SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities
- -------- Exchange Act of 1934 For the fiscal year ended July 3, 1999 Commission
File Number 0-27050
-------
Transition report pursuant to Section 13 or 15(d) of the Securities
- ---------Exchange Act of 1934 For the transition period from ________ to _______
PHAR-MOR, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1466309
- ------------------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Federal Plaza West, Youngstown, Ohio 44501-0400
- ------------------------------------------------- --------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (330) 746-6641
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
--------------------- -----------------------------------------
Common Stock, Par Value $0.01 per share NASDAQ
Warrants to purchase Common Stock NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
YES No X
------ ------
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X No
------ ------
The aggregate market value of voting stock held by non-affiliates of the
registrant as of September 20, 1999 was $64,264,541 (based on the last reported
sale price of the Registrant's Common Stock on the NASDAQ National Market System
on such date).
As of close of business on September 20, 1999, 12,240,865 shares of the
Registrant's Common Stock were outstanding.
<PAGE>
PART I
Item 1. Business
Introduction
Phar-Mor, Inc., a Pennsylvania corporation ("Phar-Mor" or the
"Company"), operates a chain of discount retail drugstores devoted to the sale
of prescription and over-the-counter drugs, health and beauty care products,
baby products, pet supplies, cosmetics, greeting cards, groceries, beer, wine,
tobacco, soft drinks, video rental and seasonal and other general merchandise.
As of July 3, 1999, the Company operated 139 stores in 24 states under the names
of Phar-Mor, Rx Place and Pharmhouse. Approximately 55% of the Company's stores
are located in New York, New Jersey, Pennsylvania and Ohio, and approximately
22% are located in Virginia, West 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 July 3, 1999.
Except for historical information contained herein, the matters
discussed in this Annual Report on Form 10-K are forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Actual results
may differ materially from those projected as a result of certain risks and
uncertainties including, but not limited to, economic, competitive, governmental
and technological factors affecting the Company's operations, markets, products,
services and prices and other factors discussed in the Company's filings with
the Securities and Exchange Commission ("SEC").
History
Phar-Mor was founded in 1982 as a division of a subsidiary of the Giant
Eagle, Inc. supermarket chain. The initial Phar-Mor concept was built on the
premise that a drugstore offering additional, and at times unexpected,
categories of merchandise could attract customers by featuring low prices made
possible by acquiring inventory at relatively low cost through deal purchases of
overstock, odd lot, discontinued, large unit size or slow-moving merchandise
from manufacturers and distributors. The Company grew, rapidly expanding from 12
stores in August 1985 to 311 stores in August 1992. Store size also grew
dramatically, increasing from an average of approximately 31,000 square feet in
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").
The Company emerged from bankruptcy on September 11, 1995, the
effective date (the "Effective Date") of Phar-Mor's Chapter 11 plan of
reorganization (the "Plan of Reorganization") 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 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 1995.
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;
introduced POS scanning in all stores; installed a new pharmacy software system;
installed a warehouse logistics system; installed a state of the art mainframe
computer; developed an EDI ordering and invoicing system; developed an
electronic store merchandise receiving system; and reduced the number of
corporate personnel by 75%.
In connection with the Company's Plan of Reorganization and its
emergence from bankruptcy, the Company restructured its debt obligations and
converted approximately $855 million of debt into equity. The Company also
entered into a three-year, $100 million revolving credit facility (the
"Revolving Credit Facility").
On March 15, 1999, the Company completed the merger of its wholly owned
subsidiary Pharmacy Acquisition Corp. ("PAC") with and into Pharmhouse Corp.
("Pharmhouse"), pursuant to the Agreement and Plan of Merger dated as of
December 17, 1998 among Phar-Mor, PAC and Pharmhouse (the "Merger Agreement").
As a result of the merger Pharmhouse became a wholly owned subsidiary of
Phar-Mor. In addition, subject to the terms of the Merger Agreement, each share
of the common stock of Pharmhouse was converted into the right to receive $2.88
per share in cash (the "Merger"). The total purchase price payable in connection
with the Merger was approximately $34.2 million, consisting of $7.5 million in
cash and the assumption of $26.7 million in debt.
The Company used its excess cash position and excess availability under
its Revolving Credit Facility to pay off $26.7 million in debt that was assumed
as part of the merger with Pharmhouse.
Pharmhouse operated 32 discount drug stores in eight mid-Atlantic and
New England states under the names "Pharmhouse" and "Rx Place" and had annual
revenues of approximately $200 million.
Operations
Typically, stores are open 95 hours per week; pharmacies are typically
open 77 hours per week. The average store has approximately 50 employees,
including a store manager and department managers, a pharmacy manager and
pharmacists, and office and cashier supervision. Overall, the Company had 6,643
employees at July 3, 1999. Approximately 302 warehouse and distribution center
employees in Youngstown are members of the Teamsters Union under a contract
which expires March 4, 2000. Seventy-five employees at the Company's Niles, Ohio
store are members of the United Food and Commercial Workers Union under a
contract which expires October 12, 2000.
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 make the customer's
shopping experience easier and more enjoyable. 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 to
employees at every level. Computer-based training, on and off-site training,
video training, and teleconferences are a few of the training methods used. The
Company believes that such training enables efficiency, understanding and
responsiveness within store operations.
The typical trade area for a Company store includes approximately
105,000 people in 41,000 households within a radius of between five and seven
miles. On average during the fiscal year ended July 3, 1999 ("Fiscal Year
1999"), each store served approximately 10,600 customers per week. The Company's
customers are approximately 52% female, with a median age of 35.5 years, and a
median household income of approximately $33,000. Approximately 24% of customer
households have children 17 years old and under.
Company stores accept payment in cash, check, credit cards, debit cards
and payment from third-party providers of prescription services.
The Company's purchasing, pricing, advertising, merchandising,
accounting and supervisory activities are centrally directed from Phar-Mor's
corporate headquarters. The Company purchases substantially all of its
merchandise either directly from manufacturers or from wholesalers under various
types of purchase arrangements. McKesson HBOC, Inc. ("McKesson"), a
pharmaceutical distributor, accounted for approximately 26% of the Company's
purchases during Fiscal Year 1999. During Fiscal Year 1999, no other single
vendor accounted for more than 10% of the Company's purchases. Substantially all
of the products the Company sells are purchased from approximately 1,200 outside
vendors. Alternative sources of supply are generally available for all products
sold by the Company.
Marketing and Merchandising
Phar-Mor's overall merchandising strategy is to offer (i) value to
consumers by pricing its products below the prices charged by conventional
drugstores and supermarkets and (ii) a broader array of products in each of its
major product categories than is offered by mass merchant discounters.
Phar-Mor's product strategy is focused on the traditional drugstore lines of
prescription and over-the-counter drugs, health and beauty care products and
cosmetics. Phar-Mor's stores also typically feature other product categories,
including groceries, snacks and beverages, pet food and supplies, beer, wine and
liquor (where permitted by law), tobacco, baby products, general merchandise,
video and music sales and video rentals. Phar-Mor is one of the leading
retailers of film, vitamins, soft drinks and batteries in the United States.
Ninety-five percent of the Company's advertising is print advertising,
through circulars, newspapers, and point of sale materials. Newspaper
advertisements and circulars appear in major newspapers in most market areas.
The Company presently advertises through 75 newspapers and mailers.
Phar-Mor introduced the "Super Phar-Mor" concept during Fiscal Year
1997. In approximately 10,000 to 15,000 square feet, each "Super Phar-Mor"
offers a variety of grocery items, including fresh, frozen, and refrigerated
foods. The Company incorporated this concept into 8 stores during Fiscal Year
1999 bringing the total number of "Super Phar-Mor" stores to 31. The concept has
been well received by customers and has improved overall sales in each such
store. The Company plans to incorporate the "Super Phar-Mor" concept into 11
stores scheduled to be remodeled during the fiscal year ending July 1, 2000
("Fiscal Year 2000"). During Fiscal Years 1997, 1998 and 1999, the Company also
undertook a plan to remodel certain stores unable to accommodate the fresh,
frozen and refrigerated foods included in the "Super Phar-Mor" concept due to
their small size. This "four-wall" remodeling program includes remerchandising
the stores to provide a more convenient shopping experience by creating product
adjacencies; adding new and color coded decor and enhancing signage throughout
the store; and further enhancing the "store within a store" idea with its
signature departments. The Company has completed eleven of the "four-wall"
remodel projects. The Company plans to complete 12 "four-wall" remodels in
Fiscal Year 2000.
Sales
The retail sale of traditional drugstore lines is a highly fragmented
business, consisting of thousands of chain drugstores and independent drugstores
that sell such products as well as mass merchandisers who sell such products as
part of their overall product lines. In Fiscal Year 1999, revenues from sales of
the Company's traditional drugstore products (i.e., prescription drugs,
over-the-counter drugs, health and beauty care products, cosmetics and greeting
cards) averaged approximately $6.1 million per store and all other merchandise
averaged $4.7 million per store in its 107 Phar-Mor stores. The Company
generated approximately $688.8 million in traditional drugstore product revenues
and approximately $517.7 million in revenues from the sale of groceries and
general merchandise in all its stores in Fiscal Year 1999.
<PAGE>
Set forth below is the percentage of sales by principal category of
products for the continuing stores for the last three fiscal years.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
July 3, 1999 June 27, 1998 June 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Category
Prescription, Health and
Beauty Care Products,
Cosmetics and Greeting Cards 57.1% 56.7% 57.0%
All Other Merchandise 42.9% 43.3% 43.0%
</TABLE>
The Company's business is seasonal to a certain extent. The highest
volume of sales and net income usually occur in the second fiscal quarter
(generally October, November and December). The following table summarizes the
Company's sales by quarter during Fiscal Year 1999.
Sales by Quarter During Fiscal Year 1999
(107 Phar-Mor stores)
Percentage of
Total Sales
-----------
First Quarter (13 weeks) 23.3%
Second Quarter (13 weeks) 25.7%
Third Quarter (13 weeks) 24.6%
Fourth Quarter (14 weeks) 26.4%
--------
100.0%
========
Competition
Phar-Mor's stores compete primarily with conventional drugstores,
supermarkets and mass merchant discounters. Many of these companies have greater
financial resources than Phar-Mor. Phar-Mor competes with conventional
drugstores by offering a 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
competes with supermarkets in grocery product lines where Phar-Mor does not have
a broader selection, by carrying 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, groceries, perishable foods in certain stores and "The Card
Shop," "Pet Place," "One Stop Baby Shop," and "Vitamin World," are designed in
part to distinguish Phar-Mor from mass merchant discounters and to increase its
strength in areas in which Phar-Mor's management believes such merchants do not
excel.
Capital Expenditures
The Company's most significant capital needs are for seasonal purchases
of inventories, technological improvements and remerchandising and remodeling of
existing stores.
The Company's capital expenditures totaled $24.0 million in Fiscal Year
1999, including $3.4 million for the construction of new stores, $8.4 million
for remodeling existing stores, and $8.5 million for corporate and store
information systems. The Company anticipates spending approximately $16.9
million for capital expenditures in Fiscal Year 2000, including costs of
remodeling 23 additional stores and opening two new stores.
Real Estate and Growth
The Company opened two new stores in Fiscal Year 1999, and plans to
open two new stores in Fiscal Year 2000. Expansion in the near future by the
construction of new stores is expected to be minimal and in existing or
contiguous markets in the Company's core areas of New York, New Jersey,
Pennsylvania and Ohio. Expansion in existing markets improves the Company's
operating margins by decreasing advertising costs on a per store basis,
permitting more efficient distribution of products to stores and increasing
utilization of existing supervisory and managerial staff.
The aggregate cost of any future expansion is dependent upon the method
utilized to finance new stores. Build to suit (i.e., landlord constructed)
leases cost approximately $750,000 per store for furniture, fixtures, and
equipment and each new store requires approximately $1.3 million in inventory.
Company-funded conversion of existing buildings is another possible method of
expansion; however the cost of such expansion per store varies significantly
depending upon the age, condition and configuration of such buildings.
Trademarks and Service Marks
The Company believes that its registered "Phar-Mor" trademark is well
recognized by its customer base and the public at large in the markets where it
has been advertised. The Company believes that the existing customer and public
recognition of its trademark and related operational philosophy will be
beneficial to its strategic plans to expand merchandise categories and add new
stores. The Company has also introduced a number of private label brands of
products under various registered trademarks and trademarks pending
registration.
Regulation
The Company is subject to the Fair Labor Standards Act, which governs
such matters as minimum wages, overtime, and other working conditions. To the
extent that pay scales for a portion of the Company's personnel relate to the
federal minimum wage, increases in the minimum wage may 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.
<PAGE>
Item 2. Properties.
As of July 3, 1999, the Company operated 139 stores in 24 states.
Approximately 55% of Phar-Mor's stores are located in New York, New Jersey,
Pennsylvania and Ohio and approximately 22% are located in Virginia, West
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 New Jersey 12
Connecticut 1 New York 8
Florida 5 North Carolina 9
Georgia 3 Ohio 17
Illinois 4 Oklahoma 1
Indiana 3 Pennsylvania 40
Iowa 2 Rhode Island 2
Kansas 1 South Carolina 4
Kentucky 1 Virginia 14
Maryland 1 West Virginia 4
Massachusetts 2 Wisconsin 1
As of July 3, 1999, 138 of the Company's stores were leased. The
Company owns the land and building of its retail store in Winchester, Virginia.
All store leases are long-term; the original terms of 106 leases and the
original terms plus options of thirteen leases expire on or before December 31,
2009. The remaining stores have longer lease terms. Most stores are located
adjacent to or near shopping centers or are part of strip centers. Some stores
are free standing. Depending on the location of a store, the sites may vary,
with averages by type of location as follows: free-standing stores are located
on sites averaging 2.84 acres; stores located in strip centers are found on
sites averaging 23.7 acres; and stores in malls are on sites averaging 46.8
acres. A proto-typical store now includes approximately 40,000 square feet of
sales space and 10,000 square feet of storage area and ample off-street parking.
The stores are designed in a "supermarket" format familiar to customers and
shopping is done with carts in wide aisles with attractive displays. Traffic
design is intended to enhance the opportunity for impulse purchases.
The Company operates a distribution center in Youngstown, Ohio which it
leases. This center delivered approximately 47% of all merchandise to the stores
in Fiscal Year 1999, primarily using contract carriers. The balance of the
products were delivered directly to the Company's stores by vendors.
The Company and a wholly-owned subsidiary of the Company are partners
in an Ohio limited partnership, which owns the office building in which the
Company occupies approximately 141,000 square feet of space for its corporate
offices in Youngstown, Ohio.
Item 3. Legal Proceedings
In the normal course of business, the Company is subject to various
claims. In the opinion of management, any ultimate liability arising from or
related to these claims should not have a material adverse effect on future
results of operations, cash flows or the consolidated financial position of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during
the fourth quarter of Fiscal Year 1999, through the solicitation of proxies or
otherwise.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock, par value $.01 per share (the "Common
Stock"), is included for quotation on the NASDAQ National Market under the
symbol "PMOR." High and low prices of the Common Stock are shown in the table
below:
Fiscal Year 1999 Fiscal Year 1998
---------------- ----------------
High Low High Low
---- --- ---- ---
1st Quarter.....................$11 1/4 $6 1/8 $7 3/4 $6 1/8
2nd Quarter..................... 8 15/16 5 1/4 9 5/8 6 3/8
3rd Quarter..................... 8 3/4 5 1/2 11 3/4 8
4th Quarter..................... 6 7/8 4 1/16 11 11/16 8 3/8
As of September 20, 1999, there were 2,904 holders of record of the
Common Stock. The Company has not declared or paid any cash dividends on the
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. The Company currently intends to retain earnings for future operations
and expansion of its business. In addition, the indenture pursuant to which the
Company's senior notes were issued and the Company's amended revolving credit
facility(the "Amended Revolving Credit Facility") restrict the payment of cash
dividends on the Company's capital stock. See "Notes to Consolidated Financial
Statements."
Item 6. Selected Financial Data.
The following selected consolidated financial data of Phar-Mor and its
subsidiaries should be read in conjunction with the consolidated financial
statements and related footnotes appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
(In thousands except per share data)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
53 Weeks 52 Weeks 52 Weeks 43 Weeks 9 Weeks 52 Weeks
Ended Ended Ended Ended Ended Ended
July 3, June 27, June 28, June 29, September 2, July 1,
1999 1998 1997 1996 1995 1995(b)
---- ---- ---- ---- ---- -------
Net sales $ 1,206,539 $ 1,100,851 $ 1,074,828 $ 874,284 | $ 181,968 $ 1,412,661
|
(Loss) income from |
continuing operations (1,592) (8,830) (2,281) 2,526 | (10,389)(a) (53,144)(c)
|
Diluted (loss) income |
per share from |
continuing operations (.13) (.72) (.19) .21 | (.19) (.98)
|
As of As of As of As of As of As of
July 3, June 27, June 28, June 29, September 2, July 1,
1999 1998 1997 1996 1995 1995
---- ---- ---- ---- ---- ----
|
Total assets 410,537 349,455 362,605 363,463 390,207 | 531,332
|
Long-term debt & capital |
leases 142,947 130,993 140,213 149,163 151,047 | --
|
Liabilities subject to |
settlement - - - - - | 1,154,959
|
</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 July 1, 1995 and for
the nine weeks ended September 2, 1995 and the 52 weeks ended July 1, 1995 are
not comparable in material respects to such data for subsequent periods.
(a) Excludes extraordinary gain of $775 million on debt discharged
pursuant to the Plan of Reorganization; and includes the gain for
revaluation of assets and liabilities under fresh-start reporting of $8
million and reorganization costs of $16.8 million.
(b) Excludes the results of 25 stores after July 2, 1994 and the
results of 41 stores after May 6, 1995, closed as part of the Company's
restructuring prior to emergence from the Chapter 11 Cases.
(c) Includes reorganization costs of $51.2 million, including $53.7
million for costs of downsizing, less $7.6 million gain on sale of
assets held for sale.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(All dollar amounts in thousands, unless otherwise stated)
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.
Recent Developments
On March 15, 1999, the Company completed the merger of its wholly owned
subsidiary Pharmacy Acquisition Corp. ("PAC") with and into Pharmhouse Corp.
("Pharmhouse"), pursuant to the Agreement and Plan of Merger dated as of
December 17, 1998 among Phar-Mor, PAC and Pharmhouse (the "Merger Agreement").
As a result of the merger Pharmhouse became a wholly owned subsidiary of
Phar-Mor. In addition, subject to the terms of the Merger Agreement, each share
of the common stock of Pharmhouse was converted into the right to receive $2.88
per share in cash (the "Merger"). The total purchase price payable in connection
with the Merger was approximately $34,200, consisting of $7,500 in cash and the
assumption of $26,700 in debt.
The Company used its excess cash position and excess availability under
its Amended Revolving Credit Facility to pay off $26,700 in debt that was
assumed as part of the Merger with Pharmhouse.
Pharmhouse operated 32 discount drug stores in eight mid-Atlantic and
New England states under the names "Pharmhouse" and "Rx Place" and had annual
revenues of approximately $200,000.
The Company's consolidated results of operations include the results of
the acquired Pharmhouse stores from March 16, 1999 to July 3, 1999.
The Company has set an aggressive schedule for the conversion of the
acquired Pharmhouse stores to the Company's store systems and merchandising mix.
As of July 3, 1999, all 32 of the Pharmhouse stores were converted to and
trained on the Company's store systems. This allowed the Company to integrate
the Pharmhouse stores into the Company's purchasing, warehousing, financial and
management reporting systems which allowed the Company to eliminate all the
Pharmhouse corporate office personnel and systems by July 3, 1999. The Company
expects to complete the conversion to the Company's merchandising mix by October
31, 1999.
<PAGE>
Results of Operations
The following table sets forth the number of retail stores operated each fiscal
year:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
July 3, 1999 June 27, 1998 June 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Stores, beginning of period 106 103 102
Stores acquired 32 -- --
Stores opened 2 3 1
Stores closed (1) -- --
------------ ------------ ------------
Stores, end of period 139 106 103
============ ============ ============
</TABLE>
53 weeks ended July 3, 1999 (Fiscal Year 1999) compared to the 52 weeks ended
June 27, 1998 (Fiscal Year 1998) (all dollar amounts in thousands)
<TABLE>
<CAPTION>
Fiscal Year 1999 Fiscal Year 1998
------------------------- --------------------------
<S> <C> <C> <C> <C>
Sales $ 1,206,539 100.00% $ 1,100,851 100.00%
Less:
Cost of goods sold, including occupancy
and distribution costs 977,878 81.05% 887,657 80.63%
----------- -----------
Gross Profit 228,661 18.95% 213,194 19.37%
Selling, general and administrative expenses 188,641 15.63% 173,982 15.80%
Terminated business combination expenses -- -- -- --
Executive severance -- -- 6,787 0.62%
Loss on disposal of equipment -- -- 4,615 0.42%
Depreciation and amortization 25,009 2.07% 22,047 2.00%
----------- -----------
Income from operations before interest and
income taxes 15,011 1.24% 5,763 0.52%
Interest expense (16,338) 1.35% (16,639) 1.51%
Avatex impairment write-down (2,393) 0.20% -- --
Interest and investment income 2,128 0.18% 2,046 0.19%
----------- -----------
Income (loss) before taxes (1,592) (0.13)% (8,830) (0.80)%
Income tax provision -- -- -- --
----------- -----------
Net income (loss) $ (1,592) (0.13)% $ (8,830) (0.80)%
=========== ===========
</TABLE>
Fiscal Year 1999 sales increased $105,688 or 9.6% over Fiscal Year
1998. Fiscal Year 1999 sales were favorably impacted by the inclusion of one
more week, $26,832, three and a half months of Pharmhouse sales, $46,280, and a
comparable store sales increase of $25,426, or 2.4%. The comparable store sales
increase was primarily due to the success of the store remodel and reformatting
program and a 9.7% comparable store pharmacy sales increase.
The Company incorporated the "Super Phar-Mor" food and drug format into
8 stores during Fiscal Year 1999 bringing the total number of "Super Phar-Mor"
stores to 31. The Company's "Super Phar-Mor" format expands the existing grocery
offering and adds fresh, frozen and refrigerated food.
Gross profit for Fiscal Year 1999 was 0.42% of sales lower than for
Fiscal Year 1998. A 0.16% of sales increase in promotional costs and a 0.33%
reduction in product gross margins more than offset $2,505 in additional vendor
income from a partial settlement received from a class action lawsuit against
pharmaceutical manufacturers, related to certain product overcharges to
retailers. A 38% reduction in video rental sales was the primary cause of the
decline in product gross margins.
Selling, general and administrative expenses decreased 0.17% of sales
in Fiscal Year 1999 over Fiscal Year 1998. The decrease in selling, general and
administrative expenses was primarily due to lower advertising expenditures
partially offset by higher store wages. The increase in store wages as a
percentage of sales is due to the addition of the Pharmhouse stores which have a
higher store wage as a percentage of sales due to lower per store sales volume
and an increase in the minimum wage.
Investment income increased by $82 in Fiscal Year 1999 from Fiscal Year
1998. The increase in investment income was due to a $543 return on the
Company's equity investments, a $1,648 increase over Fiscal Year 1998, offset by
a decline in interest income due to lower cash balances.
At the end of Fiscal Year 1999 the Company determined that the Avatex
investment had experienced an other than temporary decline in value and wrote
down the value of the Avatex investment by $2,393 to $1.25 per share.
52 weeks ended June 27, 1998 (Fiscal Year 1998) compared to the 52 weeks ended
June 28, 1997 (Fiscal Year 1997) (all dollar amounts in thousands)
<TABLE>
<CAPTION>
Fiscal Year 1998 Fiscal Year 1997
---------------------- ---------------------
<S> <C> <C> <C> <C>
Sales $ 1,100,851 100.00% $ 1,074,828 100.00%
Less:
Cost of goods sold, including occupancy
and distribution costs 887,657 80.63% 873,095 81.23%
----------- -----------
Gross Profit 213,194 19.37% 201,733 18.77%
Selling, general and administrative expenses 173,982 15.80% 168,218 15.65%
Terminated business combination expenses -- -- 3,076 0.29%
Executive severance 6,787 0.62% -- --
Loss on disposal of equipment 4,615 0.42% -- --
Depreciation and amortization 22,047 2.00% 20,982 1.95%
----------- -----------
Income from operations before interest and
income taxes 5,763 0.52% 9,457 0.88%
Interest expense (16,639) 1.51% (17,175) 1.60%
Interest and investment income 2,046 0.19% 5,437 0.51%
----------- -----------
Loss before taxes (8,830) (0.80)% (2,281) (0.21)%
Income tax provision -- -- -- --
----------- -----------
Net loss $ (8,830) (0.80)% $ (2,281) (0.21)%
=========== ===========
</TABLE>
Comparable store sales for Fiscal Year 1998 increased $4,919, or 0.5%
from Fiscal Year 1997. This increase was primarily due to the success of the
store remodel and reformatting program partially offset by the impact of
discontinuing certain promotional discount programs since the beginning of
Fiscal Year 1997.
The Company incorporated the "Super Phar-Mor" food and drug format into
18 stores during Fiscal Year 1998 bringing the total number of "Super Phar-Mor"
stores to 23. The Company's "Super Phar-Mor" format expands the existing grocery
offering and adds fresh, frozen and refrigerated food. Sales in the stores that
were remodeled to include the "Super Phar-Mor" format in the first nine months
of Fiscal Year 1998 increased 23% for the thirteen weeks ended June 27, 1998,
over the comparable period of the prior year.
Gross profit for Fiscal Year 1998 was 0.60% of sales higher than for
Fiscal Year 1997. A 0.65% of sales reduction in inventory shrink expense and a
0.55% of sales increase in vendor income were partially offset by lower product
gross margins.
Selling, general and administrative expenses increased 0.15% of sales
in Fiscal Year 1998 over Fiscal Year 1997. The increase in selling, general and
administrative expenses was primarily due to increases in store wage expense due
to increases in the minimum wage.
During Fiscal Year 1998 the Company incurred $6,787 in severance costs
associated with the departure of the Company's former Chairman and Chief
Executive Officer.
The Company recorded a charge of $4,615 associated with the write off
of the Company's old mainframe computer and other equipment which was replaced
with the latest technology IBM mainframe computer equipment. The new mainframe
computer has lower operating and maintenance costs and provides the Company
greater capacity for growth and expansion over the next three to five years.
Investment income declined by $3,391 in Fiscal Year 1998 from Fiscal
Year 1997. The decrease in investment income was due to a $2,286 decline in
interest income due to lower cash balances and $1,105 in investment losses
incurred on the Company's equity investments.
Financial Condition and Liquidity (all dollar amounts in thousands)
The Company's cash position as of July 3, 1999 was $17,346.
On September 11, 1995, the Company entered into a three-year Revolving
Credit Facility (the "Facility") with BankAmerica Business Credit, Inc.
("BABC"), as agent, and other financial institutions (collectively, the
"Lenders"), that established a credit facility in the maximum amount of
$100,000.
Borrowings under the Revolving Credit Facility could have been used for
working capital needs and general corporate purposes. Up to $50,000 of the
Facility at any time could have been used for standby and documentary letters of
credit. The Facility included restrictions on, among other things, additional
debt, capital expenditures, investments, dividends and other distributions,
mergers and acquisitions, and contained covenants requiring the Company to meet
a specified quarterly minimum EBITDA Coverage Ratio (the sum of earnings before
interest, taxes, depreciation and amortization, as defined, divided by interest
expense), calculated on a rolling four quarter basis, and a monthly minimum net
worth test.
Credit availability under the Revolving Credit Facility at any time was
the lesser of the Aggregate Availability (as defined in the Facility) or
$100,000. The Revolving Credit Facility established 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 would have borne
interest at the BankAmerica reference rate plus 1/2% or London Interbank Offered
Rate ("LIBOR") plus the applicable margin (as defined in the Facility), which
ranged between 1.50% and 2.00%. Under the terms of the Revolving Credit
Facility, the Company was 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.
The Company entered into an Amended and Restated Revolving Credit
Facility (the "Amended Revolving Credit Facility") effective September 10, 1998
with BABC, as agent, and other financial institutions that established a credit
facility in the maximum amount of $100,000.
Borrowings under the Amended Revolving Credit Facility may be used for
working capital needs and general corporate purposes. Up to $50,000 of the
facility at any time may be used for standby and documentary letters of credit.
The facility includes restrictions on, among other things, additional debt,
investments, dividends and other distributions, mergers and acquisitions. The
facility contains no financial covenants.
Credit availability under the Amended Revolving Credit Facility at any
time is the lesser of the Aggregate Availability (as defined in the Facility) or
$100,000. The Amended 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 Amended Revolving Credit Facility bear interest
at the BankAmerica reference rate plus 1/2% or LIBOR plus 2.00%. Under the terms
of the Amended Revolving Credit Facility, the Company is required to pay a
commitment fee of between 0.25% and 0.35% per annum on the unused portion of the
facility, letter of credit fees and certain other fees.
As of July 3, 1999, there were $20,066 in outstanding advances and
letters of credit in the amount of $4,709 were outstanding under the Amended
Revolving Credit Facility.
The Amended Revolving Credit Facility expires on March 14, 2002.
The Company's cash position decreased $27,309 during Fiscal Year 1999
as cash provided by operating activities of $7,294 and cash provided by
financing activities of $4,940 was offset by $39,543 in cash used for investing
activities.
Accounts receivable increased $5,750 and merchandise inventories
increased $8,539 during Fiscal Year 1999 primarily due to the acquisition of the
32 Pharmhouse stores and the opening of two new stores.
The Company invested $1,000 during Fiscal Year 1999 in the common stock
of Avatex Corporation, the Company's largest shareholder. The Company also
invested $2,291 in equity securities of other privately held companies.
The Company's cash position decreased $35,192 during Fiscal Year 1998
as cash provided by operating activities of $10,054 was offset by $35,655 in
cash used for investing activities and $9,591 in cash used for financing
activities.
The Company invested $9,065 in marketable securities in Fiscal Year
1998 in an effort to increase its return on its excess cash position.
Merchandise inventories increased $6,769 during Fiscal Year 1998 primarily due
to the opening of three new stores.
The Company invested $4,000 in the common stock of Avatex Corporation
in Fiscal Year 1998. The Company also invested $4,275 in equity securities of
other privately held companies.
The Company's cash position decreased $24,418 during Fiscal Year 1997
as cash provided by operating activities of $11,443 was offset by $27,161 in
cash used for investing activities and $8,700 in cash used for financing
activities.
Merchandise inventories increased $16,258 during Fiscal Year 1997 due
to the opening of one new store, the stocking of an additional store that opened
in early July 1997 and increases in warehouse inventory levels as a result of
deal purchases that were made in June 1997.
Trends, Demands, Commitments, Events or Uncertainties
(all dollar amounts in thousands)
Management believes the availability of the Amended Revolving Credit
Facility, together with the Company's current cash position and expected cash
flows from operations for Fiscal Year 1999 will enable the Company to fund its
working capital needs and capital expenditures. Achievement of expected cash
flows from operations is dependent upon, among other things, the Company's
attainment of sales, gross profit and expense levels that are consistent with
its financial projections, and there can be no assurance that the Company will
achieve its expected cash flows.
Investment activities for Fiscal Year 2000 are expected to total
$26,600. The major expenditures are expected to be (i) video rental tapes
($1,500), (ii) remodeling of existing stores ($8,850), (iii) systems and
technology ($3,400), (iv) new stores ($2,000), (v) an additional investment in
the common stock of Avatex ($5,725), and (vi) an investment in Vitamins.com, an
internet startup company ($2,600). The Company expects to finance and meet its
obligations for these capital expenditures through internally generated funds
and the use of the Company's Amended Revolving Credit Facility.
Certain Company information systems have potential operational problems
in connection with applications that contain a date and/or use a date in a
comparative manner as the date transitions into the Year 2000. The Company has
implemented a comprehensive program to identify and remediate potential problems
related to the Year 2000 in its information systems, infrastructure, logistics
and retail facilities. In addition, the Company has initiated formal
communication with all of its significant vendors and other external interfaces
to determine the extent to which the Company is vulnerable to a third-party's
failure to remediate their own potential problems related to the Year 2000. The
inability of the Company or significant vendors and/or external interfaces of
the Company to adequately address Year 2000 issues could cause disruption of the
Company's systems.
Management believes, based on its assessment of all of its systems,
that it has completed all of the software modifications necessary to make its
systems year 2000 compliant. The Company will replace certain personal computer
related hardware before December 31, 1999 to ensure that those systems will be
Year 2000 compliant. The Company has developed or is in the process of
developing contingency plans that include manually performing work in place of
affected systems and the renting of back-up systems and generators.
As of July 3, 1999, the Company has incurred approximately $1,100
related to the assessment of, and efforts in connection with, its Year 2000
program and remediation plan. The Company has completed all of the software
modifications necessary to make its systems Year 2000 compliant and anticipates
no future expenditures for software modifications will be necessary. Future
spending for hardware purchases required for Year 2000 are currently estimated
to be approximately $400. The Company has accelerated by one year the purchase
of approximately $5,000 in replacement hardware in order to ensure the
associated system is Year 2000 compliant. These expenditures are not expected to
have a material impact on the Company's operating results, liquidity and capital
resources.
The Company is exposed to certain market risks from transactions that
are entered into during the normal course of business. The Company's policies do
not permit active trading of, or speculation in, derivative financial
instruments. The Company's primary market risk exposure relates to interest rate
risk. The Company manages its interest rate risk in order to balance its
exposure between fixed and variable rates while attempting to minimize its
interest costs.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value,
with the potential effect on operations dependent upon certain conditions being
met. SFAS No. 133 (as amended by SFAS No. 137) is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Management does not
believe that the adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
Item 8. Financial Statements and Supplementary Data.
See Index to Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The executive officers and directors of the Company as of the date
hereof are listed below:
Name Age Position(s)
- ---- --- -----------
Abbey J. Butler 62 Co-Chairman and Co-Chief Executive Officer
Melvyn J. Estrin 57 Co-Chairman and Co-Chief Executive Officer
M. David Schwartz 54 President and Chief Operating Officer
Warren E. Jeffery 50 Executive Vice President - Merchandising,
Marketing and Logistics
Sankar Krishnan 52 Senior Vice President and Chief Financial
Officer
John R. Ficarro 47 Senior Vice President, Chief Administrative
Officer, General Counsel and Secretary
Monroe Osterman 72 Director
Arthur G. Rosenberg 61 Director
John D. Shulman 36 Director
Abbey J . Butler has been a director of the Company since September
1995 and Co-Chairman of the Board and Co-Chief Executive Officer of the Company
since October 1, 1997. Mr. Butler is Co-Chairman of the Board and Co-Chief
Executive Officer of Avatex Corporation ("Avatex"), formerly known as FoxMeyer
Health Corporation. Mr. Butler also serves as managing partner of Centaur
Partners, L.P., an investment partnership with ownership interests in Avatex,
and as President and a director of C.B. Equities Corp., a private investment
company. Mr. Butler presently serves as a director and a member of the Executive
Committee of GrandBanc, Inc.; and as a director of Carson, Inc., a global
manufacturer of ethnic hair care products for African-Americans and persons of
African descent; Cyclone, Incorporated, a distributor and installer of chain
link fence systems, highway guard rails and industrial gates and posts; iLife
Systems, Inc., a manufacturer of miniature continuous-wear vital signs monitors
and in conjunction with investments by the Company, as a director of RAS Holding
Corp. and HPD Holdings Corp. and as a member of the Board of Managers of
Chemlink Laboratories. LLC. Mr. Butler is a trustee and a member of the
Executive Committee of the Board of Trustees of the American University, and a
director of the Starlight Foundation, a charitable organization. He was
appointed by President George Bush to serve on the President's Advisory
Committee on the Arts, and he now serves as the president and chief executive
officer of the National Committee for the Performing Arts, John F. Kennedy
Center, Washington, D.C. On August 27, 1996, FoxMeyer Corporation and FoxMeyer
Drug Company, subsidiaries of Avatex, each filed a petition under Chapter 11 of
the United States Bankruptcy Code. At the time of the filing Mr. Butler was an
executive officer and director of FoxMeyer Corporation and FoxMeyer Drug
Company. On July 26, 1996, Ben Franklin Retail Stores, Inc. filed a petition for
protection under Chapter 11 of the United State Bankruptcy Code. At the time of
the filing, Mr. Butler was a director of Ben Franklin Retail Stores, Inc.
Melvyn J. Estrin has been a director of the Company since September
1995 and Co-Chairman of the Board and Co-Chief Executive Officer of the Company
since October 1, 1997. Melvyn J. Estrin is Co-Chairman of the Board and Co-Chief
Executive Officer of Avatex. Mr. Estrin also serves as Chairman of the Board and
Chief Executive Officer of Human Service Group, Inc., a private management and
investment firm, and of University Research Corporation, a consulting firm. Mr.
Estrin presently serves as a director and a member of the Executive Committee of
GrandBanc, Inc.; as a director of Washington Gas Light Company, Carson, Inc., a
global manufacturer of ethnic hair care products for African-Americans and
persons of African descent; i Life Systems,Inc., a manufacturer of miniature
continuous-wear vital signs monitors and in conjunction with investments by the
Company, as a director of RAS Holding Corp. and HPD Holdings Corp. and as a
member of the Board of Managers of Chemlink Laboratories. LLC. Mr. Estrin has
served as a Trustee of the University of Pennsylvania and was appointed by
President George Bush to serve as Commissioner of the National Capital Planning
Commission. On August 27, 1996, FoxMeyer Corporation and FoxMeyer Drug Company,
subsidiaries of Avatex Corporation, each filed a petition under Chapter 11 of
the United States Bankruptcy Code. At the time of the filing Mr. Estrin was an
executive officer and director of FoxMeyer Corporation and FoxMeyer Drug
Company. On July 26, 1996, Ben Franklin Retail Stores, Inc. filed a petition for
protection under Chapter 11 of the United States Bankruptcy Code. At the time of
the filing, Mr. Estrin was a director of Ben Franklin Retail Stores, Inc.
M. David Schwartz has served as President and Chief Operating Officer
of the Company since February 1993. From 1991 to 1993, he was a Director and the
President and Chief Executive Officer of Smitty's Super Valu, Inc., a food and
general merchandising retailer, and between 1987 and 1991 Mr. Schwartz served as
a Director and the President and Chief Operating Officer of Perry Drug Stores
Inc., a regional chain of 200 drug stores. Mr. Schwartz was Vice President of
Drug/General Manager for the Kroger Company between 1985 and 1987 and, between
1971 and 1985, held positions with Albertson's Inc. including Senior Vice
President of Marketing, Senior Vice President of Non-Foods Merchandising,
Distribution and Procurement, Vice President of Merchandising, and Non-Foods
Merchandise Manager. Mr. Schwartz attended Arizona State University.
Warren E. Jeffery has served as Executive Vice President of
Merchandising, Marketing and Logistics of the Company since February 1999. Prior
to that, Mr. Jeffery served as Senior Vice President of Operations from April
1996 to February 1999 and 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.
Sankar Krishnan has served as Senior Vice President and Chief Financial
Officer of the Company since June 1997. From August 1993 to June 1997, Mr.
Krishnan served as Vice President - Corporate Controller of the Company. From
February until August 1993, Mr. Krishnan served as Pharmacy Business
Administrator of the Company. From 1991 until the time he joined Phar-Mor, Mr.
Krishnan served as Senior Vice President and Chief Financial Officer of Thrifty
Drug Stores. From 1988 to 1991, he served as Senior Vice President and Chief
Financial Officer of Lord & Taylor, a division of May Department Stores. He was
employed with Macy's from 1970 to 1988, serving as Senior Vice President and
Chief Financial Officer of Macy's New Jersey division from 1983 to 1988. In
September 1994, Mr. Krishnan filed a petition under Chapter 7 of the United
States Bankruptcy Code which was discharged in March 1995. Mr. Krishnan received
a Masters degree in Applied Science from the University of Waterloo in Ontario,
Canada, and a Bachelor of Technology degree from the University of Madras,
India.
John R. Ficarro has served as Senior Vice President and Chief
Administrative Officer (in addition to his existing duties as General Counsel
and Secretary of the Company) since June 1997. Prior to that, Mr. Ficarro served
as Vice President, General Counsel and Secretary of the Company beginning in
February 1995. From 1981 to 1995, Mr. Ficarro was employed by General Host
Corporation where he served as Vice President, General Counsel and Secretary
since 1989 and prior to that time served as Counsel to several of its retail
businesses. Prior to 1981, Mr. Ficarro practiced law at Titone & Roarke in Ft.
Lauderdale, Florida. Mr. Ficarro received a B.A. from the Maxwell School at
Syracuse University and a J.D. from its College of Law.
Monroe Osterman has been a director of the Company since September 25,
1997. Mr. Osterman has served as President of Gala Trading Corporation, an
investment company specializing in large purchases of diamonds from Europe,
since 1982. Prior to serving as President of Gala Trading Corporation, Mr.
Osterman served as President of Paras USA and Bermont Corporation and was also a
partner at J. Winston & Company, an importing and merchandising company.
Arthur G. Rosenberg has been a director of the Company since November
23, 1997. Mr. Rosenberg was a principal of The Associated Companies, a real
estate development firm, from 1987 to 1998 and in 1999 became a principal of
Millennium Development Group LLC. Prior thereto, Mr. Rosenberg was a practicing
lawyer in Huntington, New York and served as General Counsel for ITT Levitt &
Sons, Inc., an international builder. Mr. Rosenberg currently serves on the
Board of Directors of New Yorker Marketing Corp., Inc. and Antra Holding
Company.
John D. Shulman has been a director of the Company since November 23,
1997. Mr. Shulman has served as President and Chief Executive Officer of ONYX
International, L.L.C., a merchant banking and venture firm focusing primarily on
private equity placements in high growth companies, since 1994. Prior to serving
as President and Chief Executive Officer of ONYX International, L.L.C., Mr.
Shulman served as the Director of Development for Tower Companies, a diversified
group of companies including real estate development, banking and related
activities since 1986. Mr. Shulman currently serves on the Board of Directors of
U.S. Interactive, Inc., Performance Distribution, Inc., Taiwan Mezzanine Fund I,
L.P., Interactive Video Technologies, Inc., and on the Board of Managers of
ChemLink Laboratories, LLC and is the Chairman of Juggernaut Partners, LLC. Mr.
Shulman is the husband of Mr. Estrin's niece.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated herein by reference
from the information set forth under the sections titled "Executive
Compensation," "Committees of the Board; Meetings," "Executive Compensation
Plans," "Compensation of Directors," "Employment Contracts and Termination of
Employment and Change -In-Control Arrangements," "Compensation Committee Report
on Executive Compensation," "Executive Summary Compensation Table," "Option
Grants in Fiscal Year 1999," "Option Exercises and Values for Fiscal Year 1999,"
and "Performance Graph" of the Company's definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the close of its fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated herein by reference
from the information set forth under sections titled "Voting Securities and
Principal Holders Thereof" of the Company's definitive proxy statement to be
filed pursuant to Regulation 14A within 120 days after the close of its fiscal
year.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated herein by reference
from the information set forth under the section titled "Certain Relationships
and Related Transactions" of the Company's definitive proxy statement to be
filed pursuant to Regulation 14A within 120 days after the close of its fiscal
year.
<PAGE>
PART IV
ITEM 14. Financial Statements, Financial Statement Schedule, Exhibits and
Reports on Form 8-K.
(a) Documents filed as part of this Form 10-K
1. Financial Statements
The Financial Statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this
Form 10-K.
2. Financial Statement Schedule
The Financial Statement Schedule listed in the accompanying
Index to Consolidated Financial Statements is filed as part of
this Form 10-K
3. Exhibits
The Exhibits filed as part of this Form 10-K are listed on the
Exhibit Index immediately preceding such exhibits,
incorporated herein by reference.
(b) Reports on Form 8-K
Date of Report Date of Filing Description
-------------- -------------- -----------
December 17, 1998 December 22, 1998 Agreement and plan
of Merger between the
Company and Pharmhouse
Corp.
March 15, 1999 March 15, 1999 Completion of acquisi-
tion of Pharmhouse
Corp.
May 10, 1999 May 10, 1999 Financial statements
relating to the acqui-
sition of Pharmhouse
Corp.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHAR-MOR, INC.
Date: September 29, 1999 By: /s/ John R. Ficarro
-----------------------------------
John R. Ficarro
Senior Vice President and Chief
Administrative Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates listed below.
Date: September 29, 1999 /s/ M. David Schwartz
-----------------------------------
M. David Schwartz, President
Date: September 29, 1999 /s/ Abbey J. Butler
-----------------------------------
Abbey J. Butler, Co-Chairman and
Co-Chief Executive Officer
(Co-Principal executive officer)
Date: September 29, 1999 /s/ Melvyn J. Estrin
-----------------------------------
Melvyn J. Estrin, Co-Chairman and
Co-Chief Executive Officer
(Co-Principal executive officer)
Date: September 29, 1999 /s/ Monroe Osterman
-----------------------------------
Monroe Osterman, Director
Date: September 29, 1999 /s/ Arthur G. Rosenberg
-----------------------------------
Arthur G. Rosenberg, Director
Date: September 29, 1999 /s/ John D. Shulman
-----------------------------------
John D. Shulman, Director
Date: September 29, 1999 /s/ Sankar Krishnan
-----------------------------------
Sankar Krishnan
Senior Vice President and Chief
Financial Officer
(principal financial and accounting
officer)
<PAGE>
PHAR-MOR, INC.
INDEX TO EXHIBITS
Exhibit No.
*2.1 Third Amended Joint Plan of Reorganization of Phar-Mor, Inc. and
certain affiliated entities dated May 25, 1995, as modified
**2.2 Disclosure Statement in Support of Plan of Reorganization
**2.3 Exhibits to Third Amended Plan of Reorganization
*3.1 Amended and Restated Articles of Incorporation
*****3.2 Amended and Restated 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
*10.1 New Security Agreements and New Equipment Notes entered into and
issued by Phar-Mor, Inc. with the CIT Group/Equipment Financing,
Inc., Ford Equipment Leasing Corp./General Electrical Capital
Corporation, NBD Bank Evanston, N.A., Heleasco Twenty-Three, Inc.,
HCFS Business Equipment Corp., Romulus Holdings, Inc. and FINOVA
Capital/Corporation
***10.2 Loan Security Agreement, dated September 10, 1998, by and among the
financial institutions listed on the signature pages therein,
BankAmerica Business Credit, Inc., as agent, and Phar-Mor, Inc.,
Phar-Mor, Inc. LLC, Phar-Mor of Delaware, 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
10.2.2 Amendment No. 1 to Loan Security Agreement, dated March 3, 1999, by
and among the financial institutions listed on the signature pages
therein, BankAmerica Business Credit, Inc., as agent, and Phar-Mor,
Inc., Phar-Mor, Inc. LLC, Phar-Mor of Delaware, Inc., Phar-Mor of
Florida, Inc., Phar-Mor of Ohio, Inc., Phar-Mor of Virginia, Inc.
and Phar-Mor of Wisconsin, Inc.
10.2.3 Amendment No. 2 to Loan Security Agreement, dated March 15, 1999,
by and among the financial institutions listed on the signature
pages therein, BankAmerica Business Credit, Inc., as agent, and
Phar-Mor, Inc., Phar-Mor, Inc. LLC, Phar-Mor of Delaware, Inc.,
Phar-Mor of Florida, Inc., Phar-Mor of Ohio, Inc., Phar-Mor of
Virginia, Inc. and Phar-Mor of Wisconsin, Inc.
****10.3 Employment Agreement between Phar-Mor, Inc. and M. David Schwartz,
dated June 5, 1997
****10.4 Employment Agreement between Phar-Mor, Inc. and John R. Ficarro,
dated June 5, 1997
******10.5 Employment Agreement between Phar-Mor, Inc. and Sankar Krishnan,
dated June 13, 1997
******10.6 Employment Agreement between Phar-Mor, Inc. and Abbey J. Butler,
dated October 1, 1997
******10.7 Employment Agreement between Phar-Mor, Inc. and Melvyn J. Estrin,
dated October 1, 1997
******10.8 Employment Agreement between Phar-Mor, Inc. and Warren E. Jeffery,
dated June 23, 1998
******10.9 Amendment to Employment Agreement between Phar-Mor, Inc. and M.
David Schwartz, dated June 23, 1998
******10.10 Amendment to Employment Agreement between Phar-Mor, Inc. and Sankar
Krishnan, dated June 23, 1998
******10.11 Amendment to Employment Agreement between Phar-Mor, Inc. and John
R. Ficarro, dated June 23, 1998
******10.12 Amendment to Employment Agreement between Phar-Mor, Inc. and Warren
E. Jeffery, dated August 27, 1998
******10.13 Second Amendment to Employment Agreement between Phar-Mor, Inc. and
M. David Schwartz, dated August 27, 1998
******10.14 Second Amendment to Employment Agreement between Phar-Mor, Inc. and
Sankar Krishnan, dated August 27, 1998
******10.15 Second Amendment to Employment Agreement between Phar-Mor, Inc. and
John R. Ficarro, dated August 27, 1998
10.16 Second Amendment to Employment Agreement between Phar-Mor, Inc. and
Warren E. Jeffery, dated February 10, 1999
10.17 Third Amendment to Employment Agreement between Phar-Mor, Inc. and
M. David Schwartz, dated February 10, 1999
10.18 Third Amendment to Employment Agreement between Phar-Mor, Inc. and
Sankar Krishnan, dated February 10, 1999
10.19 Third Amendment to Employment Agreement between Phar-Mor, Inc. and
John R. Ficarro, dated February 10, 1999
*10.20 Form of Indemnification Agreement dated as of September 11, 1995
*****10.21 Phar-Mor, Inc. 1995 Amended and Restated Stock Incentive Plan
*****10.22 Phar-Mor, Inc. 1995 Director Stock Plan, as Amended
*****10.23 Phar-Mor, Inc. 1996 Director Retirement Plan
*****10.24 Employee Stock Purchase Plan
****10.25 Supply Agreement dated as of June 19, 1997 between Phar-Mor and
McKesson Drug Company
****10.26 Severance Agreement between Phar-Mor, Inc. and Robert M. Haft dated
September 19, 1997
***21.1 List of Subsidiaries
23 Independent Auditors' Consent
27 Financial Data Schedule
- -----------------------------------------------------------------
* Previously filed in connection with the filing of Phar-Mor's Form 10,
on October 23, 1995
** Previously filed in connection with the filing of Amendment No. 1 to
Phar-Mor's Form 10, on December 15, 1995
*** Previously filed in connection with the filing of Phar-Mor's quarterly
report on Form 10-Q, on November 2, 1998
**** Previously filed in connection with the filing of Phar-Mor's annual
report on Form 10-K 405, on September 25, 1997
***** Previously filed in connection with the filing of Phar-Mor's quarterly
report on Form 10-Q, on May 1, 1998
****** Previously filed in connection with the filing of Phar-Mor's annual
report on Form 10-K 405, on September 25, 1998
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F - 2
CONSOLIDATED BALANCE SHEETS AS OF JULY 3, 1999 AND JUNE 27, 1998 F - 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FIFTY-THREE WEEKS
ENDED JULY 3, 1999, THE FIFTY-TWO WEEKS ENDED JUNE 27, 1998 AND THE
FIFTY-TWO WEEKS ENDED JUNE 28, 1997 F - 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FIFTY-THREE WEEKS ENDED JULY 3, 1999, THE FIFTY- TWO WEEKS
ENDED JUNE 27, 1998 AND THE FIFTY-TWO WEEKS ENDED JUNE 28, 1997 F - 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FIFTY-THREE WEEKS
ENDED JULY 3, 1999, THE FIFTY-TWO WEEKS ENDED JUNE 27, 1998 AND
THE FIFTY-TWO WEEKS ENDED JUNE 28, 1997 F - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 7
SCHEDULE II F - 25
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Phar-Mor, Inc. :
We have audited the accompanying consolidated balance sheets of Phar-Mor, Inc.
and subsidiaries (the "Company") as of July 3, 1999 and June 27, 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the fifty-three weeks ended July 3, 1999, the fifty-two weeks
ended June 27, 1998 and the fifty-two weeks ended June 28, 1997. Our audits also
included consolidated financial statement Schedule II, Valuation and Qualifying
Accounts. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Phar-Mor, Inc. and
subsidiaries as of July 3, 1999 and June 27, 1998 and the results of their
operations and their cash flows for the fifty-three weeks ended July 3, 1999,
the fifty-two weeks ended June 27, 1998 and the fifty-two weeks ended June 28,
1997, 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.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
September 17, 1999
F-2
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 3, June 27,
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,346 $ 44,655
Marketable securities 3,254 9,065
Accounts receivable - net 28,293 20,927
Merchandise inventories 218,945 176,069
Prepaid expenses 6,902 2,214
Deferred tax asset 516 489
------- -------
Total current assets 275,256 253,419
Property and equipment - net 93,738 75,512
Goodwill 16,234 1,667
Deferred tax asset 9,254 9,281
Investments 8,314 4,275
Investment in Avatex 2,608 3,525
Other assets 5,133 1,776
------- -------
Total assets $410,537 $349,455
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $119,843 $ 67,091
Accrued expenses 34,926 37,036
Current portion of self insurance reserves 2,178 2,280
Current portion of long-term debt 1,751 3,276
Current portion of capital lease obligation 7,195 7,051
------- -------
Total current liabilities 165,893 116,734
Long-term debt 122,804 103,859
Capital lease obligations 20,143 27,134
Long-term self insurance reserves 8,032 7,680
Unfavorable lease liability - net 11,073 11,074
------- -------
Total liabilities 327,945 266,481
------- -------
Commitments and contingencies
Minority interests 535 535
------- -------
Stockholders' equity:
Preferred stock, $.01 par value, authorized shares,
10,000,000, none outstanding - -
Common stock, $.01 par value, authorized shares,
40,000,000; issued and outstanding shares,
12,240,865 at July 3, 1999, and 12,235,865 at
June 27, 1998 122 122
Additional paid-in capital 90,007 89,976
Stock options outstanding 2,105 1,401
Unrealized loss on investment in Avatex -- (475)
Retained deficit (10,177) (8,585)
------- -------
Total stockholders' equity 82,057 82,439
------- -------
Total liabilities and stockholders' equity $ 410,537 $ 349,455
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fifty-three Fifty-two Fifty-two
weeks ended weeks ended weeks ended
July 3, 1999 June 27, 1998 June 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Sales $ 1,206,539 $ 1,100,851 $ 1,074,828
Less:
Cost of goods sold, including occupancy and
distribution costs 977,878 887,657 873,095
Selling, general and administrative expenses 188,641 173,982 168,218
Executive severance -- 6,787 --
Loss on disposal of equipment -- 4,615 --
Business combination expenses -- -- 3,076
Depreciation and amortization 25,009 22,047 20,982
------ ------ ------
Income from operations before interest
expense, Avatex impairment write-down, investment
income (loss), interest income and income taxes 15,011 5,763 9,457
Interest expense (16,338) (16,639) (17,175)
Avatex impairment write-down (2,393) -- --
Investment income (loss) 543 (1,105) --
Interest income 1,585 3,151 5,437
----- ----- -----
Loss before income taxes (1,592) (8,830) (2,281)
Income tax provision -- -- --
----- ----- -----
Net loss $ (1,592) $ (8,830) $ (2,281)
============ ============ ============
Basic and diluted loss per common share $ (.13) $ (.72) $ (.19)
============ ============ ============
Weighted average number of common shares
outstanding 12,240,595 12,197,371 12,157,419
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
------------
Par Additional Stock Unrealized Retained Total
Value Paid-in Options Loss on (Deficit) Stockholders'
Shares Amount Capital Outstanding Investment Earnings Equity
------ ------ ------- ----------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 29, 1996 12,157 $ 122 $ 89,385 $ -- $ -- $ 2,526 $ 92,033
Net loss -- -- -- -- -- (2,281) (2,281)
Shares issued 2 -- 17 -- -- -- 17
------ ------ -------- ----------- ---------- -------- ------
Balance at June 28, 1997 12,159 122 89,402 -- -- 245 89,769
Net loss -- -- -- -- -- (8,830) (8,830)
Stock options outstanding -- -- -- 1,401 -- -- 1,401
Unrealized loss on investments -- -- -- -- (475) -- (475)
Shares issued 77 -- 574 -- -- -- 574
------ ------ -------- ----------- ---------- -------- ------
Balance at June 27, 1998 12,236 122 89,976 1,401 (475) (8,585) 82,439
Net loss -- -- -- -- -- (1,592) (1,592)
Stock options outstanding -- -- -- 704 -- -- 704
Avatex impairment write-down -- -- -- -- 475 -- 475
Shares issued 5 -- 31 -- -- -- 31
------ ------ -------- ----------- ---------- -------- ------
Balance at July 3, 1999 12,241 $ 122 $ 90,007 $ 2,105 $ -- $ (10,177) $ 82,057
====== ======== ========== ========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fifty-three Fifty-two Fifty-two
weeks ended weeks ended weeks ended
July 3, 1999 June 27, 1998 June 28, 1997
------------ ------------- -------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (1,592) $ (8,830) $ (2,281)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Items not requiring the outlay of cash:
Depreciation 17,028 14,030 12,182
Loss on disposal of equipment -- 4,615 --
Stock option expense 704 1,401 --
Amortization of video rental tapes 7,784 7,970 8,800
Amortization of deferred financing costs and goodwill 446 467 408
Avatex impairment write-down 2,393 -- --
Unrealized gain on equity investments (1,748) -- --
Deferred rent and unfavorable lease liabilities (1,059) (1,419) 1,412
Changes in assets and liabilities:
Accounts receivable (5,750) 687 (780)
Marketable securities 5,811 (9,065) --
Merchandise inventories (8,539) (6,769) (16,258)
Prepaid expenses (4,385) 3,014 (44)
Other assets 181 298 (707)
Accounts payable 8,174 5,283 8,047
Accrued expenses (11,175) 58 2,610
Accrued bankruptcy professional fees -- -- (181)
Reserve for costs of rightsizing program (849) (899) (1,585)
Self insurance reserves (130) (787) (180)
---- ---- ----
Net cash provided by operating activities 7,294 10,054 11,443
----- ------ ------
INVESTING ACTIVITIES
Additions to rental videotapes (7,446) (8,167) (8,694)
Additions to property and equipment (23,968) (19,213) (18,467)
Investment in Avatex (1,000) (4,000) --
Investment in Pharmhouse Corp., net of $3,292 cash
acquired (4,838) -- --
Investment in equity securities (2,291) (4,275) --
------ ------ ------
Net cash used for investing activities (39,543) (35,655) (27,161)
------- ------- -------
FINANCING ACTIVITIES
Borrowings under revolving credit facility 20,066 -- --
Principal payments on term debt (29,592) (3,043) (2,698)
Principal payments on capital lease obligations (6,847) (7,122) (6,019)
Bank overdrafts 21,032 -- --
Additions to long-term debt 250 -- --
Issuance of common stock 31 574 17
----- ------ ------
Net cash provided by (used for) financing activities 4,940 (9,591) (8,700)
----- ------ ------
Decrease in cash and cash equivalents (27,309) (35,192) (24,418)
Cash and cash equivalents, beginning of period 44,655 79,847 104,265
------ ------ -------
Cash and cash equivalents, end of period $ 17,346 $ 44,655 $ 79,847
============= ============= =============
Supplemental Information
- ------------------------
Interest paid $ 21,744 $ 16,155 $ 16,762
Income tax refunds 47 48 86
</TABLE>
Non-Cash: For the fifty-two weeks ended June 27, 1998, the Company entered into
a capital lease which increased property and equipment and capital lease
obligations $2,178.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Fiscal Periods Presented - The accompanying consolidated
balance sheets were prepared as of July 3, 1999 and June 27,
1998. The accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows were prepared
for the fifty-three weeks ended July 3, 1999, the fifty-two
weeks ended June 27, 1998, and the fifty-two weeks ended June
28, 1997. The Company's year ends on the Saturday closest to
June 30.
b. Business - The Company operates a chain of "deep discount"
drugstores primarily located in the midwest and along the east
coast of the continental United States in which it sells
merchandise in various categories.
c. Principles of Consolidation - The consolidated financial
statements include the accounts of Phar-Mor, Inc., its
wholly-owned subsidiaries and its majority-owned partnerships.
All intercompany accounts and transactions have been
eliminated.
d. Cash and Cash Equivalents - The Company considers all
short-term investments with an original maturity of three
months or less to be cash equivalents.
e. Marketable Securities - Under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," marketable securities are carried at fair market
value as trading securities. The cost of the securities sold
is determined using the specific identification method.
Marketable securities consist primarily of equity instruments
of corporations and real estate investment trusts. Unrealized
losses of $390 and $1,363 are included in Investment income
(loss) in the Consolidated Statements of Operations for the
fifty-three weeks ended July 3, 1999 and the fifty-two weeks
ended June 27, 1998, respectively.
f. Merchandise Inventories - Merchandise inventories are
valued at the lower of first-in, first-out ("FIFO") cost or
market.
g. Video Rental Tapes - Videotapes held for rental which are
included in inventories, are recorded at cost and are
amortized over their estimated economic lives 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.
h. Investments - Investments consist of equity interests in
unconsolidated affiliates that do not have readily
determinable market values. The Company uses the equity method
of accounting for investments in which it has 20% or more
interest in voting common stock and the cost method of
accounting for investments in which it has less than a 20%
interest in voting common stock or investments in preferred
stock (see Note 9).
i. Investment in Avatex - During the fifty-three weeks ended
July 3, 1999 and the fifty-two weeks ended June 27, 1998, the
Company invested $1,000 and $4,000, respectively, to purchase
approximately 15.1% of Avatex Corporation, formerly known as
FoxMeyer Health Corporation ("Avatex"), an affiliate of one of
the Company's former largest suppliers and the largest
stockholder of the Company (see Note 9). Under the provisions
of SFAS No. 115, this investment was carried at market value
as available-for-sale securities. Unrealized losses on these
securities were excluded from earnings and were reported as a
separate component of stockholders' equity until realized. In
the fourth quarter of fiscal year 1999, management determined
the investment sustained an other than temporary impairment as
defined in SFAS No. 115. As such, the Company recorded a
charge of $2,393 in the Consolidated Statement of Operations.
On June 18, 1999, the Company entered into an agreement with
certain preferred shareholders of Avatex to purchase
approximately 2.8 million shares of Avatex common stock at a
price of $2.00 per share. The transaction is expected to close
in the second quarter of fiscal year 2000 after which Phar-Mor
will own approximately 4.95 million shares of Avatex common
stock (representing approximately 36% of Avatex common stock).
As a result of the transaction and in accordance with
Accounting Principles Board Opinion ("APB") No. 18, the
Company will revise its method of accounting for the
investment to the equity method of accounting.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
j. 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.
k. Goodwill - Goodwill is amortized on a straight-line basis
over its estimated useful life, which ranges between 25 and 40
years and is net of accumulated amortization of $318 and $123
at July 3, 1999 and June 27, 1998, respectively.
l. Purchased Pharmacy Files - Purchased pharmacy files are
included in other assets and are recorded at fair value and
amortized over their estimated useful lives, which range
between 3 and 20 years.
m. Pre-Opening Costs - Expenses incurred for new stores prior
to their opening are expensed as incurred.
n. 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. The Company capitalizes the costs of software and
software upgrades purchased for use in its operations. The
Company expenses the internal costs of software developed or
modified for use in its operations. Maintenance and repairs
are expensed as incurred. Replacements and betterments are
capitalized and depreciated over the remaining estimated
useful life of the asset .
o. 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.
p. 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.
q. Unfavorable Lease Liability - The unfavorable lease
liability represents the excess of the present value of the
liability related to lease commitments over the present value
of market rate rents. This liability will be amortized as a
reduction of rent expense over the remaining lease terms. The
amounts were recorded as part of fresh-start reporting in
conjunction with a Chapter 11 Bankruptcy proceeding in which
the Company emerged from Chapter 11 on September 11, 1995, and
related to purchase accounting for an acquisition.
r. Self Insurance Reserves - The Company is generally
self-insured for losses and liabilities related primarily to
workers' compensation and comprehensive general and product
liability. Losses are accrued based upon the Company's
estimates of the aggregate liability for claims incurred using
certain actuarial assumptions followed in the insurance
industry and based on Company experience.
s. Income Taxes - The Company accounts for income taxes using
the provisions of SFAS No. 109, "Accounting for Income Taxes".
t. Stock Based Compensation - The Company applies the
provisions of APB No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its
stock-based compensation arrangements.
u. Revenue Recognition - Sales are recognized on merchandise
inventories sold upon receipt by the customer and are recorded
net of returns.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
v. Reclassifications - Certain amounts in prior year financial
statements have been reclassified to conform with the current
year presentation.
w. 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.
x. New Accounting Pronouncements - In June 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting comprehensive income and its
components, some of which have been historically excluded from
the Consolidated Statement of Operations and recorded directly
to the equity section of an entity's statement of financial
position. SFAS No. 130 also requires that the cumulative
balance of these items of other comprehensive income are
reported separately from retained earnings and additional
paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal
years beginning after December 15, 1997. The Company adopted
SFAS No. 130 in fiscal year 1999. As a result of the
accounting related to the Avatex transaction there are no
components of other comprehensive income for the fifty-three
weeks ended July 3, 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure
those instruments at fair value, with the potential effect on
operations dependent upon certain conditions being met. SFAS
No. 133 (as amended by SFAS No. 137) is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000.
Management does not believe that the adoption of SFAS No. 133
will have a material impact on its financial position or
results of operations.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
July 3, 1999 June 27, 1998
------------ -------------
<S> <C> <C>
Accounts receivable - vendors $ 13,587 $ 11,712
Third-party prescriptions 14,038 9,205
Vendor coupons 1,015 1,238
Other 1,397 174
------ ------
30,037 22,329
Less allowance for doubtful accounts 1,744 1,402
------ ------
$ 28,293 $ 20,927
============= =============
</TABLE>
<TABLE>
<CAPTION>
3. MERCHANDISE INVENTORIES
Merchandise inventories consists of the following:
July 3, 1999 June 27, 1998
------------ -------------
<S> <C> <C>
Store inventories $ 187,197 $ 146,969
Warehouse inventories 41,624 34,659
Video rental tapes - net 5,080 6,065
------- -------
233,901 187,693
Less reserves for markdowns, shrinkage
and vendor rebates 14,956 11,624
------- -------
$ 218,945 $ 176,069
============= =============
</TABLE>
The video rental tape inventory is net of accumulated amortization of
$7,526 and $13,340 at July 3, 1999 and June 27, 1998, respectively.
<TABLE>
<CAPTION>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
July 3, 1999 June 27, 1998
------------ -------------
<S> <C> <C>
Furniture, fixtures and equipment $ 60,534 $ 40,083
Building improvements to leased property 45,804 33,622
Land 497 166
Building 1,517 --
Capital leases:
Buildings 11,076 11,076
Furniture, fixtures and equipment 22,072 21,860
------ ------
141,500 106,807
Less accumulated depreciation and
amortization 47,539 30,923
Less allowance for disposal of property
and equipment 223 372
------ ------
$ 93,738 $ 75,512
============= =============
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
5. OTHER ASSETS
Other assets consists of the following:
July 3, 1999 June 27, 1998
------------ -------------
<S> <C> <C>
Purchased pharmacy files $ 4,001 $ 496
Deferred debt expense 456 79
Utility and other deposits 396 664
Other 280 537
----- -----
$ 5,133 $ 1,776
============= =============
</TABLE>
Deferred debt expense and purchased pharmacy files are net of
accumulated amortization of $171 and $803, respectively, at July 3,
1999 and $989 and $425, respectively, at June 27, 1998. The deferred
debt expense consists of debt origination costs associated with the
credit facility (See Note 6).
6. REVOLVING CREDIT FACILITIES
On September 11, 1995, the Company entered into a Loan and Security
Agreement (the "Facility") with BankAmerica Business Credit, Inc.
("BABC"), as agent, and other financial institutions (collectively, the
"Lenders"), that established a credit facility in the maximum amount of
$100,000.
Borrowings under the Facility could have been used for working capital
needs and general corporate purposes. Up to $50,000 of the Facility at
any time could have been used for standby and documentary letters of
credit. The Facility included restrictions on, among other things,
additional debt, capital expenditures, investments, restricted payments
and other distributions, mergers and acquisitions, and contained
covenants requiring the Company to meet a specified quarterly minimum
EBITDA Coverage Ratio (the sum of earnings before interest, taxes,
depreciation and amortization, as defined, divided by interest
expense), calculated on a rolling four quarter basis, and a monthly
minimum net worth test.
Credit availability under the Facility at any time was 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 $91,704 at June 27, 1998. The
Facility established 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 would have borne interest at the
BankAmerica reference rate plus 1/2% or London Interbank Offered Rate
("LIBOR") plus the applicable margin. The applicable margin ranged
between 1.50% and 2.00% and was 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 was 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 borrowings under the Facility. At June 27, 1998 there
were letters of credit in the amount of $5,709 outstanding under the
Facility.
The Company entered into an Amended and Restated Revolving Credit
Facility (the "Amended Revolving Credit Facility") effective September
10, 1998 with BABC, as agent, and other financial institutions that
established a credit facility in the maximum amount of $100,000.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
Borrowings under the Amended Revolving Credit Facility may be used for
working capital needs and general corporate purposes. Up to $50,000 of
the facility at any time may be used for standby and documentary
letters of credit. The Facility includes restrictions on, among other
things, additional debt, investments, dividends and other
distributions, mergers and acquisitions. The facility contains no
financial covenants.
Credit availability under the Amended Revolving Credit 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 outstanding letters of credit, was $75,225 at July 3, 1999.
The Amended 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 Amended Revolving Credit Facility bear interest
at the BankAmerica reference rate plus 1/2% or LIBOR plus 2.00%. Under
the terms of the Amended Revolving Credit Facility, the Company is
required to pay a commitment fee of between 0.25% and 0.35% per annum
on the unused portion of the facility, letter of credit fees and
certain other fees.
At July 3, 1999 the BankAmerica reference rate (prime rate) was 8.0%
and the LIBOR rate was 5.18%.
At July 3, 1999 there were letters of credit in the amount of $4,709
outstanding under the Amended Revolving Credit Facility.
The Amended Revolving Credit Facility expires on March 14, 2002.
7. LONG-TERM DEBT
The composition of the debt obligations included on the consolidated
balance sheets is as follows:
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998
------------ -------------
<S> <C> <C>
Senior unsecured notes, interest rate of 11.72%,
due September 2002 $ 91,462 $ 91,462
Amended Revolving Credit Facility 20,066 --
Equipment notes, interest rate of 7%, due in installments
through October 2003 3,785 5,484
Tax notes, interest rates at 5.89% to 8%, due through
September 2001 4,575 5,257
Real estate mortgage notes and bonds payable at rates ranging
from 3% to 9.98% and the prime rate plus 1% 4,667 4,932
------- -------
Total debt 124,555 107,135
Less current portion 1,751 3,276
------- -------
Total long-term debt $ 122,804 $ 103,859
============= =============
</TABLE>
The Company must offer to purchase the senior unsecured notes at a
price equal to 101% of the principal amount upon the occurrence of a
change in control. The new senior notes contain restrictions on, among
other things, incurrence of debt, payment of dividends and repurchases
of common stock.
The Company has mortgage notes and bonds payable collateralized by real
estate with an aggregate net book value of $4,038 and $4,222 at July 3,
1999 and June 27, 1998, respectively.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
Future maturities of long-term debt subsequent to July 3, 1999 are
summarized as follows:
2000 $ 1,751
2001 1,139
2002 23,159
2003 92,604
2004 525
Thereafter 5,377
-----
$124,555
========
8. 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 July 3, 1999
are as follows:
Capital Operating
Leases Leases
------ ------
2000 $ 9,036 $ 44,767
2001 5,989 42,350
2002 5,291 39,996
2003 3,423 36,088
2004 2,033 30,582
Thereafter 8,449 145,016
----- -------
Total minimum lease payments 34,221 $338,799
Less amounts representing interest 6,883 ========
-----
Present value of minimum lease payments 27,338
Less current portion 7,195
-----
Long-term capital lease obligations $20,143
=======
The operating leases on substantially all store properties provide for
additional rentals when sales exceed specified levels and contain
escalation clauses. Rent expense for the fifty-three weeks ended July
3, 1999, fifty-two weeks ended June 27, 1998, and the fifty-two weeks
ended June 28, 1997 was $37,306, $31,921, and $32,557 respectively,
including $223, $123, and $145 of additional rentals.
9. TRANSACTIONS WITH RELATED PARTIES
From September 11, 1995 to September 19, 1997, Hamilton Morgan LLC
("Hamilton Morgan") beneficially owned approximately 39.9% of the
Company's common stock. During this period, (a) Avatex owned 69.8% of
Hamilton Morgan, and Abbey J. Butler and Melvyn J. Estrin, Avatex's
Co-Chairmen of the Board and Co-Chief Executive Officers, served as
directors of the Company, and (b) Robert Haft owned 30.2% of Hamilton
Morgan and served as Hamilton Morgan's President and the Company's
Chairman of the Board and Chief Executive Officer. On September 19,
1997, under the terms of an agreement between Hamilton Morgan, Robert
Haft and Avatex (the "Hamilton Morgan Agreement"), Avatex acquired the
3,750,000 shares of the Company's common stock previously owned by
Hamilton Morgan in exchange for (i) the redemption of Avatex's
membership interest in Hamilton
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
Morgan, (ii) the satisfaction of a certain promissory note from
Hamilton Morgan to Avatex and (iii) the transfer of certain other
assets from Avatex to Hamilton Morgan. Avatex now beneficially owns
approximately 39.1% of the Company's common stock.
In conjunction with the Hamilton Morgan Agreement, the Company entered
into a Severance Agreement with Robert Haft whereby he resigned his
positions as Chairman of the Board of Directors and Chief Executive
Officer and received a lump sum cash payment of $4,417. Under the terms
of the Severance Agreement, the Company will continue to provide
benefits to him through September 19, 2000. He is indemnified and
entitled to tax reimbursement in respect to any payments that
constitute excess parachute payments under Federal Income Tax laws. The
Company is obligated to provide a letter of credit in the amount of
approximately $2,900 to secure its contractual obligations under the
Severance Agreement.
A subsidiary of Avatex, FoxMeyer Drug Company, supplied the Company
with pharmaceuticals and health and beauty care products under a long
term contract until November 1996, when substantially all of FoxMeyer
Drug Company's assets were acquired by McKesson Corporation. For the
fifty-two weeks ended June 28, 1997 the Company purchased $71,298 of
products from FoxMeyer Drug Company under the contract.
In March 1998 and December 1998, 13 persons and entities purchased (or
committed to purchase) a total of $7,200 of Series A membership
interests in Chemlink Acquisition Company, LLC, which in turn purchased
a total of 50% of the membership interests in Chemlink Laboratories,
LLC. These persons and entities included the Company; Avatex; two of
the Company's executive officers, Abbey J. Butler and Melvyn J. Estrin
(and/or their designees); one Avatex officer, Edward L. Massman; one
non-officer director of Avatex; and five additional parties related to,
or referred to by, Abbey J. Butler or Melvyn J. Estrin. Of the total
amount invested, the Company's share was approximately 35.8%, Avatex's
share was approximately 41.1%, the Avatex officers/designees' share
(including Messrs. Butler and Estrin) was approximately 14.4%, the
Avatex non-officer director's share was approximately 0.7%, and the
related parties' share was approximately 8.0%. The largest share
invested by a Company officer or director (or his designee) was
approximately 6.1% of the total amount invested. Messrs. Butler, Estrin
and Shulman serve on the Board of Managers of Chemlink Laboratories,
LLC. The Company accounts for this investment using the equity method
of accounting.
In April 1998, 13 persons and entities purchased (or committed to
purchase) a total of $3,000 of Series B Non-voting Preferred Stock and
warrants to purchase Series B Preferred Stock of RAS Holding Corp.
These persons and entities included the Company; Avatex; two of the
Company's executive officers, Melvyn J. Estrin and Abbey J. Butler; all
of Avatex's executive officers and its Director of Accounting (and/or
their designees); one non-officer director of Avatex; and two
additional parties related to, or referred to by, Abbey J. Butler or
Melvyn J. Estrin. Mr. Butler is also a director of RAS Holding Corp. Of
the total amount invested, Avatex's share was approximately 46.7%, the
Company's share was 25%, the Avatex officers/designees' share was
19.8%, the Avatex non-officer director's share was 1% and the related
parties' share was approximately 7.5%. The largest share invested by an
officer or director of the Company (or his designee) was 5% of the
total amount invested. The Company accounts for this investment using
the cost method of accounting.
In April 1998, the Company and Avatex each purchased $1,250 of
preferred stock of HPD Holdings Corp. ("HPD") in connection with the
acquisition by a HPD subsidiary of certain of the assets of Block Drug
Company, Inc. ("Block") used in or related to the manufacture, sale or
distribution of Block's household product lines. In addition, the
Company and Avatex each acquired 2.5% of the common stock of HPD as
part of the transaction. The largest shareholder of HPD is HPD
Partners, LP, a Delaware limited partnership and Abbey J. Butler and
Melvyn J. Estrin are limited partners of HPD Partners, LP and directors
of HPD Laboratories, Inc., a wholly owned subsidiary of HPD. The
Company accounts for this investment using the cost method of
accounting.
During Fiscal Year 1999, the Company paid $77 to Human Service Group,
Inc. for secretarial services provided to Mr. Estrin. Human Service
Group, Inc. is a corporation wholly owned by Mr. Estrin.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
The Company purchased $319 and $314 of product from AM Cosmetics, Inc.
during Fiscal Year 1999 and 1998, respectively. Mr. Butler and Mr.
Estrin were directors of AM Cosmetics, Inc. until September, 1998.
The Company purchased $20 and $241 of product from Carson Products, a
subsidiary of Carson, Inc. during Fiscal Year 1999 and 1998,
respectively. Mr. Butler and Mr. Estrin are directors of Carson, Inc. A
subsidiary of Avatex purchased a total of 372,000 shares of Carson
Class A common stock in December 1997 and January 1998.
The Company paid CB Equities Corporation $74 and $52, during Fiscal
Year 1999 and 1998, respectively, for office and equipment support for
Mr. Butler. Mr. Butler is President of CB Equities Corporation.
10. WARRANTS AND OPTIONS
Warrants
--------
There are warrants to purchase an aggregate of 1,250,000 common shares
outstanding as of July 3, 1999. Each warrant entitles the holder
thereof to acquire one common share at a price of $13.50, subject to
certain adjustments. The warrants are exercisable at any time until the
close of business on September 10, 2002. As of July 3, 1999, no
warrants had been exercised.
Stock Options
-------------
The Company has an incentive stock option plan for officers and key
employees which allows for the issuance of a maximum of 3,500,000
options. As of July 3, 1999, options for 441,433 common shares were
reserved for future grant, and options for 3,058,567 shares were
outstanding 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% or 33 1/3% of
the underlying shares on the grant date, and will vest in additional
increments of 20% or 33 1/3% of the underlying shares on each of the
subsequent anniversaries of the grant date until 100% vested. 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 Company has a stock option plan for directors. Before October 1,
1997, each director received an annual grant of an option to purchase
5,000 shares of Common Stock. Commencing with the grant on October 1,
1997, each director now receives an annual grant of an option to
purchase 10,000 shares of Common Stock. 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 500,000 common shares may be granted under the stock option plan for
directors. As of July 3, 1999, options for 235,000 shares were
outstanding.
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.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts,continued)
- --------------------------------------------------------------------------------
The Company applies APB No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its
stock-based compensation. Accordingly, for the fifty-three weeks ended
July 3, 1999 and the fifty-two weeks ended June 27, 1998, the Company
recognized $704 and $1,401, respectively, in compensation cost for the
Company's stock option plans in the accompanying consolidated financial
statements. Had compensation cost for the Company's plans been
determined based on the fair value at the grant date instead of the
intrinsic value method described above for the awards granted in 1997,
1998, and 1999 the Company's net income (loss) and net income (loss)
per share would have been reduced to the pro forma amounts indicated
below.
<TABLE>
<CAPTION>
Fifty-three weeks Fifty-two weeks Fifty-two weeks
ended July 3, 1999 ended June 27, 1998 ended June 28, 1997
------------------ ------------------- -------------------
<S> <C> <C> <C>
Net loss
As reported $(1,592) $ (8,830) $ (2,281)
Pro forma $(3,849) $ (11,654) $ (2,541)
Basic and diluted earnings
per share
As reported $(0.13) $(0.72) $ (0.19)
Pro forma $(0.31) $(0.96) $ (0.21)
</TABLE>
The fair value of each option has been estimated on the date of grant
using the Black-Scholes options pricing model with the following
assumptions for the periods presented: expected volatility of 30%; no
dividend yield; expected life of 7 years; and a risk-free interest rate
of 6.5%.
All of the Company's stock option plans are administered by the
Compensation Committee of the Company's Board of Directors.
As of July 3, 1999, 2,499,273 options were exercisable at a weighted
average exercise price per share of $7.23.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The following table summarizes stock option activity under the plans:
Weighted
Weighted Average Weighted
Average Exercise Remaining Average
Options Exercise Price Contractual Grant Date
Outstanding Price Per Share per Share Life (Years) Fair Value
----------- --------------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Balance at June 29, 1996 1,358,617 $ 7.91 $ 7.06 - $ 8.00 6.22
Granted 100,000 $ 5.66 $ 5.44 - $6.17 2.68
Forfeited (137,800) $ 7.82 $ 7.06 - $8.00
---------
Balance at June 28, 1997 1,320,817 $ 7.75 $ 5.44 - $8.00 5.30
Granted 1,840,000 $ 7.83 $ 5.44 - $9.63 3.55
Forfeited (467,984) $ 7.00 $ 5.44 - $8.00
Exercised (76,666) $ 7.50 $ 6.50 - $8.00
---------
Balance at June 27, 1998 2,616,167 $ 7.92 $ 5.44 - $9.63 5.71
Granted 1,120,300 $ 4.47 $ 4.25 - $8.13 2.11
Forfeited (21,233) $ 7.88 $ 7.22 - $9.63
Exercised (5,000) $ 6.17 $ 6.17
---------
Balance at July 3, 1999 3,710,234 $ 6.88 $ 4.25 - $9.63 5.32
=========
</TABLE>
On February 17, 1998, the Company granted options to purchase 375,000
shares at $5.4375 and options to purchase 400,000 shares at $6.84375.
These options were issued at exercise prices below the market price of
$9.6875 on this date. All of the remaining options were granted at the
market price on the date of the grant.
The following table stratifies the options as of July 3, 1999:
<TABLE>
<CAPTION>
Weighted
Weighted Average Average
Total Weighted Average Remaining Exercise
Exercise Price Options Exercise Contractual Options Price Per Share
per Share Outstanding Price Per Share Life (Years) Exercisable Exercisable
--------- ----------- --------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$ 8.00 - $ 9.63 1,554,934 $ 8.86 4.67 1,218,101 $ 8.73
$ 6.17 - $ 7.75 785,300 $ 7.04 4.67 571,172 $ 7.06
$ 4.25 - $ 5.44 1,370,000 $ 4.55 6.42 710,000 $ 4.80
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
----------------------------
The Company sponsors an Employee Stock Purchase Plan ("ESPP") under
which it is authorized to issue up to 500,000 shares of common stock to
all employees with a minimum of three months of service. The ESPP
allows eligible employees to contribute through payroll deductions up
to 10% of their annual salary toward stock purchases. Stock purchases
will be made quarterly at 90% of the closing price at the last day of
any calendar quarter.
11. INCOME TAXES
Deferred income taxes at July 3, 1999 and June 27, 1998, 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.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The components of deferred tax assets and liabilities are as follows:
July 3, 1999 June 27, 1998
------------ -------------
<S> <C> <C>
Deferred Tax Assets:
Operating and restructuring reserves $ 5,977 $ 5,495
Net operating losses 131,807 114,293
Depreciation and amortization 29,578 28,411
Lease escalation accruals 4,454 4,470
Jobs tax credit 4,432 4,432
Other items 4,458 3,730
----- -----
180,706 160,831
Valuation allowance (170,936) (151,061)
-------- --------
Net deferred tax assets $ 9,770 $ 9,770
========= =========
Composition of amounts in Consolidated
Balance Sheet:
Deferred tax assets - current $ 516 $ 489
Deferred tax liabilities - current -- --
-------- --------
Net deferred tax assets - current $ 516 $ 489
========= =========
Deferred tax assets - noncurrent $ 9,254 $ 9,281
Deferred tax liabilities - noncurrent -- --
-------- --------
Net deferred tax assets - noncurrent $ 9,254 $ 9,281
========= =========
</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 of the Company's plan of reorganization 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 (loss) income before taxes is as follows:
<TABLE>
<CAPTION>
Fifty-three Fifty-two Fifty-two
weeks ended weeks ended weeks ended
July 3, 1999 June 27, 1998 June 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Statutory tax rate (35.0%) (35.0%) (35.0%)
Change in valuation allowance 35.0% 35.0% 35.0%
---- ---- ----
Effective tax rate 0.0% 0.0% 0.0%
=== === ===
</TABLE>
The Company has approximately $363,000 of tax basis NOLs available to
offset future taxable income. Approximately $347,000 of this amount
("Section 382 NOLs") is subject to restrictions enacted in the Internal
Revenue Code of 1986, as amended, dealing specifically with stock
ownership changes and debt cancellations that occurred in connection
with the Company's emergence from bankruptcy. Additional restrictions
imposed by Internal Revenue Code Section 382 (I)(6), and the
regulations thereunder, could further limit the Company's ability to
use its Section 382 NOLs to offset future income to an amount
approximating $5,500 annually. The remaining $16,000 of NOLs were
incurred subsequent to September 2, 1995, and may be used to offset
future taxable income without restriction. These NOLs will expire
beginning in 2008.
The Company also has $4,432 of federal targeted jobs tax credit
carryovers, which will expire beginning in 2001.
The Internal Revenue Service has completed its field examination of the
Company's federal income tax returns for all years to and including
June 1992.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
12. EMPLOYEE BENEFIT PLANS
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 the union employee savings plan an
amount equal to 25% of an employee's contribution up to a maximum of 4%
of the employee's compensation. The Company contributes to the nonunion
employee savings plan an amount equal to 100% of the employee's
contribution up to 2% of the employee's pay and a minimum of 20% of the
employee's contribution in excess of 2% up to 4% of employee's pay
based on the Company's financial performance. The Company contributes
to the Pharmhouse employee savings plan an amount equal to 100% of the
employee's contribution up to one dollar of an employee's pay each week
and 25% of the employee's contribution in excess of one dollar each
week up to 3% of employee's pay. Employee savings plan expenses for the
fifty-three weeks ended July 3, 1999, the fifty-two weeks ended June
27, 1998 and the fifty-two weeks ended June 28, 1997, were $1,087,
$1,009 and $980, respectively.
Health and Welfare Plans
------------------------
The Company also contributes to a multiemployer union sponsored health
and welfare plan covering truck drivers and warehouse personnel. Total
expenses for the fifty-three weeks ended July 3, 1999, the fifty-two
weeks ended June 27, 1998, and the fifty-two weeks ended June 28, 1997,
were $2,050, $1,858, and $1,303, respectively.
The Company has no postretirement health and welfare or benefits
programs.
Defined Benefit Plans
---------------------
During the fifty-three weeks ended July 3, 1999, the Company adopted
SFAS No. 132, "Employer's Disclosures about Pensions and Other
Postretirement Benefits", which standardizes the disclosure
requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and the
fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures no longer considered useful. It does not
change the recognition or measurement of these plans. As required, the
presentation of information for years prior to July 3, 1999 have been
restated for comparative purposes.
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 non-union employees who had 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 non-union
personnel effective June 29, 1996 and to increase the Company's
matching contribution to the defined contribution plan for those
employees. The Company terminated its defined benefit plan that covers
non-union personnel on April 30, 1998. Lump sum cash payments were made
to the majority of plan participants prior to June 27, 1998. Annuities
were purchased for the remaining participants during the fifty-three
weeks ended July 3, 1999.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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:
July 3, 1999 June 27, 1998
------------ -------------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at the beginning of the year $ 5,175 $ 10,262
Service costs with expenses 287 170
Interest cost 264 668
Actuarial (gain)/loss 907 (235)
Benefits paid (2,041) (7,136)
Settlements -- 1,446
----- -----
Benefit obligation at end of year 4,592 5,175
----- -----
Change in plan assets
Fair value of plan assets at beginning of year 3,589 8,829
Actual return on plan assets 437 1,783
Employer contributions 1,205 113
Benefits paid (2,041) (7,136)
------ ------
Fair value of plan assets at end of year 3,190 3,589
----- -----
Funded status (1,402) (1,586)
Unrecognized transitional (asset) -- (1)
Unrecognized net actuarial loss 929 309
Unrecognized prior service cost 1 1
----- -----
Net amount recognized $ (472) $ (1,277)
========== ==========
Amounts recognized in the statement of
financial position consist of:
Accrued benefit liability $ (479) $ (1,277)
Intangible asset 1 --
Accumulated other comprehensive incom 6 --
----- -----
Net amount recognized $ (472) $ (1,277)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998
------------ -------------
<S> <C> <C>
Weighted-average assumptions
Discount rate 6.5 % 6.5 %
Expected long-term rate of return on assets 8.5 % 8.5 %
Rate of increase in future compensation levels 4.0 % 4.0 %
</TABLE>
<TABLE>
<CAPTION>
Fifty-three Fifty-two Fifty-two
weeks ended weeks ended weeks ended
July 3, 1999 June 27, 1998 June 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 286 $ 170 $ 85
Interest cost 264 668 622
Expected return on plan assets (244) (773) (651)
Amortization of transition asset -- -- --
Amortization of prior service cost -- -- --
Recognized actuarial loss 46 (1) --
---- ---- ----
Net periodic pension cost 352 64 56
Settlement effect from lump sum cashouts -- (1,446) --
---- ---- ----
Net pension (income) expense $ 352 $ (1,382) $ 56
========== =========== ==========
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
The projected benefit obligation, the accumulated benefit obligation,
and the fair value of plan assets for the pension plan with the
accumulated benefit obligations in excess of plan assets were $58, $44,
and $22, respectively, as of July 3, 1999 and $34, $20, and $14,
respectively, as of June 27, 1998.
13. REORGANIZATION ITEMS AND RELATED RESERVES
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 were scheduled to be reduced in size (rightsized) and
provided for the cost of rightsizing and provided a markdown reserve
for the inventories which would be liquidated in the affected stores.
In 1997, the rightsizing program was replaced with the "Super Phar-Mor"
concept. The "Super Phar-Mor" concept involves liquidating slow-moving
merchandise and utilizes the excess space to expand the existing
grocery offering and adds frozen and refrigerated food.
In March 1999, the Company recorded a reserve of approximately $800 in
purchase accounting related to the planned closure of a distribution
facility acquired as part of the Pharmhouse acquisition (see note 18).
The activity in the reserve for costs of downsizing is as follows:
<TABLE>
<CAPTION>
Fifty-three Fifty-two Fifty-two
weeks ended weeks ended weeks ended
July 3, 1999 June 27, 1998 June 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
Balance, beginning of period $ 967 $ 1,866 $ 3,451
Costs incurred in connection with the Pharmhouse 800 -- --
acquisition
Charges associated with closed stores -- -- (462)
Store rightsizing costs (849) (899) (895)
Corporate and distribution center costs -- -- (228)
----- ----- -----
Balance, end of period $ 918 $ 967 $ 1,866
=========== =========== ===========
</TABLE>
The remainder of the reserve for the costs of downsizing at July 3,
1999 is considered by management to be a reasonable estimate of the
costs to be incurred related to the downsizings. To the extent
additional stores or distribution centers are identified for closure at
a later date or the estimates for write-downs or reserves for the
current downsizing program require adjustment, such adjustments will be
recognized in future periods.
14. FINANCIAL INSTRUMENTS
The Company has financial instruments which include marketable
securities, investments and long-term debt. The carrying values of all
instruments at July 3, 1999 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.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal 1999
-----------
Thirteen Thirteen Thirteen Fourteen
weeks ended weeks ended weeks ended weeks ended
September 26, December 26, March 27, July 3,
1998 1998 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 269,412 $ 296,989 $ 290,928 $ 349,210
Gross profit $ 50,815 $ 58,704 $ 55,018 $ 64,124
Net (loss) income $ (1,512) $ 3,747 $ 1,167 $ (4,994)
Net (loss) income per basic share $ (0.12) $ 0.31 $ 0.10 $ (0.41)
Weighted average number of basic
shares outstanding 12,239,821 12,240,865 12,240,865 12,240,865
Net (loss) income per diluted share $ (0.12) $ 0.30 $ 0.09 $ (0.41)
Weighted average number of diluted
shares outstanding 12,239,821 12,362,089 12,317,051 12,240,865
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998
-----------
Thirteen Thirteen Thirteen Thirteen
weeks ended weeks ended weeks ended weeks ended
September 27, December 27, March 28, June 27,
1997 1997 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 256,332 $ 292,212 $ 277,319 $ 274,988
Gross profit $ 48,130 $ 57,992 $ 53,623 $ 53,449
Net (loss) income $ (7,571) $ 2,778 $ (4,712) $ 675
Net (loss) income per basic share $ (0.62) $ 0.23 $ (0.39) $ 0.06
Weighted average number of basic
shares outstanding 12,159,199 12,165,353 12,229,071 12,235,865
Net (loss) income per diluted share $ (0.62) $ 0.23 $ (0.39) $ 0.05
Weighted average number of diluted
shares outstanding 12,159,199 12,212,527 12,229,071 12,790,933
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
16. (LOSS) INCOME PER SHARE
During 1997, the Company adopted SFAS No. 128 "Earnings per Share."
This standard requires the Company to present basic and diluted
earnings per share. Basic earnings per share is computed by dividing
net income by the average number of common shares outstanding during
the period. The diluted earnings per share calculation assumes the
conversion of dilutive stock options and warrants into common shares.
The earnings per share calculations for all periods are as follows:
<TABLE>
<CAPTION>
Fifty-three Fifty-two Fifty-two
weeks ended weeks ended weeks ended
July 3, 1999 June 27, 1998 June 28, 1997
------------ ------------- -------------
<S> <C> <C> <C>
BASIC (LOSS) EARNINGS PER SHARE
-------------------------------
Net loss available for common shares $ (1,592) $ (8,830) $ (2,281)
Basic weighted average common shares
outstanding 12,240,595 12,197,371 12,157,419
Basic earnings per share $ (.13) $ (.72) $ (.19)
DILUTED (LOSS) EARNINGS PER SHARE
---------------------------------
Net loss available for common shares $ (1,592) $ (8,830) $ (2,281)
Diluted weighted average common shares 12,240,595 12,197,371 12,157,419
Diluted earnings per share $ (.13) $ (.72) $ (.19)
</TABLE>
There were 3,710,234, 2,616,167 and 1,320,817 options for the
fifty-three weeks ended July 3, 1999, the fifty-two weeks ended June
27, 1998 and the fifty-two weeks ended June 28, 1997, respectively, and
1,250,000 warrants for the fifty-three weeks ended July 3, 1999, the
fifty-two weeks ended June 27, 1998 and the fifty-two weeks ended June
28, 1997 excluded from the calculation of diluted (loss) income per
share as they would have had an anti-dilutive effect on (loss) income
per share.
17. LITIGATION
The Company and its subsidiaries are involved in legal proceedings,
claims and litigation arising in the ordinary course of business. In
the opinion of management, the outcome of such current legal
proceedings, claims and litigation will not have a material impact on
the Company's consolidated financial position.
18. BUSINESS COMBINATIONS
The Company entered into an Agreement and Plan of Reorganization dated
September 7, 1996 (as amended as of October 9, 1996) with ShopKo
Stores, Inc. ("ShopKo") and Cabot Noble, Inc. ("Cabot Noble").
On April 1, 1997, the Company, ShopKo and Cabot Noble entered into a
Termination Agreement mutually terminating the Agreement Plan of
Reorganization effective as of April 1, 1997.
On March 15, 1999, the Company completed the merger of its wholly owned
subsidiary Pharmacy Acquisition Corp. ("PAC") with and into Pharmhouse
Corp. ("Pharmhouse"), pursuant to the Agreement and Plan of Merger
dated as of December 17, 1998 among Phar-Mor, PAC and Pharmhouse (the
"Merger Agreement"). As a result of the merger Pharmhouse became a
wholly owned subsidiary of Phar-Mor. In addition, subject to the terms
of the Merger Agreement, each share of the common stock of Pharmhouse
was converted into the right to receive $2.88 per share in cash (the
"Merger"). The total purchase price payable in connection with the
Merger was approximately $34,200, consisting of $7,500 in cash and the
assumption of $26,700 in debt.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
- --------------------------------------------------------------------------------
Phar-Mor and PAC financed the payment of the purchase price and all
other fees and expenses associated with the Merger through cash from
operations and from borrowings under the Company's Amended Revolving
Credit Facility.
The Company used its excess cash position and excess availability under
its Amended Revolving Credit Facility to pay off $26,700 in debt that
was assumed as part of the merger with Pharmhouse.
The Merger was accounted for under the purchase method of accounting.
The results of operations of Pharmhouse from March 16, 1999 through
July 3, 1999 have been included in the Consolidated Statements of
Operations for the fifty-three weeks ended July 3, 1999. The total
purchase price payable in connection with the Merger was approximately
$34,200, consisting of $7,500 in cash and the assumption of $26,700 in
debt. Goodwill is being amortized using the straight-line method over a
period of 25 years. The fair value of the assets acquired and
liabilities assumed was as follows:
Identifiable assets acquired $54,962
Liabilities assumed (61,954)
Goodwill 14,866
------
Cash paid $7,874
======
The following supplemental pro forma information is presented as though
the companies combined at the beginning of the respective periods:
<TABLE>
<CAPTION>
Fifty-three weeks Fifty-two weeks
ended July 3, 1999 ended June 27, 1998
------------------ -------------------
<S> <C> <C>
Sales $ 1,337,222 $ 1,293,956
=========== ===========
Net loss $ (10,171) $ (13,377)
=========== ===========
Basic and diluted loss per common share $ (.83) $ (1.10)
=========== ===========
</TABLE>
Pharmhouse operated 32 discount drug stores in eight mid-Atlantic and
New England states under the names "Pharmhouse" and "Rx Place".
F-24
<PAGE>
<TABLE>
<CAPTION>
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
beginning costs and Deductions- end of
Description of period expense Charge-offs period
----------- --------- ------- ----------- ------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
-------------------------------
52 weeks ended June 28, 1997 4,191 1,382 (2,870) 2,703
52 weeks ended June 27, 1998 2,703 (186) (1,115) 1,402
53 weeks ended July 3 1999 1,402 2,097 (1,755) 1,744
Inventory shrink reserve
------------------------
52 weeks ended June 28, 1997 6,469 13,122 (13,968) 5,623
52 weeks ended June 27, 1998 5,623 6,310 (8,009) 3,924
53 weeks ended July 3, 1999 3,924 9,741 (7,839) 5,826
Inventory markdown reserve
--------------------------
52 weeks ended June 28, 1997 5,361 - (4,616) 745
52 weeks ended June 27, 1998 745 - (745) -
53 weeks ended July 3, 1999 - - - -
</TABLE>
F-25
Amendment No.1, dated as of March 3, 1999, (this "Amendment"), to the
Amended and Restated Loan and Security Agreement, dated as of September 10, 1998
(as heretofore or hereafter amended, supplemented or otherwise modified, the
"Agreement") among (i) the financial institutions listed on the signature pages
hereof, (ii) BankAmerica Business Credit, Inc., a Delaware corporation ("BABC"),
as agent for such financial institutions (in its capacity as agent, the "Agent")
and Phar-Mor, Inc., a Pennsylvania corporation, ("Phar-Mor"), Phar-Mor of
Florida, Inc., a Pennsylvania corporation, Phar-Mor of Ohio, Inc., an Ohio
corporation, Phar-Mor of Virginia, Inc., a Virginia corporation, Phar-Mor of
Wisconsin, Inc., a Wisconsin corporation, Phar-Mor of Delaware, Inc., a Delaware
corporation, Phar-Mor, Inc., LLC, a Pennsylvania limited liability company,
(each individually, including Phar-Mor, a "Borrower" and collectively the
"Borrowers")
WITNESSETH:
WHEREAS, the Borrowers have requested that the Lenders amend certain
covenants concerning restricted investments;
WHEREAS, pursuant to this Amendment certain covenants will be modified
on the terms and conditions as hereinafter set forth,
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein have the respective meanings ascribed thereto in the Agreement.
2. Amendments to the Agreement. The Agreement is hereby amended as
follows:
(a) Section 9.9 is hereby amended by deleting from clause
(iii) thereof the dollar figure "$20,000,000" and inserting in its place the
dollar figure "$40,000,000,"
(b) Clause (ii) of Section 9.13 is hereby amended in its
entirety as follows:
"an aggregate investment of up to $20,000,000 in Avatex Corporation by Phar-Mor,
Inc., may be made and maintained."
3. Representations and Warranties. To induce Lender to enter into this
Amendment, Borrowers hereby represent and warrant as follows, with the same
effect as if such representations and warranties were set forth in the
Agreement:
(a) each Borrower has the power and authority to enter into
this Amendment and has taken all corporate action required to authorized its
execution, delivery and performance of this Amendment. This amendment has been
duly executed and delivered by each Borrower and the Agreement, as amended
hereby, constitutes the valid and binding obligation of Borrowers, enforceable
against each Borrower in accordance with its terms. The execution, delivery and
performance of this Amendment and the Agreement, as amended hereby, by each
Borrower, will not violate its respective certificate of incorporation or
by-laws or any agreement or legal requirement binding on such Borrower.
(b) On the date hereof and after giving effect to the terms of
this Amendment, (i) the Agreement and the other loan Documents are in full force
and effect and, to the extent that a Borrower is a party thereto, constitutes
its binding obligation, enforceable against it in accordance with their
respective terms; (ii) no Default or Event of Default has occurred and is
continuing; and (iii) no Borrower has any defense to or setoff, counterclaim or
claim against payment of the Obligations and enforcement of the Loan Documents
based upon a fact or circumstance existing occurring on or prior to the date
hereof.
(c) The Collateral is entirely free and clear of all security
interests, liens, pledges and other charges and encumbrances, except those (A)
created by the Agreement as amended hereby, or (B) permitted pursuant to the
terms of the Agreement as so amended, and the Borrowers have not entered into
any agreement pursuant to which any security interests, liens, pledges, or other
charges or encumbrances will be imposed or created directly, or as a result of
any act or event, upon any of the Collateral. Without limiting the generality of
the foregoing, the Collateral does and shall continue to secure the payment of
all Obligations.
4. Limited Effect. Except as expressly amended hereby, all of the
covenants and provisions of the Agreement are and shall continue to be in full
force and effect. Upon the effectiveness of this Amendment, each reference in
the Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of
like import and each reference in the other Loan Documents to the Agreement
shall mean and be a reference to the Agreement as amended hereby.
5. Conditions of Effectiveness. This Amendment shall become effective
when and only when:
(i) this Amendment shall be executed by the Borrowers;
(ii) Payment to Agent of the fee set forth in the fee Letter
dated February 26, 1999, between Agent and Phar-Mor, Inc; and
(iii) the Agent shall have received such other documents, as
the Agent shall request.
6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO THE
CONFLICT OF LAWS PROVISIONS) OF THE STATE OF NEW YORK.
7. Counterparts. this Amendment may be executed by the parties hereto
in any number of separate counterparts, each of which shall be an original, and
all of which taken together shall be deemed to constitute one and the same
instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
PHARMOR, INC.
By:________________________________
Name:
Title:
PHAR-MOR OF DELAWARE, INC.
By:_______________________________
Name:
Title:
PHARMOR OF FLORIDA, INC.
By:________________________________
Name:
Title:
PHARMOR OF OHIO, INC.
By:________________________________
Name:
Title:
PHARMOR OF VIRGINIA, INC.
By:________________________________
Name:
Title:
PHARMOR OF WISCONSIN, INC.
By:________________________________
Name:
Title:
PHAR-MOR, INC., LLC
By:________________________________
Name:
Title:
PHARMHOUSE CORP.
By:________________________________
Name:
Title:
BANKAMERICA BUSINESS CREDIT, INC.,
as the Agent
By:________________________________
Name:
Title:
BANKAMERICA BUSINESS CREDIT, INC.,
as a Lender
By:________________________________
Name:
Title:
HELLER FINANCIAL, INC.,
as a Lender
By:________________________________
Name:
Title:
LASALLE BUSINESS CREDIT, INC.,
as a Lender
By:________________________________
Name:
Title:
BNY FINANCIAL CORP.,
as a Lender
By:________________________________
Name:
Title:
AMENDMENT No. 2, dated as of March 15, 1999, (this "Amendment"), to the
Amended and Restated Loan and Security Agreement, dated as of September 10, 1998
(as heretofore or hereafter amended, supplemented or otherwise modified, the
"Agreement") among (i) the financial institutions listed on the signature pages
hereof, (ii) BankAmerica Business Credit, Inc., a Delaware corporation ("BABC"),
as agent for such financial institutions (in its capacity as agent, the "Agent")
and Phar-Mor, Inc., a Pennsylvania corporation, ("Phar-Mor"), Phar-Mor of
Florida, Inc., a Pennsylvania corporation, Phar-Mor of Ohio, Inc., an Ohio
corporation, Phar-Mor of Virginia, Inc., a Virginia corporation, Phar-Mor of
Wisconsin, Inc., a Wisconsin corporation, Phar-Mor of Delaware, Inc., a Delaware
corporation, Phar-Mor, Inc., LLC, a Pennsylvania limited liability company and
Pharmhouse Corp., a New York corporation (each individually, including Phar-Mor,
a "Borrower" and collectively the "Borrowers").
W I T N E S S E T H :
WHEREAS, the Agreement requires the adding of new subsidiaries
as borrowers;
WHEREAS, pursuant to this Amendment new subsidiaries shall be added as
borrowers and certain provisions of the Agreement will be modified and/or waived
on the terms and conditions as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein have the respective meanings ascribed thereto in the Agreement.
2. Amendments to the Agreement. The Agreement is hereby amended as
follows:
(a) The words "LOAN AND SECURITY AGREEMENT" on the cover page
of the Agreement are hereby amended to read "AMENDED AND RESTATED LOAN AND
SECURITY AGREEMENT".
(b) Clause (iii) of the first paragraph of the first page of
the Agreement is hereby amended as follows:
"Phar-Mor, Inc., a Pennsylvania corporation, ("Phar-Mor"),
Phar-Mor of Florida, Inc., a Pennsylvania corporation, Phar-Mor of Ohio, Inc.,
an Ohio corporation, Phar-Mor of Virginia, Inc., a Virginia corporation,
Phar-Mor of Wisconsin, Inc., a Wisconsin corporation, Phar-Mor of Delaware,
Inc., a Delaware corporation and Phar-Mor, Inc., LLC, a Pennsylvania limited
liability company, Pharmhouse Corp., a New York corporation, (each individually,
including Phar-Mor, a "Borrower" and collectively the "Borrowers")".
(c) The following definition is added to Article 1: "Merger
Agreement" means the Agreement and Plan of Merger among Pharmhouse Corp.,
Phar-Mor, Inc. and Pharmacy Acquisition Corp., pursuant to which Pharmacy
Acquisition Corp. will be merged with and into Pharmhouse Corp. (the "Merger").
(d) The definition of "Reaffirmation of Guaranty and Stock
Pledge Agreement" is hereby amended in its entirety as follows:
"Reaffirmation of Guaranty and Stock Pledge Agreement means
the Reaffirmation of Guaranty and Stock Pledge Agreement, dated as of March 15,
1999, and delivered by the Borrowers party thereto to Agent on March 15, 1999."
(e) The definition of "Joint and Several Guaranty" is amended
by inserting the following words immediately after the word Agreement in the
last line of such definition:
"dated September 10, 1998, and as further reaffirmed and
amended by the Reaffirmation of Guaranty and Stock Pledge
Agreement dated March 15, 1999".
(f) The definition "Stated Termination Date" is amended by
replacing the date "September 10, 2001" with the date "March 14, 2002."
(g) The definition of Stock Pledge Agreement is amended by
deleting the words "the date of this Agreement" on the last line of such
definition and inserting in place thereof the following:
"September 10, 1998, and as further reaffirmed and amended by
the Reaffirmation of Guaranty and Stock Pledge Agreement dated
March 15, 1999".
(h) Clause (g) of the definition of Permitted Liens is amended
as follows:
(i) The letter "s" at the end of the word "clauses", the word
"and" and the parenthetical "(h)" in the last line of Section 6.12 are hereby
deleted.
(j) Section 8.4 is hereby amended by changing the
capitalization of the word "Each" to "each" and inserting the following words
and punctuation immediately before such word: "Except as set forth on Schedule
8.4,"
(k) Section 8.7 is hereby amended by deleting the word "othe"
in the first line of such definition and replacing it with the word "the".
(l) Clause (iv) of Section 8.9 is hereby amended by adding
immediately after the word "Reorganization" the following: "and Debt incurred in
connection with the Merger"
(m) Section 8.10 is hereby amended by changing the word
"Since" to "since" and adding the following words and punctuation immediately
before such word: "Except as set forth in Schedule 8.10,"
(n) Section 9.12 is hereby amended by deleting the word "and"
that immediately precedes clause "(iii)" and adding the following punctuation
and words immediately after the word "sales" in the last sentence thereof:
", and (iv) up to $30,000,000 of Debt consisting of high yield
bonds or notes ("Permitted Bonds Prepayment"); provided that,
(a) at the time of such Permitted Bonds
Prepayment, average daily Aggregate
Availability (without giving effect to
clause (a) (i) thereof) was not less than
$60,000,000 for the 90 days immediately
prior to such Permitted Bonds Prepayment,
(b) after giving effect to such Permitted Bonds
Prepayment, Aggregate Availability (without
giving effect to clause (a)(i) thereof) is
not less than $30,000,000,
(c) no Default or Event of Default shall exist
at the time of such Permitted Bonds
Prepayment or after giving effect thereto,
and
(d) Phar-Mor shall have provided Agent with at
least three (and not more than five) days
prior written notice, which notice shall
include a statement as to the amount of such
Permitted Bonds Prepayment, the total of all
Permitted Bonds Prepayments after giving
effect to such Permitted Bonds Prepayment,
and that no Default or Event of Default
exists as of the date thereof before or
after giving effect to such Permitted Bonds
Prepayment".
(o) Section 9.20 is hereby amended by adding the following
immediately after the dollar figure $30,000,000 in the eighth line thereof:
", for the 90 days immediately prior to the closing date of
such acquisition, average daily Aggregate Availability (without giving effect to
clause (a)(i) thereof) was not less than $60,000,000, and immediately after
giving effect to such Permitted Acquisition, Aggregate Availability (without
giving effect to clause (a)(i) thereof) is not less than $30,000,000"
(p) Section 9.23 is hereby amended by changing the word "Such"
to "such" and adding the following words and punctuation immediately before such
word: "Except for the Merger,"
(q) Section 11.1(p) is hereby amended by deleting from the
fifth line thereof the letter "s" from the word "clauses", the word "and" and
the parenthetical "(h)".
3. Joinder of New Borrower to Loan Documents. From and after the date
hereof, the new Borrower is and shall be subject to and bound by, and shall be
entitled to all the benefits of the Loan Documents, and shall be a party
thereto, all as if such new Borrower had been a "Borrower" party to the original
execution and delivery thereof, and all references in the Loan Documents to
"Borrower", the "Borrowers", shall hereafter be deemed to be references to and
include the new Borrower. The new Borrower confirms that the Obligations are and
shall be joint and several Obligations and assumes all rights, duties and
obligations under and grants a continuing security interest to the Agent for the
benefit of the Agent and the ratable benefit of the Lenders in all of their
Property (as defined in the Agreement) that would constitute Collateral under
the Agreement and any of the Loan Documents as if it had been an original
signatory to the Agreement. To the extent not otherwise modified, the preamble
to the Agreement and each other applicable Loan Document, and any other
applicable provisions of the Loan Documents, shall hereafter be deemed modified
to reflect the provisions of this paragraph.
4. Representations and Warranties. To induce Lender to enter into this
Amendment, Borrowers hereby represent and warrant as follows, with the same
effect as if such representations and warranties were set forth in the
Agreement:
(a) Each Borrower has the power and authority to enter into
this Amendment and has taken all corporate action required to authorize its
execution, delivery and performance of this Amendment. This Amendment has been
duly executed and delivered by each Borrower and the Agreement, as amended
hereby, constitutes the valid and binding obligation of Borrowers, enforceable
against each Borrower in accordance with its terms. The execution, delivery, and
performance of this Amendment and the Agreement, as amended hereby, by each
Borrower, will not violate its respective certificate of incorporation or bylaws
or any agreement or legal requirement binding on such Borrower.
(b) On the date hereof and after giving effect to the terms
of this Amendment, (i) the Agreement and the other Loan Documents are in full
force and effect and, to the extent that a Borrower is a party thereto,
constitutes its binding obligation, enforceable against it in accordance with
their respective terms; (ii) no Default or Event of Default has occurred and is
continuing; and (iii) no Borrower has any defense to or setoff, counterclaim or
claim against payment of the Obligations and enforcement of the Loan Documents
based upon a fact or circumstance existing or occurring on or prior to the date
hereof.
(c) The Collateral is entirely free and clear of all
security interests, liens, pledges and other charges and encumbrances, except
those (A) created by the Agreement as amended hereby, or (B) permitted pursuant
to the terms of the Agreement as so amended, and the Borrowers have not entered
into any agreement pursuant to which any security interests, liens, pledges, or
other charges or encumbrances will be imposed or created directly, or as a
result of any act or event, upon any of the Collateral. Without limiting the
generality of the foregoing, the Collateral does and shall continue to secure
the payment of all Obligations.
5. Opinions. To induce the Lender to enter into this Amendment, the
Borrowers shall deliver an opinion of counsel for the Borrowers, satisfactory to
the Agent, covering matters satisfactory to the Agent.
6. Limited Effect. Except as expressly amended hereby, all of the
covenants and provisions of the Agreement are and shall continue to be in full
force and effect. Upon the effectiveness of this Amendment, each reference in
the Agreement to this Agreement , hereunder , hereof , herein or words of like
import and each reference in the other Loan Documents to the Agreement shall
mean and be a reference to the Agreement as amended hereby.
7. Conditions of Effectiveness. This Amendment shall become effective
when and only when:
(i) this Amendment shall be executed by the Borrowers;
(ii) the Agent shall have received the Merger Agreement and
related closing documents as in effect on the date hereof, certified by an
authorized officer of Phar-Mor to be true and correct copies (there shall have
been no amendments or modifications to the Merger Agreement from the copy
thereof previously delivered to Agent that are not acceptable to Agent);
(iii) the Agent shall have received a copy of the certificate
of merger to be filed with the Secretary of State of New York in order to
consummate the Merger and such proof of filing and acceptance of such
certificate as shall be reasonably satisfactory to Agent;
(iv) the Agent shall have received a release and termination
of the financing arrangements with Foothill Capital Corporation, satisfactory to
Agent; and
(v) the Agent shall have received such other documents, as
the Agent shall request.
8. Post Effectiveness. Phar-Mor agrees to provide the Agent with the
following, not later than 30 days after the effective date of this Amendment:
(i) a copy certified by an authorized officer of a
certificate of qualification and good standing for Pharmhouse Corp.;
(ii) original stock certificates or other equity interests,
with signed blank stock powers for Pharmhouse Corp.;
(iii) duly executed UCC-3 Termination Statements and other
instruments, in form and substance satisfactory to Agent, as shall be necessary
to terminate and satisfy all liens of prior lenders on Pharmhouse Collateral;
(iv) duly executed UCC-1 financing statements for Pharmhouse
Corp., duly filed under the UCC of all jurisdictions that the Agent may deem
necessary or desirable in order to perfect the Agent's lien;
(v) the following updated Schedules: (1.1(D)) - Premises;
(6.3) - Location of Collateral; (6.4) - Permitted Liens on Collateral; (8.5) -
Subsidiaries and Affiliates; (8.7) Capitalization; (8.11) - Title to Property;
(8.13) - Proprietary Rights; (8.17) Labor Disputes; (8.18) - Environmental Laws;
(8.21) - ERISA Compliance; (8.27) Material Agreements; (8.28) - Bank Accounts;
(9.5) - Insurance; (9.9) - Management Agreements;
(vi) the opinion of counsel for the Borrowers required by
Section 5 of this Amendment; and
(vii) such other documents as the Agent shall reasonably
request.
9. Waiver. Solely for purposes of consummating the Merger, the Lenders
hereby waive Sections 9.8, 9.9, 9.18 and 9.20.
10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO THE
CONFLICT OF LAWS PROVISIONS) OF THE STATE OF NEW YORK.
11. Counterparts. This Amendment may be executed by the parties hereto
in any number of separate counterparts, each of which shall be an original, and
all of which taken together shall be deemed to constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective proper and duly authorized
officers as of the day and year first above written.
PHARMOR, INC.
By:________________________________
Name:
Title:
PHAR-MOR OF DELAWARE, INC.
By:_______________________________
Name:
Title:
PHARMOR OF FLORIDA, INC.
By:________________________________
Name:
Title:
PHARMOR OF OHIO, INC.
By:________________________________
Name:
Title:
PHARMOR OF VIRGINIA, INC.
By:________________________________
Name:
Title:
PHARMOR OF WISCONSIN, INC.
By:________________________________
Name:
Title:
PHAR-MOR, INC., LLC
By:________________________________
Name:
Title:
PHARMHOUSE CORP.
By:________________________________
Name:
Title:
BANKAMERICA BUSINESS CREDIT, INC.,
as the Agent
By:________________________________
Name:
Title:
BANKAMERICA BUSINESS CREDIT, INC.,
as a Lender
By:________________________________
Name:
Title:
HELLER FINANCIAL, INC.,
as a Lender
By:________________________________
Name:
Title:
LASALLE BUSINESS CREDIT, INC.,
as a Lender
By:________________________________
Name:
Title:
BNY FINANCIAL CORP.,
as a Lender
By:________________________________
Name:
Title:
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (the "Second Amendment")
is entered into by and between Phar-Mor, Inc., a Pennsylvania corporation (the
"Company") and Warren E. Jeffery (the "Employee") as of February 10, 1999 (the
"Effective Date").
WHEREAS, Employee is currently employed by the Company pursuant to a
written Employment Agreement dated as of June 23, 1998 (the "Existing
Agreement") as amended as of August 27, 1998 (the "First Amendment"); and
WHEREAS, the Company and the Employee desire to further amend the
Existing Agreement, as amended.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
1. All terms, conditions and provisions of the Existing Agreement, as amended by
the First Amendment shall remain the same to the extent not modified or amended
herein in which event the terms, conditions and provisions of this Second
Amendment shall prevail.
2. Section II., DUTIES, sub-paragraph A., shall be amended to provide that the
Company shall employ Employee and Employee shall serve the Company for the
stated term (the "Term") in the capacity of Executive Vice President of
Merchandising, Marketing and Logistics of the Company.
3. Section I., EMPLOYMENT TERM, of the Existing Agreement, as amended, is
further amended to provide that the Term shall be two years and shall be
automatically extended daily, it being the intent of the parties that the
Existing Agreement, as amended, shall have a Term that is a "rolling term" of
two years.
4. Section III., COMPENSATION, sub-paragraph A., Base Salary, shall be amended
to provide that the minimum annual base salary paid to the Employee shall be
$250,000 until the year beginning June 1, 1999 when such minimum annual base
salary shall increase to $300,000. Such minimum annual salary shall be payable
weekly to the Employee and shall be subject to increase effective on each June 1
thereafter beginning with June 1, 2000. The amount of the increase, if any,
shall be determined by the Company based upon the individual performance of the
Employee and the Company. In no event shall such minimum annual salary be
decreased.
5. Section IV., TERMINATION, sub-paragraph F.3., Other Than for Cause or by
Reason of Death or Disability, shall be amended to provide that notwithstanding
anything to the contrary contained in the Existing Agreement, as amended, should
a Change of Control occur during the first year of the rolling two-year term of
the Agreement, then, as provided in the Existing Agreement, the Employee shall
be receive two times total annual compensation (in addition to any other
benefits the Employee is entitled to thereunder) as described therein. This
shall supersede any changes to this provision previously made in the First
Amendment.
c:\wp51\ficarro\empamnd2.wj 2/10/99
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
PHAR-MOR, INC.
By:
Abbey J. Butler Warren E. Jeffery
Co-Chairman and Chief
Executive Officer
By:
Melvyn J. Estrin
Co-Chairman and Chief
Executive Officer
c:\wp51\ficarro\empamnd2.wj 2/10/99
- Page 2 -
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
This Third Amendment to Employment Agreement (the "Third Amendment") is
entered into by and between Phar-Mor, Inc., a Pennsylvania corporation (the
"Company") and M. David Schwartz (the "Employee") as of February 10, 1999 (the
"Effective Date").
WHEREAS, Employee is currently employed by the Company pursuant to a
written Employment Agreement dated as of June 5, 1997 (the "Existing Agreement")
as amended as of June 23, 1998 (the "First Amendment") and as further amended as
of August 27, 1998 (the "Second Amendment"); and
WHEREAS, the Company and the Employee desire to further amend the
Existing Agreement, as amended.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
1. All terms, conditions and provisions of the Existing Agreement, as amended by
the First Amendment and Second Amendment shall remain the same to the extent not
modified or amended herein in which event the terms, conditions and provisions
of this Third Amendment shall prevail.
2. Section I., EMPLOYMENT TERM, of the Existing Agreement, as amended, is
further amended to provide that the stated term (the "Term") shall be two years
and shall be automatically extended daily, it being the intent of the parties
that the Existing Agreement, as amended, shall have a Term that is a "rolling
term" of two years.
3. Section III., COMPENSATION, sub-paragraph A., Base Salary, shall be amended
to provide that the minimum annual base salary of $715,500 to be paid to the
Employee for the year beginning June 1, 1999 shall be payable weekly to the
Employee and shall be subject to increase effective on each June 1 thereafter
beginning with June 1, 2000. The amount of the increase, if any, shall be
determined by the Company based upon the individual performance of the Employee
and the Company. In no event shall such minimum annual salary be decreased.
4. Section IV., TERMINATION, sub-paragraph F.3., Other Than for Cause or by
Reason of Death or Disability, shall be amended to provide that notwithstanding
anything to the contrary contained in the Existing Agreement, as amended, should
a Change of Control occur during the first year of the rolling two-year term of
the Agreement, then, as provided in the Existing Agreement, the Employee shall
be receive two times total annual compensation (in addition to any other
benefits the Employee is entitled to thereunder) as described therein. This
shall supersede any changes to this provision previously made in the First and
Second Amendments.
c:\wp51\ficarro\empamnd3.ds 2/10/99
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
PHAR-MOR, INC.
By:
Abbey J. Butler M. David Schwartz
Co-Chairman and Chief
Executive Officer
By:
Melvyn J. Estrin
Co-Chairman and Chief
Executive Officer
c:\wp51\ficarro\empamnd3.ds 2/10/99
- Page 2 -
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
This Third Amendment to Employment Agreement (the "Third Amendment") is
entered into by and between Phar-Mor, Inc., a Pennsylvania corporation (the
"Company") and Sankar Krishnan (the "Employee") as of February 10, 1999 (the
"Effective Date").
WHEREAS, Employee is currently employed by the Company pursuant to a
written Employment Agreement dated as of June 13, 1997 (the "Existing
Agreement") as amended as of June 23, 1998 (the "First Amendment") and as
further amended as of August 27, 1998 (the "Second Amendment"); and
WHEREAS, the Company and the Employee desire to further amend the
Existing Agreement, as amended.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
1. All terms, conditions and provisions of the Existing Agreement, as amended by
the First Amendment and Second Amendment shall remain the same to the extent not
modified or amended herein in which event the terms, conditions and provisions
of this Third Amendment shall prevail.
2. Section I., EMPLOYMENT TERM, of the Existing Agreement, as amended, is
further amended to provide that the stated term (the "Term") shall be two years
and shall be automatically extended daily, it being the intent of the parties
that the Existing Agreement, as amended, shall have a Term that is a "rolling
term" of two years.
3. Section III., COMPENSATION, sub-paragraph A., Base Salary, shall be amended
to provide that the base salary paid to the Employee for the year beginning June
1, 1999 shall be $270,000. Such minimum annual salary shall be payable weekly to
the Employee and shall be subject to increase effective on each June 1
thereafter beginning with June 1, 2000. The amount of the increase, if any,
shall be determined by the Company based upon the individual performance of the
Employee and the Company. In no event shall such minimum annual salary be
decreased.
4. Section IV., TERMINATION, sub-paragraph F.3., Other Than for Cause or by
Reason of Death or Disability, shall be amended to provide that notwithstanding
anything to the contrary contained in the Existing Agreement, as amended, should
a Change of Control occur during the first year of the rolling two-year term of
the Agreement, then, as provided in the Existing Agreement, the Employee shall
be receive two times total annual compensation (in addition to any other
benefits the Employee is entitled to thereunder) as described therein. This
shall supersede any changes to this provision previously made in the First and
Second Amendments.
5. Upon execution hereof, the Employee shall receive a signing bonus of $25,000
payable immediately.
c:\wp51\ficarro\empamnd3.sk 2/10/99
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
PHAR-MOR, INC.
By:
Abbey J. Butler Sankar Krishnan
Co-Chairman and Chief
Executive Officer
By:
Melvyn J. Estrin
Co-Chairman and Chief
Executive Officer
c:\wp51\ficarro\empamnd3.sk 2/10/99
- Page 2 -
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
This Third Amendment to Employment Agreement (the "Third Amendment") is
entered into by and between Phar-Mor, Inc., a Pennsylvania corporation (the
"Company") and John R. Ficarro (the "Employee") as of February 10, 1999 (the
"Effective Date").
WHEREAS, Employee is currently employed by the Company pursuant to a
written Employment Agreement dated as of June 5, 1997 (the "Existing Agreement")
as amended as of June 23, 1998 (the "First Amendment") and as further amended as
of August 27, 1998 (the "Second Amendment"); and
WHEREAS, the Company and the Employee desire to further amend the
Existing Agreement, as amended.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
1. All terms, conditions and provisions of the Existing Agreement, as amended by
the First Amendment and Second Amendment shall remain the same to the extent not
modified or amended herein in which event the terms, conditions and provisions
of this Third Amendment shall prevail.
2. Section I., EMPLOYMENT TERM, of the Existing Agreement, as amended, is
further amended to provide that the stated term (the "Term") shall be two years
and shall be automatically extended daily, it being the intent of the parties
that the Existing Agreement, as amended, shall have a Term that is a "rolling
term" of two years.
3. Section III., COMPENSATION, sub-paragraph A., Base Salary, shall be amended
to provide that the base salary paid to the Employee for the year beginning June
1, 1999 shall be $230,000. Such minimum annual salary shall be payable weekly to
the Employee and shall be subject to increase effective on each June 1
thereafter beginning with June 1, 2000. The amount of the increase, if any,
shall be determined by the Company based upon the individual performance of the
Employee and the Company. In no event shall such minimum annual salary be
decreased.
4. Section IV., TERMINATION, sub-paragraph F.3., Other Than for Cause or by
Reason of Death or Disability, shall be amended to provide that notwithstanding
anything to the contrary contained in the Existing Agreement, as amended, should
a Change of Control occur during the first year of the rolling two-year term of
the Agreement, then, as provided in the Existing Agreement, the Employee shall
be receive two times total annual compensation (in addition to any other
benefits the Employee is entitled to thereunder) as described therein. This
shall supersede any changes to this provision previously made in the First and
Second Amendments.
5. Upon execution hereof, the Employee shall receive a signing bonus of $25,000
payable immediately.
c:\wp51\ficarro\empamnd3.jf 2/10/99
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
PHAR-MOR, INC.
By:
Abbey J. Butler John R. Ficarro
Co-Chairman and Chief
Executive Officer
By:
Melvyn J. Estrin
Co-Chairman and Chief
Executive Officer
c:\wp51\ficarro\empamnd3.jf 2/10/99
- Page 2 -
We consent to the incorporation by reference in Registration Stetement No.
333-30895 of Phar-Mor, Inc. on Form S-8 of our report dated September 17, 1999,
appearing in the Annual Report on form 10-K of Phar-Mor, Inc. for the fiscal
year ended July 3, 1999.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
September 30, 1999
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<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-END> JUL-03-1999
<CASH> 17,346
<SECURITIES> 3,254
<RECEIVABLES> 30,037
<ALLOWANCES> 1,744
<INVENTORY> 218,945
<CURRENT-ASSETS> 275,256
<PP&E> 141,500
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0
0
<COMMON> 122
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<SALES> 1,206,539
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