.
(a) Documents filed as part of this Form 10-K
1. Financial Statements
The Financial Statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this Form
10-K.
2. Financial Statement Schedule
The Financial Statement Schedule listed in the accompanying Index
to Consolidated Financial Statements is filed as part of this
Form 10-K
3. Exhibits
The Exhibits filed as part of this Form 10-K are listed on the
Exhibit Index immediately preceding such exhibits, incorporated
herein by reference.
(b) Reports on Form 8-K
Date of Report Date of Filing Description
- -------------- -------------- -----------
September 7, 1996 September 10, 1996 Agreement and Plan of Reorganization
by and among the Company, ShopKo
Stores, Inc. and Cabot Noble, Inc.
October 11, 1996 October 16, 1996 Amended Agreement and Plan of
Reorganization by and among the
Company, ShopKo Stores, Inc. and
Cabot Noble, Inc.
December 18, 1996 December 20, 1996 Exercise by FoxMeyer Health
Corporation of buy-sell provisions of
Hamilton Morgan, LLC Operating
Agreement.
April 1, 1997 April 3, 1997 Termination Agreement mutually
terminating the Agreement and Plan of
Reorganization by and among the
Company, ShopKo Stores, Inc. and
Cabot Noble, Inc.
May 20, 1997 May 29, 1997 Promotion of Sankar Krishnan to
Senior Vice President and Chief
Financial Officer
<PAGE>
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.
PHAR-MOR, INC.
Date: September 25, 1997 By: /s/ John R. Ficarro
John R. Ficarro
Senior Vice President and Chief
Administrative Officer
<PAGE>
Pursuant to the requirements 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 listed below.
Date: September 25, 1997 /s/ M. David Schwartz
M. David Schwartz, President
(principal executive officer)
Date: September 25, 1997 /s/ Abbey J Butler
Abbey J Butler, Director
Date: September 25, 1997 /s/ Melvyn J. Estrin
Melvyn J. Estrin, Director
Date: September 25, 1997 /s/ Malcolm T. Hopkins
Malcolm T. Hopkins, Director
Date: September 25, 1997 /s/ Richard M. McCarthy
Richard M. McCarthy, Director
Date: September 25, 1997 /s/ Sankar Krishnan
Sankar Krishnan
Senior Vice President and Chief
Financial Officer (principal
financial and accounting officer)
<PAGE>
- -
PHAR-MOR, INC.
INDEX TO EXHIBITS
Exhibit No.
*2.1 Third Amended Joint Plan of Reorganization of Phar-Mor, Inc. and
certain affiliated entities dated May 25, 1995, as modified
**2.2 Disclosure Statement in Support of Plan of Reorganization
**2.3 Exhibits to Third Amended Plan of Reorganization
*3.1 Amended and Restated Articles of Incorporation
*3.2 By-laws
*4.1 Indenture dated September 11, 1995 between Phar-Mor, Inc. and IBJ
Schroder Bank & Trust Company
*4.2 Warrant Agreement dated September 11, 1995 between Phar-Mor, Inc. and
Society National Bank
*9.1 Amended and Restated Limited Liability Company Agreement of Hamilton
Morgan dated May 5, 1995, among Robert M. Haft, Mary Z. Haft and
FoxMeyer Health Corporation
*10.1 New Security Agreements and New Equipment Notes entered into and
issued by Phar-Mor, Inc. with the CIT Group/Equipment Financing, Inc.,
Ford Equipment Leasing Corp./General Electrical Capital Corporation,
NBD Bank Evanston, N.A., Heleasco Twenty-Three, Inc., HCFS Business
Equipment Corp., Romulus Holdings, Inc. and FINOVA Capital/Corporation
*10.2 Loan Security Agreement, dated September 11, 1995, by and among
the financial institutions listed on the signature pages therein,
BankAmerica Business Credit, Inc., as agent, and Phar-Mor, Inc.,
Phar-Mor of Florida, Inc., Phar-Mor of Ohio, Inc., Phar-Mor of
Virginia, Inc. and Phar-Mor of Wisconsin,
Inc.
**10.2.1 Exhibits to Loan and Security Agreement
10.3 Employment Agreement between Phar-Mor, Inc. and M. David Schwartz,
dated June 5, 1997
10.4 Employment Agreement between Phar-Mor, Inc. and John R. Ficarro, dated
June 5, 1997
<PAGE>
***10.5 Employment Agreement between Phar-Mor, Inc. and Robert M. Haft, dated
September 11, 1995
*10.6 Registration Rights Agreement by and among Phar-Mor, Inc. and FoxMeyer
Drug Company and Hamilton Morgan L.L.C. dated September 11, 1995
*10.7 Registration Rights Agreement between Phar-Mor, Inc. and Alvarez &
Marsal, Inc. dated September 11, 1995
*10.8 Third Amendment to Management Services Agreement dated as of September
11, 1995 among Phar-Mor, Inc. and certain affiliated entities, Alvarez
& Marsal, Inc., Antonio C. Alvarez and Joseph A. Bondi
*10.9 Form of Indemnification Agreement dated as of September 11, 1995
*10.10 Phar-Mor, Inc. 1995 Amended and Restated Stock Incentive Plan
*10.11 Phar-Mor, Inc. 1995 Director Stock Plan
***10.12 Phar-Mor, Inc. 1996 Director Retirement Plan
# 10.13 Supply Agreement dated as of June 19, 1997 between Phar-Mor and
McKesson Drug Company.
10.14 Severance Agreement between Phar-Mor, Inc. and Robert M. Haft dated
September 19, 1997.
***21.1 List of Subsidiaries
23 Independent Auditors' Consent
27 Financial Data Schedule
- -----------------------------------------------------------------
* Previously filed in connection with the filing of Phar-Mor's Form 10,
on October 23, 1995
** Previously filed in connection with the filing of Amendment No. 1 to
Phar-Mor's Form 10, on December 15, 1995.
*** Previously filed in connection with the filing of Amendment No. 2 to
Phar-Mor's Annual Report on Form 10-K405/A2, on March 27, 1997
**** Previously filed in connection with the filing of Amendment No. 2 to
Form 10, on February 1, 1996
# Portions of this exhibit have been omitted pursuant to a request for
confidential treatment and filed separately with the Commission
<PAGE>
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F - 2
CONSOLIDATED BALANCE SHEETS AS OF JUNE 28, 1997
AND JUNE 29, 1996 F - 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FIFTY-TWO
WEEKS ENDED JUNE 28, 1997, THE FORTY-THREE WEEKS ENDED
JUNE 29, 1996, THE NINE WEEKS ENDED SEPTEMBER 2, 1995, AND THE
FIFTY-TWO WEEKS ENDED JULY 1, 1995 F - 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY) FOR THE FIFTY-TWO WEEKS ENDED JUNE 28, 1997, THE
FORTY-THREE WEEKS ENDED JUNE 29, 1996, THE NINE WEEKS ENDED
SEPTEMBER 2, 1995, AND THE FIFTY-TWO WEEKS ENDED JULY 1, 1995 F - 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FIFTY-TWO
WEEKS ENDED JUNE 28, 1997, THE FORTY-THREE WEEKS ENDED
JUNE 29, 1996, THE NINE WEEKS ENDED SEPTEMBER 2, 1995, AND THE
FIFTY-TWO WEEKS ENDED JULY 1, 1995 F - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 7
SCHEDULE II F - 26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Phar-Mor, Inc. :
We have audited the accompanying consolidated balance sheets of Phar-Mor, Inc.
and subsidiaries (the "Company") as of June 28, 1997 and June 29, 1996
(Successor Phar-Mor balance sheets), and the related consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows for the
fifty-two weeks ended June 28, 1997, the forty-three weeks ended June 29, 1996
(Successor Phar-Mor operations), the nine weeks ended September 2, 1995 and the
fifty-two weeks ended July 1, 1995 (Predecessor Phar-Mor operations). Our audits
also included financial statement Schedule II, Valuation and Qualifying
Accounts. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
Except as discussed in the following paragraph, we conducted our audits in
accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, in August 1992, the Board of
Directors of the Company disclosed that a fraud and embezzlement of the
Company's assets, which had been concealed for a period of years by
falsification of the accounting records, had been discovered. As a result, and
as discussed in Notes 1 and 6, reliable accounting records and sufficient
evidential matter to support the acquisition cost of property and equipment were
not available; accordingly, we were not able to complete our auditing procedures
for depreciation and amortization related to property and equipment for the nine
weeks ended September 2, 1995 and for the fifty-two weeks ended July 1, 1995. As
discussed in Note 6, during the fifty-three weeks ended July 2, 1994, the
Company recorded a $53,211,000 write down of its property and equipment based
upon an independent appraisal. It was not possible to determine whether the
aggregate amount of property and equipment at July 2, 1994 was greater than the
original acquisition cost of such assets less accumulated depreciation and
amortization.
In our opinion, except for the effect of any adjustments that might have been
determined to be necessary had reliable accounting records and sufficient
evidential matter to support the acquisition cost of property and equipment been
available, the Predecessor Phar-Mor financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Predecessor Phar-Mor for the nine weeks ended September 2, 1995 and the
fifty-two weeks ended July 1, 1995 in conformity with generally accepted
accounting principles.
In our opinion, the Successor Phar-Mor financial statements referred to above
present fairly, in all material respects, the financial position of Phar-Mor,
Inc. and subsidiaries as of June 28, 1997 and June 29, 1996 and the results of
their operations and cash flows for the fifty-two weeks ended June 28, 1997 and
the forty-three weeks ended June 29, 1996 in conformity with general accepted
accounting principles.
In our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As discussed in Note 1 to the financial statements, on August 29, 1995, the
Bankruptcy Court entered an order confirming the Plan of Reorganization which
became effective on September 11, 1995. Accordingly, the accompanying financial
statements have been prepared in conformity with AICPA Statement of Position
90-7, "Financial Reporting for Entities in Reorganization Under the Bankruptcy
Code," for the Successor Phar-Mor as a new entity with assets, liabilities and a
capital structure having carrying values not comparable with prior periods as
described in Note 1.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 15, 1997
(September 19, 1997 as to Note 11)
F-2
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 28, June 29,
1997 1996
---------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 79,847 $104,265
Accounts receivable - net 21,614 20,834
Merchandise inventories 169,103 152,904
Prepaid expenses 5,228 5,184
Deferred tax asset 515 388
-------- --------
Total current assets 276,307 283,575
Property and equipment - net 72,835 66,550
Deferred tax asset 9,255 9,382
Other assets 4,208 3,956
-------- --------
Total assets $362,605 $363,463
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 61,808 $ 53,761
Accrued expenses 36,019 33,590
Reserve for costs of rightsizing program 1,866 3,451
Current portion of self insurance reserves 2,649 3,701
Current portion of long-term debt 2,624 2,903
Current portion of capital lease obligations 6,531 6,019
-------- --------
Total current liabilities 111,497 103,425
Long-term debt 107,554 109,973
Capital lease obligations 32,659 39,190
Long-term self insurance reserves 8,098 7,226
Unfavorable lease liability - net 12,493 11,081
-------- --------
Total liabilities 272,301 270,895
-------- --------
Commitments and contingencies -- --
Minority interests 535 535
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, authorized shares,
10,000,000, none outstanding -- --
Common stock, $.01 par value, authorized shares,
40,000,000; issued and outstanding shares, 12,159,199
at June 28, 1997,and 12,157,054 at June 29, 1996 122 122
Additional paid-in capital 89,402 89,385
Retained earnings 245 2,526
-------- --------
Total stockholders' equity 89,769 92,033
-------- --------
Total liabilities and stockholders' equity $362,605 $363,463
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- -------------------
|| Nine
Fifty-two Forty-three || weeks ended Fifty-two
weeks ended weeks ended || September 2, weeks ended
June 28, 1997 June 29, 1996 || 1995 July 1, 1995
------------- ------------- || ------------ ------------
||
<S> <C> <C> <C> <C>
Sales $ 1,074,828 $ 874,284 || $ 181,968 $ 1,412,661
||
Less: ||
Cost of goods sold, including occupancy and ||
distribution costs 873,095 722,214 || 147,124 1,152,120
Selling, general and administrative expenses 168,218 128,312 || 27,057 204,671
Chapter 11 professional fee accrual ||
adjustment -- (1,530) || -- --
Terminated business combination expenses 3,076 -- || -- --
Depreciation and amortization 20,982 14,891 || 3,732 24,643
------------ ------------ || ------------ ------------
Income from operations before interest ||
expense, interest income, reorganization ||
items, fresh-start revaluation, income taxes ||
and extraordinary item 9,457 10,397 || 4,055 31,227
||
||
Interest expense (excludes contractual ||
interest not accrued on prepetition debt of ||
$3,897 and $20,595, in the nine weeks ended ||
September 2, 1995, and the fifty-two weeks ||
ended July 1, 1995, respectively) 17,175 14,343 || 5,689 33,324
||
Interest income 5,437 8,614 || -- --
------------ ------------ || ------------ ------------
||
||
(Loss) income before reorganization items, ||
fresh-start revaluation, income taxes and ||
extraordinary item (2,281) 4,668 || (1,634) (2,097)
||
Reorganization items -- -- || 16,798 51,158
||
Fresh-start revaluation -- -- || (8,043) --
------------ ------------ || ------------ ------------
||
||
(Loss) income before income taxes and ||
extraordinary item (2,281) 4,668 || (10,389) (53,255)
||
Income tax provision (benefit) -- 2,142 || -- (111)
------------ ------------ || ------------ ------------
||
(Loss) income before extraordinary item (2,281) 2,526 || (10,389) (53,144)
Extraordinary item - gain on debt discharge -- -- || 775,073 --
------------ ------------ || ------------ ------------
||
Net (loss) income $ (2,281) $ 2,526 || $ 764,684 $ (53,144)
============ ============ || ============ ============
||
||
Net (loss) income per common share: ||
(Loss) income before extraordinary item $ (.19) $ .21 || $ (.19) $ (.98)
Extraordinary item -- -- || 14.33 --
------------ ------------ || ------------ ------------
Net (loss) income $ (.19) $ .21 || $ 14.14 $ (.98)
============ ============ || ============ ============
Weighted average number of common shares ||
outstanding 12,157,419 12,156,614 || 54,066,463 54,066,463
============ ============ || ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
------------
Total
Par Retained Stockholders'
Value Additional (Deficit) (Deficiency)
Shares Amount Paid-in Capital Earnings Equity
------ ------ --------------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at July 2, 1994 54,066 $ 5,407 $ 487,477 $(1,204,424) $ (711,540)
Net loss -- -- -- (53,144) (53,144)
----------- ----------- ---------------- ----------- -----------
Balance at July 1, 1995 54,066 5,407 487,477 (1,257,568) (764,684)
Net income -- -- -- 764,684 764,684
Cancellation of the former common
equity under the Plan of Reorganization (54,066) (5,407) (487,477) 492,884 --
Issuance of the new equity interests
in connection with emergence from
Chapter 11 Cases 12,156 122 89,378 -- 89,500
----------- ----------- ---------------- ----------- -----------
Balance at September 2, 1995 12,156 122 89,378 -- 89,500
Net income -- -- -- 2,526 2,526
Shares issued 1 -- 7 -- 7
----------- ----------- ---------------- ----------- -----------
Balance at June 29, 1996 12,157 122 89,385 2,526 92,033
Net loss -- -- -- (2,281) (2,281)
Shares issued 2 -- 17 -- 17
----------- ----------- ---------------- ----------- -----------
Balance at June 28, 1997 12,159 $ 122 $ 89,402 $ 245 $ 89,769
=========== =========== ================ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- -------------------
Fifty-two Forty-three || Nine Fifty-two
weeks ended weeks ended || weeks ended weeks ended
June 28, June 29, || September 2, July 1,
1997 1996 || 1995 1995
---- ---- || ---- ----
||
OPERATING ACTIVITIES ||
<S> <C> <C> <C> <C>
Net (loss) income $ (2,281) $ 2,526 || $ 764,684 $ (53,144)
||
Adjustments to reconcile net (loss) income to net cash ||
provided by operating activities: ||
Items not requiring the outlay of cash: ||
Extraordinary gain on debt discharge -- -- || (775,073) --
Fresh-start revaluation -- -- || (8,043) --
Noncash charges included in reorganization items -- -- || 16,500 46,056
Depreciation 12,182 8,802 || 2,388 15,073
Amortization of video rental tapes 8,800 6,055 || 1,333 9,423
Amortization of deferred financing costs and goodwill 408 363 || 73 2,139
Deferred income taxes -- 2,142 || -- (111)
Deferred rent and unfavorable lease liabilities 1,412 606 || (89) 1,126
Issuance of common stock 17 7 || -- --
Changes in assets and liabilities: ||
Accounts receivable (780) 6,905 || 11,997 (10,335)
Merchandise inventories (16,258) 15,534 || (6,922) 164,482
Prepaid expenses (44) 1,356 || 2,441 631
Deferred income taxes -- 2,088 || -- --
Other assets (707) (681) || 449 136
Accounts payable 8,047 (4,370) || (8,865) (39,772)
Accrued expenses 2,610 (1,999) || 1,133 (18,994)
Accrued bankruptcy professional fees (181) (19,476) || 4,442 1,654
Reserve for costs of rightsizing program (1,585) (2,921) || 550 (35,311)
Self insurance reserves (180) (916) || 1,131 1,111
----------- ----------- || ----------- -----------
Net cash provided by operating activities 11,460 16,021 || 8,129 84,164
----------- ----------- || ----------- -----------
||
INVESTING ACTIVITIES ||
Additions to rental video tapes (8,694) (7,316) || (1,874) (11,925)
Additions to property and equipment (18,467) (6,368) || (649) (9,088)
Purchase of partnership interests -- (145) || -- --
----------- ----------- || ----------- -----------
Net cash used for investing activities (27,161) (13,829) || (2,523) (21,013)
----------- ----------- || ----------- -----------
||
FINANCING ACTIVITIES ||
Principal payments on term debt (2,698) (1,467) || -- --
Principal payments on capital lease obligations (6,019) (4,390) || -- --
----------- ----------- || ----------- -----------
Net cash used for financing activities (8,717) (5,857) || -- --
----------- ----------- || ----------- -----------
||
||
REORGANIZATION ACTIVITIES ||
Cash distribution pursuant to the plan of reorganization -- -- || (105,381) --
Repayment of revolving credit loan and secured notes ||
from proceeds of going-out-of-business sales and ||
sale of assets -- -- || -- (46,330)
||
Payment of reclamation claims -- -- || (23,961) --
Decrease in all other liabilities subject to settlement ||
under reorganization proceedings -- -- || (2,076) (1,256)
Proceeds from the sale of new common stock -- -- || 9,500 --
Proceeds from sale of assets held for disposition -- -- || -- 13,663
Debtor-in-possession financing costs -- -- || (15) (172)
----------- ----------- || ----------- -----------
||
Net cash used for reorganization activities -- -- || (121,933) (34,095)
----------- ----------- || ----------- -----------
||
||
(Decrease) increase in cash and cash equivalents (24,418) (3,665) || (116,327) 29,056
Cash and cash equivalents, beginning of period 104,265 107,930 || 224,257 195,201
----------- ----------- || ----------- -----------
Cash and cash equivalents, end of period $ 79,847 $ 104,265 || $ 107,930 $ 224,257
=========== =========== || =========== ===========
||
||
Supplemental Information ||
Interest paid $ 16,762 $ 9,067 || $ 4,592 $ 27,989
Income tax refunds 86 2,669 || -- 570
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
1. REORGANIZATION AND BASIS OF PRESENTATION
In early August 1992 Phar-Mor, Inc. and its subsidiaries (collectively,
the "Company") publicly disclosed that it had discovered a scheme by
certain of its senior executives to falsify financial results. The
officers believed to be involved were promptly dismissed and are no
longer employed by the Company. A new management team, hired by the
Board of Directors, assumed day-to-day management of the Company. Upon
discovery of the fraud, it became apparent that the Company's explosive
growth during the preceding several years had been fueled in part by a
systematic scheme to falsify the Company's financial results and to
conceal the Company's true financial condition. The fraud, which was
perpetrated by the manipulation of information and override of the
system of internal controls by certain of its senior executives, as
well as a lack of systems and surrounding controls, masked very
substantial losses, created in part by low margins, slow moving
merchandise categories, high rentals for the newer and larger stores
and operational inefficiencies. By the time the Company concluded its
investigation into the size of the fraud, it determined that cumulative
earnings had been overstated by approximately $500,000. In response to
the fraud, new management developed and executed a business plan that
resulted in closing retail store locations and distribution centers,
improved gross margins, reduced operating costs and invested in systems
designed to strengthen internal controls and improve management
reporting. Additional charges to cumulative earnings of approximately
$500,000 resulted from changes in accounting policies and restructuring
costs which were recorded as of September 26, 1992 (See Note 6).
On August 17, 1992, the Company filed petitions for relief under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). From
that time until September 11, 1995, the Company operated its business
as a debtor-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the Northern District of Ohio (the
"Bankruptcy Court").
On September 11, 1995, (the "Effective Date") the Company emerged from
reorganization proceedings under Chapter 11 pursuant to the
confirmation order entered on August 29, 1995 by the Bankruptcy Court
confirming the Third Amended Joint Plan of Reorganization dated May 25,
1995 (the "Joint Plan") . Consequently, the Company applied the
reorganization and fresh-start reporting adjustments to the
consolidated balance sheet as of September 2, 1995, the closest fiscal
month end to the Effective Date.
The consolidated financial statements of the Company during the
bankruptcy proceedings (the "Predecessor Company financial statements")
are presented in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7").
Pursuant to guidance provided by SOP 90-7, the Company adopted
fresh-start reporting as of September 2, 1995. Under fresh-start
reporting, a new reporting entity is deemed to be created and the
recorded amounts of assets and liabilities are adjusted to reflect
their estimated fair values at the Effective Date (see Note 2).
Financial statements for periods ended on and prior to September 2,
1995, have been designated as those of the Predecessor Company. Black
lines have been drawn to separate the Successor Company consolidated
financial statements from the Predecessor Company consolidated
financial statements to signify that they are different reporting
entities which have not been prepared on a comparable basis.
The Joint Plan provided for, among other things, settlement of all
liabilities subject to settlement under reorganization proceedings in
exchange for cash, new debt, 12,156,250 shares of common stock and
1,250,000 common stock warrants and an interest in a Limited Liability
Company ("LLC") which was established as part of the Joint Plan (see
Notes 9 and 12). The Company's cause of action against its former
auditor and certain other causes of action were assigned to such LLC.
The Predecessor Company's creditors and former shareholders are the
beneficiaries of the LLC.
The net cash disbursements upon the effectiveness of the Joint Plan
were comprised as follows:
<TABLE>
<S> <C>
Payment to the holders of claims under the prepetition credit
agreement and prepetition senior secured notes $ 103,708
Payment to fund litigation of LLC causes of action 400
Payment of origination costs for revolving credit facility for
the Successor Company 1,273
---------
105,381
Receipt of net proceeds from the sale of new common stock (9,500)
---------
95,881
=========
</TABLE>
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts,continued)
- --------------------------------------------------------------------------------
The value of cash, notes and securities required to be distributed
under the Joint Plan was less than the value of the allowed claims on
and interests in the Predecessor Company; accordingly, the Predecessor
Company recorded an extraordinary gain of $775,073 related to the
discharge of prepetition liabilities in the period ended September 2,
1995. Payments and distributions associated with the prepetition claims
and obligations were made or provided for in the consolidated balance
sheet as of September 2, 1995 (see Note 2). The consolidated financial
statements at September 2, 1995, give effect to the issuance of all
common stock, senior notes and tax notes in accordance with the Joint
Plan.
The extraordinary gain recorded by the Predecessor Company was
determined as follows:
<TABLE>
<S> <C>
Liabilities subject to settlement under reorganization proceedings
at the Effective Date $ 1,126,414
Less:
Cash distribution pursuant to the Joint Plan (105,381)
Issuance of new debt (108,523)
New capital lease obligations (49,599)
Assumption of prepetition liabilities (7,838)
Value of new common stock issued to prepetition creditors (80,000)
-----------
Extraordinary item - gain on debt discharge $ 775,073
===========
</TABLE>
2. FRESH-START REPORTING
As indicated in Note 1, the Company adopted fresh-start reporting as of
September 2, 1995. The Successor Company fresh-start reorganization
equity value of $89,500 was determined with the assistance of the
financial advisors employed by the Company. The financial advisors
reviewed financial data of the Company, including financial projections
through the fiscal year 1999. The reorganization value of the Company,
net of current liabilities, which was determined to be in a range of
$260,000 to $330,000, was based primarily on the following methods of
valuation: discounted cash flow analysis using projected five year
financial information and a discount rate of 9.8%; market valuation of
certain publicly traded companies whose operating businesses were
believed to be similar to that of the Company; review of certain
acquisitions of companies whose operating businesses were viewed to be
similar to that of the Company. In addition to these methods of
analysis, certain general economic and industry information relevant to
the business of the Company was considered.
Based on the analysis outlined above, the financial advisors determined
the equity value of the Company to be between $90,000 and $160,000.
This equity value represented the reorganization value of $260,000 to
$330,000 less $170,000 of debt assumed to be issued under the Joint
Plan. The fresh-start reorganization equity value of $89,500 correlates
to the $90,000 referred to above, less $1,000 in expenses reimbursed to
certain shareholders plus $500 reflecting the purchase of common stock
by present and former members of management as further described in the
Joint Plan.
The five year cash flow projections were based on estimates and
assumptions about circumstances and events that had not yet taken
place. Such estimates and assumptions were inherently subject to
significant economic and competitive uncertainties beyond the control
of the Company including, but not limited to, those with respect to the
future course of the Company's business activity. Any difference
between the Company's projected and actual results following its
emergence from Chapter 11 will not alter the determination of the
fresh-start reorganization equity value because such value is not
contingent upon the Company achieving the projected results.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
The Predecessor Company balance sheet as of September 2, 1995, and adjustments
thereto to give effect to the discharge of prepetition debt and fresh-start
reporting, are as follows:
<TABLE>
<CAPTION>
Predecessor
Company Adoption of Successor
Pre- Restructuring Fresh-Start Company
confirmation (see Note 1) Reporting Reorganized
------------ ------------ --------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 203,811 $ (95,881) -- $ 107,930
Account receivable - net 27,702 -- -- 27,702
Due from related parties -- -- -- --
Merchandise inventories 167,177 -- -- 167,177
Prepaid expenses 6,540 -- -- 6,540
Deferred tax asset -- -- $ 1,814 1,814
----------- ----------- ----------- -----------
Total current assets 405,230 (95,881) 1,814 311,163
Property and equipment - net 69,770 -- (4,592) 65,178
Deferred tax asset 180 -- 12,006 12,186
Other assets 2,992 3 (1,315) 1,680
----------- ----------- ----------- -----------
Total assets $ 478,172 $ (95,878) $ 7,913 $ 390,207
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable $ 56,483 $ 1,623 -- $ 58,106
Accrued expenses 27,619 6,255 -- 33,874
Accrued bankruptcy professional fees 19,657 -- -- 19,657
Reserve for costs of rightsizing program 7,301 -- -- 7,301
Current portion of self insurance reserves 5,030 -- -- 5,030
Current portion of long-term debt -- 1,541 -- 1,541
Current portion of capital lease obligations -- 5,534 -- 5,534
----------- ----------- ----------- -----------
Total current liabilities 116,090 14,953 -- 131,043
Liabilities subject to settlement under
reorganization proceedings 1,126,414 (1,126,414) -- --
Long-term debt -- 106,982 -- 106,982
Capital lease obligations -- 44,065 -- 44,065
Long-term self insurance reserves 8,142 -- -- 8,142
Unfavorable lease liability - net -- -- $ 10,475 10,475
Deferred rent 10,642 (37) (10,605) --
----------- ----------- ----------- -----------
Total liabilities 1,261,288 (960,451) (130) 300,707
----------- ----------- ----------- -----------
Stockholders' equity (deficiency):
Common stock 5,407 (5,285) -- 122
Additional paid-in capital 487,477 (398,099) -- 89,378
Retained earnings (deficit) (1,276,000) 1,267,957 8,043 --
----------- ----------- ----------- -----------
Total stockholders' equity (deficiency) (783,116) 864,573 8,043 89,500
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity
(deficiency) $ 478,172 $ (95,878) $ 7,913 $ 390,207
=========== =========== =========== ===========
</TABLE>
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
The significant fresh-start reporting adjustments are summarized as
follows:
(1) Revaluation of fixed assets and leasehold
interests based, in part, upon the estimated fair market
values of properties and leases. This revaluation resulted
in recording unfavorable lease liabilities for certain
locations.
See Notes 3 and 6.
(2) Write-off of lease acquisition costs.
(3) Valuation and recording of a deferred tax asset
representing the estimated net realizable value of net
operating loss carry forwards.
(4) Adjustments to the fair market value of other
noncurrent assets in excess of reorganization value in
accordance with fresh-start reporting.
3. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Fiscal Periods Presented - The accompanying consolidated
balance sheets were prepared as of June 28, 1997 and June 29,
1996. The accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows were prepared
for the fifty-two weeks ended June 28, 1997, the forty-three
weeks ended June 29, 1996, the nine weeks ended September 2,
1995, and the fifty-two weeks ended July 1, 1995.
b. Business - The Company operates a chain of "deep discount"
drugstores primarily located in the midwest and along the east
coast of the continental United States in which it sells
merchandise in various categories.
c. Principles of Consolidation - The consolidated financial
statements include the accounts of Phar-Mor, Inc., its
wholly-owned subsidiaries and its majority-owned partnerships.
All intercompany accounts and transactions have been
eliminated.
d. Cash and Cash Equivalents - The Company considers all
short-term investments with an original maturity of three
months or less to be cash equivalents.
e. Merchandise Inventories - Merchandise inventories are
valued at the lower of first-in, first-out ("FIFO") cost or
market.
f. Video Rental Tapes - Videotapes held for rental which are
included in inventories, are recorded at cost and are
amortized over their estimated economic life with no provision
for salvage value. With respect to "hit" titles for which four
or more copies per store are purchased, the fourth and any
succeeding copies are amortized over nine months on a
straight-line basis. All other video cassette purchases up to
three copies per store are amortized over thirty-six months on
a straight-line basis.
g. Deferred Debt Expense - Deferred debt expense is included
in other assets and is amortized on a straight-line basis over
the term of the related debt.
h. Goodwill - Goodwill is included in other assets and is
amortized on a straight-line basis over 40 years.
i. Pre-Opening Costs - Expenses incurred for new stores prior
to their opening are included in other assets and expensed
during the first month of operation.
j. Property and Equipment - The Company's policy is to record
property and equipment (including leasehold improvements) at
cost. Depreciation is recorded on the straight-line method
over the estimated useful lives of the assets. Leasehold
improvements are amortized over the estimated useful lives of
the improvements or the lives of the leases, whichever is
shorter.
Because of the fraud and embezzlement referred to in Note 1
above, which resulted in unreliable and insufficient
evidential matter to support the acquisition cost of property
and equipment, as of July 2, 1994,
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
the Company revalued property and equipment based upon an
independent appraisal. Consequently, Predecessor Company
property and equipment and related depreciation and
amortization at and for periods subsequent to July 2, 1994 are
based upon such assets valued at the lower of the appraised
value or net book value at July 2, 1994 as adjusted for
additions and disposals since that date (see Note 6).
Property and equipment was revalued at September 2,
1995 in connection with the adoption of fresh-start reporting
(see Note 2).
k. Leased Property Under Capital Leases - The Company accounts
for capital leases, which transfer substantially all of the
benefits and risks incident to the ownership of property to
the Company, as the acquisition of an asset and the incurrence
of an obligation. Under this method of accounting the cost of
the leased asset is amortized principally using the
straight-line method over its estimated useful life, and the
obligation, including interest thereon, is liquidated over the
life of the lease.
l. Operating Leases and Deferred Rent - Operating leases are
accounted for on the straight-line method over the lease term.
Deferred rent represents the difference between rents paid and
the amounts expensed for operating leases.
m. Unfavorable Lease Liability - The unfavorable lease
liability was recorded as part of fresh-start reporting (see
Note 2) and represents the excess of the present value of the
liability related to lease commitments over the present value
of market rate rents as of the date of the Reorganization for
such locations. This liability will be amortized as a
reduction of rent expense over the remaining lease terms.
n. Reclassifications - Certain amounts in the financial
statements have been reclassified for comparative purposes.
o. Net (Loss) Income Per Common Share - Net (loss) income per
common share is computed by dividing net (loss) income by the
weighted average number of common shares outstanding.
Outstanding stock options and warrants do not have a dilutive
effect on net (loss) income per share.
p. Accounting Changes - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share,"
which establishes standards for computing and presenting
earnings per share and applies to entities with publicly held
common stock or potential common stock. This Statement is
effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier
application is not permitted. This Statement requires
restatement of all prior-period earnings per share data
presented. The Company has determined that the implementation
of this Statement will not have a material effect on reported
earnings per share.
In June, 1997, the Financial Accounting Standards
Board issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be effective
for financial statements for periods beginning after December
15, 1997. SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial
and descriptive information about a company's operating
segments. The Company anticipates that the adoption of SFAS
No. 131 will not have a material effect on current
disclosures.
q. 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 and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ
from those estimates.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts,continued)
- --------------------------------------------------------------------------------
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
June 28, 1997 June 29, 1996
------------- -------------
<S> <C> <C>
Accounts receivable - vendors $ 13,162 $ 15,583
Third-party prescriptions 8,489 5,151
Vendor coupons 1,202 1,719
Income tax receivable -- 175
Other 1,464 2,397
------------- -------------
24,317 25,025
Less allowance for doubtful accounts 2,703 4,191
------------- -------------
$ 21,614 $ 20,834
============= =============
</TABLE>
5 MERCHANDISE INVENTORIES
Merchandise inventories consists of the following:
<TABLE>
<CAPTION>
June 28, 1997 June 29, 1996
------------- -------------
<S> <C> <C>
Store inventories $ 140,158 $ 140,522
Warehouse inventories 37,361 25,387
Video rental tapes - net 6,442 7,059
------------- -------------
183,961 172,968
Less reserves for markdowns, shrinkage
and vendor rebates 14,858 20,064
------------- -------------
$ 169,103 $ 152,904
============= =============
</TABLE>
The video rental tape inventory is net of accumulated amortization of
$12,797 and $6,055 at June 28, 1997 and June 29, 1996, respectively
6 PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 28, 1997 June 29, 1996
------------- -------------
<S> <C> <C>
Furniture, fixtures and equipment $ 28,394 $ 19,596
Building improvements to leased property 27,482 17,954
Land 166 166
Capital leases:
Buildings 11,235 11,235
Furniture, fixtures and equipment 27,380 27,383
------------- -------------
94,657 76,334
Less accumulated depreciation and amortization 21,308 9,014
Less allowance for disposal of property
and equipment 514 770
------------- -------------
$ 72,835 $ 66,550
============= =============
</TABLE>
Due to the lack of reliable accounting records referred to in Note 1 and
because the adverse business conditions which had been concealed by the
fraud and embezzlement dictated an assessment as to whether the carrying
amount of property and equipment had been overstated, an independent
appraisal was undertaken in 1994. The appraisal included the physical
inspection of property and equipment at the Company's corporate
headquarters, warehouse and
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
selected retail store locations. The appraised value of certain property
and equipment was less than the net book value of the assets. Accordingly,
the Company recorded a charge of $53,211 to write down property and
equipment as of July 2, 1994. The following is a reconciliation of the net
book value of property and equipment and the effects of the write down:
<TABLE>
<CAPTION>
July 2, 1994
----------------------------------------------
Historical Lower of
Net Appraised
Book Or Net
Value Write Down Book Value
----- ---------- ----------
<S> <C> <C> <C>
Furniture, fixtures and equipment $ 54,935 $ (31,150) $ 23,785
Building improvements to leased property 36,582 (22,061) 14,521
Capital leases:
Buildings 11.201 -- 11,201
Furniture, fixtures and equipment 40,850 -- 40,850
------------ ------------ ------------
$ 143,568 $ (53,211) $ 90,357
============ ============ ============
</TABLE>
The historical net book value amounts are net of accumulated depreciation
and amortization for each caption. Accumulated depreciation and
amortization is $0 for each caption for the lower of appraised or net book
value amounts.
Also, as a result of the fraudulent reporting described in Note 1, the
following types of errors extended to property and equipment:
(1) Journalization of fictitious income via systematic
capitalization of non-existent additions to store property and
equipment accounts.
(2) Repair and maintenance and short-term equipment rental
items which were improperly capitalized.
(3) Landlord reimbursements received in prior years for
leasehold improvements, which reimbursements were not credited
as a reduction to the related asset account, and in some
cases, could not be traced to the accounting records at all.
Adjustments were made in the September 26, 1992 balance sheet for the above
known errors. September 26, 1992 was the end of the Company's first fiscal
quarter of fiscal year 1993, the date closest to the dates on which the
Company conducted a physical inventory at its stores and distribution
centers following the disclosure of the fraud and the earliest date a
consolidated balance sheet could be prepared by new management.
While it is not possible to say with certainty that it was a conscious part
of the fraudulent reporting scheme, the conditions which prevented new
management from reconstructing the property and equipment records were: 1)
incomplete and unreconcilable detailed fixed asset registers or equivalent
records (i.e., there was inadequate detail maintained regarding the
composition of fixed assets below the general ledger account level); and 2)
inadequate documentation to support the acquisition cost of those assets
(e.g., lack of invoices, contracts or the like).
Despite the expenditure of substantial resources to locate sufficient
underlying documentation to reconstruct those records, the Company
ultimately concluded that it was not possible to determine that the
recorded amounts were reflective of the original acquisition cost.
Accordingly, any adjustment that might have been determined to be necessary
to adjust to original acquisition cost if reliable records could have been
reconstructed would be limited to: 1) the recorded cost of property and
equipment ; 2) accumulated depreciation thereon; and 3) the related
periodic depreciation expense. Note that any adjustment to cost or
accumulated depreciation as of September 26, 1992 would have affected those
balance sheet line-items and retained deficit, but would not have affected
subsequent statements of operations beyond the impact on depreciation
expense.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts,continued)
- --------------------------------------------------------------------------------
7. OTHER ASSETS
Other assets consists of the following:
<TABLE>
<CAPTION>
June 28, 1997 June 29, 1996
------------- -------------
<S> <C> <C>
Goodwill $ 1,712 $ 1,757
Deferred debt expense 401 711
Pharmacy files 641 513
Cash surrender value of officers life insurance 659 323
Other 795 652
------------ ------------
$ 4,208 $ 3,956
============ ============
</TABLE>
Goodwill, deferred debt expense and pharmacy files are net of accumulated
amortization of $78, $667 and $180, respectively at June 28, 1997 and $34,
$329 and $30, respectively at June 29, 1996. The deferred debt expense
consists of debt origination costs associated with the new credit facility
(See Note 8).
8. REVOLVING CREDIT FACILITIES
On September 11, 1995, the Company entered into a Loan and Security
Agreement (the "Facility") with BankAmerica Business Credit, Inc. ("BABC"),
as agent, and other financial institutions (collectively, the "Lenders"),
that established a credit facility in the maximum amount of $100,000.
Borrowings under the Facility may be used for working capital needs and
general corporate purposes. Up to $50,000 of the Facility at any time may
be used for standby and documentary letters of credit. The Facility
includes restrictions on, among other things, additional debt, capital
expenditures, investments, restricted payments and other distributions,
mergers and acquisitions, and contains covenants requiring the Company to
meet a specified quarterly minimum EBITDA Coverage Ratio (the sum of
earnings before interest, taxes, depreciation and amortization, as defined,
divided by interest expense), calculated on a rolling four quarter basis,
and a monthly minimum net worth test.
Credit availability under the Facility at any time is the lesser of the
Aggregate Availability (as defined in the Facility) or $100,000.
Availability under the Facility, after subtracting amounts used for
outstanding letters of credit, was $88,003 and $76,829 at June 28, 1997 and
June 29, 1996, respectively. The Facility establishes a first priority lien
and security interest in the current assets of the Company, including,
among other items, cash, accounts receivable and inventory.
Advances made under the Facility bear interest at the BankAmerica reference
rate plus 1/2% or London Interbank Offered Rate ("LIBOR") plus the
applicable margin. The applicable margin ranges between 1.50% and 2.00% and
is determined by a formula based on a ratio of (a) the Company's earnings
before interest, taxes, depreciation and amortization to (b) interest.
Under the terms of the Facility, the Company is required to pay a
commitment fee of 0.28125% per annum on the unused portion of the facility,
letter of credit fees and certain other fees
There have been no borrowings under the Facility. At June 28, 1997 and June
29, 1996 there were letters of credit in the amount of $4,924 and $5,384,
respectively, outstanding under the Facility.
The Facility expires on September 10, 1998.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
9. LONG-TERM DEBT
Pursuant to the Joint Plan, the Company and its lenders agreed to a
restructuring of the Company's obligations. The resulting new debt
obligations are summarized below. The difference between the
preconfirmation debt obligations and the new debt obligations was included
in the calculation of the "Extraordinary items - gain on debt discharge"
(see Note 1).
The composition of the new debt obligations included on the consolidated
balance sheet as of June 28, 1997 and June 29, 1996 is as follows:
<TABLE>
<CAPTION>
June 28, 1997 June 29, 1996
------------- -------------
<S> <C> <C>
New senior unsecured notes, interest rate of 11.72%,
due September 2002 $ 91,462 $ 91,462
New equipment notes, interest rate of 7%, due in installments
through October 2003 7,166 9,536
New tax notes, interest rates at 5.89% to 8%, due
through September 2001 6,342 6,423
Real estate mortgage notes and bonds payable at rates ranging
from 3% to 9.98% and the prime rate plus 1% 5,208 5,455
------------ ------------
Total debt 110,178 112,876
Less current portion 2,624 2,903
------------ ------------
Total long-term debt $ 107,554 $ 109,973
============ ============
</TABLE>
Holders of the prepetition senior notes and revolving credit facility
received the new senior unsecured notes as part of their distribution under
the Joint Plan.
The Company must offer to purchase the new senior unsecured notes at a
price equal to 101% of the principal amount upon the occurrence of a change
in control. The new senior notes contain restrictions on, among other
things, incurrence of debt, payment of dividends and repurchases of common
stock.
The Company has mortgage notes and bonds payable collateralized by real
estate with an aggregate net book value of $4,408 at June 28, 1997.
Future maturities of long-term debt subsequent to June 28, 1997 are
summarized as follows:
1998 $ 2,624
1999 2,918
2000 1,491
2001 1,120
2002 1,143
Thereafter 100,882
--------
$110,178
========
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
10. LEASES
The Company leases its retail store properties, certain warehouse
facilities and certain equipment under capital and operating leases.
Generally, leases are net leases that require the payment of executory
expenses such as real estate taxes, insurance, maintenance and other
operating costs, in addition to minimum rentals. The initial terms of
the leases range from three to twenty-five years and generally provide
for renewal options.
Minimum annual rentals for all capital and operating leases having
initial noncancelable lease terms in excess of one year at June 28,
1997 are as follows:
Capital Operating
Leases Leases
------ ------
1998 $ 9,221 $ 34,284
1999 8,841 34,902
2000 8,265 34,824
2001 5,330 33,569
2002 4,998 33,025
Thereafter 14,071 134,472
------ -------
Total minimum lease payments 50,726 $305,076
====== =======
Less amounts representing interest 11,536
------
Present value of minimum lease payments 39,190
Less current portion 6,531
-------
Long-term capital lease obligations $32,659
======
The operating leases on substantially all store properties, provide for
additional rentals when sales exceed specified levels and contain
escalation clauses. Rent expense for the fifty-two weeks ended June 28,
1997, the forty-three weeks ended June 29, 1996, the nine weeks ended
September 2, 1995, and the fifty-two weeks ended July 1, 1995 was
$32,557, $26,278, $5,660 and $44,385, respectively, including $145,
$103, $36 and $253 of additional rentals.
11. TRANSACTIONS WITH RELATED PARTIES
Successor Company
Avatex Corporation formerly known as FoxMeyer Health Corporation
("Avatex"), an affiliate of one of the Company's largest suppliers, owned
69.8% of Hamilton Morgan L.L.C. "Hamilton Morgan") which beneficially owned
approximately 39.9% of the Company's common stock. Robert Haft, the
Company's Chairman of the Board of Directors and Chief Executive Officer,
is President of Hamilton Morgan. The two Co-chairmen of the Board of
Directors of Avatex are members of the Board of Directors of the Company.
An affiliate of Avatex supplied the Company's stores with pharmaceuticals
and health and beauty care products under a long-term contract until the
affiliate was acquired by McKesson Drug Company in late 1996. On June 29,
1996 the Company had liabilities to the Avatex affiliate relating to these
purchases of $7,751. This liability is included in accounts payable in the
accompanying consolidated balance sheets. For the fifty-two weeks ended
June 28, 1997 and the forty-three weeks ended June 29, 1996, the Company
purchased $71,298 and $179,841, respectively, of product under the terms of
the contract.
On September 19, 1997, Robert Haft and Avatex finalized an agreement
regarding Hamilton Morgan, (Hamilton Morgan Agreement). In exchange for
3,750,000 shares of the Company's stock and the return of a voting proxy on
other Company shares, Hamilton Morgan will redeem the 69.8% Avatex interest
in Hamilton Morgan, repay certain indebtedness and receive other
consideration, Avatex now beneficially owns 39.1% of the Company's common
stock. In conjunction with the Hamilton Morgan Agreement, the Company
entered into a Severence Agreement with Robert Haft whereby he resigned his
position as Chairman of the Board of Directors and Chief Executive Officer
and will receive a lump sum cash payment of $4,417. Under the terms of the
Severence Agreement, the Company will continue to provide benefits to him
through September 19, 2000. He is indemnified and entitled to tax
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
reimbursement in respect to any payments that constitute excess parachute
payments under Federal Income Tax laws. The Company is obligated to provide
a letter of credit in the amount of approximately $2,900 to secure its
contractual obligations under the Severance Agreement.
Predecessor Company
Operating Leases - The Company leased various property and equipment from
related parties. Rental payments for the nine weeks ended September 2, 1995
and the fifty-two weeks ended July 1, 1995 were $2,280 and $15,558
respectively.
12. COMMON STOCK, WARRANTS AND OPTIONS
Common Stock
A total of 12,156,250 common shares were issued and outstanding as of the
Effective Date. Pursuant to the Joint Plan, 10,000,000 common shares were
issued to prepetition creditors. Further, pursuant to the Joint Plan,
1,250,000 common shares were issued by the Company to Hamilton Morgan,
50,000 common shares were issued to Alvarez & Marsal, Inc., and 12,500
common shares were issued to certain members of existing management in
exchange for cash consideration at $8.00 per share net of $1,000 in
expenses incurred by Hamilton Morgan. Additionally, 843,750 shares were
distributed to Avatex as settlement for a prepetition reclamation claim.
Warrants
Pursuant to the Joint Plan, warrants to purchase an aggregate of 1,250,000
common shares were issued as of the Effective Date to certain prepetition
unsecured creditors. Each warrant entitles the holder thereof to acquire
one common share at a price of $13.50, subject to certain adjustments, as
defined in the Joint Plan. The warrants are exercisable at any time until
the close of business on September 10, 2002. As of June 28, 1997, no
warrants have been exercised.
Stock Options
The Company has an incentive stock option plan for officers and key
employees. As of June 28, 1997, options for 69,183 common shares were
reserved for future grant, and options for 844,150 shares were granted and
are exercisable upon vesting. Under the terms of the option plan, all
options have a seven-year term from date of grant. Generally, the options
granted vest with respect to 20% of the underlying shares on the grant
date, and will vest in additional increments of 20% of the underlying
shares on each of the first four anniversaries of September 11, 1995. To
the extent then vested, the options are generally exercisable within one
year following the death or disability of the holder of the option, and
within six months of any termination event, except where a termination is
for cause, in which case the option will then terminate. To the extent then
not vested, the options generally will terminate upon the holders death,
disability or termination of employment. The employment agreements of
certain executive officers provide for accelerated vesting of options upon
specified termination events.
The Board of Directors voted to increase the number of shares eligible for
grant under the incentive stock option plan from 913,333 to 1,750,000. The
proposed plan amendment and restatement is subject to shareholder approval.
The firm of Alvarez & Marsal, Inc. were granted fully vested stock options
for 416,667 shares of common stock on the Effective Date. The options are
exercisable at $8.00 per share and expire seven years from date of grant.
The Company has a stock option plan for directors. Each director was
granted options for 5,000 common shares on October 3, 1995 and October 1,
1996 and will be granted options for 5,000 shares on October 1 each year
through 1999. The options vest immediately, expire five years after the
grant date and are exercisable at an exercise price equal to the market
price on the grant date. A maximum of 250,000 common shares may be granted
under the stock option plan for directors. As of June 28, 1997, options for
60,000 shares were granted.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
Each director may also elect to receive common stock, in lieu of all or
portions of the director's annual retainer at a price equal to the market
price as of October 1 of the year of the election.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related interpretations in accounting
for its stock-based compensation. Accordingly, no compensation cost for the
Company's stock option plans has been recognized in the accompanying
consolidated financial statements. Had compensation cost for the Company's
plans been determined based on the fair value at the grant date instead of
the intrinsic value method described above for the awards granted in 1996
and 1997, the Company's net (loss) income and net (loss) income per share
would have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
Fifty-two weeks Forty-three weeks
ended June 28, 1997 ended June 29, 1996
------------------- -------------------
<S> <C> <C>
Net (Loss) income As reported $(2,281) $ 2,526
Pro forma $(2,541) $ 2,364
Net (Loss) Income per share As reported $(0.19) $ 0.21
Pro forma $(0.21) $ 0.19
</TABLE>
The fair value of each option has been estimated on the date of grant using
the Black-Scholes options pricing model with the following assumptions for
the periods presented: expected volatility of 30%; no dividend yield;
expected life of 7 years; and a risk-free interest rate of 6.5%.
All of the Company's Stock Option Plans are administered by the
Compensation Committee of the Company's Board of Directors.
As of June 28, 1997, 844,840 options were excercisable at a weighted
average excercise price per share of $7.80.
The following table summarizes stock option activity under the plans:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Average Remaining
Options Exercise Option Price Contractual
Outstanding Price Per Share per Share Life (Years)
----------- --------------- --------- ------------
<S> <C> <C> <C> <C>
Balance at September 2, 1995 1,225,917 $ 8.00 $ 8.00 7.00
Granted 248,800 $ 7.53 $ 7.06 - $ 8.00
Forfeited (116,100) $ 8.00 $ 8.00
---------
Balance at June 29, 1996 1,358,617 $ 7.91 $ 7.06 - $ 8.00 6.22
Granted 100,000 $ 5.66 $ 5.44 - $ 6.17
Forfeited (137,800) $ 7.82 $ 7.06 - $ 8.00
---------
Balance at June 28, 1997 1,320,817 $ 7.75 $ 5.44 - $ 8.00 5.30
=========
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company sponsors an Employee Stock Purchase Plan ("ESPP") under which
it is authorized to issue up to 500,000 shares of common stock to all
employees with a minimum of three months of service who are non-officers
and non-highly compensated as defined by the Internal Revenue Code. The
ESPP allows eligible employees to contribute through payroll deductions up
to 10% of their annual salary toward stock purchases. Stock purchases will
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
be made quarterly at 90% of the closing price at the last day of any
calendar quarter. The plan is subject to shareholder approval.
13. INCOME TAXES
Deferred taxes at June 28, 1997 and June 29, 1996, reflect the net tax
effect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes. Deferred tax assets are recognized to the extent that
realization of such benefits is more likely than not. Changes in tax rates
or laws will result in adjustments to the recorded deferred tax assets or
liabilities in the period that the change is enacted.
The components of deferred tax assets and liabilities are as follows:
June 28, 1997 June 29, 1996
------------- -------------
Deferred Tax Assets:
Operating and restructuring reserves $ 7,448 $ 10,889
Net operating losses 116,399 113,634
Depreciation and amortization 27,078 18,831
Lease escalation accruals 5,030 4,462
Jobs tax credit 4,432 4,432
Other items 767 2,008
------------ ------------
161,154 154,256
Valuation allowance (151,384) (144,326)
------------ ------------
Net deferred tax assets $ 9,770 $ 9,930
============ ============
Deferred Tax Liabilities:
Other items -- (160)
------------ ------------
Total deferred tax liabilities $ -- $ (160)
============ ============
Composition of amounts in Consolidated Balance
Sheet:
Deferred tax assets - current $ 515 $ 548
Deferred tax liabilities - current -- (160)
------------ ------------
Net deferred tax assets - current $ 515 $ 388
============ ============
Deferred tax assets - noncurrent $ 9,255 $ 9,382
Deferred tax liabilities - noncurrent -- --
------------ ------------
Net deferred tax assets - noncurrent $ 9,255 $ 9,382
============ ============
Deferred tax assets, arising both from future deductible temporary
differences and net operating losses ("NOLs"), have been reduced by a
valuation allowance to an amount more likely than not to be realized
through the future reversal of existing taxable temporary differences. Any
future reversal of the valuation allowance existing at the Effective Date
to increase the net deferred tax asset will be added to additional paid-in
capital.
There is no current income tax provision. A reconciliation of the total tax
provision with the amount computed by applying the statutory federal income
tax rate to income (loss) before taxes is as follows:
<TABLE>
<CAPTION>
Fifty-two Forty-three || Nine Fifty-two
weeks ended weeks ended || weeks ended weeks ended
June 28, 1997 June 29, 1996 || September 2,1995 July 1, 1995
------------- ------------- || ---------------- ------------
||
<S> <C> <C> <C> <C>
Statutory tax rate (35.0%) 35.0% || 35.0% (35.0)%
State income taxes, net of federal benefit -- 5.1 || -- --
Nontaxable forgiveness of indebtedness -- -- || (29.1) --
Depreciation -- -- || (0.4) (0.2)
Restructuring reserves -- -- || (5.3) 2.2
Change in valuation allowance 35.0% -- || 0.3 36.6
Other, net -- 5.8 || (0.5) (3.8)
------------- ------------- || ------------- -------------
Effective tax rate 0.0% 45.9% || 0.0% (0.2)%
============= ============= || ============= =============
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
The Company has approximately $269,000 of tax basis NOLs available to
offset future taxable income. Approximately $263,000 of this amount
("Section 382 NOLs") is subject to restrictions enacted in the Internal
Revenue Code of 1986, as amended, dealing specifically with stock ownership
changes and debt cancellations that occurred in connection with the
Company's emergence from bankruptcy. Additional restrictions imposed by
Internal Revenue Code Section 382 (I)(6), and the regulations thereunder,
could further limit the Company's ability to use its Section 382 NOLs to
offset future income to an amount approximating $5,100 annually. The
remaining $6,000 of NOLs were incurred subsequent to September 2, 1995, and
may be used to offset future taxable income without restriction. These NOLs
will expire beginning in 2008.
The Company also has $4,432 of federal targeted jobs tax credit carryovers,
which will expire beginning in 2001.
The Internal Revenue Service has completed its field examination of the
Company's federal income tax returns for all years to and including June
1992.
14. EMPLOYEE BENEFIT PLANS
Defined Benefit Plans
The Company provides pension benefits under noncontributory defined benefit
pension plans to its union employees who have met the applicable age and
service requirements specified in the plans.
Benefits are earned on the basis of credited service and average
compensation over a period of years. Vesting occurs after five years of
service as specified under the plans. The Company makes contributions to
the plans as necessary to satisfy the minimum funding requirement of ERISA.
The Company provided pension benefits under noncontributory defined benefit
pension plans to its nonunion employees who have met the applicable age and
service requirements specified in the plans. During fiscal 1996 the
Company's Board of Directors voted to freeze the benefits accruing under
its defined benefit plan that covers nonunion personnel effective June 29,
1996 and to increase the Company's matching contribution to the defined
contribution plan for those employees.
The following table sets forth the funded status of the Company's defined
benefit pension plans and the amounts recognized in the Company's
consolidated balance sheets:
<TABLE>
<CAPTION>
June 28, 1997 June 29, 1996
------------- -------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $9,076 and $9,145 $ 9,498 $ 9,543
Additional amounts related to future salary increases 764 560
------------- -------------
Projected benefit obligation 10,262 10,103
Plan assets, at fair value 8,829 7,698
------------- -------------
Projected benefit obligation in excess of plan assets 1,433 2,405
Unrecognized net gain 1,335 312
Unrecognized prior service costs (1) (1)
Unrecognized transition asset 5 6
------------- -------------
Accrued pension costs $ 2,772 $ 2,722
============= =============
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
The significant assumptions used in determining the pension obligations
are:
<TABLE>
<CAPTION>
June 28, 1997 June 29, 1996
------------- -------------
<S> <C> <C>
Discount rate 6.3% 6.3%
Expected long-term rate of return on assets 8.5% 8.5%
Rate of increase in future compensation levels 4.0% 4.0%
</TABLE>
Assets of the plans consist primarily of investments in stock and bond
pooled funds.
The net pension expense consists of the following:
<TABLE>
<CAPTION>
Fifty-two Forty-three || Nine Fifty-two
weeks ended weeks ended || weeks ended weeks ended
June 28, 1997 June 29, 1996 || September 2, 1995 July 1, 1995
------------- ------------- || ----------------- -------------
<S> <C> <C> <C> <C>
Service costs $ 85 $ 875 || $ 179 $ 1,176
Interest cost on projected benefit obligation 622 698 || 104 636
Actual net return on assets (1,584) (1,746)|| (97) (860)
Net amortization (deferral) 933 1,186 || 2 259
------------- ------------- || ------------- -------------
Net pension expense $ 56 $ 1,013 || $ 188 $ 1,211
============= ============= || ============= =============
</TABLE>
Defined Contribution Plans
The Company has defined contribution employee savings plans covering
employees who meet the eligibility requirements as described in the plans.
The Company contributes to these plans an amount equal to 25% of an
employee's contribution up to a maximum of 4% of the employee's
compensation. The Company increased its contribution to the nonunion
employee savings plan beginning in fiscal 1997 to 100% of the employees
contribution up to 2% of the employees pay and 20% of the employees
contribution in excess of 2% up to 4% of employees pay. Employee savings
plan expenses for the fifty-two weeks ended June 28, 1997, the forty-three
weeks ended June 29, 1996, the nine weeks ended September 2, 1995, and the
fifty-two weeks ended July 1, 1995 were $980, $281, $65, and $506,
respectively.
Health and Welfare Plans
The Company also contributes to a multiemployer union sponsored health and
welfare plan covering truck drivers and warehouse personnel. Total expenses
for the fifty-two weeks ended June 28, 1997, the forty-three weeks ended
June 29, 1996, the nine weeks ended September 2, 1995, and the fifty-two
weeks ended July 1, 1995 were $1,303, $896, $196, and $1,558, respectively.
The Company has no postretirement health and welfare or benefits programs.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
15. PREDECESSOR COMPANY INTEREST EXPENSE
Interest expense for the Predecessor Company, for which disclosure is
required by SOP 90-7, consists of the following:
<TABLE>
<CAPTION>
Predecessor Company
-------------------
Nine Fifty-two
weeks ended weeks ended
September 2, 1995 July 1, 1995
----------------- ------------
<S> <C> <C>
Prepetition credit facility interest $ 3,164 $ 16,377
Senior notes 1,695 9,417
Adequate protection term loans and
capitalized equipment leases 776 5,772
Amortization of deferred debt expense 44 1,580
Loan commitment fees 10 160
Other -- 18
------------- -------------
$ 5,689 $ 33,324
============= =============
</TABLE>
Generally, as a result of the bankruptcy, the contractual terms of
prepetition debt obligations are suspended. Only creditors who are secured
by collateral, the value of which exceeds their prepetition claims, are
entitled to accrue interest on those claims after a bankruptcy filing.
Subsequent to the bankruptcy filing, the Company continued to accrue
interest on the revolving credit loan and senior notes at the contractual
rates. During October 1992, the Company entered into agreements with
lenders to make adequate protection payments at rates less than those
specified as interest in the respective agreements. The difference between
these amounts is reflected in liabilities subject to settlement under
reorganization proceedings. With respect to the remainder of the secured
debt and capitalized lease obligations, the Company accrued only the
adequate protection payments it anticipated would be required. The
difference between the interest which would have accrued at the contractual
rates and the adequate protection payments related to the remaining secured
debt and capitalized lease obligations was $2,846 and $14,521 for the nine
weeks ended September 2, 1995, and the fifty-two weeks ended July 1, 1995,
respectively. The Company did not accrue or pay interest on the unsecured
debt subsequent to the bankruptcy filing. The unaccrued interest on the
unsecured debt was $1,051 and $6,074 for the nine weeks ended September 2,
1995, and the fifty-two weeks ended July 1, 1995, respectively.
16. REORGANIZATION ITEMS AND RELATED RESERVES
Reorganization items consist of the following:
<TABLE>
<CAPTION>
Predecessor Company
-------------------
Nine Fifty-two
weeks ended weeks ended
September 2, 1995 July 1, 1995
----------------- ------------
<S> <C> <C>
Chapter 11 professional fees $ 9,373 $ 17,201
Amortization of prepetition exclusivity
income (283) (2,572)
Interest income (2,171) (10,174)
Amortization of post-petition credit facility
origination fees 29 646
Insurance claim recovery (6,650) --
Gain on sale of assets held for sale -- (7,634)
Costs of downsizing 16,500 53,691
------------ ------------
$ 16,798 $ 51,158
============ ============
</TABLE>
Costs of downsizing
In September 1992, the Company made a decision to downsize the chain, and
in October 1992 commenced a store closing program. The program involved the
closing of 143 of the Company's stores that management considered not
viable. In conjunction with the program to downsize the chain, the Company
also consolidated its distribution centers into one location in Youngstown,
Ohio and reduced corporate overhead. The Company identified for closure an
additional 25 stores in fiscal 1994 and 41 stores in fiscal 1995. In August
1995 management identified 50 stores
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts,continued)
- --------------------------------------------------------------------------------
which were scheduled to be reduced in size (rightsized) and provided for
the cost of rightsizing and provided a markdown reserve for the inventories
which would be liquidated in the affected stores. In 1997, the rightsizing
program was replaced with the "Warehouse District" concept. The "Warehouse
District" concept involves liquidating slow-moving merchandise and utilizes
the excess space to expand the existing grocery offering and adds frozen
and refrigerated food.
The consolidated statements of operations reflect reorganization expenses
related to the downsizings as follows:
<TABLE>
<CAPTION>
Predecessor Company
-------------------
Nine Fifty-two
weeks ended weeks ended
September 2, 1995 July 1, 1995
----------------- ------------
<S> <C> <C>
Downsizing reserve $ 2,500 $ 25,786
Inventory markdown reserve 14,000 --
Lease rejection reserve -- 20,400
Reserve for abandonment of property and
equipment -- 10,550
Lease-purchase cost write-off -- 860
Adjustments to deferred rent liability -- (3,905)
------------ ------------
$ 16,500 $ 53,691
============ ============
</TABLE>
The activity in the reserve for costs of downsizing is as follows:
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- -------------------
Fifty-two Forty-three || Nine Fifty-two
weeks ended weeks ended || weeks ended weeks ended
June 28, 1997 June 29, 1996 || September 2, 1995 July 1, 1995
------------- ------------- || ----------------- ------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 3,451 $ 7,301 || $ 6,564 $ 16,089
||
Additions to reserve -- -- || 2,500 25,786
Charges associated with closed stores (462) (1,772)|| (1,690) (34,502)
Store rightsizing costs (895) (640)|| -- --
Corporate and distribution center costs (228) (1,438)|| (73) (809)
------------ ------------ || ------------ ------------
Balance, end of period $ 1,866 $ 3,451 || $ 7,301 $ 6,564
============ ============ || ============ ============
</TABLE>
The remainder of the reserve for the costs of downsizing at June 28, 1997
is considered by management to be a reasonable estimate of the costs to be
incurred related to the downsizings. To the extent additional stores or
distribution centers are identified for closure at a later date or the
estimates for write-downs or reserves for the current downsizing program
require adjustment, such adjustments will be recognized in future periods.
17. FINANCIAL INSTRUMENTS
The Company has financial instruments which include cash and cash
equivalents and long-term debt. The carrying values of all instruments at
June 28, 1997 approximated their fair market value.
The fair values of the instruments were based upon quoted market prices of
the same or similar instruments or on the rate available to the Company for
instruments of the same maturities.
18. NONCASH INVESTING AND FINANCING ACTIVITIES
On September 29, 1995 the Company and one of its subsidiaries purchased all
of the partnership interests in the partnership that owns the building in
which the Company's headquarters is located for $145. Also, the partnership
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
has a 50% interest in another partnership which owns a commercial building.
In conjunction with the acquisition, assets and liabilities were assumed as
follows:
Fair value of assets acquired:
Accounts receivable 37
Land, buildings and leasehold interests 4,735
Goodwill and other assets 1,958
Liabilities and minority interest assumed:
-----------------------------------------
Accounts payable 25
Accrued expenses 205
Mortgage notes and bonds payable 5,820
Minority interest 535
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Thirteen Thirteen Thirteen
Fiscal 1997 weeks ended weeks ended weeks ended weeks ended
----------- September 28, 1996 December 28, 1996 March 29, 1997 June 28, 1997
------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Sales $ 264,551 $ 290,933 $ 264,043 $ 255,301
Gross profit 45,460 50,451 54,990 50,832
Net (loss) income $ (2,195) $ (548) $ 49 $ 413
Per Share:
Net(loss) income $ (.18) $ (.05) $ -- $ .03
Weighted average number of shares outstanding 12,157,054 12,157,054 12,157,054 12,158,515
</TABLE>
<TABLE>
<CAPTION>
Predecessor
Company Successor Company
------------ ----------------------------------------------------------
Nine || Four Thirteen Thirteen Thirteen
Fiscal 1996 weeks ended || weeks ended weeks ended weeks ended weeks ended
----------- September 2,|| September 30, December 30, March 30, June 29,
1995 || 1995 1995 1996 1996
------------ || ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales $ 181,968 || $ 72,877 $ 284,318 $ 252,291 $ 264,798
Gross profit 34,844 || 14,034 52,785 44,324 40,927
Income (loss) before extraordinary item (10,389)|| 88 3,578 1,544 (2,684)
Extraordinary item 775,073 || -- -- -- --
Net income (loss) $ 764,684 || $ 88 $ 3,578 $ 1,544 $ (2,684)
||
Per Share: ||
Income (loss) before extraordinary item $ (.19)|| $ .01 $ .29 $ .13 $ (.22)
||
Extraordinary item 14.33 || -- -- -- --
Net income (loss) $ 14.14 || $ .01 $ .29 $ .13 $ (.22)
||
Weighted average number of shares outstanding 54,066,463 || 12,156,250 12,156,250 12,156,658 12,157,046
</TABLE>
20. TERMINATED BUSINESS COMBINATION
The Company entered into an Agreement and Plan of Reorganization dated
September 7, 1996 (as amended as of October 9, 1996) with ShopKo Stores,
Inc. ("ShopKo"), a retailer specializing in prescription and vision
benefit("Cabot Noble"), a Delaware holding company (the "Proposed
Transaction").
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
On April 1, 1997, the Company, ShopKo and Cabot Noble entered into a
Termination Agreement mutually terminating the Agreement Plan of
Reorganization effective as of April 1, 1997.
The Company has expensed all fees and costs it has incurred and is
obligated to pay in connection with the Proposed Transaction.
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts,continued)
- --------------------------------------------------------------------------------
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning costs and Deductions- end of
Description of period expense Charge-offs period
----------- --------- ------- ----------- ------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
-------------------------------
52 weeks ended July 1, 1995 $ 6,520 $ 6,584 $ (8,187) $ 4,917
9 weeks ended September 2, 1995 4,917 350 (645) 4,622
43 weeks ended June 29, 1996 4,622 3,106 (3,537) 4,191
52 weeks ended June 28, 1997 4,191 1,382 (2,870) 2,703
Inventory shrink reserve
------------------------
52 weeks ended July 1, 1995 $ 4,726 $ 24,889 $ (24,120) $ 5,495
9 weeks ended September 2, 1995 5,495 3,100 (836) 7,759
43 weeks ended June 29, 1996 7,759 16,385 (17,675) 6,469
52 weeks ended June 28, 1997 6,469 13,122 (13,968) 5,623
Inventory markdown reserve
--------------------------
52 weeks ended July 1, 1995 $ -- $ -- $ -- $ --
9 weeks ended September 2, 1995 -- 14,000 -- 14,000
43 weeks ended June 29, 1996 14,000 -- (8,639) 5,361
52 weeks ended June 28, 1997 5,361 -- (4,616) 745
</TABLE>
F-26
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and
between Phar-Mor, Inc., a Pennsylvania corporation (the "Company"), and M. David
Schwartz (the "Employee") as of June 5, 1997 (the "Effective Date").
WHEREAS, Employee is currently employed by Company pursuant to a
written employment agreement dated September 11, 1995 (the "Existing
Agreement"); and
WHEREAS, the Company desires to continue employing Employee upon
modified terms and conditions of employment; and
WHEREAS, the Company and Employee desire to set forth in this Agreement
the terms and conditions of Employee's continued employment.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
I. EMPLOYMENT AND TERM.
The Company hereby employs Employee and Employee hereby accepts such
employment, upon the terms and conditions hereinafter set forth. This Agreement
shall commence on the Effective Date and continue in force and effect for two
years (the "Stated Term") through June 4, 1999 unless sooner terminated pursuant
to the provisions of Section IV of the Agreement.
II. DUTIES.
Subject to the provisions of Section IV of this Agreement:
A. The Company shall employ Employee and Employee shall serve the
Company for the Stated Term in the capacity of President and Chief Operating
Officer of the Company. The Company agrees that the duties that may be assigned
to Employee shall be usual and customary duties of the offices or positions to
which he may from time to time be appointed or elected. Employee shall have such
corporate power and authority as reasonably required to enable the discharge of
duties in any office that may be held.
B. Employee agrees to devote substantially all of his business time,
energies and abilities to the business of the Company. Nothing herein shall
prevent Employee, upon approval of the Board, from serving, or continuing to
serve upon termination of employment, as a director or trustee of other
corporations or businesses that are not in competition with the business of the
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<PAGE>
Company as set forth in Section V of this Agreement or in competition with any
present or future affiliate of the Company.
C. Employee shall report to the Chief Executive Officer and Chairman of
the Board or, at the Board's direction, to the Board.
III. COMPENSATION.
A. Base Salary. The Company shall pay to Employee a base salary of
$636,000.00 per year for the first year of the Stated Term which salary shall be
retroactive to December 9, 1996. Said base salary shall be increased to
$675,000.00 on June 5, 1998 for the second year of the Stated Term. Such salary
shall be earned weekly and shall be payable in arrears in periodic installments
no less frequently than monthly in accordance with the Company's customary
practices. Amounts payable shall be reduced by standard withholding and other
deductions authorized by Employee or required by applicable law.
B. Bonus. The Company will pay to Employee annually a bonus in an
amount not less than the amount Employee is entitled to under the Company's
incentive/bonus plan. For the Company's fiscal year ending in 1997, the Company
will pay the Employee a bonus equal to the greater of (i) 60% of his base salary
earned during such fiscal year (the "Minimum Bonus"), or (ii) the amount to
which he is entitled under the incentive/bonus plan then in effect. Thereafter,
the Company will pay the Employee a bonus equal to the amount to which he is
entitled under the incentive/bonus plan of the Company in effect from time to
time. If the fiscal year of the Company is changed, the Employee will receive a
bonus pro-rated to the amount to which he would otherwise be entitled hereunder
based on the number of months in the short year, or such other equitable method
as may be mutually agreed upon by Employee and the Company.
C. Stock Options. Employee has previously earned and is entitled to
receive, subject to the applicable vesting schedule, options to purchase 175,000
shares of the Company at $8.00 per share. Additionally, Employee shall also be
eligible and entitled to receive on June 5, 1997, a nonqualified stock option
for 100,000 shares of Company common stock at a per share exercise price equal
to the fair market value of a share of common stock on said grant date (the
"Option"). The Option shall vest as to one-third of the shares on said grant
date, one-third of the shares on the first anniversary of said grant date and
one-third on the second anniversary of said grant date. Notwithstanding the
foregoing, if, at any time, the Employee's employment is terminated by the
Company without Cause (as defined in Section IV.B. hereof) or the Employee
terminates employment with the Company for Good Reason (as defined in Section
IV.C. hereof), all said options shall immediately vest. During the term of this
Agreement Employee shall remain eligible, subject to the discretion of the
Company, to receive additional option awards ("Additional Options").
D. Other Stock or Equity Plans. Employee shall be eligible to
participate under any other stock or equity incentive plan or benefit provided
by the Company to senior officers at the
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discretion of the Company. For purposes of this Agreement, "senior officer"
means an officer of the Company of the rank of senior vice president or above.
E. Welfare Benefit Plans. Employee and/or his family, as the case may
be, shall (subject only to exceptions of general applicability or applicable
legal requirements) be eligible to participate in and shall receive all benefits
under welfare benefit plans, practices, policies and programs provided by the
Company (including, without limitation, pension, medical, prescription, dental,
disability, and life insurance plans and programs) to the extent available
generally to senior officers of the Company.
F. Expenses. Employee shall be entitled to receive prompt reimbursement
for all reasonable employment expenses incurred by him in accordance with the
policies, practices and procedures of the Company as in effect generally with
respect to senior officers.
G. Vacation. Employee shall be entitled during the term of this
Agreement to four (4) weeks paid vacation per annum. Employee may accumulate
vacation only to the extent permitted by the policies, practices and procedures
of the Company as in effect generally with respect to senior officers.
H. Car or Car Allowance. Employee shall be entitled to a car or car
allowance to the extent applicable generally to senior officers.
I. Attorneys' Fee Reimbursement. Within ten days after presentation of
the invoice therefore, the Company shall pay to the law firm of Honigman Miller
Schwartz and Cohn in Detroit, Michigan, an amount not to exceed $9,500.00 for
legal fees incurred by Employee.
J. Reservation of Right to Amend. With respect to the benefits provided
to Employee in accordance with Section III.E., the Company reserves the right to
modify, suspend or discontinue any and all of the plans, practices, policies and
programs at any time without recourse by Employee so long as such action is
taken with respect to senior officers or management generally and does not
single out Employee.
IV. TERMINATION.
A. Death or Disability. Employee's employment shall terminate
automatically upon Employee's death. If the Company determines in good faith
that a Disability of Employee has occurred (pursuant to the definition of
Disability set forth below), Company may terminate Employee's employment by
providing Employee written notice in accordance with Section XVI of the
Company's intention to terminate Employee's employment. In such event, Employee
employment with the Company shall terminate effective on the 30th day after
receipt of such notice by Employee, provided that, within the 30 days after such
receipt, Employee shall not have returned to full-time performance of his
duties.
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<PAGE>
For purposes of this Agreement, "Disability" means a physical or mental
impairment which (i) substantially limits a major life activity of Employee,
(ii) renders Employee unable to perform the essential functions of his position,
even with reasonable accommodation that does not impose an undue hardship on the
Company, and (iii) has contributed to Employee's absence from his duties with
the Company on a full-time basis for more than 60 consecutive days. The Company
reserves the right, in good faith, to make the determination of Disability under
this Agreement based upon information (as to items (i) and (ii) above) supplied
by a physician selected by the Company or its insurers and acceptable to
Employee or his legal representative (such agreement as to acceptability not to
be withheld unreasonably).
B. Cause. The Company may terminate Employee's employment for Cause
(pursuant to the definition of Cause set forth below) by providing Employee
written notice in accordance with Section XVI of the Company's intention to
terminate Employee's employment, setting forth in such notice the specific
grounds therefor. In such event, Employee's employment with the Company shall
terminate effective as of the date of receipt of such notice by Employee.
For purposes of this Agreement, "Cause" means (1) a material breach by
Employee of Employee's obligations under Section II of this Agreement (other
than as a result of incapacity due to physical or mental illness), which is
demonstrably willful and deliberate on the Employee's part and is committed in
bad faith or without reasonable belief that such conduct is in the best
interests of the Company, or which is the result of Employee's gross neglect of
duties, and, in either case, not remedied in a reasonable period of time not
more than five days after receipt of written notice from the Board specifying
such breach, (2) the conviction of Employee of a felony or other crime involving
fraud, dishonesty or moral turpitude, or (3) the commission by Employee of a
fraud which results in a material financial loss to the Company.
C. Good Reason. Employee may terminate Employee's employment for Good
Reason. Employee shall provide the Company written notice in accordance with
Section XVI of Employee's intention to terminate Employee's employment for Good
Reason, setting forth in such notice the grounds therefor. Employee's employment
with the Company shall terminate effective as of the earlier of (i) the 15th day
after the Company's receipt of such notice or (ii) such later date as set forth
in such notice, unless the Company has cured the grounds therefor.
For purposes of this Agreement, "Good Reason" means (1) Employee's
position (including responsibilities, title, reporting requirements or
authority) is reduced below the level set forth in Section II.A. hereof (2)
employee and/or his job functions are transferred to a location more than 25
miles from the location of his current office (3) the Company fails in any
material respect to comply with the provisions of Section III of this Agreement
(4) the Company has within the prior twelve months undergone a Change of Control
(pursuant to the definition of Change of Control set forth below), or (5) the
Company purports to terminate Employee's employment otherwise than as expressly
permitted by this Agreement or without payment of any amounts required to be
paid under Section IV.F. For purposes of this Agreement, "Change of Control"
shall mean (a) the acquisition by any individual, entity or group of beneficial
ownership of 20% or more of either (i) the then outstanding shares of common
stock of the Company, or (ii) the combined
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<PAGE>
voting power of the then outstanding voting securities of the Company entitled
to vote generally in the election of directors of the Company or (b) individuals
who, as of the date of this Agreement, constitute the Board cease for any reason
to constitute at least a majority of the Board; or (c) approval by the
shareholders of the Company of a reorganization, merger or consolidation which
results in a change of the ownership and/or voting rights of 30% or more of (i)
the then outstanding shares of common stock of the Company, or (ii) a majority
of the members of the Board of the Company do not remain members of the Board of
the entity resulting from such reorganization, merger or consolidation; or (d)
approval by the shareholders of the Company of a liquidation or dissolution of
the Company, or the sale or other disposition of all or substantially all of the
assets of the Company. For the purposes of this Agreement, Change of Control
shall not include any change in ownership of the Company's common stock
resulting from any transaction between the current principals of the Hamilton
Morgan LLC.
D. Other Than Cause or Good Reason or Death or Disability. The Company
may terminate Employee's employment without cause by providing Employee written
notice in accordance with Section XVI of the Company's intention to terminate
Employee's employment. In such event, Employee's employment shall terminate
effective on the 30th day after receipt of such notice by Employee.
E. Termination by Employee Other Than for Good Reason. The Employee may
voluntarily terminate his employment with the Company for any reasons
whatsoever, other than in a situation where he has Good Reason for doing so, by
providing Employer written notice thereof in accordance with Section XVI. In
such event, Employee's employment shall terminate effective on the thirtieth day
after the receipt of such notice by Company unless the parties mutually agree to
an earlier termination.
F. Obligations of the Company Upon Termination. Upon termination of
Employee's employment for any reason, the Company shall have no further
obligations to Employee (or his estate or legal representative) under this
Agreement other than the following:
1. Death or Disability. If Employee's employment is terminated by
reason of Employee's Death or Disability, the Company shall (a) pay the sum of
(i) Employee's annual base salary through the end of the calendar month during
which the termination occurs (to the extent not theretofore paid), (ii) any
accrued vacation pay not theretofore paid, and (iii) any accrued incentive
compensation that has been fixed and determined, which the Company shall pay to
Employee or his estate or beneficiary, as applicable, in a lump sum in cash
within 30 days of the date of termination, or earlier as may be required by
applicable law (b) pay any amounts then due or payable pursuant to the terms of
any applicable welfare benefit plans notwithstanding such termination of
employment and (c) perform its obligations under any then outstanding stock
option awards, in accordance with the terms of any applicable stock or equity
incentive plan (the sum of the amounts and benefits described in clauses (a),
(b) and (c) shall be hereinafter referred to as the "Accrued Obligations").
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<PAGE>
2. Cause. If Employee's employment is terminated by the Company for
Cause, the Company shall timely pay any Accrued Obligations. If it is
subsequently determined that the Company did not have Cause for termination
under Section IV.B., then the Company's decision to terminate shall be deemed to
have been made under Section IV.D, and the amounts payable under Section IV.F.3
below shall be the only amounts Employee may receive for his termination.
3. Other Than for Cause or by Reason of Death or Disability. If the
Company terminates Employee's employment (other than for Cause or because of his
Death or Disability), or Employee terminates his employment for Good Reason, the
Company shall (a) timely pay any Accrued Obligations (including but not limited
to any immediately vested stock options in accordance with Section III C.
hereof) and (b) if such termination occurs prior to June 5, 1998, pay Employee a
lump sum equal to two times (or if such termination occurs on or after June 5,
1998, one and one half times) the sum of (i) the annual base salary contained in
Section III.A. hereof (or any higher base salary currently in effect on the date
of termination) ("Base Salary") and (ii) the greater of (x) the average of the
annual bonus payable to the Employee by the Company in respect to the two fiscal
years preceding the fiscal year in which the termination occurs, annualized if
any of the fiscal years is shorter than twelve months (or the average of bonuses
paid by the Company for such shorter period preceding the fiscal year in which
the Employee was employed) or (y) the Minimum Bonus (the greater of (x) or (y)
being the "Bonus Amount"). In addition, any Additional Options granted to
Employee under any applicable stock or equity incentive plan shall continue to
vest (in accordance with the applicable option agreements) during the remainder
of the Stated Term as if such termination had not occurred and the termination
of service for purposes of any such plan and such option agreements shall be
deemed to occur at the expiration of the Stated Term. The Company shall also pay
on behalf of Employee the full cost of the continuation for two years of that
level of health benefit coverage provided by the Company to Employee and/or his
family immediately prior to termination of his employment. Employee shall be
entitled to exercise his rights to continued coverage under COBRA upon the
expiration of said two years of continued health benefit coverage. Further, the
Company shall pay to Employee, within fourteen days of presentation of receipts
or other substantiation reasonably required hereunder, an amount equal to (i)
all out of pocket expenses for packing and moving his household effects and
automobiles by commercial moving service from Youngstown, Ohio to any other
location in the continental United States and (ii) any loss he suffers on his
home in Youngstown, Ohio equal to the excess of the purchase price of his home,
plus any capital improvements thereto, over the Sale Price (as defined herein)
((i) and (ii) jointly referred to as the "Moving Reimbursement"). The Sale Price
means the actual selling price to a third party, less commissions and other
customary expenses of sale, for which Employee sells his home if the sale occurs
within 180 days after termination of employment or, if no such sale has occurred
within such period, the Appraised Value (as defined herein). The Appraised Value
means the fair market value of the home as of the date of the appraisal as
determined by a qualified appraiser mutually agreed to by the Employee and the
Company. If the parties cannot mutually agree, each party shall pick an
appraiser who in turn shall mutually agree on a third qualified appraiser who
shall determine the fair market value of the home as of the date of the
appraisal. Such appraisal shall be binding on the parties hereto. The appraisal
shall be paid for one half by the Employee and one half by the Company.
Notwithstanding the
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<PAGE>
foregoing, the Moving Reimbursement shall not exceed the lesser of $75,000 or
the full amount of the Moving Reimbursement reduced by amounts paid by a
subsequent employer for packing and moving expenses from Youngstown, Ohio and
for any loss Employee suffers on his Youngstown, Ohio home.
4. Termination by Employee Other Than for Good Reason. If the Employee
voluntarily terminates his employment with the Company without Good Reason, the
Company shall timely pay any Accrued Obligations.
5. Withholdings and Deductions. Any payment made pursuant to this
Section IV.F. shall be paid, less standard withholdings and other deductions
authorized by Employee or required by law. All amounts due Employee under this
Section IV.F. shall be paid within 14 days after the date of termination or as
earlier required by law.
6. Exclusive Remedy. Employee agrees that the payments contemplated by
this Agreement shall constitute the exclusive and sole remedy for any
termination of his employment, and Employee covenants not to assert or pursue
any other remedies, at law or in equity, with respect to any termination of
employment.
V. NONCOMPETITION.
Employee agrees that for that portion of the Stated Term during which
he remains in the employ of the Company, he will not, directly or indirectly,
without the prior written consent of the Board, provide consulting services with
or without pay, own, manage, operate, join, control, participate in, or be
connected as a stockholder, partner, employee, director, officer or otherwise
with any other person, entity or organization engaged directly or indirectly in
the business of operating a regional or national discount drug store chain.
VI. UNIQUE SERVICES; INJUNCTIVE RELIEF; SPECIFIC PERFORMANCE.
Employee agrees (i) that the services to be rendered by Employee
pursuant to this Agreement, the rights and privileges granted to the Company
pursuant to this Agreement and the rights and privileges granted to Employee by
virtue of his position, are of a special, unique, extraordinary, managerial and
intellectual character, which gives them a peculiar value, the loss of which to
the Company cannot be adequately compensated in damages in any action at law,
(ii) that the Company will or would suffer irreparable injury if Employee were
to terminate this Agreement without Good Reason or to compete with the business
of the Company or solicit employees of the Company in violation of Section V. or
VII. of this Agreement, and (iii) that the Company would by reason of such
breach or violation of this Agreement be entitled to the remedies of injunction,
specific performance and other equitable relief in a court of appropriate
jurisdiction. Employee consents to the jurisdiction of a court of equity to
enter provisional equitable relief to prevent a breach or anticipatory breach of
Section V. of this Agreement by Employee.
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VII. SOLICITING EMPLOYEES.
Employee, while employed by the Company and for one year following
termination of his employment, will not directly or indirectly solicit any
employee of the Company or of any subsidiary or affiliate of the Company in an
executive, managerial, sales or marketing capacity to work for any business,
individual, partnership, firm, corporation, or other entity then in competition
with the business of the Company or of any subsidiary or affiliate of the
Company.
VIII. CONFIDENTIAL INFORMATION.
Employee agrees that during the Stated Term of this Agreement and at
all times thereafter (notwithstanding the termination of this Agreement or the
expiration of the Stated Term of this Agreement):
A. Employee shall hold in a fiduciary capacity for the benefit of the
Company all secret or Confidential Information, knowledge or data relating to
the Company or any of its affiliated companies, and their respective businesses
that are obtained by Employee during his employment by the Company or any of its
affiliated companies and that are not or do not become public knowledge (other
than by acts by Employee or his representatives in violation of this Agreement).
For the purposes of this Agreement, "Confidential Information"
includes financial information about the Company (including gross profit
margins), contract terms with the Company's vendors and others, customer lists
and data, trade secrets and such other competitively sensitive information to
which Employee has access as a result of his positions with the Company. After
termination of Employee's employment with the Company, he shall not, without the
prior written consent of the Company, or as may otherwise be required by law or
legal process, communicate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by it.
B. Employee agrees that all styles, designs, lists, materials, books,
files, reports, computer equipment, pharmacy cards, Company automobiles, keys,
door opening cards, correspondence, records and other documents ("Company
material") used, prepared or made available to Employee, shall be and shall
remain the property of the Company. Upon the termination of employment or the
expiration of this Agreement, all Company materials shall be returned
immediately to the Company, and Employee shall not make or retain any copies
thereof.
IX. SUCCESSORS.
A. This Agreement is personal to Employee and neither it nor any
benefits hereunder shall, without the prior written consent of the Company, be
assignable by Employee.
B. This Agreement shall inure to the benefit or and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted
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<PAGE>
for the Company under the terms of this Agreement for all purposes. As used
herein, "successor" and "assignee" shall include any person, firm, corporation
or other business entity that at any time, whether by purchase, merger or
otherwise, directly or indirectly acquires the stock of the Company or to which
the Company assigns this Agreement by operation of law or otherwise.
X. WAIVER.
No waiver of any breach of any term or provision of this Agreement
shall be construed to be, nor shall be, a waiver of any other breach of this
Agreement. No waiver shall be binding unless in writing and signed by the party
waiving the breach.
XI. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by the Employee and (a) the Chairman of the Board or (b) a
duly authorized member of the Board who is not an officer or employee of the
Company or a subsidiary of the Company.
XII. SAVINGS CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not affect other provisions or applications of the
Agreement that can be given effect without the invalid provisions or
applications, and to this end the provisions of this Agreement are declared to
be severable.
XIII. COMPLETE AGREEMENT.
This Agreement constitutes and contains the entire agreement and
understanding concerning Employee's employment and the other subject matters
addressed herein between the parties and supersedes and replaces all prior
negotiations and all agreements proposed or otherwise, whether written or oral,
concerning the subject matters of this Agreement, including the Existing
Agreement.
XIV. GOVERNING LAW.
This Agreement shall be deemed to have been executed and delivered
within the State of Ohio, and the rights and obligations of the parties
hereunder shall be construed and enforced in accordance with, and governed by,
the laws of the State of Ohio without regard to principles of conflict of laws.
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XV. CAPTIONS.
The captions of this Agreement are not part of the provisions of this
Agreement and shall have no force or effect.
XVI. COMMUNICATIONS.
All notices, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered or if
mailed by registered or certified mail, postage prepaid, addressed:
If to Employee, to
M. David Schwartz
8032 Tippecanoe Road
Canfield, Ohio 44406;
If to Company, to
20 Federal Plaza West
Youngstown, Ohio 4450l,
Attention: Chairman of the Board of Directors.
Either party may change the address at which notice shall be given by written
notice given in the above manner.
XVII. ARBITRATION.
Except as otherwise provided in Section VI. of this Agreement, any
dispute, controversy or claim arising out of or in respect of this Agreement (or
its validity, interpretation or enforcement), the employment relationship or the
subject matter of this Agreement shall at the request of either party be
submitted to and settled by arbitration conducted in either Cleveland, Ohio or
Pittsburgh, Pennsylvania, as directed by the party requesting the arbitration,
in accordance with the Employment Dispute Resolution Rules of the American
Arbitration Association. The arbitration shall be governed by the Federal
Arbitration Act (9 U.S.C. ss.ss. 1-16). The arbitration of such issues,
including the determination of any amount of damages suffered, shall be final
and binding upon the parties to the maximum extent permitted by law. The
arbitrator in such action shall not be authorized to ignore, change, modify, add
to or delete from any provision of this Agreement. Judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The arbitrator shall award reasonable expenses (including reimbursement
of the assigned arbitration costs) to the prevailing party upon application
therefor.
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XVIII. EXECUTIONS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same Agreement. Photographic copies of such signed counterparts may
be used in lieu of the originals for any purpose.
XIX. LEGAL COUNSEL.
In entering this Agreement, the parties represent that they have relied
upon the advice of their respective attorneys, who are attorneys of their own
choice, and that the terms of this Agreement have been completely read and
explained to them by their attorneys, and that those terms are fully understood
and voluntarily accepted by them.
XX. LIMITATION ON PAYMENTS.
A. Notwithstanding anything contained herein to the contrary, prior to
the payment of any amounts pursuant to Section IV.F.3. hereof, an independent
national accounting firm designated by the Company (the "Accounting Firm") shall
compute whether there would be any "excess parachute payments" payable to the
Employee, within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), taking into account the total "parachute
payments," within the meaning of Section 280G of the Code, payable to the
Employee by the Company or any successor thereto under this Agreement and any
other plan, agreement or otherwise. If there would be any excess parachute
payments, the Accounting Firm will compute the net after-tax proceeds to the
Employee, taking into account the excise tax imposed by Section 4999 of the
Code, if (i) the payments hereunder were reduced, but not below zero, such that
the total parachute payments payable to the Employee would not exceed three (3)
times the "base amount" as defined in Section 280G of the Code, less One Dollar
($1.00), or (ii) the payments hereunder were not reduced. If reducing the
payments hereunder would result in a greater after-tax amount to the Employee,
such lesser amount shall be paid to the Employee. If not reducing the payments
hereunder would result in a greater after-tax amount to the Employee, such
payments shall not be reduced. The determination by the Accounting Firm shall be
binding upon the Company and the Employee subject to the application of Section
XX.B. hereof.
B. As a result of the uncertainty in the application of Sections 280G
of the Code, it is possible that excess parachute payments will be paid when
such payment would result in a lesser after-tax amount to the Employee; this is
not the intent hereof. In such cases, the payment of any excess parachute
payments will be void ab initio as regards any such excess. Any excess will be
treated as a loan by the Company to the Employee. The Employee will return the
excess to the Company, within fifteen (15) business days of any determination by
the Accounting Firm that excess parachute payments have been paid when not so
intended, with interest at an annual rate equal to the rate provided in Section
1274(d) of the Code (or 120% of such rate if the
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Accounting Firm determines that such rate is necessary to avoid an excise tax
under Section 4999 of the Code) from the date the Employee received the excess
until it is repaid to the Company.
C. All fees, costs and expenses (including, but not limited to, the
cost of retaining experts) of the Accounting Firm shall be borne by the Company
and the Company shall pay such fees, costs and expenses as they become due. In
performing the computations required hereunder, the Accounting Firm shall assume
that taxes will be paid for state and federal purposes at the highest possible
marginal tax rates which could be applicable to the Employee in the year of
receipt of the payments, unless the Employee agrees otherwise.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
PHAR-MOR, INC.
By: ___________________________ __________________________________
Robert M. Haft M. David Schwartz
Its: Chief Executive Officer
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EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and
between Phar-Mor, Inc., a Pennsylvania corporation (the "Company"), and John R.
Ficarro (the "Employee") as of June 5, 1997 (the "Effective Date").
WHEREAS, Employee is currently employed by Company without a written
employment agreement; and
WHEREAS, the Company desires to continue employing Employee upon
modified terms and conditions of employment; and
WHEREAS, the Company and Employee desire to set forth in this Agreement
the terms and conditions of Employee's continued employment.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
I. EMPLOYMENT AND TERM.
The Company hereby employs Employee and Employee hereby accepts such
employment, upon the terms and conditions hereinafter set forth. This Agreement
shall commence on the Effective Date and continue in force and effect for two
years (the "Stated Term") through June 4, 1999 unless sooner terminated pursuant
to the provisions of Section IV of the Agreement.
II. DUTIES.
Subject to the provisions of Section IV of this Agreement:
A. The Company shall employ Employee and Employee shall serve the
Company for the Stated Term in the capacity of Senior Vice President/Chief
Administrative Officer and General Counsel of the Company. In his capacity of
Senior Vice President/Chief Administrative Officer and General Counsel of the
Company, Employee shall be responsible for managing all legal and nonfinancial
corporate administrative functions, including but not limited to corporate
governance and compliance, real estate, communications, risk and litigation
management, insurance, benefits and human resources. Employee shall have such
corporate power and authority as reasonably required to enable the discharge of
duties in the office which he holds.
B. Employee agrees to devote substantially all of his business time,
energies and abilities to the business of the Company. Nothing herein shall
prevent Employee, upon approval of the Board, from serving, or continuing to
serve upon termination of employment, as a director or trustee of other
corporations or businesses that are not in competition with the business of the
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Company as set forth in Section V of this Agreement or in competition with any
present or future affiliate of the Company.
C. Employee shall report to the President and/or Chief Executive
Officer of the Company.
III. COMPENSATION.
A. Base Salary. The Company shall pay to Employee a base salary of
$195,000.00 per year for the first year of the Stated Term which salary shall be
retroactive to December 9, 1996. Said base salary shall be increased to
$206,700.00 on June 5, 1998 for the second year of the Stated Term. Such salary
shall be earned weekly and shall be payable in arrears in periodic installments
no less frequently than monthly in accordance with the Company's customary
practices. Amounts payable shall be reduced by standard withholding and other
deductions authorized by Employee or required by applicable law.
B. Bonus. The Company will pay to Employee annually a bonus in an
amount not less than the amount Employee is entitled to under the Company's
incentive/bonus plan. For the Company's fiscal year ending in 1997, the Company
will pay the Employee a bonus equal to the greater of (i) 35% of his base salary
earned during such fiscal year (the "Minimum Bonus"), or (ii) the amount to
which he is entitled under the incentive/bonus plan then in effect. Thereafter,
the Company will pay the Employee a bonus equal to the amount to which he is
entitled under the incentive/bonus plan of the Company in effect from time to
time. The "target amount" payable to Employee shall be increased to 40% for the
fiscal year ending in 1998. If the fiscal year of the Company is changed, the
Employee will receive a bonus pro-rated to the amount to which he would
otherwise be entitled hereunder based on the number of months in the short year,
or such other equitable method as may be mutually agreed upon by Employee and
the Company
C. Stock Options. Employee has previously earned and is entitled to
receive, subject to the applicable vesting schedule, options to purchase 15,000
shares of the Company at $8.00 per share. Additionally, Employee shall also be
eligible and entitled to receive on June 5, 1997 a nonqualified stock option for
75,000 shares of Company common stock at a per share exercise price equal to the
fair market value of a share of common stock on said grant date (the "Option")
The Option shall vest as to one-third of the shares on the grant date, one-third
of the shares on the first anniversary of said date and one-third on the second
anniversary of said date. Notwithstanding the foregoing, if, at any time, the
Employee's employment is terminated by the Company without Cause (as defined in
Section IV.B. hereof) or the Employee terminates employment with the Company for
Good Reason (as defined in Section IV.C. hereof), all said options shall
immediately vest. During the term of this Agreement Employee shall remain
eligible, subject to the discretion of the Company, to receive additional option
awards ("Additional Options").
D. Other Stock or Equity Plans. Employee shall be eligible to
participate under any other stock or equity incentive plan or benefit provided
by the Company to senior officers at the
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discretion of the Company. For purposes of this Agreement, "senior officer"
means an officer of the Company of the rank of senior vice president or above.
E. Welfare Benefit Plans. Employee and/or his family, as the case may
be, shall (subject only to exceptions of general applicability or applicable
legal requirements) be eligible to participate in and shall receive all benefits
under welfare benefit plans, practices, policies and programs provided by the
Company (including, without limitation, pension, medical, prescription, dental,
disability, and life insurance plans and programs) to the extent available
generally to senior officers of the Company.
F. Expenses. Employee shall be entitled to receive prompt reimbursement
for all reasonable employment expenses incurred by him in accordance with the
policies, practices and procedures of the Company as in effect generally with
respect to senior officers.
G. Vacation. Employee shall be entitled during the term of this
Agreement to four (4) weeks paid vacation per annum. Employee may accumulate
vacation only to the extent permitted by the policies, practices and procedures
of the Company as in effect generally with respect to senior officers.
H. Car or Car Allowance. Employee shall be entitled to a car or car
allowance to the extent applicable generally to senior officers.
I. Attorneys' Fee Reimbursement. Within ten days after presentation of
the invoice therefore, the Company shall pay to the law firm of Honigman Miller
Schwartz and Cohn in Detroit, Michigan, an amount not to exceed $9,500.00 for
legal fees incurred by Employee.
J. Reservation of Right to Amend. With respect to the benefits provided
to Employee in accordance with Section III.E., the Company reserves the right to
modify, suspend or discontinue any and all of the plans, practices, policies and
programs at any time without recourse by Employee so long as such action is
taken with respect to senior officers or management generally and does not
single out Employee.
IV. TERMINATION.
A. Death or Disability. Employee's employment shall terminate
automatically upon Employee's death. If the Company determines in good faith
that a Disability of Employee has occurred (pursuant to the definition of
Disability set forth below), Company may terminate Employee's employment by
providing Employee written notice in accordance with Section XVI of the
Company's intention to terminate Employee's employment. In such event, Employee
employment with the Company shall terminate effective on the 30th day after
receipt of such notice by Employee, provided that, within the 30 days after such
receipt, Employee shall not have returned to full-time performance of his
duties.
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For purposes of this Agreement, "Disability" means a physical or mental
impairment which (i) substantially limits a major life activity of Employee,
(ii) renders Employee unable to perform the essential functions of his position,
even with reasonable accommodation that does not impose an undue hardship on the
Company, and (iii) has contributed to Employee's absence from his duties with
the Company on a full-time basis for more than 60 consecutive days. The Company
reserves the right, in good faith, to make the determination of Disability under
this Agreement based upon information (as to items (i) and (ii) above) supplied
by a physician selected by the Company or its insurers and acceptable to
Employee or his legal representative (such agreement as to acceptability not to
be withheld unreasonably).
B. Cause. The Company may terminate Employee's employment for Cause
(pursuant to the definition of Cause set forth below) by providing Employee
written notice in accordance with Section XVI of the Company's intention to
terminate Employee's employment, setting forth in such notice the specific
grounds therefor. In such event, Employee's employment with the Company shall
terminate effective as of the date of receipt of such notice by Employee.
For purposes of this Agreement, "Cause" means (1) a material breach by
Employee of Employee's obligations under Section II of this Agreement (other
than as a result of incapacity due to physical or mental illness), which is
demonstrably willful and deliberate on the Employee's part and is committed in
bad faith or without reasonable belief that such conduct is in the best
interests of the Company, or which is the result of Employee's gross neglect of
duties, and, in either case, not remedied in a reasonable period of time not
more than five days after receipt of written notice from the Board specifying
such breach, (2) the conviction of Employee of a felony or other crime involving
fraud, dishonesty or moral turpitude, or (3) the commission by Employee of a
fraud which results in a material financial loss to the Company.
C. Good Reason. Employee may terminate Employee's employment for Good
Reason. Employee shall provide the Company written notice in accordance with
Section XVI of Employee's intention to terminate Employee's employment for Good
Reason, setting forth in such notice the grounds therefor. Employee's employment
with the Company shall terminate effective as of the earlier of (i) the 15th day
after the Company's receipt of such notice or (ii) such later date as set forth
in such notice, unless the Company has cured the grounds therefor.
For purposes of this Agreement, "Good Reason" means (1) Employee's
position (including responsibilities, title, reporting requirements or
authority) is reduced below the level set forth in Section II.A. hereof (2)
Employee and/or his job functions are transferred to a location more than 25
miles from the location of his current office (3) the Company fails in any
material respect to comply with the provisions of Section III of this Agreement
(4) the Company has within the prior twelve months undergone a Change of Control
(pursuant to the definition of Change of Control set forth below), or (5) the
Company purports to terminate Employee's employment otherwise than as expressly
permitted by this Agreement or without payment of any amounts required to be
paid under Section IV.F. For purposes of this Agreement, "Change of Control"
shall mean (a) the acquisition by any individual, entity or group of beneficial
ownership of 20% or more of either (i) the then outstanding shares of common
stock of the Company, or (ii) the combined
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voting power of the then outstanding voting securities of the Company entitled
to vote generally in the election of directors of the Company or (b) individuals
who, as of the date of this Agreement, constitute the Board of Directors of the
Company (the "Board") cease for any reason to constitute at least a majority of
the Board; or (c) approval by the shareholders of the Company of a
reorganization, merger or consolidation which results in a change of the
ownership and/or voting rights of 30% or more of (i) the then outstanding shares
of common stock of the Company, or (ii) a majority of the members of the Board
of the Company do not remain members of the Board of the entity resulting from
such reorganization, merger or consolidation or (d) approval by the shareholders
of the Company of a liquidation or dissolution of the Company, or the sale or
other disposition of all or substantially all of the assets of the Company. For
the purposes of this Agreement, Change of Control shall not include any change
in ownership of the Company's common stock resulting from any transaction
between the current principals of the Hamilton Morgan LLC.
D. Other Than Cause or Good Reason or Death or Disability. The Company
may terminate Employee's employment without cause by providing Employee written
notice in accordance with Section XVI of the Company's intention to terminate
Employee's employment. In such event, Employee's employment shall terminate
effective on the 30th day after receipt of such notice by Employee.
E. Termination by Employee Other Than for Good Reason. The Employee may
voluntarily terminate his employment with the Company for any reason whatsoever,
other than in a situation where he has Good Reason for doing so, by providing
Employer written notice thereof in accordance with Section XVI. In such event,
Employee's employment shall terminate effective on the thirtieth day after the
receipt of such notice by Company unless the parties mutually agree to an
earlier termination.
F. Obligations of the Company Upon Termination. Upon termination of
Employee's employment for any reason, the Company shall have no further
obligations to Employee (or his estate or legal representative) under this
Agreement other than the following:
1. Death or Disability. If Employee's employment is terminated by
reason of Employee's Death or Disability, the Company shall (a) pay the sum of
(i) Employee's annual base salary through the end of the calendar month during
which the termination occurs (to the extent not theretofore paid), (ii) any
accrued vacation pay not theretofore paid, and (iii) any accrued incentive
compensation that has been fixed and determined, which the Company shall pay to
Employee or his estate or beneficiary, as applicable, in a lump sum in cash
within 30 days of the date of termination, or earlier as may be required by
applicable law (b) pay any amounts then due or payable pursuant to the terms of
any applicable welfare benefit plans notwithstanding such termination of
employment and (c) perform its obligations under any then outstanding stock
option awards, in accordance with the terms of any applicable stock or equity
incentive plan (the sum of the amounts and benefits described in clauses (a),
(b) and (c) shall be hereinafter referred to as the "Accrued Obligations").
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2. Cause. If Employee's employment is terminated by the Company for
Cause, the Company shall timely pay any Accrued Obligations. If it is
subsequently determined that the Company did not have Cause for termination
under Section IV.B., then the Company's decision to terminate shall be deemed to
have been made under Section IV.D, and the amounts payable under Section IV.F.3
below shall be the only amounts Employee may receive for his termination.
3. Other Than for Cause or by Reason of Death or Disability. If the
Company terminates Employee's employment (other than for Cause or because of his
Death or Disability), or Employee terminates his employment for Good Reason, the
Company shall (a) timely pay any Accrued Obligations (including but not limited
to any immediately vested stock options in accordance with Section III C.
hereof) and (b) if such termination occurs prior to June 5, 1998, pay Employee a
lump sum equal to two times (or if such termination occurs on or after June 5,
1998, one and one half times) the sum of (i) the annual base salary contained in
Section III.A. hereof (or any higher base salary currently in effect on the date
of termination) ("Base Salary") and (ii) the greater of (x) the average of the
annual bonus payable to the Employee by the Company in respect to the two fiscal
years preceding the fiscal year in which the termination occurs, annualized if
any of the fiscal years is shorter than twelve months (or the average of bonuses
paid by the Company for such shorter period preceding the fiscal year in which
the Employee was employed) or (y) the Minimum Bonus (the greater of (x) or (y)
being the "Bonus Amount"). In addition, any Additional Options granted to
Employee under any applicable stock or equity incentive plan shall continue to
vest (in accordance with the applicable option agreements) during the remainder
of the Stated Term as if such termination had not occurred and the termination
of service for purposes of any such plan and such option agreements shall be
deemed to occur at the expiration of the Stated Term. The Company shall also pay
on behalf of Employee the full cost of the continuation for two years of that
level of health benefit coverage provided by the Company to Employee and/or his
family immediately prior to termination of his employment. Employee shall be
entitled to exercise his rights to continued coverage under COBRA upon the
expiration of said two years of continued health benefit coverage. Further, the
Company shall pay to Employee, within fourteen days of presentation of receipts
or other substantiation reasonably required hereunder, an amount equal to (i)
all out of pocket expenses for packing and moving his household effects and
automobiles by commercial moving service from Youngstown, Ohio to any other
location in the continental United States and (ii) any loss he suffers on his
home in Youngstown, Ohio equal to the excess of the purchase price of his home,
plus any capital improvements thereto, over the Sale Price (as defined herein)
((i) and (ii) jointly referred to as the "Moving Reimbursement"). The Sale Price
means the actual selling price to a third party, less commissions and other
customary expenses of sale, for which Employee sells his home if the sale occurs
within 180 days after termination of employment or, if no such sale has occurred
within such period, the Appraised Value (as defined herein). The Appraised Value
means the fair market value of the home as of the date of the appraisal as
determined by a qualified appraiser mutually agreed to by the Employee and the
Company. If the parties cannot mutually agree, each party shall pick an
appraiser who in turn shall mutually agree on a third qualified appraiser who
shall determine the fair market value of the home as of the date of the
appraisal. Such appraisal shall be binding on the parties hereto. The appraisal
shall be paid for one half by the Employee and one half by the Company.
Notwithstanding the
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foregoing, the Moving Reimbursement shall not exceed the lesser of $75,000.00 or
the full amount of the Moving Reimbursement reduced by amounts paid by a
subsequent employer for packing and moving expenses from Youngstown, Ohio.
4. Termination by Employee Other Than for Good Reason. If the Employee
voluntarily terminates his employment with the Company without Good Reason, the
Company shall timely pay any Accrued Obligations.
5. Withholdings and Deductions. Any payment made pursuant to this
Section IV.F. shall be paid, less standard withholdings and other deductions
authorized by Employee or required by law. All amounts due Employee under this
Section IV.F. shall be paid within 14 days after the date of termination or as
earlier required by law.
6. Exclusive Remedy. Employee agrees that the payments contemplated by
this Agreement shall constitute the exclusive and sole remedy for any
termination of his employment, and Employee covenants not to assert or pursue
any other remedies, at law or in equity, with respect to any termination of
employment.
V. NONCOMPETITION.
Employee agrees that so long as he remains in the employ of the
Company, he will not, directly or indirectly, without the prior written consent
of the Board, provide consulting services with or without pay, own, manage,
operate, join, control, participate in, or be connected as a stockholder,
partner, employee, director, officer or otherwise with any other person, entity
or organization engaged directly or indirectly in the business of operating a
regional or national discount drug store chain.
VI. UNIQUE SERVICES; INJUNCTIVE RELIEF; SPECIFIC PERFORMANCE.
Employee agrees (i) that the services to be rendered by Employee
pursuant to this Agreement, the rights and privileges granted to the Company
pursuant to this Agreement and the rights and privileges granted to Employee by
virtue of his position, are of a special, unique, extraordinary, managerial and
intellectual character, which gives them a peculiar value, the loss of which to
the Company cannot be adequately compensated in damages in any action at law,
(ii) that the Company will or would suffer irreparable injury if Employee were
to terminate this Agreement without Good Reason or to compete with the business
of the Company or solicit employees of the Company in violation of Section V. or
VII. of this Agreement, and (iii) that the Company would by reason of such
breach or violation of this Agreement be entitled to the remedies of injunction,
specific performance and other equitable relief in a court of appropriate
jurisdiction. Employee consents to the jurisdiction of a court of equity to
enter provisional equitable relief to prevent a breach or anticipatory breach of
Section V. of this Agreement by Employee.
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VII. SOLICITING EMPLOYEES.
Employee, while employed by the Company and for one year following
termination of his employment, will not directly or indirectly solicit any
employee of the Company or of any subsidiary or affiliate of the Company in an
executive, managerial, sales or marketing capacity to work for any business,
individual, partnership, firm, corporation, or other entity then in competition
with the business of the Company or of any subsidiary or affiliate of the
Company.
VIII. CONFIDENTIAL INFORMATION.
Employee agrees that during the Stated Term of this Agreement and at
all times thereafter (notwithstanding the termination of this Agreement or the
expiration of the Stated Term of this Agreement):
A. Employee shall hold in a fiduciary capacity for the benefit of the
Company all secret or Confidential Information, knowledge or data relating to
the Company or any of its affiliated companies, and their respective businesses
that are obtained by Employee during his employment by the Company or any of its
affiliated companies and that are not or do not become public knowledge (other
than by acts by Employee or his representatives in violation of this Agreement).
For the purposes of this Agreement, "Confidential Information"
includes financial information about the Company (including gross profit
margins), contract terms with the Company's vendors and others, customer lists
and data, trade secrets and such other competitively sensitive information to
which Employee has access as a result of his positions with the Company. After
termination of Employee's employment with the Company, he shall not, without the
prior written consent of the Company, or as may otherwise be required by law or
legal process, communicate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by it.
B. Employee agrees that all styles, designs, lists, materials, books,
files, reports, computer equipment, pharmacy cards, Company automobiles, keys,
door opening cards, correspondence, records and other documents ("Company
material") used, prepared or made available to Employee, shall be and shall
remain the property of the Company. Upon the termination of employment or the
expiration of this Agreement, all Company materials shall be returned
immediately to the Company, and Employee shall not make or retain any copies
thereof.
IX. SUCCESSORS.
A. This Agreement is personal to Employee and neither it nor any
benefits hereunder shall, without the prior written consent of the Company, be
assignable by Employee.
B. This Agreement shall inure to the benefit or and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted
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for the Company under the terms of this Agreement for all purposes. As used
herein, "successor" and "assignee" shall include any person, firm, corporation
or other business entity that at any time, whether by purchase, merger or
otherwise, directly or indirectly acquires the stock of the Company or to which
the Company assigns this Agreement by operation of law or otherwise.
X. WAIVER.
No waiver of any breach of any term or provision of this Agreement
shall be construed to be, nor shall be, a waiver of any other breach of this
Agreement. No waiver shall be binding unless in writing and signed by the party
waiving the breach.
XI. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by the Employee and (a) the Chairman of the Board or (b) a
duly authorized member of the Board who is not an officer or employee of the
Company or a subsidiary of the Company.
XII. SAVINGS CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not affect other provisions or applications of the
Agreement that can be given effect without the invalid provisions or
applications, and to this end the provisions of this Agreement are declared to
be severable.
XIII. COMPLETE AGREEMENT.
This Agreement constitutes and contains the entire agreement and
understanding concerning Employee's employment and the other subject matters
addressed herein between the parties and supersedes and replaces all prior
negotiations and all agreements proposed or otherwise, whether written or oral,
concerning the subject matters of this Agreement, including the Existing
Agreement.
XIV. GOVERNING LAW.
This Agreement shall be deemed to have been executed and delivered
within the State of Ohio, and the rights and obligations of the parties
hereunder shall be construed and enforced in accordance with, and governed by,
the laws of the State of Ohio without regard to principles of conflict of laws.
XV. CAPTIONS.
The captions of this Agreement are not part of the provisions of this
Agreement and shall have no force or effect.
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XVI. COMMUNICATIONS.
All notices, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered or if
mailed by registered or certified mail, postage prepaid, addressed:
If to Employee, to
John R. Ficarro
340 Russo Lane
Canfield, Ohio 44406;
If to Company, to
20 Federal Plaza West
Youngstown, Ohio 4450l,
Attention: Chairman of the Board of Directors.
Either party may change the address at which notice shall be given by written
notice given in the above manner.
XVII. ARBITRATION.
Except as otherwise provided in Section VI. of this Agreement, any
dispute, controversy or claim arising out of or in respect of this Agreement (or
its validity, interpretation or enforcement), the employment relationship or the
subject matter of this Agreement shall at the request of either party be
submitted to and settled by arbitration conducted in either Cleveland, Ohio or
Pittsburgh, Pennsylvania, as directed by the party requesting the arbitration,
in accordance with the Employment Dispute Resolution Rules of the American
Arbitration Association. The arbitration shall be governed by the Federal
Arbitration Act (9 U.S.C. ss.ss. 1-16). The arbitration of such issues,
including the determination of any amount of damages suffered, shall be final
and binding upon the parties to the maximum extent permitted by law. The
arbitrator in such action shall not be authorized to ignore, change, modify, add
to or delete from any provision of this Agreement. Judgment upon the award
rendered by the arbitrator may be entered by any court having jurisdiction
thereof. The arbitrator shall award reasonable expenses (including reimbursement
of the assigned arbitration costs) to the prevailing party upon application
therefor.
XVIII. EXECUTIONS.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same Agreement. Photographic copies of such signed counterparts may
be used in lieu of the originals for any purpose.
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<PAGE>
XIX. LEGAL COUNSEL.
In entering this Agreement, the parties represent that they have relied
upon the advice of their respective attorneys, who are attorneys of their own
choice, and that the terms of this Agreement have been completely read and
explained to them by their attorneys, and that those terms are fully understood
and voluntarily accepted by them.
XX. LIMITATION ON PAYMENTS.
A. Notwithstanding anything contained herein to the contrary, prior to
the payment of any amounts pursuant to Section IV.F.3. hereof, an independent
national accounting firm designated by the Company (the "Accounting Firm") shall
compute whether there would be any "excess parachute payments" payable to the
Employee, within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), taking into account the total "parachute
payments," within the meaning of Section 280G of the Code, payable to the
Employee by the Company or any successor thereto under this Agreement and any
other plan, agreement or otherwise. If there would be any excess parachute
payments, the Accounting Firm will compute the net after-tax proceeds to the
Employee, taking into account the excise tax imposed by Section 4999 of the
Code, if (i) the payments hereunder were reduced, but not below zero, such that
the total parachute payments payable to the Employee would not exceed three (3)
times the "base amount" as defined in Section 280G of the Code, less One Dollar
($1.00), or (ii) the payments hereunder were not reduced. If reducing the
payments hereunder would result in a greater after-tax amount to the Employee,
such lesser amount shall be paid to the Employee. If not reducing the payments
hereunder would result in a greater after-tax amount to the Employee, such
payments shall not be reduced. The determination by the Accounting Firm shall be
binding upon the Company and the Employee subject to the application of Section
XX.B. hereof.
B. As a result of the uncertainty in the application of Sections 280G
of the Code, it is possible that excess parachute payments will be paid when
such payment would result in a lesser after-tax amount to the Employee; this is
not the intent hereof. In such cases, the payment of any excess parachute
payments will be void ab initio as regards any such excess. Any excess will be
treated as a loan by the Company to the Employee. The Employee will return the
excess to the Company, within fifteen (15) business days of any determination by
the Accounting Firm that excess parachute payments have been paid when not so
intended, with interest at an annual rate equal to the rate provided in Section
1274(d) of the Code (or 120% of such rate if the Accounting Firm determines that
such rate is necessary to avoid an excise tax under Section 4999 of the Code)
from the date the Employee received the excess until it is repaid to the
Company.
C. All fees, costs and expenses (including, but not limited to, the
cost of retaining experts) of the Accounting Firm shall be borne by the Company
and the Company shall pay such fees, costs and expenses as they become due. In
performing the computations required hereunder, the Accounting Firm shall assume
that taxes will be paid for state and federal purposes at the
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<PAGE>
highest possible marginal tax rates which could be applicable to the Employee in
the year of receipt of the payments, unless the Employee agrees otherwise.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
PHAR-MOR, INC.
By: ___________________________ __________________________________
Robert M. Haft John R. Ficarro
Its: Chief Executive Officer
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<PAGE>
SUPPLY AGREEMENT
This Supply Agreement is made this 19th day of June, 1997 between McKesson
Drug Company, a division of McKesson Corporation ("McKesson") and Phar-Mor, Inc.
("Phar-Mor") to establish a program for the supply of prescription drugs and
other health and beauty aids to Phar-Mor and its retail pharmacies. The parties
hereto agree as follows:
1. MERCHANDISE
For purposes hereof, "Merchandise" shall be defined as all items
normally stocked by McKesson, including prescription drugs (which
include all diabetic products), ethical Over the Counter (OTC) drugs,
select pharmaceutical supplies mutually agreed to by the parties and
select Phar-Mor private label products as mutually agreed by both
parties hereto. This Agreement does not apply to merchandise sold to
Phar-Mor by McKesson Corporation divisions or subsidiaries other than
McKesson Drug Company.
2. ORDERING AND DELIVERY
McKesson shall provide an electronic order entry system to facilitate
Phar-Mor's ordering of Merchandise. Prescription products will be
delivered to Phar-Mor's in-store pharmacies up to five (5) times per
week, as needed.
Orders transmitted by any Phar-Mor stores by 9:00 p.m. will be
delivered by 12:00 noon on the next business day in accordance with the
attached schedule.
3. MANUFACTURERS' CONTRACTS
McKesson agrees to service all manufacturers' contracts negotiated by
Phar-Mor, provided such manufacturers are approved suppliers of
McKesson. Merchandise will be supplied at Phar-Mor's negotiated
contract prices, plus McKesson's reduction or mark-up, as applicable,
as described in Section 19 "Cost of Goods" of this Agreement.
4. PHARMACEUTICAL PRICE INCREASE
For prescription drug items only that incur price increases and for
which McKesson receives the opportunity from the manufacturer to obtain
additional inventory or is allowed additional allocation buys, a rebate
will be paid to Phar-Mor headquarters for the difference between the
old price and new price based on average purchases made by Phar-Mor for
these items for the thirty (30) days prior to the announced increase.
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
McKesson guarantees that the savings associated with this rebate will
not fall below (*) of total Phar-Mor purchases for each one year period
of this Agreement.
5. MANUFACTURER PRICE CHANGE COMMUNICATIONS
Advance notice of prescription drug price increases, when and if
received from the manufacturer, shall be submitted to Phar-Mor in the
fastest manner possible. McKesson agrees to use fax communication to
provide immediate information related to open to buy price increases,
special deals, extended dating or investment buy opportunities
(speculative) in order to maximize Phar-Mor's investment opportunities.
Other investment purchasing information will be provided on regular
basis, whether via fax or electronic mail.
McKesson will notify Phar-Mor in writing thirty (30) days prior to the
expiration or termination of all goods for which Phar-Mor has
negotiated a contract price with pharmaceutical manufacturers.
6. TECHNOLOGY
McKesson will provide the resources reasonably necessary to meet
Phar-Mor's systems and technology requirements in furtherance of its
commitment to provide "Best in Class" service through leading edge
technology. Phar-Mor will be given the opportunity to partner in
McKesson's technology development by testing new programs and system
enhancements whenever appropriate. Technology created and owned by
McKesson will be provided at no further cost to Phar-Mor.
7. PURCHASE PRICE: DEFINITION OF COST
The purchase price of the Merchandise delivered to Phar-Mor shall be
the Cost of the Merchandise less the reductions or plus the mark-up, as
applicable, set forth in the cost of goods schedule set forth in
Section 19, below. "Cost" means the manufacturers' invoice cost to
McKesson (exclusive of cash discounts) at the time of shipment to
Phar-Mor reduced for selected bonus goods, manufacturers' off-invoice
allowances, and manufacturers' deal prices.
The following Merchandise will be net items and not subject to the
retail cost of goods pricing in Section 19, Cost of Goods: SunMark,
Durable Medical Equipment (DME), Home Health Care, RxPak, MultiSource,
Select Generics, selected slow-moving products (defined as OTC product
with less than three turns per year) and any additional mutually agreed
upon net priced items.
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
8. PURCHASE COMMITMENT AND DEVELOPMENTAL FUNDS
Purchase Commitment
The cost of goods schedule set forth in Section 19 below is based on
Phar-Mor purchasing a total of (*) (net of returns and allowances) per
year from the Implementation Date as defined in Section 11 of this
Agreement in volume of Direct Store Delivery (D.S.D.) Merchandise. If
at the end of any Phar-Mor fiscal quarter following the first year of
this Agreement Phar-Mor has not achieved the appropriate pro-rata
purchase volume, McKesson reserves the right to redetermine the agreed
upon cost of goods upon thirty (30) days advance written notice to
Phar-Mor. In the event that the parties cannot mutually agree on the
redetermined cost of goods within thirty (30) days of written notice,
either party has the option to terminate the Agreement. If either party
terminates this Agreement due to failure to reach a mutually agreed
redetermined cost of goods, such termination shall not constitute a
breach of this Agreement and neither party shall have any liability to
the other, except for obligations which accrued prior to or upon such
termination.
Developmental Funds
In consideration for Phar-Mor's purchase commitment specified above,
McKesson agrees to pay to Phar-Mor within forty-five (45) days of
execution of this Agreement by both parties ("Execution Date") the sum
of $(*) as developmental funds and thereafter upon each anniversary of
the Execution Date, McKesson shall pay Phar-Mor an additional
$(*)during the term of this Agreement.
If this Agreement is terminated prior to expiration of the sixty (60)
month term for any reason whatsoever, Phar-Mor shall immediately
reimburse to McKesson the then applicable portion of the
above-specified developmental funds as determined by the following
pro-rata reimbursement formula.
Total Amount of Developmental Number of months remaining
Funds Previously Paid By times in the sixty month contract
McKesson to Phar-Mor period upon the date of
termination
--------------------------
60
9. PAYMENT TERMS
Retail Pharmacies
Payment for Merchandise shipped directly to Phar-Mor's retail
pharmacies shall be paid by Phar-Mor as follows: Invoices dated from
the 1st to the 15th of the month are due and payable on the last work
day of the same month. Invoices dated from the 16th to the end of the
month are due and payable on the 15th of the following month.
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
Prepay Incentives
30-day Prepayment Terms Defined: The prepayment is a one-time payment
equivalent to 30 days' worth of purchases which is held as a deposit in
a separate account. The deposit shall be adjusted monthly to cover
increases or decreases in purchase volume. After the one-time payment,
all purchases are payable under regular Payment Terms as described
above.
15-day Prepayment Terms Defined: The prepayment is a one-time payment
equivalent to 15 days' worth of purchases which is held as a deposit in
a separate account. The deposit shall be adjusted monthly to cover
increases or decreases in purchase volume. After the one-time payment,
all purchases are payable under regular Payment Terms as described
above.
Phar-Mor shall be entitled to a reduction in the mark-up set forth in
the cost of goods schedule in Section 19 for prepayment if Phar-Mor
elects this prepayment option. The prepay incentive shall be as
follows:
Prepay Incentive Mark-Up Reduction
30 Days (*)%
15 Days (*)%
Until EDI financial technology is available to Phar-Mor, checks will be
deposited on the specified due dates.
If for whatever reason payments are not made as indicated herein, any
late payments will result in a one and one-half percent (1.5%)
increase in the purchase price of the Merchandise, and a one percent
(1%) service charge will be imposed semi-monthly on all balances
delinquent more than fifteen (15) days. In the unlikely event any
penalties do occur, both parties agree to meet and resolve this issue
as soon as practical.
This Agreement is conditioned upon Phar-Mor's maintaining a sound
financial condition throughout the term hereof and to that end,
Phar-Mor agrees to promptly substantiate in writing, at McKesson's
request, the existence of such condition with publicly available
financial and other publicly available supporting information
reasonably requested by McKesson.
McKesson reserves the right to change a payment term or limit total
credit if there has been either a material adverse change in
Phar-Mor's financial condition or a payment default based on the
payment terms and conditions specified in this Agreement which remains
uncured for more than ten (10) days following notice of such payment
default to Phar-Mor by McKesson. Upon the occurrence of either such
event, McKesson may
<PAGE>
require cash payment or appropriate security before shipment of any
further Merchandise to Phar-Mor. In the event of such changes by
McKesson, Phar-Mor may terminate this Agreement on ten (10) days
written notice to McKesson. Any such termination will not be
considered a default under this Agreement subject to the payment of
damages; provided however such termination shall not relieve Phar-Mor
of its obligations hereunder for accounts receivable balances or any
other payments due and payable upon termination of this Agreement.
10. NEW PHARMACY OPENINGS
Except as specified below, opening order invoices for any new pharmacy
opened by Phar-Mor which was not previously in existence ("Newly Opened
Pharmacy") or any newly affiliated pharmacy resulting from a Business
Combination as defined in Section 11 ("Newly Affiliated Pharmacy") will
receive 90 day payment terms. For purposes of this Section 10, any
Newly Affiliated Pharmacy that is already being serviced by McKesson
shall not be entitled to such 90 day payment terms. Opening orders
include new pharmacy orders submitted to McKesson up to two (2) weeks
after the pharmacy begins filling prescriptions.
The prescription drug and OTC purchases made by any of Phar-Mor's Newly
Opened Pharmacies, regardless of the applicable cost of goods pricing
schedule, shall not be included in the calculation of the minimum
chainwide or group-wide average monthly purchase volumes specified
herein for a period of 18 months after the Newly Opened Pharmacy's
opening order.
A one time cleanup with no handling charges will be provided after six
(6) months of opening date for which a credit equal to 100% of the
purchase price of all eligible Merchandise shall be given by McKesson
to Phar-Mor. In order to qualify as eligible Merchandise under this
paragraph, the Merchandise must have at least six months' dating
remaining and be in salable condition.
11. PRIMARY SUPPLIER
The term of this Agreement shall be for the sixty (60) month period
from the Implementation Date of this Agreement, and for such period
Phar-Mor agrees to designate McKesson as its primary supplier for
Merchandise and to purchase from McKesson substantially all of the
requirements of its pharmacies for Merchandise. It is agreed by the
parties that the Implementation Date of this Supply Agreement shall be
November 15, 1996, provided that this Agreement is signed by Phar-Mor
no later than June 20, 1997. In the event that Phar-Mor does not sign
this Agreement by June 20, 1997, the Implementation Date will become
the date that this Agreement is fully executed by both parties. Except
as otherwise expressly specified in this Agreement, the annual
<PAGE>
periods specified in this Agreement and all volume incentives, rebates
and other amounts to be paid hereunder by McKesson shall be based on
the Implementation Date.
Both parties agree to review this Agreement annually between November 1
and December 1. The purpose of this review process is to allow both
parties to address any pertinent changes within the market or their own
internal organizations that would influence the structure of this
Agreement. Provided that Phar-Mor meets its commitment to both sales
volume and timely payments, McKesson will not propose any increase to
this Agreement's cost of goods schedule. Quarterly meetings will be
held between senior managers of both parties to ensure constant
communication.
In the event of an acquisition, merger or other business combination
that involves Phar-Mor, directly or indirectly ("Business
Combination"), it is intended by the parties that one of the three
specific pricing options set forth below shall apply to such Newly
Affiliated Pharmacies:
(i) If any such Newly Affiliated Pharmacies are subject to
existing agreements which, after reasonable efforts by
Phar-Mor, cannot be terminated without penalty, then such
pharmacies will not be subject to this Agreement until such
agreements expire. Further, if such pharmacies are subject to
agreements with better terms and conditions than those
provided for herein, then Phar-Mor may provide McKesson with
the opportunity to meet the terms and conditions provided in
such agreement for such pharmacy. If within fifteen (15) days
of its receipt of such notice from Phar-Mor, McKesson is
unable or unwilling to meet such terms and conditions, then
such Newly Affiliated Pharmacy shall not be subject to this
Agreement, and Phar-Mor shall have no obligation to purchase
goods from McKesson for such pharmacy. Any such inability or
unwillingness on the part of McKesson to meet such terms and
conditions shall not constitute a breach of this Agreement; or
(ii) Phar-Mor, at its election, may exclude a group of Newly
Affiliated Pharmacies acquired through a Business Combination
from the pricing terms specified in Section 19 below and
instead base its Cost of Goods for Merchandise for such Newly
Affiliated Pharmacies on the following pricing schedule.
Phar-Mor's purchases of Merchandise from McKesson pursuant to
this subsection 11.(ii) shall be included in calculating each
of the following:
(i) Prepayment payment amount and incentive specified
in Section 9;
(ii) Chainwide returns in Section 16.B.;
(iii) Annual Volume Incentive specified in Section 19;
(iv) Select Generics Program in Section 20; and
(v) Repack quarterly volume in Section 21.
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
The parties agree to meet to discuss possible further
reductions in the prepayment incentive percentages set forth
in Section 9 based on any additional purchase volume provided
pursuant to this Section 11.(ii).
Group-wide Monthly Average
per Newly Affiliated Pharmacy Rx OTC
-------------------------------------------------------------
$ (*) (*) (*)
$ (*) (*) (*)
$ (*) (*) (*)
$ (*) (*) (*)
$ (*) (*) (*)
$ (*) (*) (*)
$ (*) (*) (*)
$ (*) (*) (*)
$ (*) (*) (*)
$ (*) (*) (*)
$ (*) (*) (*)
It is further understood and agreed by the parties that if
Phar-Mor is unable to achieve or fails to maintain a minimum
group-wide average monthly volume of $(*) in net D.S.D.
prescription drug and OTC product purchases from McKesson per
each Newly Affiliated Pharmacy involved in a given Business
Combination during any rolling three (3) month period of this
Agreement [excluding the first three (3) months following
consummation of the Business Combination], McKesson shall have
the right, in its sole discretion, to refuse to service such
Newly Affiliated Pharmacies. Such refusal on the part of
McKesson shall not constitute a breach of this Agreement .
For purposes of this Subsection 11. (ii), each Business
Combination shall constitute a separate transaction and
Phar-Mor shall be permitted to combine the purchase volumes of
groups of Newly Affiliated Pharmacies acquired in separate and
distinct Business Combinations; or
(iii) Purchases by Newly Affiliated Pharmacies shall be
covered by the Cost of Goods pricing terms set forth in
Section 19.
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
12. COMPETITIVE BID
If at any time after the second anniversary of the Implementation Date
of this Agreement, Phar-Mor is able to secure more competitive material
terms favorable to Phar-Mor, including value-added business solutions,
Phar-Mor may terminate this Agreement upon giving thirty (30) days
written notice. Said written notice will provide McKesson with the
exclusive opportunity to meet or exceed those more competitive material
terms and/or services, Phar-Mor shall make available in writing
pertinent sections of any competitive material bid for review by
McKesson for this process. McKesson shall have fifteen (15) days from
receipt of this notice to accept or reject the change in terms
necessary to meet the more competitive material offer or agreement;
provided however, that any such rejection by McKesson shall not
constitute a default of this Agreement.
Notwithstanding the foregoing provisions, nothing in this Section 12
shall relieve Phar-Mor of its liability or obligation for any accounts
receivable balances or any other payments due to McKesson at the date
of termination.
13. SERVICE COMMITMENT
A. Inventory
1) Service Level
McKesson will ensure a (*)% service level for any
prescription drug products. In the unlikely event the
chainwide average falls below (*)% for (*) consecutive
(*), a (*) penalty will be paid to Phar-Mor on its total
purchases for that period.
In the event of a breach of this service level
requirement, in addition to the termination rights
accorded Phar-Mor hereunder, Phar-Mor, at its own expense,
may remedy the shortfall with the purchase of goods from
third parties without any liability to McKesson for same.
Service level is defined as total lines ordered (partial
lines included) less total omit lines (ordered but not
filled). Items that the manufacturer is unable to supply,
manufacturer back-orders, product recalls and new items
for a (*) day period from first distribution by McKesson
to any of Phar-Mor's pharmacies are to be excluded from
the service level calculation.
2) Items out of Stock
a) In the event the primary Distribution Center is
temporarily out of stock of Phar-Mor prescription drug
and ethical OTC products, the Distribution
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
Center will utilize McKesson's National Distribution
Network to make those items ordered available for
re-order, within (*) hours. If the item is not
available within the McKesson network, it will be drop
shipped from the vendor if stock is available. In the
event that prescription drug and ethical OTC products
are not available within (*)hours, Phar-Mor, at its
own expense, shall be entitled to purchase any
prescription drug products from any third party
without penalty.
b) Any prescription drug and ethical OTC products not
stocked by the primary Distribution Center will be
available through McKesson's Premier Customer Service
Center. If stocked in another McKesson location it
will be available for store order, within (*) hours.
If not stocked in any McKesson location, it will be
drop shipped from the vendor, if stock is available.
In the event that any prescription drug and ethical
OTC products are not available within (*) hours,
Phar-Mor, at its own expense, shall be entitled to
purchase any prescription drug and ethical OTC
products from any third party without penalty.
B. Delivery
All deliveries to Phar-Mor pharmacies will be made in
accordance with the attached delivery schedule. An exception
to the delivery schedule may arise in the event of inclement
weather conditions which would disallow normal delivery
performance. In such circumstances, McKesson will exercise its
best efforts to deliver the Merchandise as close to the
scheduled time as possible.
14. SYSTEMS AND SERVICES
All Phar-Mor in-store pharmacies will be provided access to the
following components of the ECONOMOST Asset Management System:
A. On-line access to Phar-Mor data via McKesson's Information
Warehouse technology (to include Phar-Mor requested reports)
at no charge.
B. Telxon electronic order entry equipment (including shelf
wand) at no charge.
C. Item price stickers, at no charge, with Phar-Mor custom
pricing, where required,
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
and other features such as:
1) Department number
2) Invoice cost
3) Month and year ordered
4) Store name
5) AWP or retail pricing
(Note: Each feature is available for both Rx and OTC.)
D. Bar-coded shelf labels, at no charge.
E. Consolidated Quarterly Purchase Reports for all Phar-Mor
store purchases, at no charge.
F. Monthly report of controlled substances purchased from
McKesson Drug for each store, at no charge.
G. A complete catalog or microfiche of items stocked by
McKesson's Distribution Centers, at no charge.
H. Econolink system available for the Pharmacy and OTC
departments located at Phar-Mor Headquarters, at no charge.
Retail Econolink systems will be available to all Phar-Mor
pharmacies, at no charge. Econolink shall be subject to a
separate agreement between the parties governing use and
maintenance at no charge.
I. Electronic price update information will be provided weekly,
at no charge.
J. OmniLink: Terms and conditions for utilization of McKesson's
OmniLink program will be agreed to under separate contract.
McKesson guarantees that Phar-Mor's average cost benefit for
this program will not fall below (*) per transaction. This
guarantee is contingent on Phar-Mor participating in all
designated transaction edits that McKesson and Phar-Mor have
reasonably identified as being capable of creating economic
value. Phar-Mor will reserve the right to negotiate directly
for competitive switch fees in the event they choose to do so.
Phar-Mor will reserve the right to negotiate directly for
competitive switch fees in the event they choose to do so.
OmniLink will serve as the platform for McKesson's future
development of additional value added programs, e.g., market
share, patient enhancement, asset management, etc.
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
McKesson will provide Phar-Mor with a test of the OmniLink
program to one region in Phar-Mor's chain at no charge to
Phar-Mor.
15. ON-SITE SUPPORT
McKesson will pay Phar-Mor (*) within thirty (30) days following the
execution of this Agreement by both parties and annually upon the
anniversary of the Implementation Date towards the cost of hiring an
employee to provide internal support at Phar-Mor for the execution and
administration of this Agreement and its prescription drug business.
Such individual will be an employee of Phar-Mor, and McKesson shall
have no obligation to such employee whatsoever, its only obligation
relating to the payment of funds as provided herein. Upon the
termination of this Agreement, McKesson's obligation to fund the
position provided for in this Section 15 shall cease without the
payment of any further monies in connection with same. Further, in the
event of early termination of this Agreement by either party, Phar-Mor
shall immediately repay to McKesson a pro-rata portion of the monies
paid hereunder in accordance with the following reimbursement formula:
Total Amount of On-Site Number of months
Support Monies Previously times remaining in the sixty
Paid By McKesson to month contract period
Phar-Mor upon date of termination
-----------------------
60
16. RETURNED GOODS HANDLING
A. The following policy is predicated on Phar-Mor's ability to
not exceed an average monthly return percentage of (*)%. All
returns to be processed through McKesson's electronic order
entry system. Merchandise purchased from Phar-Mor's previous
wholesale supplier will be eligible for return in accordance
with the following guidelines.
1. Credits from McKesson are divided into four (4) categories,
depending on the reason for the claim. Credits will be issued for
any of the following reasons:
a) Non-merchandise problems, such as shortages, shipping,
billing and pricing errors;
b) McKesson merchandise received in error; c) Recalls; and
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
d) Outdated merchandise [defined as items with less than six
(6) months dating].
2. The amount of credit allowed by McKesson will vary, as follows:
a) (*)credit will be given for:
i. Pricing errors, shipping errors and billing errors;
ii. Shortages (required to be phoned into the Distribution
Center within 48 hours of receipt of Merchandise);
iii. Ordering errors (must be returned within 30 days of
receipt);
iv. Manufacturer recalls,
v. Items received with less than six (6) months dating,
and
vi. Merchandise that had concealed damage.
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
b) (*) credit will be given for: i. Clean, salable merchandise
with at least nine (9) months dating returned more than 30
days after store receipt.
c) (*) credit will be given for: i. Unsalable merchandise;
which can be returned to manufacturer ii. Outdated items
(subject to the approved vendor list); and iii. Salable
merchandise with price tickets not removed.
d) (*) credit will be given for:
i. Merchandise damaged in in-store pharmacies, and ii.
Merchandise from manufacturers not listed on the approved
vendor list. These items will be returned to the store of
origination.
e) Phar-Mor stores will be allowed to return overstock
Merchandise for 100% credit one time per year with no
handling charge assessed. The Merchandise must have at least
six (6) months dating remaining and be in salable condition.
B. Understanding that returns are a costly process for both parties,
McKesson agrees to provide the following pricing adjustment, as
applicable, to Phar-Mor:
Adjustment to Cost of Goods
Chainwide Returns & Reduction/Mark Up
Allowances to Net Purchases on all Net Purchases
--------------------------- --------------------
(*) (*)
(*) (*)
Adjustment to Cost of Goods Reduction/Mark Up will be calculated
at the end of each quarter and will be credited on the
immediately previous quarter's business (i.e., 1st quarter,
Returns & Allowances = 0.0%, (*) adjustment paid on 1st quarter
purchases.)
C. McKesson agrees to undertake certain administrative activities to
reasonably assist Phar-Mor with the processing of its returns of
outdated and damaged goods through BFI Pharmaceutical Services
Inc. ("BFI"). In this regard, McKesson will credit Phar-Mor (or
pay in the event of amounts due following termination of this
Agreement) the full amount of any related payments made directly
to McKesson by the manufacturers to which such goods were
returned by BFI on Phar-Mor's behalf. Returns through BFI will be
<PAGE>
made three (3) times per year and credit shall be issued to
Phar-Mor within thirty (30) days following McKesson's receipt of
payment from the manufacturer or other party in connection with
such returns. Notwithstanding the foregoing, McKesson hereby
assumes no liability or responsibility for the actual collection
or timely payment of any such sums contemplated by Phar-Mor from
the manufacturer based on this returns process.
17. CUSTOMER SUPPORT
A. National Account Customer service personnel will be available
at the McKesson Premier Service Center from 8:00 a.m. to 7:00
p.m. Monday through Friday. Technical and emergency support is
available 24 hours a day, seven days a week.
B. A National Account Executive and National Accounts Customer
Relations Manager will be assigned to Phar-Mor's headquarters
and will be available as needed.
C. Phar-Mor will be provided the names and telephone numbers of
its key contacts at McKesson as well as the names and telephone
numbers of McKesson's designated support personnel.
D. A McKesson representative will visit each of Phar-Mor's stores
once each quarter during the term hereof. Such visits will be
scheduled with reasonable advance notice with such stores.
18. INSTALLATION AND TRAINING
McKesson field management will contact Phar-Mor's Headquarters
personnel to arrange meetings for orientation to begin the
implementation process with timing that is mutually agreeable to the
parties.
McKesson agrees to provide the necessary training on the Economost
system at no cost prior to the Implementation Date. This will include
training on the electronic order entry device if needed as well as
instruction on how to utilize the information provided on the invoice,
item sticker and shelf label. Other appropriate in-store training,
e.g., EconoLink will be made available at no cost as reasonably needed.
McKesson agrees to provide the manpower reasonably necessary to install
shelf labels for all stores at no cost.
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
19. COST OF GOODS
The following Retail Cost of Goods is based on Phar-Mor achieving a
minimum chainwide average volume of (*) in Direct Store Delivery
("D.S.D.") prescription drug and OTC product purchases (net of returns
and allowances) per store per month from McKesson throughout the term
of this Agreement.
Retail Direct Store Delivery
Rx Cost (*)
OTC Cost (*)
In the event that Phar-Mor fails to maintain a minimum chainwide
average volume of (*) in net D.S.D. prescription drug and OTC product
purchases per store per month from McKesson during any (*) month period
of this Agreement [excluding the first (*) months of this Agreement],
all retail cost of goods pricing hereunder shall be increased to the
then applicable pricing based on the following schedule during each
subsequent (*) month period until such time as the minimum chainwide
net D.S.D. prescription drug and OTC product purchase volume
requirement of (*) is met for (*) consecutive months.
Chain-wide Monthly
Average Per Store Rx OTC
(*) (*) (*)
(*) (*) (*)
(*) (*) (*)
(*) (*) (*)
(*) (*) (*)
(*) (*) (*)
(*) (*) (*)
(*) (*) (*)
(*) (*) (*)
(*) (*) (*)
It is further understood and agreed by the parties that if Phar-Mor
fails to maintain a minimum chainwide average volume of (*) in net
D.S.D. prescription drug and OTC product purchases per store per month
from McKesson during any rolling (*) month period of this Agreement
[excluding the first (*) months of this Agreement], such failure shall
constitute a default of this Agreement by Phar-Mor.
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
Annual Volume Incentive
McKesson agrees to pay Phar-Mor a volume incentive payment based on
Phar-Mor's annual purchase volume of D.S.D. prescription drug and OTC
products (net of returns and allowances) in accordance with the
following schedule. This annual purchase volume shall be calculated
using the twelve month period commencing on the Implementation Date of
this Agreement or the anniversary thereof, as appropriate, and any such
volume incentive earned by Phar-Mor shall be paid by check within
forty-five (45) days following the anniversary date of the
Implementation Date of this Agreement. The net D.S.D. prescription drug
and OTC products purchased by both Phar-Mor's Newly Opened Pharmacies
and Newly Affiliated Pharmacies shall be included in the Volume
Incentive calculation.
Volume Incentive
Annual D.S.D. Prescription Drug
and OTC Product Purchases % on Total
Less than (*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
20. GENERIC PHARMACEUTICALS
McKesson shall pay to Phar-Mor an annual guaranteed rebate based on
Phar-Mor's participation in McKesson's Select Generics Program. In
order to qualify as participation hereunder, all generic
pharmaceuticals purchased by Phar-Mor pharmacies shall be required to
be purchased through McKesson's Select Generics Program. Provided
Phar-Mor's participation meets the percentage levels as specified below
in any year, the guaranteed rebate schedule shall be as follows:
Select Generics Rebate Schedule
% of Select Generics to Total Rx Rebate
----------------------------------------------------------------------
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
Select Generics Rebate Schedule
% of Select Generics to Total Rx Rebate
- --------------------------------- ------
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
(*) (*)
The guaranteed rate shall be paid in prorated payments to Phar-Mor
quarterly.
McKesson shall conduct quarterly reviews of the Select Generics Program
to ensure Phar-Mor of the market competitiveness of the Select Generics
Program.
McKesson will ensure a (*)% service level for products purchased
under the Select Generics Program, assuming the manufacturers'
ability to supply the product.
In the event of a Business Combination, the parties agree to modify
the above Select Generics Rebates prorata to include the additional
new Select Generics volume that results from the combination. For
example, if Phar-Mor's annual total Rx purchases are (*) and
Phar-Mor is purchasing McKesson Select Generics at the(*)% of total
Rx level and Phar-Mor then combines with a comparable-sized
business entity (that is also purchasing (*) in total Rx purchases)
and that also purchases Select Generics at the (*)% of total Rx
purchases level, then the combined entity's rebate would be (*)
annually.
21 . REPACK PHARMACEUTICALS
A competitive and comprehensive program will be made available to
Phar-Mor for repacked pharmaceuticals. Stores shall be net-billed with
an additional volume rebate to be paid to Phar-Mor headquarters, each
quarter.
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
Quarterly Repack Volume Rebate %
(*) (*)
(*) (*)
(*) (*)
2. FORCE MAJEURE
If service from any of McKesson's Distribution Centers to any Phar-Mor
store(s) is interrupted or delayed because of strike, lockout, labor
dispute, fire or other casualty, or any other reasons beyond the
reasonable control of McKesson, McKesson will take such action as may
be reasonably necessary, without additional cost or expense to Phar-Mor
to maintain service as mutually agreed upon to affected Stores from an
alternate McKesson distribution center. Notwithstanding anything
contained herein to the contrary, if McKesson cannot deliver the
Merchandise in accordance with the terms of this Agreement, Phar-Mor,
at its own expense, shall be entitled to purchase the Merchandise from
any third party without penalty.
23. TERMINATION
Any breach of this Agreement by either party shall constitute a default
if not cured within sixty (60) days after written notice of such breach
is given by the non-breaching party. Upon default by either party, the
other party may terminate this Agreement on five (5) days' written
notice.
Either party may, on ten (10) days notice, terminate this Agreement,
if:
A. The other party shall file any petition under bankruptcy,
reorganization, insolvency or moratorium laws, or any other laws
for the relief of or intention to the relief of debtors; or
B. The other party shall file any involuntary petition under any
bankruptcy statute or a receiver or trustee shall be appointed to
take possession of all or substantial part of the assets of the
party which has not been dismissed or terminated within sixty
(60) days of such filing or appointment; or
C. The other party shall make a general assignment for the benefit
of creditors or shall become unable or admit in writing its
inability to meet its obligations as they mature; or
<PAGE>
D. The other party shall institute any proceedings for liquidation
or the winding up of its business other than for purposes of
reorganization, consolidation or merger; or
E. The other party fails to make any payment when due in accordance
with the terms of this Agreement; provided however, such
termination shall not take effect if the payment default is cured
prior to expiration of the ten (10) day notice period.
Upon termination pursuant to this Section 23, neither party shall have
any further obligations or liabilities hereunder except for accounts
receivable balances or any other payments due to either party based
upon obligations under this Agreement at the date or upon the
occurrence of such termination.
24. CONFIDENTIALITY
The parties agree to maintain in confidence the terms and conditions
contained herein, and shall take every precaution to disclose the
contents of this Agreement only to those employees of each of the
parties who have a reasonable need to know such information or as
required by law or legal process. Notwithstanding the foregoing, each
party hereto may reveal the terms of this Agreement, or appropriate
portions hereof, to (i) those of its (or its affiliates') employees,
directors, agents, and outside accountants, auditors, legal counsel,
and lenders who need to know the information embodied herein to carry
out the express purposes of this Agreement or otherwise to advise them
or (ii) potential lenders, potential investment bankers, or potential
bona fide investors or (iii) professionals (legal counsel and
accountants) representing either of the parties to the extent deemed
necessary or advisable by a party, provided each such party hereto
informs each such employee, director, agent, outside accountant or
auditor, or any other authorized third-party recipient specified above
of the confidential nature of this Agreement and such persons'
obligations to maintain the confidentiality herein provided.
25. NOTICES
All notices given or required to be given hereunder shall be in writing
and shall be deemed to have been duly given when delivered in person or
three (3) days after being sent by certified mail, return receipt
requested, postage prepaid, or when received via overnight courier,
confirmed telecopy, telex or other electronic transmission, in all
cases addressed to the party from whom intended at its address set
forth below, provided that either party may, by like notice, change the
address to which subsequent notices shall be sent.
<PAGE>
If to McKesson: If to Phar-Mor:
McKesson Drug Company Phar-Mor, Inc.
1220 Senlac Drive 20 Federal Plaza West
Carrollton, TX 75006 P.O. Box 400
ATTN: Senior Vice President, Youngstown, OH 44501-0400
National Accounts East ATTN: Vice President,
Facsimile: (972)446-4499 Pharmacy Operations
Facsimile: (330)740-1085
With a copy to
McKesson Corporation With a copy to:
One Post Street Phar-Mor, Inc.
San Francisco, CA 94104 20 Federal Plaza West
ATTN: General Counsel P.O. Box 400
Facsimile: (415)983-8826 Youngstown, OH 44501-0400
ATTN: General Counsel
Facsimile: (330)740-2985
26. MISCELLANEOUS
A. This Agreement embodies the entire agreement between the
parties with regard to the subject matter hereof and
supersedes all prior agreements, understandings and
representations and may not be modified except by writing
signed by the parties hereto.
B. Neither party shall have the right to assign this Agreement
or any interest therein without the prior written consent of
the other party.
C. This Agreement shall be construed in accordance with the
laws of the State of Ohio without regard to the rules
regarding conflicts of laws.
D. If any federal, state or local tax currently or in the
future is levied upon McKesson in a jurisdiction where
McKesson or Phar-Mor do business and such tax relates or
applies to the Merchandise or any transactions covered by this
Agreement (excluding taxes imposed on McKesson's net income),
the cost of goods payable to McKesson by Phar-Mor hereunder
shall be increased by a corresponding percentage amount, or in
the alternative, the amount of any such tax will be paid by
Phar-Mor as a separate invoice charge.
E. If any provision of this Agreement shall be held invalid
under any applicable law, such invalidity shall not affect any
other provision of this Agreement, except to the extent the
absence of such invalid provision deprives a party of the
benefit of its bargain hereunder, in which case, the party so
deprived may terminate this Agreement on ten (10) days written
notice to the other party, without any further liability other
than for any amount owed at the time of such termination.
<PAGE>
F. The failure of either party to enforce at any time or for
any period of time any one or more of the provisions thereof
shall not be construed to be a waiver of such provisions or of
the right of such party thereafter to enforce each such
provision.
G. Phar-Mor understands and acknowledges that all product
discounts and rebates earned by or granted to its stores under
McKesson's programs may be subject to certain state and
federal laws and regulations regarding reporting and/or
disclosure requirements and may be required to be reflected in
the costs claimed or charges made by Phar-Mor's stores under
Medicaid, Medicare or any other health care reimbursement
program or provider plan.
H. McKesson carries significant insurance. However, it also
requires its vendors to provide insurance coverage of at least
three million dollars ($3,000,000) to cover product claims and
looks to them for any deficiencies.
McKesson shall at its own expense obtain and maintain
comprehensive general liability insurance including products
liability, personal injury and contractual liability, covering
McKesson's actions and omissions with respect to its
performance hereunder, including those of all its employees,
agents and representatives, in the minimum amount of not less
than Three Million Dollars ($3,000,000) per person, per
occurrence, and Five Hundred Thousand ($500,000) for Property
damage . Such policy shall be deemed primary as to any other
valid and collectible insurance which may be carried by any
other liable party. Such policy shall name Phar-Mor as an
additional insured and shall provide at least 30 days prior
written notice to Phar-Mor of any proposed cancellation or
material change in the policy for any cause. McKesson shall
provide a certificate of insurance reflecting all such
coverages within ten days of execution of this Agreement. It
is agreed by the parties that McKesson shall have the option
to self-insure for this coverage.
I. McKesson shall defend, indemnify, and hold Phar-Mor
harmless from and against any and all losses, claims, damages,
liabilities, and expenses (including attorneys' fees) arising
out of or resulting from (1) the storage, handling, or
delivery by
McKesson of products sold to Phar-Mor hereunder and
(2) for product liability to the extent that the
manufacturer fails to indemnify Phar-Mor from any
liability for
such manufacturer's products sold to Phar-Mor hereunder and
(2) for product liability to the extent that the manufacturer
fails to indemnify Phar-Mor from any liability for such
manufacturer's products sold to Phar-Mor hereunder; provided,
however, that such indemnification shall not apply to the
extent Phar-Mor has caused such losses, claims, damages,
liabilities, and expenses by reason of the acts or omissions
of Phar-Mor, its employees or agents.
J. Phar-Mor shall have the right, during normal business hours
upon thirty (30) days written notice to McKesson, to audit
such portions of the books and records of
<PAGE>
Confidential Treatment Requested.
The redacted material has been separately filed with the Commission.
McKesson relating to the purchase of goods sold
hereunder to Phar-Mor, which audit shall be limited in scope
to verification of the cost to McKesson of goods sold and the
amount and price of goods shipped hereunder. In connection
with any such audit, McKesson shall (1) provide Phar-Mor and
its legal counsel, accountants, and other representatives with
reasonable access to all facilities, employees, and
accountants (upon reasonable request and advance notice), and
such portions of the books and records of McKesson relating to
such cost, price, and shipment hereunder and (2) furnish
Phar-Mor and such persons copies of such documents,
information, and data concerning such cost, price and shipment
hereunder as Phar-Mor or such persons may reasonably request.
If, after any such audit pursuant hereto, Phar-Mor
disputes the cost, price of amount of goods shipped or
received hereunder or the calculation of cost as reflected on
the books and records of McKesson, Phar-Mor shall provide
McKesson with a written report reflecting Phar-Mor's
determination of such disputed items. Within fifteen (15) days
after receiving such report, McKesson shall (3) pay Phar-Mor
any additional amounts due to Phar-Mor or the portion thereof
which is not disputed or (4) provide Phar-Mor with notice that
McKesson disagrees with Phar-Mor's determination of such
disputed items and the specific details of such disagreement.
If McKesson and Phar-Mor are unable to resolve such
disagreement within fifteen (15) days after such negotiations
begin, then such disagreement shall be submitted to a mutually
satisfactory independent auditor for resolution. Such
independent auditor's resolution of any such disagreement
shall be reflected in a written report which shall be
delivered to, and shall be binding upon, Phar-Mor and
McKesson. Any amounts due as a result of such resolution shall
be paid by the party required to make such payment to the
other party within fifteen (15) days after such paying party
receives the independent auditor's written report. Phar-Mor
shall pay all costs and fees of the independent auditor unless
McKesson is required to pay an amount in excess of $100,000 as
a result of the resolution by the independent auditor of any
disagreement, in which case, McKesson shall pay all costs and
fees of the independent auditor.
<PAGE>
IN WITNESS WHEREOF the parties have caused this Agreement to be duly
executed, subject to ratification by Phar-Mor's Board of Directors on or before
July 15, 1997, as of the date and year first above written.
Phar-Mor, Inc.
By:___Robert Sarvas________________ Title: Vice President, Pharmacy Operations
Print
Name: Robert Sarvas Date: ___6/19/97____________________
McKESSON DRUG COMPANY
a Division of McKESSON CORPORATION
By: Mark Majeske Title: President, Customer Operations
Print
Name: Mark Majeske Date: ____6/23/97_______________________
SUBJECT TO SETTLEMENT PRIVILEGE
PHAR-MOR SEVERANCE AGREEMENT
THIS PHAR-MOR SEVERANCE AGREEMENT ("Agreement") is made as of the day
of , 1997, by and between PHAR- MOR, INC., a Pennsylvania corporation (the
"Corporation"), and ROBERT M. HAFT ("R.M. Haft").
WHEREAS, the parties hereto previously entered into that certain
Employment Agreement dated as of September 11, 1995 (the "Employment
Agreement");
WHEREAS, the parties hereto desire to terminate R.M. Haft's employment
with the Corporation and to treat such termination as "Without Cause" for
purposes of the Employment Agreement; and
WHEREAS, the parties hereto desire to set forth herein the terms and
conditions of their understandings and agreements.
NOW, THEREFORE, in consideration of the mutual promises herein
contained the parties agree as follows:
1. Recitals. The foregoing recitals are, by this reference,
incorporated herein and made a substantive part of this Agreement. Unless
otherwise defined herein, all capitalized terms shall have the meanings ascribed
to them in the Employment Agreement.
2. Termination. The Corporation and R.M. Haft hereby agree
that R.M. Haft's employment with the Corporation shall terminate effective as of
Closing (the "Effective Date") under that certain Hamilton Morgan LLC Interests
Redemption and Exchange Agreement dated as of , 1997. The parties agree that
such termination shall for purposes of the Employment Agreement be treated as a
termination "Without Cause".
3. Severance. In satisfaction of the Corporation's
obligations under Section 5.20 of the Employment Agreement, the Corporation
agrees to the following:
a. On the Effective Date, the Corporation shall
make a lump-sum cash payment to R.M. Haft in the total amount of $5,000,000,
less the amount of any Annual Bonus actually paid to R.M. Haft by the
Corporation prior to the Effective Date with respect to the Corporation's fiscal
year 1997. If sooner than the Effective Date, the Corporation shall pay to R.M.
Haft his Annual Bonus for fiscal year 1997 at the same time as the Corporation
pays annual bonuses to any of its other senior executives for such fiscal year.
4163LHC1.5F Draft of 9709241449
<PAGE>
SUBJECT TO SETTLEMENT PRIVILEGE
b. In addition, on or before September 28, 1998,
the Corporation shall pay to R.M. Haft seventy-five percent (75%) of any
Long-Term Performance Payment payable to R.M. Haft for the three (3) year period
ended June 30, 1998. The Long-Term Performance Payment shall be calculated in
accordance with Schedule 1 attached hereto.
c. On the Effective Date, the Corporation shall
also pay to R.M. Haft the deferred compensation payable to him from his
non-qualified management deferral plan account with the Corporation in the
original amount of $325,429.21, plus any return on such account through the
Effective Date.
d. From the Effective Date to the third (3d)
anniversary of the Effective Date, the Corporation shall continue to provide the
medical, hospitalization, dental and disability benefits and reimbursements as
described in and previously provided under Section 4.20 of the Employment
Agreement. Thereafter, R.M. Haft shall be entitled to his statutory rights under
Cobra. The current disability insurance coverages are described on Schedule 2
attached hereto.
e. From the Effective Date to the third (3d)
anniversary of the Effective Date, the Corporation shall continue to reimburse
R.M. Haft on a net after-tax basis for the life insurance coverage as described
in and previously provided under Section 3.00 of the Employment Agreement. The
applicable policies and face amounts are set forth on Schedule 2 attached
hereto.
f. The Corporation acknowledges, ratifies and
confirms that (i) R.M. Haft shall, after the Effective Date, continue to be the
legal and beneficial owner of options (the "Options") to purchase (a) up to
256,250 shares of the Corporation's common stock (par value $0.01 per share) at
a purchase price of $8.00 per share (the "Original Options"), (b) up to 5,000
shares of the Corporation's common stock (par value $0.01 per share) at a
purchase price of $7.06 per share (the "1995 Director Options"), (c) up to 5,000
shares of the Corporation's common stock (par value $0.01 per share) at a
purchase price of $6.1719 per share (the "1996 Director Options") and (d) up to
125,000 shares of the Corporation's common stock (par value $0.01 per share) at
a purchase price of $5.4375 per share, provided that the Corporation's
shareholders approve an increase in the number of the Corporation's shares of
authorized common stock (the "1997 Options") (the shares to be issued upon
exercise of any of the Original Options, the 1995 Director Options, the 1996
Director Options and/or the 1997 Options are collectively referred to herein as
the "Option Shares"), (ii) the Options shall be one hundred percent (100%)
vested as of the Effective Date (provided, however, that, as to the 1997
Options,
4163LHC1.5F Draft of 9709241449
- 2 -
<PAGE>
SUBJECT TO SETTLEMENT PRIVILEGE
one-third (1/3) may be exercised immediately and thereafter, one-third (1/3) may
be exercised on or after June 5, 1998 and one-third (1/3) may be exercised on or
after June 5, 1999), (iii) the Original Options shall be exercisable by R.M.
Haft in whole or in part until February 11, 2000, (iv) the 1995 Director Options
and the 1996 Director Options shall be exercisable by R.M. Haft in whole or in
part until October 2, 2000 and October 1, 2001, respectively, (v) the 1997
Options shall be exercisable by R.M. Haft in whole or in part until June 5, 2004
and (vi) the Options shall include the following:
(1) The Corporation covenants and agrees that, unless R.M. Haft elects
otherwise, the Options shall, to the fullest extent possible under
applicable Federal income tax laws and under the Plan, be treated and
reported as incentive stock options as defined under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and any
remaining Options shall be treated as nonqualified stock options. The
Corporation covenants and agrees that, upon written request by R.M.
Haft, the Corporation shall accept the surrender by R.M. Haft of R.M.
Haft's right to exercise all or any portion of the Options and pay in
consideration therefor within ten (10) days following such surrender
an amount equal to the difference obtained by subtracting the exercise
price of the Option Shares which are the subject of such surrendered
Option(s) from the fair market value (as determined by the closing
trading price per share of the Corporation's common stock for the
business day immediately prior to the date of such exercise) of the
Option Shares which are the subject of such surrendered Option(s) on
the date of such surrender (such amount not to be less than zero),
such payment to be in cash.
(2) With respect to the Options (and the shares of the Corporation's
capital stock to be received upon exercise of the Options), R.M. Haft
shall have such rights, benefits and protections, pro rata and in pari
passu and on the same terms and conditions as are equal to the best
rights, benefits and protections as have been provided or may in the
future be provided to any executive of the Corporation or its
subsidiaries, regarding their respective options, warrants, stock
rights and/or shares of capital stock in the Corporation (collectively
or individually, "Equity"), concerning terms of payment for the
acquisition of
4163LHC1.5F Draft of 9709241449
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<PAGE>
SUBJECT TO SETTLEMENT PRIVILEGE
Equity, registration rights and anti-dilution
protection granted with respect to Equity and any
re-pricing of Equity that is more favorable than the
exercise price of the Options.
(3) In the event of any conflict, inconsistency or
ambiguity between the terms and provisions of this
Agreement and the terms and provisions of the Stock
Option Plan and/or the Initial Stock Option
Agreement, the terms and provisions of this Agreement
shall govern and control for all purposes and in all
respects in order to provide R.M. Haft with the
maximum benefit of all of the foregoing.
(4) The loan provisions of Section 4.11 of the
Employment Agreement shall terminate and be of no
force or effect.
g. From the Effective Date through the second
(2nd) anniversary of the Effective Date, the Corporation shall continue to
provide R.M. Haft with a Washington, D.C. office and full-time secretarial
services as previously provided under Section 2.30 of the Employment Agreement.
For purposes of this paragraph 3g, the Corporation agrees (i) to continue to
retain Gail Jacobs as an employee of the Corporation at her present salary (plus
an annual four percent (4%) increase) and benefits levels (which is reflected on
Schedule 3 attached hereto) and (ii) to pay the office rent (not to exceed
$30,000 per year) and utilities (plus landlord passthroughs, if any) but
excluding telephone charges on office space used by R.M. Haft in Washington,
D.C. or another location of his choosing.
4. [Intentionally left blank.]
5. Tax Adjustment Payments; Indemnification; Letter of Credit;
Agreed Tax Reporting.
a. The Corporation and R.M. Haft shall prepare
and file their respective Federal income tax returns on the basis that no
payments made or to be made by the Corporation to R.M. Haft under this Agreement
(other than payments, if any, under this paragraph 5) are "excess parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"). If all or any portion of the amount payable to
R.M. Haft under this Agreement (together with all other payments of cash or
property, whether pursuant to this Agreement or otherwise, including, without
limitation, the issuance of Options or Option Shares or the granting, exercise
or termination of options therefor, or the payments or benefits made or granted
under paragraph 3 above) constitutes or is
4163LHC1.5F Draft of 9709241449
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<PAGE>
SUBJECT TO SETTLEMENT PRIVILEGE
subsequently determined to constitute "excess parachute payments" within the
meaning of Section 280G of the Code, that are subject to the excise tax imposed
by Section 4999 of the Code (or any similar tax or assessment), then the
Corporation shall pay R.M. Haft an amount equal to the sum of: (i) such excise
or other similar taxes, plus (ii) any interest, fines and penalties resulting
from any underpayment of tax or estimated tax, plus (iii) an amount necessary to
pay to R.M. Haft any income, excise or other tax assessment incurred or to be
incurred by R.M. Haft with respect to the amounts specified in (i) and (ii)
above, and the payment provided by this clause (iii). Any such payment shall be
made immediately by the Corporation upon the earliest to occur of (x) assessment
against R.M. Haft of such tax, penalties or interest, (y) determination by R.M.
Haft and his tax advisors that he is obligated to make an estimated tax payment
in connection with any of the amounts specified in clause (iii) above or (z)
preparation by R. M. Haft of a tax return for filing after a final determination
by a Taxing Authority in an Indemnified Tax Contest that any portion of the
payments made to R.M. Haft under this Agreement are "parachute payments" under
Section 280G of the Code, that reports any of the amounts specified in clauses
(i), (ii) or (iii) above. In furtherance of the foregoing, the Corporation
hereby agrees to indemnify and hold harmless (including advance payment of
expenses) R.M. Haft from and against any loss, cost, penalty or expense
(including attorneys' and accountants' fees incurred by him) in connection with
any actual, threatened or potential assertion or assessment of any excise tax
under Section 4999 of the Code (or any similar tax or assessment) relating to
any benefit or payment received by R.M. Haft under this Agreement.
b. On the Effective Date, the Corporation shall
do the following:
(1) The Corporation shall deliver to R.M.
Haft the opinion of Honigman Miller Schwartz and Cohn, in form and content
reasonably satisfactory to R.M. Haft and his tax advisors, that there is a
reasonable basis to take a position in the preparation and filing of Federal
income tax returns, and a realistic possibility of sustaining on the merits such
position, that the payments and benefits received by R.M. Haft under this
Agreement are not "excess parachute payments" under Section 280G of the Code and
are not subject to the excise tax imposed by Section 4999 of the Code (or any
similar tax or assessment). The Corporation shall also deliver to R.M. Haft
complete copies of any analyses, memoranda or opinions prepared by Deloitte &
Touche, LLP in connection with this tax issue.
(2) The Corporation shall deliver to R.M.
Haft an unconditional and irrevocable sight draft letter of credit in the face
amount of $2,933,513 issued by a federally-
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regulated money center financial institution satisfactory to R.M. Haft, in his
sole discretion, that shall name R.M. Haft as beneficiary thereunder and, upon
presentment, shall be drawable by R.M. Haft. As between the parties hereto, it
is agreed that R.M. Haft may draw upon the letter of credit upon the first to
occur of (i) receipt by R.M. Haft of a notice of assessment from an applicable
governmental tax authority in connection with an excise tax under Section 4999
of the Code (or any similar tax or assessment), (ii) determination by R.M. Haft
and his tax advisors that R.M. Haft's liability for taxes, penalties and
interest if the IRS successfully challenges the tax reporting position described
in paragraph 5a above would, or is reasonably likely to, exceed the amount of
the letter of credit, (iii) failure by the Corporation to satisfy any of its
obligations under paragraph 5a above, or (iv) thirty (30) days or less prior to
the expiration date of such letter of credit, unless such letter of credit is
renewed or a new letter of credit that conforms to the requirements of this
paragraph 5b(2) is substituted therefor in a face amount equal to the amount set
forth above plus such additional interest as may accrue through the expiration
date of such renewed or new letter of credit plus the gross up payment that
would be due in connection with such additional interest under clause (iii) of
paragraph 5a above. The Corporation shall remain fully liable for its
obligations under this Agreement, notwithstanding any amounts drawn under the
letter of credit (but amounts so drawn shall be credited against such
obligations), and R.M. Haft shall retain any and all legal and equitable rights
and remedies in connection therewith. R.M. Haft may exercise such rights and
remedies at any time and from time to time in any order that he chooses, and any
failure to exercise a right or remedy in any one instance shall not preclude its
subsequent exercise. The letter of credit shall be in form and content
reasonably satisfactory to R.M. Haft and shall have an initial term of three (3)
years and shall thereafter be renewed (or a new letter of credit meeting the
requirements of this paragraph 5b(2) is substituted therefor) for additional one
(1) year periods until the later of (i) expiration of any applicable statute of
limitations on assessment (except where the applicable statute of limitations
remains open solely due to R.M. Haft's failure to file a tax return or fraud) or
(ii) a final determination in any pending Indemnified Tax Contest. Upon the
reasonable determination of R.M. Haft's tax advisors that all applicable
statutes of limitation have expired and that R.M. Haft has no unresolved
obligation for taxes, penalties or interest relating to "excess parachute
payments" and that all of the Corporation's obligations under paragraph 5a above
have been fully satisfied, R.M. Haft shall deliver to the Corporation any
amounts held by him that were previously drawn under the letter of credit and
not applied toward the Corporation's obligations under paragraph 5a above. In
the event that R.M. Haft draws upon the letter of credit pursuant to any of the
events described in paragraph
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5b(2)(i) - (iv) above, R.M. Haft shall, promptly after such draw on the letter
of credit is received by him, notify the Corporation thereof. The Corporation
shall have fifteen (15) days following such notice to fully and completely cure
the event that led to such draw. If the Corporation (x) fully and completely
cures such event within such period and (y) causes the letter of credit required
under this paragraph 5b(2) to be reinstated (on the same terms and conditions
imposed under this paragraph 5b(2)) within such period, then R.M. Haft shall
repay such drawn amounts to the Corporation.
c. In connection with the payments made pursuant
to paragraphs 3a, c, d and e above, the Corporation shall prepare and file with
the Social Security Administration and any other applicable governmental
authority a Form W-2 in the form of Exhibit "A" attached hereto. Payments by the
Corporation to R.M. Haft shall be subject to withholding as required by law (and
payments under paragraph 3e above shall be grossed-up so that R.M. Haft incurs
no net tax cost in connection therewith). Notwithstanding the foregoing, the
parties agree that the Corporation shall not withhold taxes or other payroll
deductions or otherwise report income to R.M. Haft on any tax reporting form
relating to the Corporation's satisfaction of its obligations under paragraph 3g
above.
d. In the event of any determination or proposed
determination by the Internal Revenue Service or other taxing authority (a "Tax
Authority") affecting R.M. Haft's liability for taxes, interest, or penalties
subject to indemnity under paragraph 5a above (an "Indemnified Adverse Tax
Effect"), R.M. Haft agrees that the Corporation's representatives shall be
authorized to conduct or participate in administrative and/or judicial
proceedings in which such Indemnified Adverse Tax Effect is contested (an
"Indemnified Tax Contest") to the extent provided below:
(1) Right of Corporation to Pursue
Indemnified Tax Contest. Subject to the terms and conditions of this paragraph
5d, the Corporation may, but is not required to, conduct or participate in any
Indemnified Tax Contest at its own expense. The Corporation shall have thirty
(30) days following notice of an Indemnified Tax Contest to notify R.M. Haft of
its exercise of its right under this paragraph 5d(1) to conduct or participate
in the Indemnified Tax Contest. Any failure by the Corporation to so notify R.M.
Haft and exercise such right, shall be conclusively deemed an irrevocable waiver
by the Corporation of such rights and thereafter R.M. Haft shall have no
obligation to maintain the tax reporting position described in paragraph 5a
above and R.M. Haft shall be free to pursue any position he, in his sole
discretion, deems appropriate or desirable, including, without limitation,
filing an amended return, drawing on the
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letter of credit and paying the excise tax liability (plus penalties and
interest, if any). The Corporation shall only have such rights to conduct or
participate under this paragraph 5d so long as it maintains, on its own behalf,
the tax reporting position set forth in paragraph 5a above. Upon the
Corporation's timely notice and exercise of its rights under this paragraph
5d(1), R.M. Haft agrees not to voluntarily consent to assessment of tax with
respect to and to the extent of the Indemnified Adverse Tax Effect. R.M. Haft
shall promptly notify the Company of (i) his receipt of any notice of audit for
any of the years for which there may be an Indemnified Adverse Tax Effect and
(ii) the occurrence of an event which causes an Indemnified Tax Contest to
exist. The term "conduct or participate in" as used in this paragraph 5 shall
include (x) the right to attend, through representatives of the Corporation's
choice, all meetings, interviews, and conferences by and between R.M. Haft
and/or his representatives and representatives of the Internal Revenue Service,
where, but only to the extent that, the subjects thereof include an Indemnified
Adverse Tax Effect and (y) the right to submit to R.M. Haft for filing any
protest, petition, or claim for refund or any other filing or submission
regarding an Indemnified Adverse Tax Effect.
(2) Execution of Documents Necessary to
Conduct of Indemnified Tax Contest. R.M. Haft will execute such documents as may
be reasonably required to facilitate the Corporation's ability to conduct or
participate in any Indemnified Tax Contest; provided, however, R.M. Haft shall
not be required in any event to execute a power of attorney authorizing
representatives of the Corporation to act on his behalf (other than a limited
power of attorney on IRS Form 2848-D authorizing the Corporation's outside tax
counsel to receive copies of all IRS notices and correspondence relating to an
Indemnified Adverse Tax Effect), and shall not be required to execute extensions
of the statute of limitations on assessment which are not limited solely to
assessment of taxes causing the Indemnified Adverse Tax Effect.
(3) Separation of Proceedings by Piggy-Back
Settlement Agreement. If the asserted legal basis for an Indemnified Adverse Tax
Effect, if sustained, would necessarily also require an increase in tax
liabilities of the Corporation (a "Related Tax Increase"), the Corporation shall
use its best efforts to cause the Related Tax Increase to be contested directly
by the Corporation on its own behalf, so that R.M. Haft's liability for such
Indemnified Adverse Tax Effect may be resolved pursuant to a "piggy-back"
settlement agreement under which R.M. Haft agrees with the relevant Tax
Authority to be bound to tax treatment consistent with any final determination
with respect to the Related Tax Increase.
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(4) Corporation's Participation in Tax
Audits. If an Indemnified Adverse Tax Effect is an issue under consideration in
an audit of the returns of R.M. Haft, the Corporation shall be authorized to
participate in such audit only with respect to, and to the extent of, issues
related to an Indemnified Adverse Tax Effect.
(5) Corporation's Right to Convert Contest
to Refund Proceedings. If an Indemnified Adverse Tax Effect is an issue under
consideration in an audit of the returns of R.M. Haft, and the Corporation has
given adequate assurance of the availability of funds provided by the
Corporation to immediately and fully pay such Indemnified Adverse Tax Effect
when assessed, R.M. Haft will, if the Corporation so requests, file a Form 870
or amended return permitting the assessment of the Indemnified Adverse Tax
Effect with respect to such issue, and after assessment and payment thereof,
R.M. Haft will execute all documents as are reasonably required for the
Corporation to then contest such Indemnified Adverse Tax Effect through a claim
for refund, including a judicial challenge to the administrative denial of any
such claim for refund. In the event such Indemnified Adverse Tax Effect is
converted to a refund proceeding, the Corporation shall be authorized to control
the conduct of such refund proceeding so long as the Indemnified Adverse Tax
Effect is the only issue in the refund proceeding.
(6) Participation of Corporation in
Litigation Controlled by R.M. Haft. In any litigation with a Tax Authority in
which the Indemnified Adverse Tax Effect is an issue, the Corporation shall be
permitted to participate in such litigation (or, as provided in subparagraph
5d(5) above, control such litigation), but only with respect to, and to the
extent of, the Indemnified Adverse Tax Effect, including providing a response to
such issue in the context of such litigation.
(7) Cooperation and Information Sharing.
The Corporation and R.M. Haft will provide each other with such cooperation,
assistance and information as either of them reasonably may request of the other
to facilitate the presentation or adjudication of an issue concerning an
Indemnified Adverse Tax Effect. At any time, upon the request of any party, the
other party will promptly and duly execute and deliver, or cause to be promptly
and duly executed and delivered, such further instruments and documents and take
such further action as may reasonably be required to effectuate the provisions
of this paragraph 5d.
(8) Final Determination. In the event that
an indemnification payment has been made to R.M. Haft pursuant to
paragraph 5a in order to permit the conduct of a refund
proceeding under subparagraph 5d(5) hereof, and a refund is
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finally determined and issued as a result of such proceeding, the amount of the
indemnification obligation of the Corporation under paragraph 5a shall be
recomputed to reflect such outcome (and the collateral consequences thereof) and
any excess indemnity payment determined to have been paid by the Corporation in
view of the determination in such refund proceeding shall, along with any
statutory interest payments received by R.M. Haft (after deduction for any
related tax liability) in connection with such a refund of tax, be returned by
R.M. Haft to the Corporation (net of any then outstanding indemnity obligations
of the Corporation to R.M. Haft). R.M. Haft agrees promptly to execute such
documents as reasonably requested by the Corporation to recover excise or income
tax paid to taxing authorities as a consequence of an Indemnified Adverse Tax
Effect. The full amount of such refund(s), including interest (after deduction
by R.M. Haft for any related tax liability), actually received by R.M. Haft
shall be held in trust by R.M. Haft for the Corporation's benefit and shall be
promptly paid by R.M. Haft to the Corporation.
(9) No Limitations or Restrictions on R.M.
Haft. Notwithstanding the foregoing provisions of this paragraph 5, nothing
herein shall be interpreted to require R.M. Haft to take, or prohibit him from
taking, any action that, if taken or not taken (as applicable), would, or
reasonably could be expected to, adversely affect or impede his ability to
conduct, contest, defend or settle any matter that is not an Indemnified Adverse
Tax Effect, including, without limitation, his ability to file a petition in the
U.S. Tax Court to contest any matters unrelated to an Indemnified Adverse Tax
Effect that are raised in a notice of proposed deficiency from the Internal
Revenue Service. So long as the Corporation is not in breach or default of any
of its obligations, representations or warranties under this Agreement, R.M.
Haft shall not concede or compromise an Indemnified Adverse Tax Effect in a
manner that would prevent judicial review of the determination of the
Indemnified Adverse Tax Effect without the Corporation's prior written consent.
(10) R.M. Haft's Right to Terminate. Upon
the occurrence of (i) failure by the Corporation to exercise its rights under
paragraph 5d(1) above to conduct or participate in an Indemnified Tax Contest,
(ii) any breach or default by the Corporation of any of its representations,
warranties, covenants or indemnifications provided under this Agreement (or any
other agreement by the Corporation for R.M. Haft's benefit) and if any such
breach or default is not fully and completely cured within ten (10) days
following notice thereof to the Corporation, then, in either case, R.M. Haft
may, in addition to all of his other legal and equitable rights and remedies,
terminate the Corporation's rights, and R.M. Haft's obligations, under this
paragraph 5d; it being understood and agreed that, notwithstanding R.M. Haft's
exercise of such termination right,
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the Corporation shall remain fully responsible for all of its obligations and
liabilities under this Agreement (including specifically its obligations under
paragraph 5a above) and R.M. Haft shall thereafter have no duty or obligation to
pursue or permit the Corporation to pursue an Indemnified Tax Contest.
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6. Corporation's Representations and Warranties. The
Corporation represents and warrants that, as of the date hereof, and as of the
Effective Date, each of the following representations and warranties is, and
shall be, true, complete and correct:
a. The Corporation has the full power, right,
authority and legal capacity to enter into, execute and deliver this Agreement
and to perform all of its obligations hereunder.
b. This Agreement has been duly executed and
delivered by the Corporation, has been duly authorized by all necessary
corporate action and is the valid and binding obligation of the Corporation,
enforceable in accordance with its terms.
c. The Corporation is not the debtor in any
bankruptcy or insolvency proceeding, nor is it insolvent, nor will the
performance of any actual or potential obligations under this Agreement render
the Corporation insolvent.
7. Release.
a. Effective as of the Effective Date, the
Corporation, on behalf of itself and its Affiliates, officers, directors,
employees, agents and representatives (collectively, the "Phar-Mor Parties"),
hereby agrees to release, acquit and discharge R.M. Haft, whether in his
capacity as an officer, employee, director or shareholder (including release of
any entity through which R.M. Haft holds any indirect share ownership in the
Corporation) of the Corporation or otherwise, and his heirs, agents and
representatives, successors and assigns (collectively, the "Haft Parties"), from
any and all claims, actions, causes of action, liabilities, obligations and
responsibilities of any kind whatsoever, known or unknown, mature or contingent,
that the Phar-Mor Parties have, have had or may hereafter have, against any of
the Haft Parties, directly or indirectly, in connection with any act, event or
omission occurring or failing to occur at any time on or before the Effective
Date. In furtherance and not in limitation of the Corporation's release under
this paragraph 7a, the Corporation specifically acknowledges and agrees that
R.M. Haft is free to pursue any and all business opportunities, investments and
employment of any kind whatsoever, whether arising on, before or after the
Effective Date, as he may desire without restriction of any kind, and the
Corporation hereby expressly waives any claims against R.M. Haft or any of his
Affiliates with respect thereto. For purposes of this Agreement, "Affiliate"
shall, with respect to any person, mean any individual or entity, directly or
indirectly, controlled by, controlling or in common control with such person.
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b. R.M. Haft, on behalf of himself and the Haft
Parties, hereby agrees to release, acquit and discharge the Corporation and its
officers, directors, and employees from any and all claims, actions, causes of
action, liabilities, obligations and responsibilities of any kind whatsoever,
known or unknown, mature or contingent that the Haft Parties have, have had or
may in the future have, against the Corporation, directly or indirectly, in
connection with any act, event or omission occurring or failing to occur, at any
time on or before the Effective Date; provided, however, that nothing contained
in this paragraph 6b shall be deemed a release by R.M. Haft of (i) his rights,
or the Corporation's obligations, under this Agreement or that certain Stock
Option Agreement dated September 11, 1995 between the Corporation and R.M. Haft
(the "Option Agreement") or under any pension, profit sharing, option or other
compensation or benefit plan of the Corporation in which he has participated
prior to the Effective Date or with respect to any stock options or related
rights (including registration rights) that he has previously been granted, or
(ii) Abbey Butler or Melvyn Estrin, other than in their respective capacities as
members of the Corporation's Board of Directors, or any of their respective
Affiliates.
8. Indemnification. To the fullest extent permitted or
required by the laws of the state of incorporation of the Corporation, as may
apply form time to time, the Corporation shall indemnify and hold harmless
(including advance payment of expenses) R.M. Haft, in accordance with the terms
of such laws, if R.M. Haft is made a party, or threatened to be made a party, to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that R.M. Haft
is or was an officer or director for the Corporation or any subsidiary or
affiliate of the Corporation, against expenses (including reasonable attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with any such action, suit or proceeding, which
indemnification shall include the protection of the applicable indemnification
provisions of the Amended and Restated Certificate of Incorporation and the
Amended and Restated By-laws of the Corporation from time to time in effect. The
Corporation hereby agrees that such obligations include indemnification of R.M.
Haft from any claims asserted against or incurred by him in connection with any
direct or indirect stock ownership in the Corporation. In addition to the
foregoing, the Corporation shall indemnify and hold harmless R.M. Haft from and
against any loss, cost, damage, claim or expense (including attorneys' fees and
litigation expenses) incurred by or asserted against him as the result, directly
or indirectly, of the Corporation's breach or default of any of its
representations, warranties or covenants under this Agreement.
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9. Return of Personal Possessions. The Corporation shall
permit R.M. Haft (or his representatives) to remove any and all of his personal
possessions, mementos, art work, furniture, furnishings and other property that
are located in the Corporation's offices in Youngstown, Ohio. The Corporation
acknowledges and agrees that all furnishings, fixtures and equipment located in
R.M. Haft's Washington, D.C. office are the exclusive property of R.M. Haft.
10. No Duty to Mitigate, Etc. R.M. Haft's rights under
paragraphs 3a, b, c, d and e and paragraph 4 above are absolute, and R.M. Haft
shall have no duty to seek substitute employment or otherwise to mitigate any
loss and all amounts and benefits payable under such paragraphs shall be paid to
R.M. Haft without offset or reduction (regardless of any claims that the
Corporation may possess) and even if R.M. Haft obtains substitute employment.
The Corporation shall not garnish, offset or otherwise withhold for the benefit
of itself or any third party (other than withholding imposed by any governmental
authority) any amounts payable to R.M. Haft under this Agreement unless
compelled to do so by judicial order; it being specifically agreed that the
Corporation shall not offset or withhold any payment under paragraphs 5a or 8
hereof, even if the Corporation believes it has defenses or claims in connection
therewith.
11. Miscellaneous.
a. The provisions of this Agreement are severable and if any
one or more provisions may be determined by a court of competent jurisdiction to
be illegal or otherwise unenforceable, in whole or in part, the remaining
provisions and any partially unenforceable provisions to the extent enforceable
in any jurisdiction nevertheless shall be binding and enforceable.
b. During the Term, the Corporation shall maintain customary
directors' and officers' liability insurance with R.M. Haft as a beneficiary
thereunder, for any acts, events or omissions occurring or failing to occur on
or before the Effective Date.
c. This Agreement embodies the entire agreement of the parties
with respect to R.M. Haft's termination of employment and, except as provided
herein, supersedes any other prior oral or written agreements, arrangements or
understandings between R.M. Haft and the Corporation. This Agreement may not be
changed or terminated orally but only by an agreement in writing signed by the
parties hereto.
d. All notices and other communications required or permitted
under this Agreement shall be in writing, and shall be deemed properly given if
delivered personally, mailed by
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registered or certified mail in the United States mail, postage prepaid, return
receipt requested, sent by facsimile, or sent by overnight Express delivery
service, as follows:
If to the Corporation:
Phar-Mor, Inc.
20 Federal Plaza West
Youngstown, Ohio 44501
Attn: General Counsel
If to R.M. Haft:
Robert M. Haft
2346 Massachusetts Avenue, N.W.
Washington, D.C. 20008
With a copy to:
Tucker, Flyer & Lewis, a professional corporation 1615 L
Street, N.W.
Suite 400
Washington, D.C. 20036
Attn: Michael A. Schlesinger, Esquire
Notice given by hand, Express Mail, Federal Express or other such express
delivery service shall be effective upon actual receipt. Notice given by
facsimile transmission shall be effective upon actual receipt if received during
the recipient's normal business hours, or at the beginning of the recipient's
next business day after receipt if not received during the recipient's normal
business hours. All notices by facsimile transmission shall be confirmed
promptly after transmission in writing by certified mail or personal delivery.
Any party may change any address to which notice is to be given to it by giving
notice as provided above of such change of address.
e. The parties acknowledge and agree that they are each familiar with
and desire their relationship to be governed by the laws of the State of
Delaware. Accordingly, this Agreement shall be construed under and governed by
the laws of the State of Delaware and the parties hereto irrevocably consent
(and waiver any objection) to the jurisdiction and venue of the State of
Delaware courts and/or the United States District for the District of Delaware
for any action arising under this Agreement.
f. This Agreement shall inure to the benefit and bind the successors
and assigns of the parties. In particular, the provisions of Section 3.00 of the
Employment Agreement applicable to R.M. Haft shall inure to the benefit and bind
any assignee
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(including donee and legatee) of the policy or policies from R.M.
Haft.
g. Captions to the paragraphs and subparagraphs of this Agreement are
solely for the convenience of the parties, are not a part of this Agreement, and
shall not be used for the interpretation of any of the provisions of this
Agreement.
h. The Corporation shall reimburse R.M. Haft for any legal and
accounting fees and expenses incurred by him in connection with the preparation,
execution and delivery of this Agreement, such fees and expenses not to exceed
$50,000.
i. In the event a controversy or claim arises under or related to this
Agreement and the parties to the dispute do not settle their dispute, any
unresolved claim or controversy shall, at the election of either party, be
submitted to binding arbitration before a single neutral arbitrator, said
arbitrator to be an individual with at least ten (10) years experience as a
senior executive of a Fortune 500 company (a "Qualified Arbitrator"). The
Qualified Arbitrator shall be selected through the following procedure: within
ten (10) days following a party's notice of its election to arbitrate, each
party shall submit to the other a list of at least five (5) qualified
individuals and the parties shall proceed in good faith to select a Qualified
Arbitrator from such lists. If the parties are unable to agree upon a Qualified
Arbitrator within thirty (30) days of submission of such lists, then they shall
seek appointment of a Qualified Arbitrator by the American Arbitration
Association. The arbitration shall be conducted within the greater Washington,
D.C. metropolitan area in accordance with the then current Commercial
Arbitration Rules of the American Arbitration Association and commenced within
ninety (90) days after selection of the Qualified Arbitrator, and judgment on
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof; it being the intent of the parties hereto that, if
arbitration is pursued hereunder, any award made pursuant thereto shall be
binding upon and enforceable against the parties hereto. The parties hereto
specifically and expressly desire that any such controversy or claim be resolved
in the most expeditious manner possible, and, accordingly, irrevocably instruct
any such arbitrator to issue a decision and award within thirty (30) days after
the arbitration hearing is completed and written submissions, if any are
required or permitted, have been filed with the Qualified Arbitrator, or as soon
as practicable thereafter.
j. Time is of the essence for all purposes of
this Agreement.
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IN WITNESS WHEREOF, the undersigned parties have executed this
Agreement as of the date first above written.
PHAR-MOR, INC., a Pennsylvania
corporation
By:
Robert M. Haft
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EXHIBIT A
Form W-2
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Schedule 1
Long Term Performance Payment
The Long-Term Performance Payment (if any) shall be
(x) three percent (3%) of any excess of (i) the aggregate
market value of the Corporation's publicly-traded common stock
based on the average closing price for the thirty (30)-day
period ending on the last day of the subject period (less the
sum of (a) the proceeds from the exercise during such period
of any options or warrants plus (b) any cash or property
consideration actually received by the Corporation during such
period form the issuance of any shares of its common stock)
over (ii) the aggregate market value of the Corporation's
publicly-traded common stock based on the average closing
price for the thirty (30)-day period ending on the last day of
the immediately prior subject period (provided that for the
first day of the period ending on June 30, 1998 such average
closing price shall be deemed to be $8.00 per share), less (y)
one-half of the Annual Bonus paid or payable to R.M. Haft, if
any, for each of the three fiscal years comprising such period
(but not in any event less than zero).
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Schedule 2
Life Insurance
Company Policy Number Face Amount Premium
------- ------------- ----------- -------
Pacific Mutual 1A23092310 $3,000,000 $38,110.00
Disability Insurance
Policy Monthly Annual Owner and
Company Number Benefit Premium Loss Payee
Paul Revere 01028146490 $10,000 $ 5,664.00 R.M. Haft
Reliance RN HLD 0445 $35,000 $19,993.00 Phar-Mor
Reliance RN HLD 0445a Lump Sum - 0 - Phar-Mor
4163LHC1.5F Draft of 9709241449
- 20 -
<PAGE>
SUBJECT TO SETTLEMENT PRIVILEGE
Schedule 3
Gail Jacobs
4163LHC1.5F Draft of 9709241449
- 21 -
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-30895 on Form S-8 of our report dated August 15, 1997 (September 19,
1997 as to Note 11), appearing in this Annual Report on Form 10-K of Phar-Mor,
Inc. for the year ended June 28, 1997. Our report expresses an unqualified
opinion on the consolidated balance sheets of Phar-Mor, Inc. and subsidiaries as
of June 28, 1997 and June 29, 1996 and the related consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows for the
fifty-two weeks ended June 28, 1997 and the forty-three weeks ended June 29,
1996. Our report expresses a qualified opinion on the consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash flows of
Phar-Mor, Inc. and subsidiaries for the nine weeks ended September 2, 1995 and
the fifty-two weeks ended July 1, 1995 as reliable accounting records and
sufficient evidential matter to support the acquisition cost of property and
equipment were not available. Also, our report includes an explanatory paragraph
relating to the comparability of financial information prior to September 2,
1995 as a result of Phar-Mor's emergence from bankruptcy and the creation of a
new entity.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
September 24, 1997
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