SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405/A2
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 29, 1996
- ------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-27050
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
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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
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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
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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. [X]
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
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The aggregate market value of voting stock held by non-affiliates of the
Registrant as of September 13, 1996 was $85,099,378 based on the last reported
sale price of the Registrant's Common Stock on the NASDAQ National Market
System.
As of September 13, 1996, 12,157,054 shares of the Registrant's Common Stock
were outstanding.<PAGE>
<PAGE>1
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
and tobacco, soft drinks, video rental and seasonal and other general
merchandise. As of June 29, 1996, the Company operated 102 stores in 22
metropolitan markets in 18 states under the name of Phar-Mor. Approximately
51% of Phar-Mor's stores are located in Pennsylvania, Ohio and West Virginia,
and approximately 24% 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 29, 1996.
<TABLE>
TOTAL CHAIN SALES BY PRODUCT TYPE
(for the 52-week period ending June 29, 1996)
- ------------------------------------------------------------------------------
<S> <S>
Drugstore: 45%
Includes health & beauty care
products, cosmetics, greeting
cards, seasonal goods and other
general merchandise
Consumables: 28%
Includes grocery, snacks, beer,
wine, tobacco and soft drinks
Pharmacy: 24%
Includes prescription drugs
Video and video rentals 3%
</TABLE>
On September 11, 1995 Phar-Mor became a publicly traded, $1 billion
drugstore chain with 102 individually profitable stores. The Company's new
senior management team implemented a series of fundamental changes designed to
achieve operating profitability. The Company:
- - Implemented an increased advertising and marketing program that
includes reducing prices on over 3,000 high volume items in every
product category;
- - Increased advertising expenditures and frequency, highlighted by
8 to 24-page weekly inserts;
<PAGE>
<PAGE>2
- - Introduced a program that guaranteed the lowest prescription price or
it's FREE;
- - Enhanced the store within a store concept by improving its drugstore and
food store operations, and adding new features such as the "discount book
store", "$0.39 card store", "pet place", "Kodak film kiosk", club-store
"two-ton items";
- - Reduced the number of stores and focused on a core group of high volume,
profitable stores with over 60% in Pennsylvania, Ohio, Virginia and
West Virginia;
- - Reduced the number of warehouses and increased out-sourcing of product
distribution;
- - Introduced point of sale (POS) scanning in all stores;
- - Installed a new pharmacy software system;
- - Installed a new warehouse logistics system;
- - Reduced the number of corporate personnel by 75%; and
- - Reduced the number of stock keeping units (SKUs) by 20,000.
Except for historical information contained herein, the matters discussed
in this annual report are forward-looking statements which involve 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 this
Annual Report on Form 10-K filed with the Securities and Exchange Commission
("SEC").
RECENT DEVELOPMENTS
In an Agreement and Plan of Reorganization (the "Reorganization
Agreement") dated as of September 7, 1996, by and among Phar-Mor, ShopKo
Stores, Inc., a Minnesota corporation ("ShopKo"), and Cabot Noble, Inc., a
newly formed Delaware corporation ("Cabot Noble"), ShopKo and Phar-Mor have
agreed, subject to shareholder approval and to certain other conditions set
forth in the Reorganization Agreement, to a reorganization pursuant to which
Phar-Mor and ShopKo will each become separate wholly owned subsidiaries of
Cabot Noble (the "Proposed Transaction"). The Proposed Transaction provides
for share exchanges with Cabot Noble, and for ShopKo and Phar-Mor to continue
as separate, wholly owned operating subsidiaries of Cabot Noble once the share
exchanges are consummated.
Under the terms of the Reorganization Agreement, each issued and
outstanding share of Phar-Mor common stock ("Common Stock") will be exchanged
for one share of Cabot Noble common stock. Each issued and outstanding share
of ShopKo common stock will be exchanged for 2.4 shares of Cabot Noble common
stock, subject to adjustment in the event the value of the exchange<PAGE>
<PAGE>3
consideration would otherwise fall outside a range between $17.25 and $18.00
per ShopKo share (based on the average daily closing sale prices of the
Phar-Mor Common Stock over a specified 30-day period).
In connection with the Proposed Transaction, SUPERVALU INC., a Delaware
corporation ("SuperValu"), which currently beneficially owns approximately 46%
of the issued and outstanding shares of ShopKo common stock, has entered into
a Stock Purchase Agreement (the "Stock Purchase Agreement") with Cabot Noble
whereby SuperValu has agreed to sell the Cabot Noble shares it receives in the
Proposed Transaction to Cabot Noble immediately after the Proposed Transaction
is completed for an aggregate purchase price of $248,438,339, which represents
$16.86 per share for the ShopKo common stock beneficially owned by SuperValu
prior to the Proposed Transaction. The Stock Purchase Agreement provides that
SuperValu will receive $208,038,339 in cash at closing and $40,400,000 in a
short-term promissory note from Cabot-Noble due January 31, 1997.
SuperValu also has entered into a Voting Agreement (the "Voting
Agreement") with Robert M. Haft. Mr. Haft and his wife, Mary Haft, as tenants
by the entirety, jointly comprise one of two members of Hamilton
Morgan, L.L.C., a Delaware limited liability company ("Hamilton Morgan").
Hamilton Morgan beneficially owns 39.4% of Phar-Mor's outstanding Common
Stock. The other member of Hamilton Morgan is FoxMeyer Health Corporation
("FoxMeyer"). In the Voting Agreement, SuperValu has agreed to vote that
number of ShopKo shares equal to 19.9% of the total outstanding ShopKo shares
in favor of the Proposed Transaction, and Mr. Haft has agreed to use his
reasonable efforts to cause Hamilton Morgan to vote all of the shares of
Common Stock over which it has voting control in favor of the Proposed
Transaction. FoxMeyer has not reached a conclusion as to its position on the
Proposed Transaction. SuperValu, which beneficially owns approximately 46% of
the total outstanding ShopKo common stock, was limited as to the number of
shares it could agree to vote in favor of the Proposed Transaction by certain
provisions of the Minnesota Business Corporation Act relating to control
shares.
Consummation of the Proposed Transaction is subject to certain
conditions, including (a) receipt of financing of at least $100 million, (b)
approval by the shareholders of ShopKo and Phar-Mor, (c) receipt of necessary
regulatory approvals, and (d) other conditions to closing customary in
transactions of this type.
Certain additional information regarding the Proposed Transaction is
contained in Phar-Mor's press release (the "Press Release") dated September 9,
1996 and Phar-Mor's Form 8-K dated September 7, 1996, filed with the SEC,
which are incorporated herein by reference.
In connection with the Proposed Transaction, it is anticipated that
certain operational and administrative aspects of Phar-Mor and ShopKo will be
integrated and/or combined in an effort to realize savings from reductions in
corporate overhead and selling, general and administrative efficiencies and
economies of scale. Moreover, it is likely that the Proposed Transaction
would result in certain adjustments or modifications in the respective
business plans and strategies of Phar-Mor and ShopKo. The Company is
currently reviewing and reconsidering all aspects of its operations,<PAGE>
<PAGE>4
administration, plans and strategy in order to facilitate the Proposed
Transaction. Accordingly, the information contained in this report on Form
10-K, including, without limitation, the anticipated amount or timing of
future capital expenditures and other investments and the purposes therefor,
planned store openings, remodelings or rightsizing and expected methods of
operation may change if the Proposed Transaction is consummated. However, no
such changes have been made or plans developed and there can be no assurance
that the Proposed Transaction will be consummated.
The Reorganization Agreement, the Voting Agreement, the Stock Purchase
Agreement, the Press Release and the Form 8-K are incorporated herein by
reference. The foregoing summary of such exhibits is qualified in its
entirety by reference to the complete text of such exhibits.
Robert A. Peiser, a director of the Company, has resigned from the Board
of Directors of Phar-Mor effective as of September 4, 1996, in connection with
his acceptance of a position with FoxMeyer Drug Company. Mr. Peiser's
resignation did not result from any disagreement with Phar-Mor on any matter
relating to the Company's operations, policies or practices.
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, pharmacy manager and
pharmacists, and office and cashier supervision. Overall, the Company had
5,389 employees at June 29, 1996. Approximately 208 warehouse and
distribution center employees in Youngstown are members of the Teamsters Union
under contract which expires March 1, 1998. Sixty-three employees at the
Company's Niles, Ohio store are members of the United Food and Commercial
Workers Union under 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 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 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 an area of between five and seven miles.
On average during fiscal 1996, each store served approximately 12,500
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.<PAGE>
<PAGE>5
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. FoxMeyer Drug Company, a pharmaceutical distributor
and an affiliate of the Company since the effective date of Phar-Mor's Chapter
11 plan of reorganization (the "Plan of Reorganization"), accounted for
approximately 24% of the Company's purchases, and Riser Foods, Inc., a grocery
wholesaler, accounted for approximately 5.4% of the Company's purchases during
fiscal 1996. See "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -
Transactions with FoxMeyer Drug Company." The purchase of pharmaceutical
products by the Company from FoxMeyer Drug Company is governed by a supply
agreement dated August 17, 1992 which expires August 17, 1997 (the "FoxMeyer
Supply Agreement"). During fiscal 1996, 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.
On August 27, 1996, FoxMeyer Drug Company filed a petition for protection
under Chapter 11 of the United States Bankruptcy Code. On August 29, 1996,
the Company notified FoxMeyer Drug Company that the supply of products to the
Company under the FoxMeyer Supply Agreement was insufficient and 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, which response states in part, "we
[FoxMeyer] acknowledge that there have been service level issues over the past
several weeks, while we work with our suppliers to extend more favorable
terms. However, our calculations reflect that six of the nine [FoxMeyer]
distribution centers exceeded the 95% fill rate average required [under the
FoxMeyer Supply Agreement] for the ninety days preceding your demand letter."
The Company believes that it has, at this time, overcome all related business
interruptions because there are adequate alternative sources of supply,
subject to pricing, readily available to the Company.
MARKETING AND MERCHANDISING
Phar-Mor's overall merchandising strategy is to offer (a) value to
consumers by pricing its products below the prices charged by conventional
drugstores and supermarkets and (b) 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 stores also typically feature other product categories,
including grocery, 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.
<PAGE>
<PAGE>6
Ninety-five percent of the Company's advertising is print advertising,
through circulars, newspapers, and point of sale materials. Newspaper
advertisements and circulars appear in major newspapers in each market area.
The Company presently advertises through 75 newspapers and mailers.
In January 1996, the Company introduced a new marketing approach that
improved sales during the last two quarters of fiscal 1996 (see table below).
This program included price reductions on over 3,000 items and the
consequent reduction of gross profit margins, and was implemented in order to
generate increased sales volume. At the same time, the Company adopted an
"everyday low price" strategy on substantially all products and increased
advertising by expanding the size of its circulars. The Company continues to
review its prices relative to its competitors.
Simultaneously, the Company also introduced a program guaranteeing the
"lowest prescription price or its free." At the inception of the program in
January 1996, same store pharmacy sales for the month of January 1996 were 7%
lower than for the month of January 1995. Same store pharmacy sales improved
in the month of June 1996 versus June 1995 by 4.2%. Overall pharmacy gross
margins decreased approximately 1% in fiscal 1996 versus fiscal 1995, of which
reduction approximately one half resulted from the increase in third party
prescription business.
<TABLE>
<CAPTION>
PHAR-MOR, INC. COMPARABLE SALES, 102 STORES
-------------------------------------------
FY 1996 FY 1995 % Variance
-------- ------- -----------
<S> <C> <C> <C>
January $ 91,249,149 $ 97,949,728 -6.84%
February 80,456,860 84,467,595 -4.75%
March 80,584,706 78,488,924 2.67%
April 100,983,873 104,492,861 -3.36%
May 80,432,036 79,205,254 1.55%
June 83,382,186 80,981,428 2.96%
</TABLE>
In January 1996, Phar-Mor retained a national design firm to assist in
the redesign and creation of a new prototypical store. The new prototype
repositioned signature departments to provide the customer an easy-to-navigate
shopping format further enhanced by custom signage.
The Company has completed remodeling two stores: Bethel Park and
Allentown, Pennsylvania. The Bethel Park store was completed in May 1996 and
the Allentown store was completed in June 1996. Each store has shown
increased sales and gross profit versus fiscal 1995 since the stores were
remodeled and redesigned. In addition, the Company is in the process of<PAGE>
<PAGE>7
remodeling and redesigning two stores located in New Philadelphia, Ohio and
West Palm Beach, Florida.
In conjunction with its remodeling and redesigning of two Ohio (St.
Clairsville and Mansfield) stores in August 1996, Phar-Mor has also introduced
the "club store" concept as a test for other locations. In an approximate
10,000 to 15,000 square foot excess area, each "club store" offers a varied
selection of grocery items, including fresh, frozen, and refrigerated foods.
At this time, it is too early to determine whether or not the success of
these programs will result in the introduction of additional "club stores",
but the concept is being well received by customers and has improved sales in
each store. The Company is reviewing plans to remodel approximately twelve
additional stores in fiscal 1997.
SALES
The retail sale of traditional drugstore lines is a highly fragmented
business, consisting of thousands of chain drugstores and independent drug
stores that sell such products as well as mass merchandisers who sell such
products as part of their overall product lines. In fiscal 1996, revenues
from sales of the Company's traditional drugstore products (i.e., prescription
drugs, greeting cards, over-the-counter drugs, health and beauty care products
and cosmetics) averaged approximately $5.8 million dollars per store in its
102 stores. In addition to the approximately $591.4 million in traditional
drugstore products revenues in fiscal 1996, the Company generated
approximately $464.9 million in sales in the last fiscal year from the sale of
groceries and general merchandise.
Set forth below is the percentage of sales by principal category of
products for the 102 continuing stores for the last three fiscal years.
<TABLE>
<CAPTION>
PERIOD ENDED
------------
June 29, 1996 July 1, 1995 July 2, 1994
Category (52 Weeks) (52 Weeks) (53 Weeks)
- -------- ------------- ------------ ------------
<S> <C> <C> <C>
Prescription, Health
and Beauty Care Products,
Cosmetics and Greeting
Cards 56.0% 55.7% 54.9%
All Other Merchandise 44.0% 44.3% 45.1%
</TABLE>
SEASONALITY
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 ) and the lowest volume occurs
during the third fiscal quarter (generally January, February and March). The
following table summarizes the Company's sales by quarter during fiscal 1996.
<PAGE>
<PAGE>8
<TABLE>
<CAPTION>
SALES BY QUARTER DURING FISCAL 1996*
Percentage of
Total Sales
--------------
<S> <C>
First Quarter 24.1%
Second Quarter 26.9
Third Quarter 23.9
Fourth Quarter 25.1
------
100.0%
----------------------------
* For the 102 stores operating as of June 29, 1996
</TABLE>
COMPETITION
Phar-Mor's stores compete primarily with conventional drugstores,
supermarkets and mass merchant discounters. Among these competitors, many
have greater financial resources than the Company. 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, in
Phar-Mor's opinion, such merchants do not excel.
CAPITAL EXPENDITURES
The Company's most significant capital needs are for seasonal buildup of
inventories, technology improvements and remerchandising and remodeling of
existing stores.
Capital expenditures of the Company totaled $7.0 million in fiscal 1996.
This included expenditures totaling $2.4 million for rightsizing and<PAGE>
<PAGE>9
remodeling of existing stores. Prior to the Proposed Transaction, the Company
anticipated spending approximately $30.1 million for capital expenditures in
fiscal 1997.
In light of the Proposed Transaction, the amount of capital expenditures
for fiscal 1997 is being reviewed and will likely change; however, the Company
is reviewing plans to remodel approximately 12 additional stores in fiscal
1997 in addition to the three or four new stores the Company plans to open in
fiscal 1997.
REAL ESTATE AND GROWTH
The Company opened no new stores in fiscal 1996 and currently plans to
open approximately three or four new stores in fiscal 1997. Expansion in the
near future is expected to be minimal and in existing or contiguous markets in
the Company's core market states 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
of financing 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
future 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 29, 1996, 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. The Company also currently intends to
remodel certain rightsized and other stores. As of September 15, 1996, the
Company has completed remodeling four stores, including the "club stores."
While the average cost of remodeling each store is approximately $600,000,
the Company believes that the cost of remodeling additional stores can be
reduced depending upon size, configuration and geographic location of a
store.
In anticipation of the Proposed Transaction, the Company has suspended
its rightsizing program. However, two locations are being remodeled (New
Philadelphia, Ohio and West Palm Beach, Florida) as a result of consummated
rightsizing transactions. The Company estimates that approximately 45 stores
previously identified as potential downsizing candidates may be remerchandised
to include certain additional complementary merchandise typically sold in
ShopKo stores. Also, a limited number of the stores may accommodate the "club
store" concept. If implemented, these changes in the space utilization
strategy would allow the Company to draw on merchandising expertise from
<PAGE>
<PAGE>10
ShopKo, create buying efficiencies not previously available to the Company,
and offer the opportunity to consolidate certain related functions.
TRADEMARKS AND SERVICE MARKS
The Company believes that its registered "Phar-Mor" and "Power Buying"
trademarks are well recognized by its customer base and the public at large in
the markets where such trademarks have been advertised. The Company believes
that the existing customer and public recognition of its trademarks and
related operation 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.
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 of 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 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 Phar-Mor concluded its
investigation into the size of the fraud, it determined that cumulative
earnings had been overstated by approximately $500,000,000. Additional
charges to cumulative earnings of approximately $500,000,000 resulted from
<PAGE>
<PAGE>11
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 reconstructing its
accounting records and strengthening the control systems. New management
developed and implemented a strict internal control regimen, buttressed by
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 full 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 of the Plan of Reorganization.<PAGE>
<PAGE>12
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 (as discussed below), 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 29, 1996, no borrowings were
outstanding under the Revolving Credit Facility, other than standby letters of
credit totaling approximately $5.4 million.
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.
ITEM 2. PROPERTIES.
The Company operates 102 stores in 18 states. Approximately 51% of Phar-Mor's
stores are located in Pennsylvania, Ohio and West Virginia, and approximately
24% 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 33
Indiana 3 South Carolina 4
Iowa 2 Virginia 11
Kansas 2 West Virginia 4
Kentucky 1 Wisconsin 1
As of June 29, 1996, all of the Company 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. Most
stores are located adjacent to or near shopping centers or are part of strip
centers. The remaining stores are free standing. Depending on the location
<PAGE>
<PAGE>13
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 prototypical store is designed in a
"supermarket" format familiar to customers and shopping is done with carts in
wide aisles with attractive displays and includes 32,000 square feet of sales
space and 8,000 square feet of storage area and ample off-street parking.
Traffic design is intended to enhance the opportunity for impulse purchases.
The Company operates a distribution center in Austintown, Ohio comprised
of two adjoining leased warehouse facilities. The Company also leases most of
the equipment used in the warehouse facilities. This center delivered
approximately 35% of all merchandise to the stores in fiscal 1996, primarily
using contract carriers. The balance of the products were delivered directly
to the stores by vendors. The Company has the option to terminate one or more
of these warehouse and/or equipment leases on December 31, 2000 upon payment
of an early termination fee. If all these leases were terminated on that
date, the aggregate early termination fee would be $1.8 million. In addition,
Phar-Mor has a separate option to terminate all of the warehouse leases at any
time after July 1, 1996 for payment of approximately $5.2 million.
The Company and a wholly-owned subsidiary of the Company are partners in
an Ohio limited partnership, which owns the office building where the Company
occupies approximately 141,000 square feet of space for its corporate offices
in Youngstown, Ohio. The Company leases offices for its headquarters in such
building from such partnership comprising approximately 80,000 square feet.
The headquarters lease has a five year term and allows Phar-Mor to renew the
lease for two additional five year terms. The Company has the right
terminate the headquarters lease beginning march 1, 1997 and ending March 1,
1998. Should the company elect to terminate the headquarters lease, the
Company is not liable to any loans secured by the headquarters property.
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.
None.
<PAGE>
<PAGE>14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock was issued to creditors on September 11, 1995,
pursuant to the terms of the Plan of Reorganization. From September 11, 1995
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 Company's Common Stock has
been included for quotation on the NASDAQ National Market under the symbol
"PMOR." Prior to September 11, 1995 there was no established public trading
market for the Company's Common Stock. High and low prices of the Company's
Common Stock from September 11, 1995 are shown in the table below:
<TABLE>
<CAPTION>
Fiscal 1996
-----------
High Low
---- ---
<S> <C> <C>
1st Quarter...........................$9 1/4 $6 13/16
2nd Quarter............................9 3/4 6 3/8
3rd Quarter............................8 1/4 6 7/8
4th Quarter............................8 5/8 7
</TABLE>
As of September 13, 1996, there were 2,862 holders of the Company's
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 Revolving Credit
Facility and the indenture pursuant to which Phar-Mor issued certain senior
unsecured notes restrict the payment of cash dividends on the Company's
capital stock. See "Notes to Consolidated Financial Statements."
<PAGE>
<PAGE>15
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)
- ---------------------------------------------------------------------------------------------
43 Weeks 9 Weeks 52 Weeks 53 Weeks 39 Weeks
Ended Ended Ended Ended Ended
June 29, 1996 September 2, 1995 July 1, 1995(b) July 2,1994 June 26,1993
-------------- ----------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $874,284 | $181,968 $1,412,661 $1,852,244 $1,434,256
Income (loss) from |
continuing operations 2,526 | (10,389)(a) (53,144)(c) (142,763)(d)
(82,179)(e) |
Income (loss) per |
share from continuing |
operations .21 | (.19) (.98) (2.64) (1.52)
As of As of As of As of As of
June 29, 1996 September 2, 1995 July 1, 1995 July 2,1994 June 26,1993
------------- ----------------- ------------ ------------ -------------
Total assets 363,463 390,207 | 531,332 680,105 860,953
Long-term debt & |
capital leases 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
and June 29, 1996 and for the 43 weeks ended June 29, 1996, is not comparable
in material respects to such data for prior periods. Furthermore, the
Company's results of operations for periods prior to the effective date of the
Plan of Reorganization are not necessarily indicative of results of operations
that may be achieved in the future.
(a) Excludes extraordinary gain of $775 million on debt discharge 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.
<PAGE>
<PAGE>16
(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 disposition
of assets held for sale.
(d) Includes reorganization costs of $53.2 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 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-25.
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 "Item 1. BUSINESS - History"
and 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 of the Plan of
Reorganization 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 of the Plan of Reorganization will not necessarily be comparable to those
prior to such date.
RECENT DEVELOPMENTS AND OUTLOOK
The Company's results of operations and financial condition reflect the
impact of the 1995 recapitalization effected pursuant to the Plan of
Reorganization and the consolidation of operations following the Petition
Date.
The Company has significantly restructured its debt obligations. 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<PAGE>
<PAGE>17
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.
Although there can be no assurance, management believes that the Company
is now 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.
On September 7, 1996, the Company executed an Agreement and Plan of
Reorganization with ShopKo and Cabot Noble. See "Item 1. BUSINESS."
Changes in the federal minimum wage may affect 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
between years:
<TABLE>
<CAPTION> Fiscal Year Ended
--------------------------------------------
June 29, July 1, 1995 July 2, 1994
-------- ------------ -------------
1996(a)
-------
<S> <C> <C> <C>
Stores,
beginning of period 143 168 168
Stores closed (41) (25) -
Stores, end of period 102 143(b) 168
</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 fiscal 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 fiscal 1996 (also part of the Company's restructuring) after the date their
closing was decided (May 6, 1995).<PAGE>
<PAGE>18
The Company's results of operations for 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
the fifty-two weeks ended June 29, 1996 (fiscal 1996) and the fifty-two weeks
ended July 1, 1995 (fiscal 1995) will be compared.
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
1996 and fiscal 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 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 1996 Fiscal 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 875,148 82.86% 900,814 81.36%
Selling, general and
administrative
expenses 149,458 14.15% 158,009 14.27%
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
<PAGE>
<PAGE>19
PRO FORMA RESULTS FOR THE 52 WEEKS ENDED JUNE 29, 1996 (FISCAL 1996)
COMPARED TO THE PRO FORMA RESULTS FOR THE 52 WEEKS ENDED JULY 1, 1995 (FISCAL
1995) (ALL DOLLAR AMOUNTS IN THOUSANDS)
Comparable store sales for fiscal 1996 were down $50,970, or 4.6%, from
fiscal 1995. This is due to: (i) the fact that the Company has not opened a
new store since September 1992, while competitors have opened a significant
number of new stores in the markets where the Company operates, and (ii) the
negative impact of continued penetration of third party prescription plans and
its impact on the Company's pharmacy business. Sales improved over the last
two quarters of fiscal 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 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 1996 was 1.50% of sales lower than fiscal 1995.
The Company's new marketing approach resulted in a lower product gross margin.
Vendor rebate income was .39% of sales lower than fiscal 1995 due primarily to
the company's lower sales level in fiscal 1996. Inventory shrink and damage
expenses were reduced by .42% of sales in fiscal 1996 compared with fiscal
1995.
Selling, general and administrative expenses for fiscal 1996 were 0.12%
of sales lower than fiscal 1995. Increases in advertising expenses to support
the new marketing approach were more than offset by a 16.8% reduction in
corporate overhead costs.
Fiscal 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 1995 results assumed the Company would not have earned
any interest income.
RESULTS FOR THE 43 WEEKS ENDED JUNE 29, 1996 (ALL DOLLAR AMOUNTS IN
THOUSANDS)
The Company emerged from bankruptcy on September 11, 1995 operating 102
stores in 18 states.
On January 14, 1996, the Company launched a new marketing approach which
included retail price reductions on over 3,000 items and additional
advertising. Sales improved during the six months ended June 29, 1996 as a
result of the new marketing approach. Comparable store sales increased .04% in
the fourth quarter of fiscal 1996 compared with the same period in the prior
year, and increased 2.96% for the fiscal month of June 1996 (the four weeks
ended June 29, 1996) compared to the same period of the prior year.
<PAGE>
<PAGE>20
Sales and gross margins by product type for the forty-three weeks ended
June 29, 1996 were as follows:
Percentage
Percentage of Total
of Total Product Gross
Sales Margin
------------ --------------
Drug Store:
Includes health & beauty care
products, cosmetics, greeting
cards, seasonal goods and other
general merchandise............... 45% 53.2%
Consumables:
Includes grocery, snacks, beer,
wine, tobacco and soft drinks..... 27% 14.5%
Pharmacy:
Includes prescription drugs........ 25% 23.7%
Video, music and video rentals.......... 3% 8.6%
----- -----
Total................................... 100% 100.0%
For the 43 weeks ended June 29, 1996 other items included in cost of goods
sold (warehouse and transportation costs, cash discounts, inventory shrink,
promotional discounts and vendor rebates and promotional allowances) totaled
.8% of sales. Gross margin is also reduced by store occupancy costs which were
4.0% of sales for the period.
Selling, general and administrative expenses were 14.1% of sales for the
forty-three weeks ended June 29, 1996. The Company continued to be effective
at increasing employee productivity and as a result store wages and benefits
were the same percentage of sales as the prior year, despite a 3.8% sales
decline from the same period of the prior year. Increases in advertising
expenses to support the Company's new marketing approach were more than offset
by a 16.4% reduction in corporate overhead costs.
The Company earned $8,614 in interest income during the period, $3,135 of
which was interest received on federal income tax refunds.
RESULTS FOR THE 52 WEEKS ENDED JULY 1, 1995 (FISCAL 1995) COMPARED TO 53
WEEKS ENDED JULY 2, 1994 (FISCAL 1994) (ALL DOLLAR AMOUNTS IN THOUSANDS)
During fiscal 1995, the Company closed 25 stores after conducting
going-out-of-business ("GOB") sales. The projected costs of closing the stores
were recorded as of July 2, 1994 (the Company's previous year end). In May
1995, the Company announced the closing of an additional 41 stores and began
GOB sales at such stores. These additional 41 stores were closed in July 1995.
The projected costs of closing these stores were recorded as of May 6, 1995.
Consequently, the actual operating results for fiscal 1995 included below are
for 143 stores for the first 44 weeks of the period and 102 continuing stores
for the remaining 8 weeks of the period. The operating results for fiscal 1994
included below are for 168 stores.<PAGE>
<PAGE>21
<TABLE>
<CAPTION>
(000's)
--------------------------------------------------
Fiscal 1995 Fiscal 1994
--------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 1,412,661 100.00% $ 1,852,244 100.00%
Cost of goods sold,
including occupancy
and distribution costs 1,156,928 81.90% 1,522,722 82.21%
Gross profit 255,733 18.10% 329,522 17.79%
--------- ---------
Selling, general and
administrative expenses 199,863 14.15% 276,887 14.95%
Write-down of property
and equipment to lower
of appraised or net
book value - - 53,211 2.87%
Depreciation and
amortization 24,643 1.74% 55,401 2.99%
--------- ---------
Income (loss) from
operations before
interest expense,
reorganization items
and income taxes 31,277 2.21% (55,977) -3.02%
Interest expense 33,324 2.36% 33,878 1.83%
--------- --------
Loss before reorganization
items and income taxes (2,097) -0.15% (89,855) -4.85%
Reorganization items 51,158 3.62% 53,239 2.87%
--------- --------
Loss before income tax
benefit (53,255) -3.77% (143,094) -7.73%
Income tax benefit (111) -0.01% (331) -0.02%
Net income (loss) ($53,144) -3.76% ($142,763) -7.71%
---------- ----------
---------- ----------
</TABLE>
Net retail sales for fiscal 1995 were $1,412,661, which was 22.5% less
than the comparable 52 week period in fiscal 1994 and is primarily due to
closing of the 41 stores discussed above. The net retail sales for the 102
continuing stores for the comparable period declined by 4.5%. Generally, this
decrease in sales is attributable to: (i) the fact that the Company has not
opened new stores since September 1992, while competitors have opened a
significant number of new stores in those markets where the Company continues
to operate and (ii) the negative impact of continued penetration of third
party prescription plans and its impact on the Company's pharmacy business.
<PAGE>
<PAGE>22
The gross profit improvement of 0.31% of sales for fiscal 1995, compared
to fiscal 1994, is primarily a result of the Company realizing the full
benefit of the margin enhancement program instituted during fiscal 1994.
Selling, general and administrative expenses were 0.80% of sales lower
for fiscal 1995 compared to fiscal 1994. This is a result of cost reduction
programs implemented during fiscal 1994 and acceleration of the cost reduction
activities planned for fiscal 1995.
The decrease in depreciation and amortization expense for fiscal 1995,
compared to fiscal 1994, is due primarily to the write-down of property and
equipment that resulted from closing 66 stores and a $53,211 charge to
write-down property and equipment to the lower of appraised or net book value
as of July 2, 1994 based on an independent appraisal undertaken in 1994. The
appraisal included a physical inspection of property and equipment at the
Company's corporate headquarters, warehouse and selected retail store
locations. The appraisal was undertaken because the Company lacked reliable
historical accounting records for property and equipment as a result of the
fraud and because the adverse business conditions concealed by the fraud
dictated an assessment of whether the carrying amount of property and
equipment was overstated. (The adjustment was recorded at July 2, 1994;
consequently, depreciation included in depreciation and amortization for
fiscal 1994 was computed on the unadjusted balances of property and
equipment).
The decrease in interest expense for fiscal 1995, compared to fiscal
1994, is due primarily to repayment of approximately $123,000 of principal on
prepetition secured debt from the net proceeds of GOB sales and was partially
offset by an increase in interest rates under the prepetition senior notes and
the prepetition revolving credit loan (collectively, the "Prepetition
Revolving Credit Agreement").
The decrease in reorganization items is due to an increase in interest
income from higher level of funds invested and higher interest rates, gains on
sales of real property in Boardman, Ohio and Jacksonville, Florida,
recognition of a gain in insurance settlement from a claim the Company
asserted against its insurance carrier seeking reimbursement of monies
allegedly embezzled by certain former officers of the Company and
partially offset by increased costs associated with closing of an additional
66 stores.
FINANCIAL CONDITION AND LIQUIDITY (ALL DOLLAR AMOUNTS IN THOUSANDS)
The Company's cash position as of June 29, 1996 is $104,265.
On September 11, 1995, the Company entered into the Revolving Credit
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>
<PAGE>23
Borrowings under the Revolving Credit Facility may be used for working
capital needs and general corporate purposes. Up to $50,000 of the Revolving
Credit Facility at any time may be used for standby and documentary letters of
credit. The Revolving Credit 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 believes it 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 Revolving Credit
Facility) or $100,000. Availability under the Revolving Credit Facility,
after subtracting amounts used for outstanding letters of credit, was $76,829
at June 29, 1996. 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 Revolving Credit
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.
There were no outstanding advances under the Revolving Credit Facility at
any time during the forty-three weeks ended June 29, 1996. As of June 29,
1996, there were letters of credit in the amount of $5,384 outstanding under
the Revolving Credit Facility. The Revolving Credit Facility expires on
August 30, 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
under Item 14 of this Form 10-K.
The Company's cash position decreased $3,665 during the 43 weeks ended
June 29, 1996 as cash provided by operating activities of $16,014 was offset
by $13,829 in cash used for investing activities and $5,850 in cash used for
financing activities.
The Company generated cash from operations of $16,014 after payments of
professional fees of $19,476 in connection with the Chapter 11 Cases.
Inventories declined $15,534 during the 43 weeks ended 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
<PAGE>
<PAGE>24
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. Other
significant sources and uses of cash during the period were as follows:
The Company generated $8,129 from operations after net interest expense
(including adequate protection payments) and payment of professional fees in
connection with the Chapter 11 Cases totaling $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 GOB sales. The Company paid $1,079 of
equipment capital lease obligations.
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 payment of
professional fees in connection with the Chapter 11 Cases totaling
$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 Prepetition Revolving Credit Agreement
and 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 right-sizing, merchandising fixtures and
financial systems. The Company invested $11,925 in video rental tapes.
- - The Company paid $3,744 of equipment capital lease obligations from
December 1994 (the date the new leases became effective) through July 1,
1995.
From October 22, 1992 to the effective date of the Plan of
Reorganization, the Company had debtor-in-possession revolving credit
facilities. The maximum amount available under the facilities ranged from
$150,000 to $50,000 during the pendency fo the bankruptcy cases. The Company
never borrowed under the facilities, utilizing the credit availability only
for standby letters of credit of which the maximum amount outstanding during
the pendency of the bankruptcy cases was $9,814.
<PAGE>
<PAGE>25
During the 53 weeks ended July 2, 1994, the Company's cash position decreased
by $87,242. The significant sources and uses of cash for the period were as
follows:
- - The Company generated $26,331 of cash from operations, after net
interest expense and payment of professional fees in connection with the
Chapter 11 Cases totaling $39,400.
- - The Company invested $12,904 in property and equipment. The majority of
funds were invested in computer system development and implementation of
POS scanning system. When fully implemented, these systems are expected
to assist in controlling inventories and shrink at the store level and
increase labor efficiencies. Further, the Company has invested in store
remodeling to enhance merchandising presentation.
- - The Company invested $13,756 for rental video tape inventory.
- - The Company made principal payments of $76,300 against the Prepetition
Revolving Credit Agreement and senior notes, using proceeds from the
store closing sales completed by July 1993.
- - The Company made payments of $12,655 against liabilities required to be
satisfied in the Chapter 11 Cases. Generally, these payments were for
settlements with equipment financiers and amounts due landlords for
rent, common area maintenance, and real estate taxes that accrued
between August 17, 1992 and the date leases on closed stores were
rejected.
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 1997 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. In connection with the Proposed Transaction,
the Company is seeking the consent of its Lenders under the Revolving Credit
Facility to continue or to replace the facility. There can be no assurance
that the Company will obtain the consents necessary to maintain the facility.
See "Item 1. BUSINESS."
Investment activities for fiscal year 1997 are expected to total $39,486.
The major expenditures are expected to be (i) video rental tapes ($9,399),
(ii) redesigning and remodeling of existing stores ($8,873), (iii) systems and
technology ($7,069) and (iv) new stores ($3,601). 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.
<PAGE>
<PAGE>26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to the Consolidated Financial Statements.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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 seven directors whose
terms commenced on September 11, 1995 will serve until the second
annual meeting of shareholders of Phar-Mor following the effective date of the
Plan of Reorganization, which shall take place during the last calendar
quarter of 1997 (and holders of Phar-Mor Common Stock shall be obligated to
vote their shares for the election of such directors at the first annual
meeting of shareholders after the effective date of the Plan of Reorganization
for a one-year term ending on the date of the second annual meeting of
shareholders after the effective date of the Plan of Reorganization), with the
exception of Robert A. Peiser, who resigned from the Board of Directors
effective as of September 4, 1996. See "Item 1. BUSINESS - Recent
Developments."
The executive officers and directors of the Company as of the date hereof
are listed below:
Name Age Position(s)
- ---- --- -----------
Robert M. Haft 43 Chairman of the Board and
Chief Executive Officer
M. David Schwartz 51 President and Chief
Operating Officer
Daniel J. O'Leary 49 Senior Vice President
and Chief Financial Officer
Warren E. Jeffery 47 Senior Vice President
of Operations and Pharmacy
John R. Ficarro 44 Senior Vice President,
General Counsel and Secretary
Michael K. Spear 51 Senior Vice President of
Marketing and Merchandising
Abbey J. Butler 58 Director
Melvyn J. Estrin 52 Director
Linda Haft 46 Director
Malcolm T. Hopkins 68 Director
Richard M. McCarthy 59 Director
<PAGE>
<PAGE>27
ROBERT M. HAFT assumed the positions of Chairman and Chief Executive
Officer of Phar-Mor as of the effective date of the Plan of Reorganization.
He served as President and Chief Executive Officer at different times with
Crown Books, a retail chain of bookstores, from 1977 to 1993. He also served
as President and Vice Chairman at different times at Trak Auto, a retail auto
parts chain, from 1979 to 1993. Mr. Haft also served at various positions at
different times with Dart Group, a retailing, real estate and financial
management company from 1975 to 1993, including Director, President, and Chief
Operations Officer. From 1993 to 1995, Mr. Haft was not employed. Mr. Haft
currently serves on the Board of Directors of the Second Cup, an international
retail chain of coffee shops, and the Advisory Board Companies, a company
focused on health care and financial institutions.
Mr. Haft and other members of the Haft family (including Mr. Haft's
sister, Linda Haft) are or have been involved in certain litigation involving
or related to the Dart Group and affiliated entities and affiliates of
Combined Properties, Inc. ("CPI"). This litigation relates to, among other
things, claims to compensation, options or payments from those entities,
claims by creditors of those entities on loan documents and guarantees,
alleged related party transactions, and the validity of releases executed by
Dart Group and CPI. CPI and certain related entities filed Chapter 11
petitions in the United States Bankruptcy Court for the District of Maryland
on May 25, 1995. Until July 1993, Mr. Haft served as a director (but not an
executive officer) of CPI and one of several general partners of certain of
the related entities.
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 regional
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.
DANIEL J. O'LEARY has served as Senior Vice President and Chief Financial
Officer of the Company since December 1992. Prior to that time, he served as
a Director and, at various times, President and Chief Operating Officer,
Executive Vice President, Vice President of Finance and Chief Financial
Officer at Fay's Inc., a multi-concept regional retailer with drug stores and
auto parts stores. From 1969 to 1987, Mr. O'Leary was a member of the
accounting firm of Touche, Ross & Co. (now known as Deloitte & Touche LLP),
holding, at various times, positions including an office Managing Partner,
Audit Partner and Director of Audit Operations. Mr. O'Leary graduated from
Siena College, Loudonville, New York with a BBA in Accounting.
<PAGE>
<PAGE>28
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, General Counsel and
Secretary of the Company since September 1996. Prior to that, Mr. Ficarro
served as Vice President, General Counsel and Secretary of the Company since
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. General Host Corporation currently operates a multi-regional lawn
and garden retail chain under the name Frank's Nursery and Crafts. Prior to
1981, Mr. Ficarro practiced law at Titone & Roarke in Ft. Lauderdale, Florida.
Mr. Ficarro received a B.A. from 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, the nation's largest discount retail chain, 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, a retail
warehouse club operation.
ABBEY J. BUTLER is co-Chief Executive Officer, co-Chairman of the Board,
and a major shareholder of FoxMeyer Health Corporation. He also served as
co-Chairman of the board of Ben Franklin stores, a retail craft company which
is an affiliate of FoxMeyer Health Corporation, and as managing partner of
Centaur Partners, L.P., an investment partnership. Mr. Butler has also been
the President and Director of C.B. Equities Corp., a private investment
company, since 1982. Mr. Butler currently serves as a Director of CST
Entertainment Imaging, Inc., a company engaged in digital color enhancement of
black and white films, and as a Director and member of the Executive Committee
of FWB Bancorporation. He also serves as a Director of Urohealth Systems,
Inc., a developer, manufacturer and distributor of products for the health
care market and Carson Products, the leading manufacturer and marketer in the
U.S. retail ethnic hair care market. He is a trustee of the American
University and a Director of the Starlight Foundation. Mr. Butler was
appointed by President Bush to serve as a member of the Executive Committee of
the National Committee for the Performing Arts of the John F. Kennedy Center.
<PAGE>
<PAGE>29
MELVYN J. ESTRIN is co-Chief Executive Officer, co-Chairman of the Board,
and a major shareholder of FoxMeyer Health Corporation. He also serves as
co-Chairman of the Board of Ben Franklin Stores, a retail craft company. From
1983 to the present, Mr. Estrin served 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.
He currently serves as a director of Washington Gas Light Company, and as a
trustee of the University of Pennsylvania. Mr. Estrin also serves as a
Commissioner on the President's National Capital Planning Commission.
LINDA HAFT served as a Vice President of the Dart Group and Dart Drug
Stores and previously had responsibility for various buying functions,
customer relations, and internal affairs from 1974 to 1993. During 1994, she
was employed in a general administrative capacity by Temps & Company, a
temporary services company.Until 1993, she served as an Administrator of both
Crown Books and the Dart Group Foundation, and was Senior Vice President of
Dart Group Financial in 1993. Ms. Haft was not otherwise employed from 1993
to the present. Ms. Haft is a trustee of the American University. She
received a B.S. degree from the School of Management from Syracuse University.
Ms. Haft is Robert Haft's sister. Ms. Haft is or has been involved in certain
of the litigation described above under Robert M. Haft's biography. Until
July 1993, Ms. Haft served as a general partner of certain entities affiliated
with CPI.
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), State Street
Research Portfolios, Inc. (1985), KinderCare Learning Centers, Inc. (1990),
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.
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 positions 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
<PAGE>
<PAGE>30
a B.S. from Cornell University and served as an officer in the United States
Marine Corps from 1958 to 1961.
The Board of Directors met eight times in fiscal 1996.
See "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -
Transactions with FoxMeyer Drug Company."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has a standing Audit Committee and a standing
Compensation 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 auditor and reviews the services provided by the
independent auditors. The Audit Committee consists of Mr. Hopkins (the
Committee Chairman) and Mr. McCarthy and met four times in fiscal 1996.
The Compensation Committee of the Board determines compensation and
benefits for officers, reviews salary and benefits changes for other senior
officers, administers the Phar-Mor, Inc. 1995 Stock Incentive Plan, the
Phar-Mor, Inc. 1995 Directors Stock Plan and other employee benefit plans.
Members of the Compensation Committee will be appointed annually with the
Compensation Committee initially consisting of Ms. Haft and Messrs. Butler
(the Committee Chairman), Estrin and Hopkins and met twice in fiscal 1996.
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
29, 1996 and an officer who would have been among the four most highly
compensated executive officers had he been an executive officer at fiscal
year-end (the "Named Officers").<PAGE>
<PAGE>31
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
---------------------------------- -----------
Name and Fiscal Other Annual Stock All Other
Principal Position Year Salary Bonus($)(1) Compensation Options(#) Compensation($)(4)
- ------------------ ------ ------ ---------- ------------ --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Antonio C. Alvarez 1996 178,562 107,942 - 416,667(3) 2,650,000 (3)
Former CEO 1995 900,000 540,000 - - -
Robert M. Haft 1996 726,936(5) 270,000 - 256,250 66,637
Chairman and CEO - -
M. David Schwartz 1996 571,632 215,000 - 175,000 505,548
President and COO 1995 500,000 200,000 - - 2,602
Daniel J. O'Leary 1996 236,500 85,000 - 87,500 250,147
Senior Vice President 1995 236,500 106,250 - -
and CFO
Warren E. Jeffery 1996 176,265 45,000 - 50,000 78,540
Senior Vice President 1995 168,390 80,000 - - 875
- Operations and
Pharmacy
John R. Ficarro 1996 155,016 50,000 - 15,000 34,013
Senior Vice 1995 59,622(7) 28,000 - - -
President,(6) General
Counsel and Secretary
Sankar Krishnan 1996 150,000 45,000 - 25,000 139,226
Vice President and 1995 150,000 70,000 - - -
Controller
- ----------------------
</TABLE>
(1) Bonuses are shown for the fiscal year earned, but are paid in the
following fiscal year. Mr. Haft will not receive payment of his 1996
bonus until 1997.
(2) 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.
<PAGE>
<PAGE>32
(3) The 416,667 in stock options reported for Mr. Alvarez are not
specifically allocated to him, but rather were issued to A&M pursuant
to the Management Services Agreement. $2,500,000 of the $2,650,000
reported above in "All Other Compensation" was a confirmation bonus
which was not paid to him but rather was paid to A&M pursuant to the
Management Services Agreement.
(4) Information provided in the column labeled "All Other Compensation"
for the 1996 Fiscal Year 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, $66,637; Mr. Schwartz, $2,040;
Mr. O'Leary, $147; Mr. Jeffery, $2,234; Mr. Ficarro, $4,376; and Mr.
Krishnan, $132; (ii) matching contributions to the Company's Employee
Savings and Retirement Plan to certain of the Named Officers as
follows:Mr. Schwartz, $3,508; Mr. Jeffery, $1,306; Mr. Ficarro, $653;
and Mr. Krishnan, $1,760; (iii) moving expenses paid by the Company
for the benefit of certain of the Named Officers as follows: Mr.
Ficarro, $28,984; and Mr. Krishnan, $37,334; (iv) confirmation
bonuses paid by the Company to certain of the Named Officers as
follows: Mr. Schwartz, $500,000; Mr.O'Leary, $250,000; Mr. Jeffery,
$75,000; Mr. Krishnan, $100,000 and (v) consulting fees in the amount
of $150,000 paid to Mr. Alvarez.
(5) This figure represents Mr. Haft's salary from the date of the
commencement of his employment with Phar-Mor, September 11, 1995
through the end of the fiscal year.
(6) As of September 1996, Mr. Ficarro has been named Senior Vice
President.
(7) This figure represents Mr. Ficarro's salary from the date of the
commencement of his employment with Phar-Mor, February 13, 1995,
through the end of the fiscal year.
OPTION GRANTS
The table below shows, for each of the Named Officers, the number of
shares of Common Stock subject to options as of June 29, 1996. All of the
options set forth below were issued under the Phar-Mor, Inc. 1995 Stock
Incentive Plan (the "Options"), other than (i) options to purchase
5,000 shares granted to Mr. Haft (and each of the other directors of the
Company) under the Phar-Mor, Inc. 1995 Director Stock Plan, and (ii) the
options issued to A&M and shown below as if issued to Mr. Alvarez (the "A&M
Options").
<PAGE>
<PAGE>33
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Percent of Totel Stock Price Appre-
Number of Option Granted ciation for Option
Securities Under- to Employees as Term (5)in thousands)
Name and ying Options of June 29, 1996 Exercise Expiration
Position Granted(#) (%)(4) Price($/Sh) Date 5%($) 10%($)
- ---------- ------------------ ---------------- ----------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Robert Haft (1) 256,250 27.2 8.00 9/11/2002 835 1,945
Chairman and Chief 5,000 0.5 7.06 10/3/2000 10 22
Executive Officer
Antonio C. Alvarez(1)416,667(2)(3) - 8.00 9/11/2002 1357 3,162
Former Chief
Executive Officer
M. David Schwartz(1) 175,000 18.6 8.00 9/11/2002 570 1,328
President and Chief
Operating Officer
Daniel J. O'Leary (1) 87,500 9.3 8.00 9/11/2002 285 664
Senior Vice President
and Chief Financial
Officer
Warren E. Jeffery 45,000 4.8 8.00 9/11/2002 147 342
Senior Vice President 5,000(6) 0.5 7.56 9/11/2002 15 36
Operations and
Pharmacy
John R. Ficarro 15,000 1.6 8.00 9/11/2002 49 114
Senior Vice
President, General
Counsel and Secretary
Sankar Krishnan 25,000 2.7 8.00 9/11/2002 82 190
Vice President and
Controller
</TABLE>
(1) The options issued to Messrs. Haft (other than options to purchase
5,000 shares granted to Mr. Haft under the Phar-Mor, Inc. 1995
Director Stock Plan), Schwartz and O'Leary are affected by certain
provisions of their employment agreements as described below. Mr.
Haft's options provide for extended post-termination exercise periods
and accelerated vesting on termination of employment other than for
cause. A&M and Mr. Haft also received certain registration rights in
respect of shares issuable upon exercise of their respective options.
<PAGE>
<PAGE>34
(2) The 416,667 options reported for Mr. Alvarez are not specifically
allocated to him, but rather were issued to A&M pursuant to the
Management Services Agreement.
(3) The options granted to A&M for the services of Mr. Alvarez are on
substantially the same terms as options granted to Messrs. Haft,
Schwartz, O'Leary and Jeffery under the Phar-Mor, Inc. 1995 Stock
Incentive Plan, except that the options granted to A&M were fully
vested on issuance, are subject to fewer restrictions on transfer,
provide for non-discretionary anti-dilutive, reorganization and
similar adjustments, and are not subject to forfeiture or other limits
on exercise, other than those imposed by law.
(4) Based on a total of 941,950 options granted to employees of Phar-Mor,
which amount excludes the 416,667 options reported for Mr. Alvarez,
which options were not specifically allocated to him, but rather were
issued to A&M pursuant to the Management Services Agreement.
(5) Annual growth-rate assumptions are prescribed by the rules of the
Securities and Exchange Commission and do not reflect actual or
projected price appreciation of the underlying Common Stock.
(6) Options to purchase 5,000 shares granted to Mr. Jeffery under the
Phar-Mor, Inc. 1995 Stock Incentive Plan vested with respect to 20% of
the underlying shares on each of the date of grant (May 14, 1996) and
the first anniversary of the effective date of the Plan of
Reorganization, and will vest in additional increments of 20% of the
underlying shares (subject to adjustment) on each of the succeeding
three anniversaries of such date.
Except as otherwise indicated in the foregoing table, the Options
granted under the Phar-Mor, Inc. 1995 Stock Incentive Plan vested with respect
to 20% of the underlying shares on each of the effective date of the Plan of
Reorganization and the first anniversary of such date, and will vest in
additional increments of 20% of the underlying shares (subject to adjustment)
on each of the succeeding three anniversaries of such date. All Options under
the Phar-Mor, Inc. 1995 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, Inc. 1995 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 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 Phar-Mor is for cause, in which case the options then will
terminate. In addition to the Options, the Phar-Mor, Inc. 1995 Stock Incentive
Plan authorizes the issuance of options to purchase an additional 24,083
shares, plus any shares that become available on the expiration, cancellation
or early termination of the Options.<PAGE>
<PAGE>35
Mr. Haft's employment and option agreements provide for acceleration of
vesting upon a termination by the Company (other than for cause) and for
extended post-termination exercise periods ranging from six to eighteen months
(but in certain events not less than 4-1/2 years after the effective date of
the Plan of Reorganization) depending on the reason for termination.
In the case of the Options granted to Mr. Haft, the terms and
conditions pertaining to the grant, exercise and ownership thereof will, in
addition to the terms and conditions of the Phar-Mor, Inc.1995 Stock Incentive
Plan, be governed by the terms and conditions of his employment and option
agreements, and in the event of any conflict, inconsistency or ambiguity
between, or arising as the result of, the terms and conditions of the
Phar-Mor, Inc. 1995 Stock Incentive Plan and such agreements, the terms most
favorable to Mr. Haft will control for all purposes and in all respects.
EXECUTIVE COMPENSATION PLANS
PHAR-MOR, INC. 1995 STOCK INCENTIVE PLAN. The Phar-Mor, Inc. 1995 Stock
Incentive Plan was adopted in order to attract, reward and retain key
personnel (including officers, whether or not directors) of Phar-Mor 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 Phar-Mor's stock performance.
Approximately 30 officers and approximately 575 other employees of Phar-Mor
and its subsidiaries are currently eligible to participate under the Phar-Mor,
Inc. 1995 Stock Incentive Plan.
The Phar-Mor, Inc. 1995 Stock Incentive Plan is administered by the
Compensation Committee (the "Administrator"). A maximum of 913,333 shares
of Common Stock (subject to adjustment) may be issued upon the exercise of
awards granted under the Phar-Mor, Inc. 1995 Stock Incentive Plan. As of June
29, 1996, a total of 906,950 shares of Common Stock were subject to options
granted under such Plan.
The Phar-Mor, Inc. 1995 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, Inc. 1995 Stock Incentive Plan,
<PAGE>
<PAGE>36
share limits, and shares subject to outstanding awards are subject to
adjustment in the event of certain reorganizations, recapitalizations, stock
splits, stock dividends, spin-offs, property distributions or other similar
extraordinary transactions or events in respect of Phar-Mor or the Common
Stock. 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, Inc. 1995 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 Common Stock may
be subject to options that during any twelve month period are granted to any
Eligible Person under the Phar-Mor, Inc. 1995 Stock Incentive Plan.
The exercise price under the Phar-Mor, Inc. 1995 Stock Incentive Plan of
the Options is $8.00 per share and thereafter generally may not be
less than the fair market value of one share of 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 option, as defined in the Internal
Revenue Code, or a non-qualified stock option. All Options were non-qualified
stock options. The aggregate fair market value of the shares of 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, Inc. 1995 Stock Incentive Plan or any other plan of
Phar-Mor 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, Inc. 1995 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, Inc. 1995 Stock Incentive Plan to include, but not be limited
to, (i) the approval by the shareholders of Phar-Mor of a dissolution or
liquidation, (ii) certain agreements of merger or consolidation resulting in
Phar-Mor'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 Phar-Mor as an entirety to a person
that is not an affiliated person of Phar-Mor, (iv) a person or group (other
than Robert M. Haft, Hamilton Morgan or other 25% owners as of the Effective
Date and certain related entities) acquiring beneficial ownership of over 50%
of the voting power, or (v) certain changes in the composition of the Board of
Directors), 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
<PAGE>
<PAGE>37
determine the extent, duration and other conditions of such additional rights
by amendment to outstanding awards or otherwise.
The Board of Directors of Phar-Mor may terminate or amend the Phar-Mor,
Inc. 1995 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, Inc. 1995 Stock
Incentive Plan, (ii) materially increase the aggregate number of shares that
may be issued under the Phar-Mor, Inc. 1995 Stock Incentive Plan, or
(iii) materially modify the eligibility requirements for participation under
the Phar-Mor, Inc. 1995 Stock Incentive Plan, the amendment, to the extent
deemed necessary by the Board of Directors or the Administrator or then
required by applicable law, must be approved by the shareholders.
401(K) EMPLOYEE SAVINGS PLAN. Employees of Phar-Mor 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. Phar-Mor 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 Phar-Mor. The plan provides a monthly pension for life to
supplement personal savings and Social Security benefits. The following table
shows as of June 29, 1996 the estimated annual benefits payable upon
retirement at age 65 under the Retirement Plan by specified compensation and
years of service classifications applicable to officers:
<TABLE>
<CAPTION>
Average Annual 15 Years 20 Years 25 Years 30 or More
Compensation Service Service Service Years Service
- --------------- -------- -------- -------- -------------
<S> <C> <C> <C> <C>
$100,000 $14,109 $18,182 $23,515 $28,218
$150,000 or more $21,984 $29,312 $36,640 $43,968
</TABLE>
<PAGE>
<PAGE>38
The amounts shown in the table are based on an assumed continued applicability
of the $150,000 compensation limit for qualified plans under the Internal
Revenue 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 compensation in excess of such average wage base, multiplied by years
of credited service up to a maximum of 30 years. The estimated annual retire-
ment 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 and ages as of June 29, 1996
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. O'Leary -- 4 years; Mr. Jeffery -- 4 years; Mr. Ficarro -- 2 years; and
Mr. Krishnan -- 4 years. The plan was frozen as of July 1, 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. O'Leary -- $6,965; Mr. Jeffery -- $5,585; Mr. Ficarro -- $2,934;
and Mr. Krishnan -- $4,331.
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,
Phar-Mor 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"). For a more detailed discussion of the financial status of
the Pension Plans, see Note 15 to the Consolidated Financial Statements.
PHAR-MOR, INC. 1995 DIRECTOR STOCK PLAN. The Board of Directors believes
that the ownership of Common Stock by directors supports the maximization of
long-term stockholder value by aligning the interests of directors with those
of stockholders. The Phar-Mor, Inc. 1995 Director Stock Plan (the "Director
Stock Plan") is designed to facilitate the ownership of Common Stock by
directors. The purpose of the Director Stock Plan is to promote the long-term
growth of Phar-Mor by enhancing its ability to attract and retain highly
qualified and capable directors with diverse backgrounds and experience and by
increasing the proprietary interest of directors in Phar-Mor.
Under the Director Stock Plan, each director receives an annual grant of
an option to purchase 5,000 shares of Common Stock. In addition, each
director may elect to receive shares of Common Stock in lieu of all or a
portion of his or her annual retainer. The number of shares of Common Stock
issuable in the event of such election will be based upon the fair market
value per share of Common Stock (as defined in the Director Stock Plan) on
<PAGE>
<PAGE>39
October 1st in the year of such election, and will be determined by dividing
such fair market value into the amount of the annual retainer that the
director elected to receive in Common Stock.
A maximum of 250,000 shares of Common Stock will be available for the
award of shares and the grant of options under the Director Stock Plan,
subject to adjustment in the event of stock splits, stock dividends or changes
in corporate structure affecting Common Stock. To the extent a stock option
granted under the Director Stock Plan expires or terminates unexercised, the
shares of Common Stock allocable to the unexercised portion of such option
will be available for awards under the Director Stock Plan. In addition, to
the extent that shares are delivered (actually or by attestation) to pay all
or a portion of an option exercise price, such shares will become available
for awards under the Director Stock Plan.
Each director was granted an option to purchase 5,000 shares of Common
Stock on October 3, 1995 at an exercise price of $7.06 per share and will be
granted an option to purchase 5,000 shares of Common Stock on each October 1st
thereafter while the Director Stock Plan is in effect. If a director begins
service on a date other than the date of the annual meeting of Phar-Mor
stockholders in any year, the number of shares subject to the option shall be
prorated.
The exercise price per share of all stock options granted under the
Director Stock Plan will be 100% of the fair market value per share of Common
Stock (as defined by the Director Stock Plan) on the grant date. Options
granted under the Director Stock Plan vest and are exercisable immediately,
and may be exercised until the fifth anniversary of the date of grant.
Options may be exercised either by the payment of cash in the amount of the
aggregate option price or by surrendering (or attesting to ownership of)
shares of Common Stock owned by the participant for at least six months prior
to the date the option is exercised, or a combination of both, having a
combined value equal to the aggregate option price of the shares subject to
the option or portion of the option being exercised. Any option or portion
thereof that is not exercised on or before the fifth anniversary of the date
of grant shall expire.
The Director Stock Plan is administered by the Compensation Committee of
the Board of Directors. The Board of Directors may amend or terminate the
Director Stock Plan at any time, but the terms of any option granted under the
Director Stock Plan may not be adversely modified without the participant's
consent.
PHAR-MOR, INC. 1996 DIRECTOR PHANTOM STOCK PLAN. The Phar-Mor, Inc. 1996
Director Phantom Stock Plan (the "Phantom Stock Plan") awards certain deferred
compensation to any director of Phar-Mor who is not an employee of Phar-Mor or
a subsidiary of Phar-Mor and who has served as a director for at least three
years (an "Eligible Director"). Under the Phantom Stock Plan, Phar-Mor will
establish a phantom stock account for each Eligible Director which is credited
<PAGE>
<PAGE>40
annually by that number of shares of Common Stock whose aggregate fair market
value on a date as specified under the Phantom Stock 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 Phar-Mor Board. The award is not in the form of actual shares of
Commmon Stock, and no shares of Common Stock will be set aside for the benefit
of Eligible Directors under the Phantom Stock Plan. The number of shares in
each phantom stock account is subject to adjustment for dilution and otherwise
as set forth in the Phantom Stock Plan.
Awards made under the Phantom Stock Plan are payable solely in cash upon
the effective date of the first to occur of: (1) the Eligible Director's
resignation from the Phar-Mor Board; (2) the Eligible Director's failure to be
elected or re-elected to the Phar-Mor Board; (3) the retirement of the
Eligible Director from the Board; or (4) death or permanent disability of the
Eligible Director. The amount of the payment will be calculated based upon
the fair market value of the shares of phantom stock recorded in the Eligible
Director's Phantom Stock Account (including all accrued cash dividends) as of
the date of distribution.
COMPENSATION OF DIRECTORS.
Each director of the Company (other than Mr. Haft, who has waived such
fees) 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 also will be reimbursed for travel and other out-of-pocket
expenses incurred by them in attending Board or committee meetings.
Pursuant to the Director Stock Plan, directors receive an annual grant of
options to purchase 5,000 shares of Common Stock, and may elect to receive
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.
Pursuant to the Phantom Stock Plan, the Company credits each Eligible
Director annually, commencing in October 1996, with that number of shares of
Phar-Mor Common Stock whose aggregate fair market value on a date as specified
under the Phantom Stock 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 Phar-Mor Board.
The award is not in the form of actual shares of Common Stock, and no shares
will be set aside for the benefit of Eligible Directors under the Phantom
Stock Plan. The number of shares in each phantom stock account is subject to
adjustment for dilution and otherwise as set forth in the Phantom Stock Plan.
<PAGE>
<PAGE>41
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.
Phar-Mor has entered into employment agreements with Messrs. Haft,
Schwartz and O'Leary, each of which is described below.
MR. ROBERT HAFT. The employment agreement with Mr. Haft has a rolling
three-year term commencing on (and each anniversary thereof) that provides for
Mr. Haft to serve as Chief Executive Officer and, subject to his continued
election to the Phar-Mor Board, as its Chairman. Mr. Haft's initial annual
base salary is $900,000, subject to annual cumulative increases of 8%. The
agreement provides for an annual incentive bonus under a company-sponsored
bonus plan (if a bonus plan is approved, or otherwise as provided under a
separate agreement between Phar-Mor and Mr. Haft), if performance objectives
are approved by the Board and such objectives are achieved, with a maximum
bonus of 60% and a minimum bonus of 21% of annual base salary, commencing for
fiscal year 1996, and various other benefits summarized below.
Mr. Haft also was granted options to purchase 256,250 shares of Common
Stock at $8.00 per share under the Phar-Mor, Inc. 1995 Stock Incentive Plan.
Mr. Haft's employment agreement provides 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.
The employment agreement provides that Mr. Haft serve as Chief Executive
Officer and Chairman of the Phar-Mor Board. Mr. Haft may engage in other
activities or pursue other investments (including activities that may be
competitive with Phar-Mor's business provided that they do not unreasonably
impede the performance of his duties for Phar-Mor and do not violate
applicable legal requirements. The Phar-Mor Board has the authority to
terminate Mr. Haft's employment without compensation under certain
circumstances. The agreement does not require Mr. Haft to provide services at
Phar-Mor's principal locations. Mr. Haft may resign at any time without
violating the agreement, although his resignation without cause and without
the Phar-Mor Board's consent would otherwise be treated like a termination for
cause by Phar-Mor.
Mr. Haft's employment agreement also provides for a long-term performance
payout to Mr. Haft in an amount (subject to the offset referred to in the last
sentence of this paragraph) equal to 3% of (i) the increase (if any) in the
fair market value of the Common Stock over $8.00 per share during the 36-month
period beginning on September 11, 1995 (or, in the case of certain
reorganizations, during the period from September 11, 1995 to the date
thereof) and (ii) the increase (if any) in the fair market value of such stock
over subsequent 36-month periods during the term of the agreement (if any),
commencing after the expiration of the initial 36-month period. The
calculation of increases in the market capitalization of Phar-Mor will be
adjusted for new offerings and for certain reorganizations and acquisitions
and other extraordinary events. One-half of the aggregate annual bonuses paid
<PAGE>
<PAGE>42
or payable in respect of the applicable three-year period will be offset
against the long-term payout amount.
The employment agreement with Mr. Haft further provides 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; 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 Phar-Mor's headquarters. The agreement with Mr. Haft
provides that, if it is terminated other than for cause, he is 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 remainder of the
term, the accelerated vesting (and extended post-termination exercise periods)
of all outstanding stock options, continued health and other benefits and (as
further discussed below) tax-reimbursement in respect of any termination
payments that constitute excess parachute payments under Federal income tax
laws. A termination for cause by Phar-Mor, under the agreement, is limited to
death, permanent disability (as defined), acts of moral turpitude concerning
Phar-Mor, voluntary resignation, or the entry of a felony conviction. For a
discussion of certain benefits and other consequences for Mr. Haft resulting
from a change in control of Phar-Mor, see " - Change in Control Consequences
for Mr. Haft," below.
MR. SCHWARTZ. The employment agreement with Mr. Schwartz has a term of
two years commencing on September 11, 1995 and provides for Mr. Schwartz to
serve Phar-Mor's President and Chief Operating Officer. Mr. Schwartz' annual
base salary is $600,000. The agreement provides for an annual incentive bonus
if Phar-Mor achieves certain performance objectives approved by the Phar-Mor
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.
Mr. Schwartz was granted options to purchase 175,000 shares of Common Stock at
$8.00 per share under the Phar-Mor, Inc. 1995 Stock Incentive Plan and a
confirmation bonus of $450,000.
MR. O'LEARY. The employment agreement with Mr. O'Leary also has a term
of two years from September 11, 1995 and provides for Mr. O'Leary to serve as
a senior officer, initially as Senior Vice President and Chief Financial
Officer of Phar-Mor. Mr. O'Leary's annual base salary is $236,500, subject to
periodic increases consistent with increases granted to other senior officers
(except Mr. Haft) generally. The agreement provides for an annual incentive
bonus if Phar-Mor achieves certain performance objectives approved by the
Phar-Mor Board, with a target bonus of not less than 50% of annual base salary
and a maximum of 100% of annual base salary, as further described below.
Mr. O'Leary was granted options to purchase 87,500 shares of Common Stock at
$8.00 per share under the Phar-Mor, Inc. 1995 Stock Incentive Plan and a
confirmation bonus of $200,000 plus 6,250 shares of Common Stock.
<PAGE>
<PAGE>43
Under the Company's Corporate Executive Bonus Plan for Fiscal Year 1996
(the "1996 Bonus Plan"), certain executive officers would be elegible 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. The entry level performance was not achieved in Fiscal Year
1996. However, the Board of Directors elected to pay certain discretionary
bonuses. For the fiscal year ended June 29, 1996, total bonuses of $1,188,539
were paid to 110 employees under the 1996 Bonus Plan.
Mr. Haft's annual cash bonus rights under his employment agreement (which
will be 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. Mr. Haft also
received a discretionary bonus for Fiscal Year 1996 which was included in the
amount above.
The general terms of the options granted to Messrs. Haft, Schwartz and
O'Leary are summarized above. Each of the employment agreements provides for
continued vesting and exerciseability of options during the term as if a
termination of employment did not occur (or, in Mr. Haft's case, acceleration
of vesting) 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). Mr. Haft's options in such circumstances may be exercised at any
time within 4-1/2 years after the Effective Date.
LOANS. Under the terms of Mr. Haft's employment agreement and grant of
options, when consummated, Phar-Mor will agree to loan Mr. Haft an amount
equal to the exercise price of the options (upon exercise). No loans have
been made as of the date hereof. Such loan or loans will become due on the
first to occur of (i) the fifth anniversary of the date that the loan was
made, (ii) to the extent of net proceeds of sale, after payment of related
taxes, five business days after the sale of the shares so acquired, (iii) 30
days after a termination of his employment by Phar-Mor for specified cause or
<PAGE>
<PAGE>44
his resignation other than for specified "good reason", or (iv) by way of
offset, upon the payment of settlement amounts to him upon a termination
without cause by the Company. The loans will bear interest, payable
semi-annually, on the outstanding principal balance at the mid-term applicable
federal rate in effect on the date such loans were made and shall be subject
to compliance with applicable laws. The Phar-Mor, Inc. 1995 Stock Incentive
Plan authorizes the Administrator to make loans to other optionees to pay the
exercise price of options, subject to specified conditions.
SEVERANCE PLAN. The employment agreements for Messrs. Schwartz and
O'Leary provide, in the case of a termination by the Company without cause or
by them "for good reason", for a severance payment equal to the highest of
(1) the amount available under the Phar-Mor severance policy at the time of
termination, (2) the base salary remaining under the individual's employment
agreement or (3) one year's base salary. Phar-Mor's current severance plan,
as it applies to officers, 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. Mr. Haft's
severance benefits are described throughout this section and also depend upon
the reasons for termination.
CHANGE IN CONTROL CONSEQUENCES FOR MR. HAFT. The agreement with Mr. Haft
provides that upon a change in control (as defined) Mr. Haft will have 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 may include (among other events) the removal of or failure to elect
Mr. Haft Chairman of the Board, his involuntary disassociation from Hamilton
Morgan under certain circumstances by reason of the operation of certain
buy-sell agreements, certain changes in ownership involving 50% or more of the
voting stock (or voting control) of Phar-Mor, the sale of all or substantially
all of the assets of Phar-Mor, 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 Phar-Mor. Such a termination by
Mr. Haft would be deemed a termination without cause by Phar-Mor and entitle
him to the rights attendant thereto, in addition to certain reimbursement for
any excise taxes thereon on a "grossed-up" basis as described below.
If the Proposed Transaction is consummated, Mr. Haft would have the right
to terminate his employment and accelerate the vesting of his options. Mr.
Haft has indicated his intention to continue his employment with the Company
after consummation of the Proposed Transaction.
TAX CONSIDERATIONS. Because the compensation of certain executive
officers will or may exceed $1,000,000 in any year, the provisions of
Section 162(m) of the Internal Revenue Code may limit the deductibility of
<PAGE>
<PAGE>45
such compensation unless an exception to such limitations is available.
Because of uncertainties surrounding the application and interpretation of
such limits, no assurance can be given that such compensation will be
deductible. In addition, the employment agreement with Mr. Haft provides
explicit benefits in the event of a change in control. To the extent these
and other benefits (deemed to result from the change in control) equal or
exceed 300% of his average annual taxable compensation (as defined in
applicable regulations), the full amount of such excess ("parachute payments")
will be subject to a 20% non-deductible excise tax in addition to any income
tax otherwise payable. Phar-Mor will not be entitled to a deduction for the
portion of the payment subject to the excise tax, and the amount of the
parachute payments will reduce the $1,000,000 limit under Section 162(m).
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 1996. The
Compensation Committee met twice during Fiscal Year 1996. Ms. Haft and Mr.
Hopkins are independent directors. Messrs. Butler and Estrin are co-Chief
Executive Officers, co-Chairman of the Board, and a major shareholders of
FoxMeyer Health Corporation and FoxMeyer Corporation. FoxMeyer Drug
Corporation, a wholly owned subsidiary of FoxMeyer Corporation, is Phar-Mor's
principal supplier of pharmaceuticals. See "Item 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS - Transactions with FoxMeyer Drug Company."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Set forth in the table below is information, as of September 13, 1996,
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).
<TABLE>
<CAPTION> Amount and Number of Shares
Nature of Percent Which May be
Name and Address of Beneficial of Acquired Within
Beneficial Owner(1) Ownership(2) Class 60 Days (3)
------------------- ------------ -------- -----------------
<S> <C> <C> <C>
Hamilton Morgan L.L.C.
3000 K Street, N.W.,
Suite 105
Washington, DC 20008 4,857,185(4) 39.4% 153,152(5)
Lappin Capital Management, L.P.
LBL Group, L.P.
767 Third Avenue, 16th Floor
New York, New York 10017 615,300(6) 5.1% -
Robert M. Haft
20 Federal Plaza West
Youngstown, Ohio 44501 4,857,185(7) 39.4% 153,152(5)
FoxMeyer Health Corporation
1220 Senlac Drive
Carrollton, TX 75006 4,857,185(7) 39.4% 153,152(5)
M. David Schwartz
20 Federal Plaza West
Youngstown, Ohio 44501 76,250 * 70,000(8)
Daniel J. O'Leary
20 Federal Plaza West
Youngstown, Ohio 44501 41,250 * 35,000(8)
John R. Ficarro
20 Federal Plaza West
Youngstown, Ohio 44501 6,000 * 6,000(8)
Warren E. Jeffery
20 Federal Plaza West
Youngstown, Ohio 44501 20,000 * 20,000(8)
Sankar Krishnan
20 Federal Plaza West
Youngstown, Ohio 44501 10,000 * 10,000(8)
Abbey J. Butler
1220 Senlac Drive
Carrollton, Texas 75006 10,000(9) * 10,000(10)
Melvyn J. Estrin
FoxMeyer Drug Corporation
1220 Senlac Drive
Carrollton, Texas 75006 10,000(9) * 10,000(10)
Linda Haft
8709 Burning Tree Road
Bethesda, MD 20817 10,000 * 10,000(10)
Malcolm T. Hopkins
14 Brookside Road
Ashville, NC 28803 10,000 * 10,000(10)
Richard M. McCarthy
1710 Cottontail Drive
Milford, Ohio 45105 11,304 * 10,000(10)
Antonio C. Alvarez
885 Third Avenue
New York, NY 10022-4802 466,667(11) 3.7% 416,667
All Directors and Executive
Officers, including those
named above, as a Group (11
persons) 5,497,352(12) 42.3% 730,819
(*less than 1%)
- ----------------------------
</TABLE>
<PAGE>
<PAGE>46
(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 named
person or entity has the right to acquire within 60 days after
September 13, 1996 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 3,750,000 shares of Common Stock owned directly by Hamilton
Morgan, and (i) 954,033 shares held directly by FoxMeyer Health
Corporation, (ii) 91,902 shares subject to purchase by FoxMeyer Health
Corporation, within 60 days upon exercise of Warrants and (iii) 61,250
shares subject to purchase by Mr. Haft within 60 days upon exercise of
options (all such shares held directly by FoxMeyer Health Corporation
and subject to purchase by FoxMeyer Health Corporation and Mr. Haft
being collectively referred to herein as the "Proxy Shares"). Hamilton
Morgan has been granted sole voting power over the Proxy Shares as a
result of irrevocable proxies granted to Hamilton Morgan by FoxMeyer
Health Corporation, and Mr. Haft. See "-Potential Changes in Control"
below. Certain shares indicated as being beneficially owned by
FoxMeyer Health Corporation are owned of record by FoxMeyer Drug
Company. Information concerning beneficial ownership of Common Stock
by FoxMeyer Health Corporation is based on information furnished to
Phar-Mor as of September 27, 1996 by FoxMeyer Health Corporation.
(5) Includes 91,902 shares of Common Stock subject to purchase by FoxMeyer
Health Corporation within 60 days upon exercise of Warrants and 61,250
shares of Common Stock subject to purchase by Mr. Haft within 60 days
upon exercise of options awarded to Mr. Haft (of which options to
purchase 51,250 shares were awarded under the Phar-Mor, Inc. 1995
Stock Incentive Plan). Pursuant to Mr. Haft's employment agreement
with the Company, if the Proposed Transaction is consummated, Mr. Haft
would have the right to terminate his employment and accelerate the
vesting of his options. Mr. Haft has indicated his intention to
continue his employment with the Company after consummation of the
Proposed Transaction. See note 7 below.
(6) The information provided is based on reports on Schedule 13D filed by
the designated persons and entities with the Securities and Exchange
Commission through September 1996.
(7) Includes 3,750,000 shares of Common Stock held directly by Hamilton
Morgan and the 1,102,185 Proxy Shares with respect to which Hamilton
Morgan has sole voting power. See note 4 above. Pursuant to the
terms of the Amended and Restated Limited Liability Company agreement
<PAGE>
<PAGE>47
of Hamilton Morgan (the "Hamilton Morgan LLC Agreement") all of such
shares may be voted only with the consent of Hamilton Morgan's
members. As of September 13, 1996, Robert M. Haft and his wife, Mary
Z. Haft, as tenants by the entirety, owned 30.2% of the membership
interests in Hamilton Morgan, Robert Haft is the president of Hamilton
Morgan and FoxMeyer Health Corporation owned 69.8% of the membership
interests in Hamilton Morgan. Accordingly, each of FoxMeyer Health
Corporation and Mr. Haft have shared voting power with respect to all
shares of Common Stock beneficially owned by Hamilton Morgan. The
Proxy Shares include options to purchase 51,250 shares awarded to Mr.
Haft under the Phar-Mor, Inc. 1995 Stock Incentive Plan.
(8) 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, Inc. 1995 Stock Incentive Plan.
(9) Messrs. Butler and Estrin are co-chairmen of the Board, co-chief
executive officers and major shareholders of FoxMeyer Corporation and
FoxMeyer Health Corporation. FoxMeyer Drug Corporation, a wholly
owned subsidiary of FoxMeyer Corporation, is Phar-Mor's principal
supplier of pharmaceuticals. Messrs. Butler and Estrin disclaim
beneficial ownership of the shares shown as being beneficially owned
by FoxMeyer Health Corporation and Hamilton Morgan.
(10) All such shares are subject to purchase within 60 days by the
indicated person upon exercise of options awarded under the Phar-Mor,
Inc. 1995 Director Stock Plan.
(11) Includes options to purchase 416,667 shares of Common Stock awarded to
A&M pursuant to the "Management Services Agreement" as defined in Item
13 below. Mr. Alvarez resigned as an officer of the Company as of
the Effective Date.
(12) Includes 4,852,185 shares of Common Stock which Mr. Haft is deemed to
beneficially own, as described above in note 7. Also includes 466,667
shares of Common Stock which Mr. Alvarez is deemed to beneficially
own, as described above in note 11.
POTENTIAL CHANGES IN CONTROL. Hamilton Morgan owns directly 3,750,000
shares of Common Stock representing 30.8% of the issued and outstanding shares
of Common Stock as of September 13, 1996. Pursuant to the terms of the
Hamilton Morgan LLC Agreement, all of such shares may be voted with the
consent of Hamilton Morgan's members. Accordingly, each of FoxMeyer Health
Corporation and Mr. Haft currently have shared voting power with respect to
all such shares. If Mr. Haft and FoxMeyer Health Corporation disagree on how
to vote these shares, the shares are not voted. Pursuant to the Hamilton
Morgan LLC Agreement, from and after May 1, 1996, either member of Hamilton
Morgan may offer to buy from, and sell to, the other member its membership
interest in Hamilton Morgan. Upon the occurrence of such a sale or purchase,
<PAGE>
<PAGE>48
the purchasing member would obtain sole voting power over the 3,750,000 share
sof Common Stock held by Hamilton Morgan. However, in the event of such a
sale or purchase, the proxies granted by FoxMeyer Health Corporation and Mr.
Haft to Hamilton Morgan with respect to the Proxy Shares would terminate, and
sole voting power with respect to such shares would revert to the grantor of
the proxy.
In connection with the purchase by Hamilton Morgan of such 3,750,000
shares of Common Stock, FoxMeyer Health Corporation entered into a financing
agreement with Credit Lyonnais New York Branch ("Credit Lyonnais") pursuant to
which Hamilton Morgan pledged 2,617,500 shares of Common Stock as collateral.
In the event of a default under the financing agreement, Credit Lyonnais may
acquire such shares by foreclosing on its collateral. In addition, in the
event that the foregoing pledge by Hamilton Morgan is void for any reason,
Credit Lyonnais may enforce a lien on FoxMeyer Health Corporation's membership
interest in Hamilton Morgan. As of August 19, 1996, FoxMeyer Health
Corporation was in violation of certain terms of the financing agreement, but
is negotiating with Credit Lyonnais to amend or refinance the financing
agreement. As of September 27, 1996, FoxMeyer Health Corporation has informed
Phar-Mor that Credit Lyonnais has waived such violation through October 24,
1996. The Hamilton Morgan LLC Agreement provides that, upon an event of
default by FoxMeyer Health Corporation and until closing on any disposition,
if any, of the shares pledged as collateral, Mr. Haft, in his capacity of
President of Hamilton Morgan, shall have the exclusive power and authority,
exercisable in his sole and absolute discretion, to exercise all voting rights
arising in connection with the Proxy Shares and other shares of Phar-Mor
Common Stock held by Hamilton Morgan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH FOXMEYER DRUG COMPANY
In the Chapter 11 Cases, FoxMeyer Drug Company filed a reclamation claim
for $21 million. Phar-Mor responded with a preference action asserting the
$25 million in payment received by FoxMeyer Drug Company during the period
when the pharmaceuticals sought to be reclaimed by FoxMeyer Drug Company had
been delivered to Phar-Mor should have been applied to the current shipment,
thus leaving FoxMeyer Drug Company with no unpaid-for goods, or alternatively
that the payments were preferences under Section 547 of the Bankruptcy Code.
FoxMeyer Drug Company raised an ordinary course of business defense to the
preference action and extensive discovery ensued. On the eve of the trial,
Phar-Mor and FoxMeyer Drug Company reached a settlement (the "FoxMeyer
Settlement").
The Bankruptcy Court approved the FoxMeyer Settlement on May 10, 1995.
The FoxMeyer Settlement provided for the issuance of 843,750 shares of Common
Stock to FoxMeyer Drug Company under the Plan of Reorganization and the
release of all reclamation claims and preference claims. In addition, under
the terms of the settlement, FoxMeyer Drug Company agreed to modify
<PAGE>
<PAGE>49
restrictions under its pharmaceutical supply agreement with Phar-Mor requiring
Phar-Mor to maintain a minimum number of operating stores.
FoxMeyer Drug Company also received 110,283 shares of Common Stock and
Warrants to purchase 91,902 shares of Common Stock on account of its general
unsecured claim. FoxMeyer Drug Company may receive additional shares
of Common Stock and additional Warrants on account of its general unsecured
claims in future distributions to holders of unsecured claims, although
Phar-Mor is unable to determine the amount of any such shares or Warrants at
this time.
Following the Petition Date, the Company entered into a revised,
long-term Supply Agreement with FoxMeyer Drug Company to become the Company's
primary supplier of prescription medications until the later of August 17,
1997 or the date on which Phar-Mor's purchases equal an aggregate net minimum
of $1.4 billion of products. The Supply Agreement establishes certain minimum
supply requirements, specifies events of default, and limits damages
recoverable in the event of a termination.
On August 27, 1996, FoxMeyer Drug Company filed a petition for protection
under chapter 11 of the United States Bankruptcy Code. On August 29, 1996,
the Company notified FoxMeyer Drug Company that the supply of products to the
Company under the FoxMeyer Supply Agreement was insufficient and 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, which response states in part, "we
[FoxMeyer] acknowledge that there have been service level issues over the past
several weeks, while we work with our suppliers to extend more favorable
terms. However, our calculations reflect that six of the nine [FoxMeyer]
distribution centers exceeded the 95% fill rate average required [under the
FoxMeyer Supply Agreement] for the ninety days preceding your demand letter."
The Company believes that it has, at this time, overcome all related business
interruption because there are adequate alternative sources of supply, subject
to pricing, readily available to the Company.
Abbey J. Butler and Melvyn J. Estrin, directors of Phar-Mor, are
co-chairmen of the Board, co-chief executive officers and major shareholders
of FoxMeyer Corporation and FoxMeyer Health Corporation. FoxMeyer Drug
Company is a wholly owned subsidiary of FoxMeyer Corporation, and FoxMeyer
Health Corporation owns 69.8% of the membership interest in Hamilton Morgan.
TRANSACTIONS WITH HAMILTON MORGAN
On the Effective Date, pursuant to the Plan of Reorganization and the
Hamilton Purchase Agreement, Hamilton Morgan purchased 1,250,000 shares of
Common Stock from the Company and 2,500,000 shares of Common Stock from the
Company's prepetition senior secured creditors for a price of $8.00 per share.
Messrs. Haft, Butler and Estrin, each of whom was appointed a director of
Phar-Mor in connection with the Plan of Reorganization and currently serves as
<PAGE>
<PAGE>50
director of Phar-Mor, are affiliated with Hamilton Morgan. As of September
13, 1996, Robert M. Haft and his wife Mary Z. Haft, as tenants by the
entirety, owned 30.2% of the membership interests and FoxMeyer Health
Corporation owned 69.8% of the membership interests in Hamilton Morgan and
Robert Haft is the president of Hamilton Morgan. Messrs. Butler and Estrin
are co-chairmen of the Board, co-chief executive officers and major
shareholders of FoxMeyer Health Corporation. See "Item 12. SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
On the Effective Date, pursuant to the Plan of Reorganization the Company
paid Hamilton Morgan $1.0 million as reimbursement for Hamilton Morgan's
reasonable expenses, including fees and expenses of legal, accounting and
other outside advisors engaged by or on behalf of Hamilton Morgan, incurred in
connection with its purchase of Common Stock and the Plan of Reorganization.
TRANSACTIONS WITH ROBERT M. HAFT
During Chapter 11 Cases, Hamilton Morgan negotiated the terms of the
Hamilton Morgan Purchase Agreement with representatives of the Company's
senior secured lenders pursuant to which Hamilton Morgan agreed to purchase on
the Effective Date at least $30 million of Common Stock of reorganized
Phar-Mor representing approximately 31% of such Common Stock. The Hamilton
Morgan Purchase Agreement also provided that Hamilton Morgan's president,
Robert M. Haft, would become Chairman of the Board and Chief Executive Officer
of the Company and that the Company would propose a plan of reorganization to
restructure Phar-Mor consistent with the terms of the Hamilton Morgan Purchase
Agreement. On the Effective Date, Robert M. Haft assumed the positions of
Chairman of the Board and Chief Executive Officer of Phar-Mor and Hamilton
Morgan designated four of the seven new directors of reorganized Phar-Mor. In
addition the Company entered into an employment agreement and an option
agreement with Mr. Haft.
TRANSACTIONS WITH A&M
After the dismissal of Phar-Mor's executive officers in August 1992
following the discovery of the fraud perpetrated on the Company, the Company's
Board of Directors retained A&M to assume day-to-day management of the
Company. Antonio C. Alvarez, a founding principal of the firm, originally
served as President and Chief Operating Officer until David Schwartz was
retained to fill those positions, at which time Mr. Alvarez assumed the role
of Chief Executive Officer. Joseph A. Bondi, a Managing Director of A&M,
served as Senior Vice President and Chief Administrative Officer of Phar-Mor.
In addition, A&M provided other support personnel while Phar-Mor rebuilt its
financial staff. A&M's services were provided under the Management Services
Agreement pursuant to which Phar-Mor agreed to pay fixed fees, annual cash
bonuses and certain share incentives.
Under its terms as amended by the Plan of Reorganization, the Management
Services Agreement terminated on October 28, 1995. Messrs. Alvarez and Bondi
<PAGE>
<PAGE>51
resigned as officers as of the Effective Date. During the 60 day period after
the Effective Date, Mr. Alvarez served as a consultant to Phar-Mor. On the
Effective Date Messrs. Alvarez and Bondi were paid any accrued but unpaid
salary, their incentive bonuses for Phar-Mor's 1995 fiscal year in the amount
of $680,000, the pro rated amount of their incentive bonuses for the 1996
fiscal year ($135,926) and consulting fees of $150,000 for Mr. Alvarez's
services during the 60 days after the Effective Date.
The Management Services Agreement, as amended, also provided for the
payment to A&M of a confirmation bonus of $2.1 million and the A&M Shares
(50,000 shares of Common Stock) on the Effective Date in lieu of a $2.5
million cash payment originally provided to be paid A&M on such date under the
Management Services Agreement. In addition to the foregoing, the Plan of
Reorganization also included provisions for the issuance of the A&M Options
relating to 416,667 shares of Common Stock, and a related registration rights
agreement.
TRANSACTION WITH GIANT EAGLE, INC.
Certain holders of more than 5% of the pre-reorganization Common Stock of
the Company were parties to transactions with the Company which are part of
the public record of the Bankruptcy Court proceedings. Pursuant to the Plan
of Reorganization, disputes with respect to these transactions were settled
and agreements with respect thereto were amended and/or terminated, including,
without limitation, (i) the leases between the Company and Giant Eagle and
affiliates of Giant Eagle with respect to the Company's two warehouses in
Austintown, Ohio and equipment located at the warehouses, and (ii) the lease
with respect to the Company's office headquarters in Youngstown, Ohio.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, 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 are 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.
4. Reports on Form 8-K
Reports on Form 8-K dated as of September 7, 1996 and October
11, 1996 were filed by the Company with respect to the
Agreement and Plan of Reorganization dated as of September 7,
1996, by and among the Company, ShopKo Stores, Inc. and Cabot
Noble, Inc.
<PAGE>
<PAGE>52
PHAR-MOR, INC. AND SUBSIDIARIES
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT F - 2
CONSOLIDATED BALANCE SHEETS AS OF JUNE 29, 1996,
SEPTEMBER 2, 1995 AND JULY 1, 1995 F - 4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
FORTY-THREE WEEKS ENDED JUNE 29, 1996, THE NINE WEEKS
ENDED SEPTEMBER 2, 1995, THE FIFTY-TWO WEEKS ENDED
JULY 1, 1995 AND THE FIFTY-THREE WEEKS ENDED JULY 2, 1994 F - 5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY) FOR THE FORTY-THREE WEEKS ENDED JUNE 29, 1996, THE
NINE WEEKS ENDED SEPTEMBER 2, 1995, THE FIFTY-TWO WEEKS ENDED
JULY 1, 1995 AND THE FIFTY-THREE WEEKS ENDED JULY 2, 1994 F - 6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FORTY-THREE
WEEKS ENDED JUNE 29, 1996, THE NINE WEEKS ENDED SEPTEMBER 2, 1995,
THE FIFTY-TWO WEEKS ENDED JULY 1, 1995 AND THE FIFTY-THREE WEEKS
ENDED JULY 2, 1994 F - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 8
SCHEDULE II F - 26
</TABLE>
F-1
<PAGE>
<PAGE>53
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Phar-Mor, Inc.:
We have audited the accompanying consolidated balance sheets of Phar-Mar,
Inc. and subsidiaries ("Phar-Mor") as of June 29, 1996 and September 2, 1995
(Successor Phar-Mor balance sheets) and July 1, 1995 (Predecessor Phar-Mor
balance sheet), and the related consolidated statements of operations, changes
in stockholders' equity (deficiency) and cash flows for the forty-three weeks
ended June 29, 1996 (Successor Phar-Mor operations), the nine weeks ended
September 2, 1995, the fifty-two weeks ended July 1, 1995 and the fifty-three
weeks ended July 2, 1994 (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 Phar-Mor, Inc.'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 Phar-Mor disclosed that a fraud and embezzlement
of Phar-Mor'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 relating to property and equipment and depreciation and
amortization related thereto for the nine weeks ended September 2, 1995 and as
of and for the fifty-two weeks ended July 1, 1995, and for the fifty-three
weeks ended July 2, 1994. As discussed in Note 6, for the fifty-three weeks
ended July 2, 1994 Phar-Mor recorded a $53,211,000 write down of its
property and equipment based upon an independent appraisal. It is not possible
to determine whether the aggregate amount of property and equipment at July 1,
1995 is greater than the original acquisition cost of such assets less
accumulated depreciation and amortization.
<PAGE>
<PAGE>54
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 consolidated financial statements of Predecessor Phar-Mor
referred to above present fairly, in all material respects, the financial
position of Predecessor Phar-Mor as of July 1, 1995 and the results of its
operations and its cash flows for the nine weeks ended September 2, 1995, the
fifty-two weeks ended July 1, 1995 and the fifty-three weeks ended July 2,
1994 in conformity with generally accepted accounting principles.
In our opinion, the consolidated financial statements of Successor
Phar-Mor referred to above present fairly, in all material respects, the
financial position of Successor Phar-Mor as of June 29, 1996 and September 2,
1995 and the results of its operations and its cash flows for the forty-three
weeks ended June 29, 1996 in conformity with generally 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 consolidated 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 Successor Phar-Mor balance sheet as of September 2, 1995 has 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.
As discussed in Note 20 to the financial statements, Phar-Mor
entered into an agreement dated September 7, 1996 (as amended and restated as
of October 9, 1996) with Shopko Stores, Inc., subject to certain conditions to
combine the respective companies under Cabot Noble, Inc., a newly organized
holding company.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
August 16, 1996
(October 9, 1996 as to Note 20)
<PAGE>
<PAGE>55
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
------------------------ || -------
ASSETS JUNE 29, SEPTEMBER 2, ||
1996 1995 || JULY 1, 1995
---------- ------------ || ----------------
<S> <C> <C> || <C>
CURRENT ASSETS: ||
Cash and cash equivalents $ 104,265 $ 107,930 || $ 224,257
Accounts receivable - net 20,834 27,702 || 43,685
Due from related parties - - || 4,181
Merchandise inventories 152,904 167,177 || 173,714
Prepaid expenses 5,184 6,540 || 8,174
Deferred tax asset 388 1,814 || -
---------- ---------- || -----------
Total current assets 283,575 311,163 || 454,011
||
PROPERTY AND EQUIPMENT - NET 66,550 65,178 || 73,822
DEFERRED TAX ASSET 9,382 12,186 || 181
OTHER ASSETS 3,956 1,680 || 3,318
---------- ---------- || -----------
||
Total assets $ 363,463 $ 390,207 || $ 531,332
========== ========== || ===========
||
LIABILITIES AND STOCKHOLDERS' EQUITY ||
(DEFICIENCY) ||
||
CURRENT LIABILITIES: ||
Accounts payable $ 46,010 $ 48,942 || $ 69,563
Related party accounts payable 7,751 9,164 || -
Accrued expenses 33,409 33,874 || 24,465
Related party accrued expenses - - || 2,383
Accrued bankruptcy professional fees 181 19,657 || 15,215
Reserve for costs of rightsizing program 3,451 7,301 || 6,564
Current portion of self insurance reserves 3,701 5,030 || 5,030
Current portion of long-term debt 2,903 1,541 || -
Current portion of capital lease obligations 6,019 5,534 || -
---------- ---------- || -----------
Total current liabilities 103,425 131,043 || 123,220
||
LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS - - || 1,154,959
LONG-TERM DEBT 109,973 106,982 || -
CAPITAL LEASE OBLIGATIONS 39,190 44,065 || -
LONG-TERM SELF INSURANCE RESERVES 7,226 8,142 || 7,011
UNFAVORABLE LEASE LIABILITY - NET 10,783 10,475 || -
DEFERRED RENT 298 - || 10,826
---------- ---------- || -----------
Total liabilities 270,895 300,707 || 1,296,016
---------- ---------- || -----------
||
COMMITMENTS AND CONTINGENCIES ||
MINORITY INTERESTS 535 - || -
---------- ---------- || -----------
||
STOCKHOLDERS' EQUITY (DEFICIENCY): ||
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, 12,157,054 at June 29, 1996 and ||
12,156,250 at September 2, 1995 122 122 || -
Common stock, $.10 par value, authorized shares, 200,000,000; ||
issued and outstanding shares, 54,066,463 - - || 5,407
Additional paid-in capital 89,385 89,378 || 487,477
Retained earnings (deficit) 2,526 - || (1,257,568)
---------- ---------- || ----------
Total stockholders' equity (deficiency) 92,033 89,500 || (764,684)
---------- ---------- || ----------
||
Total liabilities and stockholders' equity (deficiency) $ 363,463 $ 390,207 || $ 531,332
========== ========== || ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<PAGE>56
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------- || -----------------------------------------------------------
FORTY-THREE || NINE FIFTY-TWO FIFTY-THREE
WEEKS ENDED || WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 29, 1996 || SEPTEMBER 2, 1995 JULY 1, 1995 JULY 2, 1994
------------- || ------------------ ------------ ------------
<S> <C> || <C> <C> <C>
Sales $ 874,284 || $ 181,968 $ 1,412,661 $ 1,852,244
||
Less: ||
Cost of goods sold, including ||
occupancy and distribution costs 726,944 || 148,305 1,156,928 1,522,722
Selling, general and administrative ||
expenses 123,582 || 25,876 199,863 276,887
Chapter 11 professional fee accrual ||
adjustment (1,530)|| - - -
Write-down of property and equipment to ||
lower of appraised or net book value || - - 53,211
Depreciation and amortization 14,891 || 3,732 24,643 55,401
----------- || ----------- ----------- -----------
||
Income (loss) from operations before ||
interest expense, interest income, ||
reorganization items, fresh-start ||
revaluation, income taxes and ||
extraordinary item 10,397 || 4,055 31,227 (55,977)
||
Interest expense (excludes ||
contractual interest not accrued ||
on unsecured prepetition debt of ||
$3,897, $20,595, and $21,639 in the ||
nine weeks ended September 2, 1995, ||
the fifty-two weeks ended July 1, ||
1995, and the fifty-three weeks ||
ended July 2,1994, respectively) 14,343 || 5,689 33,324 33,878
Interest income 8,614 || - - -
----------- || ----------- ----------- -----------
||
Income (loss) before ||
reorganization items, fresh-start ||
revaluation, income taxes and ||
extraordinary item 4,668 || (1,634) (2,097) (89,855)
||
Reorganization items - || 16,798 51,158 53,239
Fresh-start revaluation - || (8,043) - -
----------- || ----------- ----------- -----------
||
Income (loss) before income taxes ||
and extraordinary item 4,668 || (10,389) (53,255) (143,094)
||
Income tax provision (benefit) 2,142 || - (111) (331)
----------- || ----------- ----------- -----------
||
Income (loss) before extraordinary ||
item 2,526 || (10,389) (53,144) (142,763)
Extraordinary item - gain on debt ||
discharge - || 775,073 - -
----------- || ----------- ----------- -----------
||
Net income (loss) $ 2,526 || $ 764,684 $ (53,144) $ (142,763)
=========== || =========== =========== ===========
||
Net income (loss) per common share: ||
Income (loss) before extraordinary ||
item $ .21 || $ (.19) $ (.98) $ (2.64)
Extraordinary item - || 14.33 - -
----------- || ----------- ----------- -----------
Net income (loss) $ .21 || $ 14.14 $ (.98) $ (2.64)
=========== || =========== =========== ===========
Weighted average number of common ||
shares outstanding 12,156,614 || 54,066,463 54,066,463 54,066,463
=========== || =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<PAGE>57
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
------------
PAR RETAINED TOTAL
VALUE ADDITIONAL EARNINGS STOCKHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL (DEFICIT) EQUITY (DEFICIENCY)
------ ------ --------------- -------- ------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 26, 1993 54,066 $ 5,407 $ 487,477 $(1,061,661) $(568,777)
Net loss - - - (142,763) (142,763)
------- ------- --------- ----------- ---------
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
======= ======= ========= =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
<PAGE>58
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------- ||-------------------------------------------------
FORTY-THREE || NINE FIFTY-TWO FIFTY-THREE
WEEKS ENDED || WEEKS ENDED WEEKS ENDED WEEKS ENDED
JUNE 29, 1996 ||SEPTEMBER 2, 1995 JULY 1, 1995 JULY 2, 1994
------------- ||----------------- ------------- ------------
<S> <C> ||<C> <C> <C>
OPERATING ACTIVITIES ||
Net income (loss) $ 2,526 || $ 764,684 $(53,144) $(142,763)
Adjustments to reconcile net income ||
(loss) 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) - -
Write-down of property and equipment to ||
lower of appraised or net book value || - - 53,211
Noncash charges included in ||
reorganization items - || 16,500 46,056 42,963
Depreciation 8,802 || 2,388 15,073 40,961
Amortization of video rental tapes 6,055 || 1,333 9,423 14,440
Amortization of deferred ||
financing costs and goodwill 363 || 73 2,139 5,106
Loss on abandonment of equipment - || - - 2,111
Deferred income taxes 2,142 || - (111) (331)
Deferred rent and unfavorable ||
lease liabilities 606 || (89) 1,126 2,836
||
Changes in assets and liabilities: ||
Accounts receivable 6,905 || 11,997 (10,335) 10,407
Merchandise inventories 15,534 || (6,922) 164,482 (24,199)
Prepaid expenses 1,356 || 2,441 631 (3,319)
Deferred income taxes 2,088 || - - -
Other assets (681) || 449 136 (205)
Accounts payable and related ||
party accounts payable (4,370) || (8,865) (39,772) 35,481
Accrued expenses and related ||
party accrued expenses (1,999) || 1,133 (18,994) (674)
Accrued bankruptcy professional ||
fees (19,476) || 4,442 1,654 1,915
Reserve for costs of rightsizing ||
program (2,921) || 550 (35,311) (17,558)
Self insurance reserves (916) || 1,131 1,111 5,949
-------- || --------- -------- ---------
Net cash provided by operating ||
activities 16,014 || 8,129 84,164 26,331
-------- || --------- -------- ---------
INVESTING ACTIVITIES ||
Additions to rental videotapes (7,316) || (1,874) (11,925) (13,756)
Additions to property and equipment (6,368) || (649) (9,088) (12,904)
Purchase of partnership interests (145) || - - -
-------- || --------- -------- ---------
Net cash used for investing activities (13,829) || (2,523) (21,013) (26,660)
-------- || --------- -------- ---------
||
FINANCING ACTIVITIES ||
Issuance of common stock 7 || - - -
Principal payments on term debt (1,467) || - - -
Principal payments on capital lease ||
obligations (4,390) || - - -
-------- || --------- -------- ---------
Net cash used for financing activities (5,850) || - - -
-------- || --------- -------- ---------
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) (76,300)
Payment of reclamation claims - || (23,961) - -
Decrease in all other liabilities ||
subject to settlement under ||
reorganization proceedings - || (2,076) (1,256) (12,655)
Proceeds from the sale of new common ||
stock - || 9,500 - -
Proceeds from sale of assets held for ||
disposition - || - 13,663 3,965
Debtor-in-possession financing costs - || (15) (172) (1,923)
-------- || --------- -------- ---------
Net cash used for reorganization ||
activities - || (121,933) (34,095) (86,913)
-------- || --------- -------- ---------
||
(Decrease) increase in cash and cash ||
equivalents (3,665) || (116,327) 29,056 (87,242)
Cash and cash equivalents, beginning ||
of period 107,930 || 224,257 195,201 282,443
-------- || --------- -------- ---------
Cash and cash equivalents, end of ||
period $104,265 || $ 107,930 $224,257 $ 195,201
======== || ========= ======== =========
||
SUPPLEMENTAL INFORMATION ||
- ------------------------ ||
Interest paid $ 9,067 || $ 4,592 $ 27,989 $ 30,621
Income tax refunds 2,669 || - 570 228
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
<PAGE>59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
1. REORGANIZATION AND BASIS OF PRESENTATION
In early August 1992 Phar-Mor 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 Phar-Mor. 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 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 Phar-Mor 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 investment 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, Phar-Mor, Inc. and its subsidiaries (collectively,
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 has 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>
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. 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.
F-8<PAGE>
<PAGE>60
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>
In the accompanying Predecessor Company consolidated balance sheet,
liabilities subject to resolution in the Chapter 11 Cases are classified
as liabilities subject to settlement under reorganization proceedings,
and are comprised of the following:
<TABLE>
<S> <C>
Secured debt $ 375,350
Unsecured debt 53,695
Capital lease obligations:
Real estate 13,528
Equipment 122,759
Rejected store leases 139,295
Accrued interest 16,218
Accounts payable and accrued liabilities 434,114
---------
$1,154,959
=========
</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 Phar-Mor. The financial advisors reviewed
financial data of Phar-Mor, including financial projections through the
fiscal year 1999. The reorganization value of Phar-Mor, 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 Phar-Mor; review of certain acquisitions of companies
whose operating businesses were viewed to be similar to that of Phar-Mor.
In addition to these methods of analysis, certain general economic and
industry information relevant to the business of Phar-Mor was considered.
Based on the analysis outlined above, the financial advisors determined
the equity value of Phar-Mor 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 Phar-Mor
including, but not limited to, those with respect to the future course of
Phar-Mor'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 Phar-Mor achieving the
projected results.
F-9
<PAGE>
<PAGE>61
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 $ 47,319 $ 1,623 - $ 48,942
Related party accounts payable 9,164 - - 9,164
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-10
<PAGE>
<PAGE>62
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 29, 1996, September 2, 1995 and July
1, 1995 (see Note 1). The accompanying consolidated statements of
operations, changes in stockholders' equity and cash flows were
prepared for the forty-three weeks ended June 29, 1996, the nine
weeks ended September 2, 1995, the fifty-two weeks ended July 1,
1995 and the fifty-three weeks ended July 2, 1994.
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. The Company is one of the leading retailers of
film, vitamins, soft drinks and batteries.
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.
F-11
<PAGE>
<PAGE>63
i. 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 a. above, which
resulted in unreliable and insufficient evidential matter to support
the acquisition cost of property and equipment, as of July 2, 1994,
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).
j. 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.
k. 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.
l. 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.
m. Reclassifications - Certain amounts in the financial statements have
been reclassified for comparative purposes.
n. Net Income (Loss) Per Common Share - Net income (loss) per common
share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding. Outstanding stock
options and warrants do not have a dilutive effect on net income per
share.
o. Accounting Changes - In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," which
establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. This statement
requires adoption no later than fiscal years beginning after
December 15, 1995. The Company has not yet completed its evaluation
of the effect that implementation of this new standard will have on
its results of operations and financial position.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which
requires adoption no later than fiscal years beginning after
December 15, 1995. The new standard defines a fair value method of
accounting for stock options and similar equity instruments. Under
the fair value method, compensation cost is measured at the grant
date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but not
required, to adopt the fair value method of accounting for employee
stock-based transactions. Companies are also permitted to continue
to account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," but
would be required to disclose in a note to the financial statements
pro forma net income and earnings per share as if the company had
applied the new method of accounting.
The accounting requirements of the new method are effective to all
employee awards granted after the beginning of the fiscal year of
adoption. The Company has not yet determined if it will elect to
change to the fair value method, nor has it determined the effect
the new standard will have on net income and earnings per
F-12<PAGE>
<PAGE>64
share should it elect to make such a change. Adoption of the new
standard will have no effect on the Company's cash flows.
p. 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.
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
-------------------------------- || ------------
June 29, 1996 September 2, 1995 || July 1, 1995
------------- ----------------- || ------------
<S> <C> <C> || <C>
Accounts receivable - vendors $15,583 $16,141 || $22,530
Receivable from inventory liquidation company - - || 12,418
Insurance claim receivable - 6,650 || -
Third-party prescriptions 5,151 5,271 || 5,580
Vendor coupons 1,719 1,605 || 1,543
Income tax receivable 175 193 || 193
Other 2,397 2,464 || 6,338
------- ------- || -------
25,025 32,324 || 48,602
Less allowance for doubtful accounts 4,191 4,622 || 4,917
------- ------- || -------
$20,834 $27,702 || $43,685
======= ======= || =======
</TABLE>
5. MERCHANDISE INVENTORIES
Merchandise inventories consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
-------------------------------- || ------------
June 29, 1996 September 2, 1995 || July 1, 1995
------------- ----------------- || ------------
<S> <C> <C> || <C>
Store inventories $140,522 $153,856 || $140,560
Warehouse inventories 25,387 35,237 || 39,510
Video rental tapes - net 7,059 6,746 || 6,229
-------- -------- || --------
172,968 195,839 || 186,299
Less reserves for markdowns, shrinkage ||
and vendor rebates 20,064 28,662 || 12,585
-------- -------- || --------
$152,904 $167,177 || $173,714
======== ======== || ========
</TABLE>
The video rental tape inventory is net of accumulated amortization of
$6,055, $0, and $13,405 at June 29, 1996, September 2, 1995 and July 1,
1995, respectively.
F-13
<PAGE>
<PAGE>65
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION> Predecessor
Successor Company Company
--------------------------------- || -------------
June 29, 1996 September 2, 1995 || July 1, 1995
-------------- ----------------- || -------------
<S> <C> <C> || <C>
Furniture, fixtures and equipment $19,596 $15,215 || $ 30,416
Building improvements to leased property 17,954 11,626 || 16,748
Land 166 - || -
Capital leases: ||
Buildings 11,235 11,033 || 11,201
Furniture, fixtures and equipment 27,383 27,304 || 40,880
------- ------- || --------
76,334 65,178 || 99,245
Less accumulated depreciation and amortization (9,014) - || (15,344)
Less allowance for disposal of property ||
and equipment (770) - || (10,079)
------- ------- || --------
$66,550 $65,178 || $ 73,822
======= ======= || ========
</TABLE>
Due to the lack of reliable accounting records referred to in Note 1 and
because the adverse business condition 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 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
- ------------------------------------------------------------------------------
Lower of
Historical Appraised or Net
Net Book 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
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 Phar-Mor's first fiscal
quarter of fiscal year 1993, the date closest to the dates on which Phar-Mor
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, Phar-Mor 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.
7. OTHER ASSETS
Other assets consists of the following:
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
--------------------------------- || -------------
June 29, 1996 September 2, 1995 || July 1, 1995
------------- ----------------- || -------------
<S> <C> <C> || <C>
Lease purchase costs $ - $ - || $ 684
Goodwill 1,757 - || -
Deferred debt expense 711 922 || 1,329
Other 1,488 758 || 1,305
------- ------- || --------
$ 3,956 $ 1,680 || $ 3,318
======= ======= || ========
</TABLE>
The lease purchase cost reflected above is net of accumulated
amortization of $340 at July 1, 1995. Lease purchase costs were eliminated at
September 2, 1995 as a result of adopting fresh-start reporting (see Note 2).
Deferred debt expense is net of accumulated amortization of $329 and
$8,517 at June 29, 1996 and July 1, 1995, respectively. The deferred debt
expense at June 29, 1996 and September 2, 1995 consists of debt origination
costs associated with the new credit facility (see Note 8).
8. REVOLVING CREDIT FACILITIES
SUCCESSOR COMPANY
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.
F-14<PAGE>
<PAGE>66
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 $76,829 at June 29, 1996. 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.
At the Effective Date there were no outstanding advances or issued
letters of credit under the Facility. Subsequent to the Effective Date,
letters of credit in the amount of $9,814 that were outstanding under the
Debtor-in-Possession credit facilities were canceled and reissued under
this Facility.
There were no outstanding advances under the Facility at any time during
the forty-three weeks ended June 29, 1996. At June 29, 1996 there were
letters of credit in the amount of $5,384 outstanding under the Facility.
The Facility expires on August 30, 1998.
PREDECESSOR COMPANY
From October 22, 1992 to the Effective Date, the Company had Debtor-in-
Possession revolving credit facilities. The maximum amount available
under the facilities ranged from $150,000 to $50,000 during the pendency
of the bankruptcy cases. The Company never borrowed under the facilities,
utilizing the credit availability only for standby letters of credit of
which the maximum amount outstanding during the pendency of the
bankruptcy cases was $9,814.
9. LONG-TERM DEBT
SUCCESSOR COMPANY
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 29, 1996 and September 2, 1995 is as follows:
<TABLE>
<CAPTION>
June 29, 1996 September 2,1995
------------- -----------------
<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 9,536 9,952
New tax notes, interest rates at 5.89% to 8%, due
through September 2001 6,423 7,109
Real estate mortgage notes and bonds payable at rates ranging
from 3% to 9.98% and the prime rate plus 1% 5,455 -
-------- --------
Total debt 112,876 108,523
Less current portion 2,903 1,541
-------- --------
Total long-term debt $109,973 $106,982
======== ========
</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.
F-15<PAGE>
<PAGE>67
The Company has mortgage notes and bonds payable collateralized by real
estate with an aggregate net book value of $4,600 at June 29, 1996.
Future maturities of long-term debt subsequent to June 29, 1996 are
summarized as follows:
<TABLE>
<S> <C>
1997 $ 2,903
1998 2,535
1999 3,821
2000 1,432
2001 1,140
Thereafter 101,045
--------
$112,876
========
PREDECESSOR COMPANY LONG-TERM DEBT (see Note 1)
July 1, 1995
------------
Prepetition secured debt:
Revolving credit loan $206,728
Senior notes 97,100
Term loans 71,522
--------
Total prepetition secured debt 375,350
--------
Prepetition unsecured debt:
Senior subordinated notes 50,000
Subordinated debt with related party 3,695
--------
Total prepetition unsecured debt 53,695
--------
$429,045
========
</TABLE>
The descriptions of the financing arrangements that follow are based on
the original contractual terms and maturities. However, as a result of
the bankruptcy the Company was in default of substantially all of its
prepetition financing agreements which caused the amounts due under the
agreements to be accelerated. The amounts outstanding under all of the
prepetition financing arrangements are included in liabilities subject to
settlement under reorganization proceedings as of July 1, 1995 (see Note
1).
Revolving Credit Loan - In March 1992, the Company entered into a
revolving credit agreement (the "Credit Agreement") with a consortium of
banks providing for borrowing up to $600,000 with interest at LIBOR, plus
a margin as defined in the Credit Agreement, which varied with the
fluctuation of the ratio of consolidated net income to interest expense.
At July 1, 1995 the interest rate was LIBOR plus 1.75% (effective rate of
7.9375%).
Under the Credit Agreement, the banks agreed to make revolving loans to,
and to issue letters of credit for, the Company in an amount not
exceeding at any time the lesser of the Borrowing Base (as defined in the
Credit Agreement) or $600,000. The aggregate stated amount of letters of
credit could not exceed at any time $7,500. The Credit Agreement was
collateralized by substantially all merchandise inventories, accounts
receivable and certain other assets.
Senior Notes - In March 1992, the Company issued $155,000 senior secured
notes (the "Senior Notes"). The Senior Notes bore interest, payable semi-
annually on the fifteenth day of March and September, at the rate of
9.11% and together with borrowings under the Credit Agreement, were
collateralized by merchandise inventories and accounts receivable on a
pari passu basis. The senior note agreement provided for equal annual
principal payments of $38,750 to commence in March 1998.
Term Loans - The Company had term loans with various financing
institutions, which were collateralized by furniture, fixtures and
equipment. Payments were due monthly, and included interest at rates
ranging from 6.5% to 11.75% per annum.
F-16
<PAGE>
<PAGE>68
Senior Subordinated Notes - The loan agreement relating to the senior
subordinated notes specified that interest only was payable on the notes,
on a semi-annual basis, each March and September, at 12% per annum. The
notes were unsecured, and principal payments were due in equal annual
installments commencing September 30, 1993.
Subordinated Debt with Related Party - In May 1990 the Company borrowed,
on an unsecured basis, $8,867 from Giant Eagle, Inc. (a former
shareholder of the Company). The subordinated note agreement specified
that principal payments of approximately $369 were payable over
twenty-four months commencing June 1991, and the note bore interest at
the prime rate plus 1%
(see Note 11).
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 29, 1996
are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
1997 $ 9,211 $ 32,644
1998 9,221 32,751
1999 8,841 32,871
2000 8,265 33,110
2001 5,330 32,059
Thereafter 19,044 145,953
------ -------
Total minimum lease payments 59,912 $ 309,388
=========
Less amounts representing interest 14,703
------
Present value of minimum lease payments 45,209
Less current portion 6,019
------
Long-term capital lease obligations $39,190
=======
</TABLE>
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 forty-three weeks ended June 29,
1996, the nine weeks ended September 2, 1995, the fifty-two weeks ended
July 1, 1995 and the fifty-three weeks ended July 2, 1994 was $26,278,
$5,660, $44,385 and $58,645, respectively, including $103, $36, $253 and
$302 of additional rentals.
11. TRANSACTIONS WITH RELATED PARTIES
SUCCESSOR COMPANY
FoxMeyer Health Corporation ("FoxMeyer"), an affiliate of the Company's
largest supplier, owns 69.8% of Hamilton Morgan L.L.C. ("Hamilton
Morgan") which beneficially owns approximately 39.4% 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 Cochairmen of the Board of Directors of FoxMeyer are members of
the Board of Directors of the Company. An affiliate of FoxMeyer supplies
the Company's stores with pharmaceuticals and health and beauty care
products under a long-term contract which expires on the later of August
17, 1997 or the date when the Company's purchases from FoxMeyer equal an
aggregate net minimum of $1,400,000 of products. On June 29, 1996 and
September 2, 1995, the Company had liabilities relating to these
purchases of $7,751 and $9,164, respectively. This liability is included
in related party accounts payable in the accompanying consolidated
balance sheets. For the forty-three weeks ended June 29, 1996, the
Company purchased $179,841 of product under the terms of the contract.
F-17 <PAGE>
<PAGE>69
PREDECESSOR COMPANY
As of August 17, 1992, Giant Eagle, Inc. was a 40% shareholder of the
Company.
Acquisition of Subsidiary - In November 1989, Phar-Mor and Giant Eagle,
Inc. formed Tamco Distributor Company ("Tamco"), each owning 50% of the
outstanding common stock. In March 1992, the Company purchased Tamco's
outstanding shares owned by Giant Eagle, Inc. for $11,000, which was
based on 50% of Tamco's net book value at the date of the transaction.
Tamco was merged into Phar-Mor on the Effective Date of the Joint Plan.
Subordinated Debt - In 1990, Tamco borrowed $8,867 from Giant Eagle, Inc.
Operating Leases - The Company leased various property and equipment from
related parties. Rental payments for the nine weeks ended September 2,
1995, the fifty-two weeks ended July 1, 1995 and the fifty-three weeks
ended July 2, 1994 were $2,280, $15,558 and $17,300, respectively.
Other - The Company has rejected certain store leases with a related
landlord, PMI Associates (related through common ownership). The
accompanying consolidated balance sheet at July 1, 1995 reflect costs of
rejecting these leases of $13,450. The Company loaned funds to PMI
Associates for the construction of store locations. The loan balance
receivable at July 1, 1995 of $4,626 is netted in the above reserve.
The Company had a receivable due from Giant Eagle, Inc. of $4,181 at July
1, 1995 relating principally to the sale of merchandise. The receivable
relating to the sale of merchandise is included in due from related
parties in the accompanying consolidated balance sheet.
On or about August 16, 1994, Phar-Mor and its subsidiaries filed several
complaints against Giant Eagle, Inc., and certain of its affiliates.
Giant Eagle, Inc., in turn, filed three complaints against Phar-Mor. The
complaints set forth various causes of action including, among others,
requests for (i) declaratory judgment that certain agreements constitute
secured loans rather than leases for purposes of Bankruptcy Code section
365, (ii) recovery of preferences, (iii) damages for breach of contract
and (iv) recovery of a constructive fraudulent conveyance. All of the
causes of action set forth in the complaints were the subject of a
Settlement Agreement between Phar-Mor and its subsidiaries and Giant
Eagle and certain of its affiliates. On August 29, 1995, the Bankruptcy
Court approved the Settlement Agreement. Except for certain immaterial
unresolved claims, the conditions to the effectiveness of the Settlement
Agreement were satisfied as of November 3, 1995.
In addition to the foregoing, the Company purchased merchandise and
services from various other related parties. During the nine weeks ended
September 2, 1995, the fifty-two weeks ended July 1, 1995 and the fifty-
three weeks ended July 2, 1994, the total amounts of these purchases were
$51, $508 and $1,099, respectively. The liabilities relating to these
transactions are as follows:
<TABLE>
<CAPTION>
July 1, 1995
------------
<S> <C>
Post-petition liabilities $2,383
Prepetition liabilities 3,699
</TABLE>
The post-petition liabilities are included in related party accrued
expenses in the accompanying consolidated balance sheets. The prepetition
liabilities are included in liabilities subject to settlement under
reorganization proceedings in the accompanying consolidated balance
sheets. The prepetition liabilities included $1,641 payable to a
third-party which was guaranteed by Giant Eagle, Inc.
F-18<PAGE>
<PAGE>70
12. COMMON STOCK, WARRANTS AND OPTIONS
SUCCESSOR COMPANY
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 FoxMeyer 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
29, 1996, no warrants have been exercised.
STOCK OPTIONS
-------------
The Company has an incentive stock option plan for officers and key
employees. As of June 29, 1996, options for 6,050 common shares were
reserved for future grant, and options for 906,950 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 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 (aggregating 35,000 shares) on
October 3, 1995 and will be granted options for 5,000 shares on October 1
in each of the next four years. 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.
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.
Options outstanding under the plans are as follows:
<TABLE>
<CAPTION>
Options Option Price
Outstanding per Share
----------- ---------
<S> <C> <C>
Balance at September 2, 1995 1,225,917 $ 8.00
Granted 248,800 $7.06 - $ 8.00
Forfeited (116,100) $ 8.00
Exercised - -
--------- --------------
Balance at June 29, 1996 1,358,617 $7.06 - $ 8.00
=========
</TABLE>
At June 29, 1996, 620,577 options were exercisable.
PREDECESSOR COMPANY
All common stock in the Predecessor Company was canceled under the Joint
Plan and all warrants and stock options issued prior to the Effective
Date were forfeited.
F-19<PAGE>
<PAGE>71
13. INCOME TAXES
Deferred taxes at June 29, 1996, September 2, 1995 and July 1, 1995,
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:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
---------------------------------- ||------------
June 29, 1996 September 2, 1995 ||July 1, 1995
-------------- ----------------- ||------------
<S> <C> <C> ||<C>
Deferred Tax Assets: ||
Operating and restructuring reserves $ 10,889 $ 20,101 || $ 68,314
Net operating losses 113,634 326,050 || 330,583
Deferred exclusivity income - - || 31,506
Depreciation and amortization 18,831 32,881 || 37,425
Lease escalation accruals 4,462 4,162 || 2,717
Jobs tax credit 4,432 4,432 || 4,432
Other items 2,008 3,165 || 6,131
--------- --------- || ---------
154,256 390,791 || 481,108
Valuation allowance (144,326) (376,791) || (480,713)
--------- --------- || ---------
Net deferred tax assets $ 9,930 $ 14,000 || $ 395
========= ========= || =========
Deferred Tax Liabilities: ||
Other items (160) $ - || $ (395)
--------- --------- || ---------
Total deferred tax liabilities $ (160) $ - || $ (395)
========= ========= || =========
||
Composition of amounts in Consolidated Balance Sheet: ||
Deferred tax assets - current $ 548 $ 1,814 || $ 56
Deferred tax liabilities - current (160) - || (237)
--------- --------- || ---------
Net deferred tax assets (liabilities) - current $ 388 $ 1,814 || $ (181)
========= ========= || =========
||
Deferred tax assets - noncurrent $ 9,382 $ 12,186 || $ 339
Deferred tax liabilities - noncurrent - - || (158)
--------- --------- || ---------
Net deferred tax assets (liabilities) - noncurrent $ 9,382 $ 12,186 || $ 181
========= ========= || =========
</TABLE>
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>
Forty-three Nine Fifty-two Fifty-three
weeks ended weeks ended weeks ended weeks ended
June 29, 1996 September 2, 1995 July 1, 1995 July 2, 1994
--------------||------------------ ------------ -------------
<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) 20.5
Restructuring reserves - || (5.3) 2.2 (1.9)
Federal tax benefit of NOLs not recognized - || 0.3 36.6 16.5
Reversal of excess deferred taxes - || - (0.2) (0.2)
Other, net 5.8 || (0.5) (3.6) (0.1)
------ || ------ -------- -------
Effective tax rate 45.9% || 0.0% (0.2)% (0.2)%
====== || ====== ======== =======
</TABLE>
The Company has approximately $275,000 of tax basis NOLs available to
offset future taxable income. The amount of such NOLs is net of
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
F-20<PAGE>
<PAGE>72
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 NOLs to offset future income to an
amount approximating $5,100 annually. These NOLs will begin to expire
beginning in 2005.
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>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
--------------------------------- ------------
June 29, 1996 September 2, 1995 ||July 1, 1995
------------- ----------------- ||------------
<S> <C> <C> ||<C>
Actuarial present value of benefit obligations: ||
Accumulated benefit obligation, including ||
vested benefits of $9,145, $3,714 and $3,714 $ 9,543 $ 5,177 || $ 5,177
Additional amounts related to future salary increases 560 3,113 || 3,113
------- ------- || -------
Projected benefit obligation 10,103 8,290 || 8,290
Plan assets, at fair value 7,698 7,299 || 7,299
------- ------- || -------
Projected benefit obligation in excess of plan assets 2,405 991 || 991
Unrecognized net gain 312 1,278 || 1,209
Unrecognized prior service costs (1) (147) || (152)
Unrecognized transition asset 6 6 || 6
------- ------- || -------
||
Accrued pension costs $ 2,722 $ 2,128 || $ 2,054
======= ======= || =======
</TABLE>
The significant assumptions used in determining the pension obligations
are:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
--------------------------------- ------------
June 29, 1996 September 2, 1995 ||July 1, 1995
------------- ----------------- ||------------
<S> <C> <C> ||<C>
Discount rate 6.3% 8.0% || 8.0%
Expected long-term rate of ||
return on assets 8.5% 8.5% || 8.5%
Rate of increase in future ||
compensation levels 4.0% 4.0% || 4.0%
</TABLE>
Assets of the plans consist primarily of investments in stock and bond
pooled funds.
F-21<PAGE>
<PAGE>72
The net pension expense consists of the following:
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ || ------------------------------------------------
Forty-three || Nine Fifty-two Fifty-three
weeks ended || weeks ended weeks ended weeks ended
June 29, 1996 || September 2, 1995 July 1, 1995 July 2, 1994
-------------- || ------------------ ------------- -------------
<S> <C> || <C> <C> <C>
Service costs $ 875 || $ 179 $ 1,176 $ 1,479
Interest cost on projected benefit obligation 698 || 104 636 674
Actual net return on assets (1,746) || (97) (860) (177)
Net amortization (deferral) 1,186 || 2 259 (348)
------- || --------- -------- --------
Net pension expense $ 1,013 || $ 188 $ 1,211 $ 1,628
======= || ========= ======== ========
</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 expense for the forty-three weeks ended June 29, 1996, the nine
weeks ended September 2, 1995, the fifty-two weeks ended July 1, 1995 and
the fifty-three weeks ended July 2, 1994 were $281, $65, $506 and $557,
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 forty-three weeks ended June 29, 1996, the nine weeks
ended September 2, 1995, the fifty-two weeks ended July 1, 1995 and the
fifty-three weeks ended July 2, 1994 were $896, $196, $1,558 and $2,377,
respectively.
The Company has no postretirement health and welfare or benefits
programs.
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 Fifty-three
weeks ended weeks ended weeks ended
September 2, 1995 July 1, 1995 July 2, 1994
----------------- ------------ ------------
<S> <C> <C> <C>
Prepetition credit facility interest $ 3,164 $ 16,377 $ 13,577
Senior notes 1,695 9,417 10,935
Adequate protection term loans and
capitalized equipment leases 776 5,772 6,602
Amortization of deferred debt expense 44 1,580 2,223
Loan commitment fees 10 160 538
Other - 18 3
------- -------- --------
$ 5,689 $ 33,324 $ 33,878
======= ======== ========
</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, $14,521 and $15,449 for the nine weeks ended September 2,
1995, the fifty-two weeks ended July 1, 1995 and the fifty-three weeks
ended July 2, 1994, 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, $6,074 and $6,190
for the nine weeks ended September 2, 1995, the fifty-two weeks ended
July 1, 1995 and the fifty-three weeks ended July 2, 1994, respectively.
F-22<PAGE>
<PAGE>73
16. REORGANIZATION ITEMS AND RELATED RESERVES
Reorganization items consist of the following:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------------------
Nine Fifty-two Fifty-three
weeks ended weeks ended weeks ended
September 2, 1995 July 1, 1995 July 2, 1994
----------------- ------------ ------------
<S> <C> <C> <C>
Chapter 11 professional fees $ 9,373 $ 17,201 $ 17,638
Amortization of prepetition exclusivity
income (283) (2,572) (4,161)
Interest income (2,171) (10,174) (6,256)
Amortization of post-petition credit facility
origination fees 29 646 3,055
Insurance claim recovery (6,650) - -
Gain on sale of assets held for sale - (7,634) -
Costs of downsizing 16,500 53,691 42,963
------- -------- ---------
$16,798 $ 51,158 $ 53,239
======= ======== =========
</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 which will 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.
The consolidated statements of operations reflect reorganization expenses
related to the downsizings as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------------------
Nine Fifty-two Fifty-three
weeks ended weeks ended weeks ended
September 2, 1995 July 1, 1995 July 2, 1994
----------------- ------------ ------------
<S> <C> <C> <C>
Downsizing reserve $ 2,500 $25,786 $13,016
Inventory markdown reserve 14,000 - -
Lease rejection reserve - 20,400 18,119
Reserve for abandonment of property and
equipment - 10,550 15,787
Lease-purchase cost write-off - 860 -
Adjustments to deferred rent liability - (3,905) (3,959)
------- ------- -------
$16,500 $53,691 $42,963
======= ======= =======
</TABLE>
The activity in the reserve for costs of downsizing program is as follows:
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
--------- ||-----------------------------------------------
Forty-three || Nine Fifty-two Fifty-three
weeks ended || weeks ended weeks ended weeks ended
June 29, 1996 ||September 2, 1995 July 1, 1995 July 2, 1994
--------------|| ---------------- ------------- -------------
<S> <C> ||<C> <C> <C>
Balance, beginning of period $ 7,301 || $ 6,564 $ 16,089 $ 20,631
Additions to reserve - || 2,500 25,786 13,016
Losses from going-out-of-business ("GOB") sales (1,772) || (1,690) (34,502) (12,431)
Store rightsizing costs (640) || - - -
Corporate and distribution center costs (1,438) || (73) (809) (5,127)
------- || ------- -------- --------
Balance, end of period $ 3,451 || $ 7,301 $ 6,564 $ 16,089
======= || ======= ======== ========
</TABLE>
The remainder of the reserve for the costs of downsizing program at June
29, 1996 is considered by management to be a reasonable estimate of the
costs to be incurred related to the downsizing program. 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.
F-23<PAGE>
<PAGE>74
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 29, 1996 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 has a 50% interest in another partnership which owns a
commercial building. In conjunction with the acquisition, assets and
liabilities were assumed as follows:
<TABLE>
Fair value of assets acquired:
-----------------------------
<S> <C>
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
</TABLE>
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
----------------- -----------------------------------------------------------------
NINE FOUR THIRTEEN THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
FISCAL 1996 SEPTEMBER 2, 1995 SEPTEMBER 30, 1995 DECEMBER 30, 1995 MARCH 30, 1996 JUNE 29, 1996
----------- ----------------- ------------------ ----------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $ 181,968 $ 72,877 $ 284,318 $ 252,291 $ 264,798
Gross profit 33,663 13,261 51,415 42,952 39,712
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>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
- ---------------------------------------------------------------------
THIRTEEN THIRTEEN THIRTEEN THIRTEEN
FISCAL 1995 WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
----------- OCTOBER 1, 1994 DECEMBER 31, 1994 APRIL 1, 1995 JULY 1, 1995
--------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C>
Sales $ 363,224 $ 405,616 $ 346,691 $ 297,130
Gross profit 64,367 75,268 62,715 53,383
Net income (loss) $ (6,586) $ 6,530 $ 1,809 $ (54,897)
Per Share:
Net income (loss) $ (.12) $ .12 $ .03 $ (1.01)
Weighted average number of shares outstanding 54,066,463 54,066,463 54,066,463 54,066,463
</TABLE>
F-24<PAGE>
<PAGE>75
20. SUBSEQUENT EVENT
The Company entered into an Agreement and Plan of Reorganization
(the "Proposed Transaction") dated September 7, 1996 (as amended and
restated as of October 9, 1996) with ShopKo Stores, Inc. (ShopKo), a
retailer specializing in prescription and vision benefit management and
health decision support services, have agreed to combine the respective
companies under Cabot Noble, Inc. ("Cabot Noble") a newly organized
Delaware holding company. Under the terms of the Proposed Transaction,
each issued and outstanding share of the Company's common stock will be
exchanged for one share of Cabot Noble common stock. Each issued and
outstanding share of ShopKo common stock will be exchanged for 2.4 shares
of Cabot Noble common stock, subject to adjustment in the event the value
of the exchange consideration falls outside a range between $17.25 and
$18.00 (based on the average daily closing sale prices of the Company's
common stock over a specified 30 day period).
In connection with the Proposed Transaction, SUPERVALU, INC.
("SuperValu"), which currently owns approximately 46% of the issued and
outstanding shares of ShopKo common stock, has entered into an Amended
and Restated Stock Purchase Agreement (the "Stock Purchase Agreement")
with Cabot Noble whereby SuperValu has agreed to sell to Cabot Noble
90% of the Cabot Noble shares it receives in the Proposed Transaction to
Cabot Noble immediately after the Proposed Transaction is completed at
$16.86 per share for the ShopKo common stock held by SuperValu prior to
the transaction. The Stock Purchase Agreement provides that SuperValu
will receive a combination of cash and a short-term note at closing.
Consummation of the Reorganization is subject to certain conditions,
including (a) receipt of financing of at least $75,000, (b) approval by
shareholders of ShopKo and the Company, (c) receipt of necessary
regulatory approvals, and (d) other conditions to closing customary in
transactions of this type.
An ownership change will occur upon the completion of the Proposed
Transaction which may result in the reduction of available NOLs (see
Note 13).
F-25<PAGE>
<PAGE>76
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
-------------------------------
53 weeks ended July 2, 1994 $ 21,891 $ 8,729 $ (24,100) $ 6,520
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
INVENTORY SHRINK RESERVE
------------------------
53 weeks ended July 2, 1994 $ - $ 28,915 $ (24,189) $ 4,726
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
INVENTORY MARKDOWN RESERVE
--------------------------
53 weeks ended July 2, 1994 $ - $ - $ - $ -
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
</TABLE>
F-26
<PAGE>
<PAGE>77
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: , 1997 By: /s/ M.David Schwartz
-----------------------------
M. David Schwartz
President and Chief Operating Officer
Date: , 1997 /s/ Daniel J. O'Leary
------------------------------
Daniel J. O'Leary
Senior Vice President and Chief
Financial Officer (principal financial
and accounting officer)
Date: , 1997 /s/ John R. Ficarro
-------------------------------
John R. Ficarro
Senior Vice President, General Counsel
and Secretary<PAGE>
<PAGE>78
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 indicated.
Date: , 1997 /s/ Robert M. Haft
----------------------------
Robert M. Haft
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
Date: , 1997 /s/ Abbey J. Butler
----------------------------
Abbey J. Butler, Director
Date: , 1997 /s/ Melvyn J. Estrin
----------------------------
Melvyn J. Estrin, Director
Date: , 1997 /s/ Linda Haft
----------------------------
Linda Haft, Director
Date: , 1997 /s/ Malcolm T. Hopkins
-----------------------------
Malcolm T. Hopkins, Director
Date: , 1997 /s/ Richard M. McCarthy
-----------------------------
Richard M. McCarthy, Director
Date: , 1997 /s/ Daniel J. O'Leary
------------------------------
Daniel J. O'Leary
Senior Vice President and Chief
Financial Officer (principal financial
and accounting officer)
<PAGE>
<PAGE>79
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 Article 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
*9.2 Joint Irrevocable Proxy dated May 5, 1995 by and among Robert M.
Haft, FoxMeyer Health Corporation, FoxMeyer Corporation and Hamilton
Morgan L.L.C. (f/k/a Robert Haft Group/Phar-Mor L.L.C.)
*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 and 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 David Schwartz,
dated September 11, 1995
*10.4 Employment Agreement between Phar-Mor, Inc. and David J. O'Leary,
dated September 11, 1995<PAGE>
<PAGE>80
***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 Mortgage L.L.C. dated September
11, 1995
*10.7 Registration Rights Agreement between Phar-Mor, Inc. and Alvarez &
Marshal, 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 & Marshal, 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 Stock Incentive Plan
*10.11 Phar-Mor, Inc. 1995 Director Stock Plan
***10.12 Phar-Mor, Inc. 1996 Director Phantom Stock Plan
****10.13 Supply Agreement dated as of August 17, 1992 between Phar-Mor and
FoxMeyer Drug Company. (Phar-Mor requested confidential treatment
of certain portions of this Exhibit 10.13 when it was originally
filed, which portions have been so omitted and filed separately with
the Securities and Exchange Commission.
***21.1 List of Subsidiaries
***27.1 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, on September __, 1996
**** Previously filed in connection with the filing of Amendment No. 2 to
Form 10, on February 1, 1996
