SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 10, 1999
PHAR-MOR, INC.
(Exact name of registrant as specified in its charter)
1-7090 25-1466309
------ ----------
(Commission File Number) (I. R. S. Employer 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
--------------
<PAGE>
Item 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of the Business Acquired
The following financial statements for the acquired business are filed
herewith:
Report of Independent Accountants on Pharmhouse Corp. and subsidiaries
Consolidated Financial Statements for the Fiscal Years ended January 30,
1999, January 31, 1998 and February 1, 1997
Pharmhouse Corp. and subsidiaries: Consolidated Balance Sheets as of
January 30, 1999 and January 31, 1998
Pharmhouse Corp. and subsidiaries: Consolidated Statements of Operations,
Consolidated Statements of Cash Flows, and Consolidated Statements of
Shareholders' Equity (Deficit) for the Fiscal Years ended January 30, 1999,
January 31, 1998, and February 1, 1997
Notes to the Consolidated Financial Statements
(b) Unaudited Pro Forma Financial Information:
The following unaudited pro forma condensed consolidated financial
statements are filed herewith:
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 26,
1998
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Twenty-six weeks ended December 26, 1998
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Fifty-two weeks ended June 27, 1998
Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Statements
<PAGE>
Report of Independent Accountants
April 9, 1999
To the Board of Directors and Shareholder of Pharmhouse Corp.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Pharmhouse Corp. and its subsidiaries (the "Company") at January 30, 1999 and
January 31, 1998 and the results of their operations and their cash flows for
each of the fiscal years ended January 30, 1999, January 31, 1998 and February
1, 1997 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1, on March 15, 1999, the Company was acquired by Phar-Mor,
Inc. The accompanying financial statements do not reflect any adjustments as a
result of such acquisition.
Pricewaterhouse Coopers LLP
New York, New York
<PAGE>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash $ 2,484 $ 3,296
Receivables, net of allowances
of $3,026 and $1,075, respectively 2,939 4,518
Merchandise inventory 35,708 37,332
Prepaid expenses 1,942 1,292
----------- -----------
Total current assets 43,073 46,438
Property, fixtures and equipment, net 5,255 4,795
Video rental inventory, net 1,353 1,972
Other assets 323 487
----------- -----------
Total assets $ 50,004 $ 53,692
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank overdraft $ 2,148 $ 1,922
Current portion of long-term debt 27,505 4,647
Accounts payable 19,656 18,791
Provision for store closure -- 284
Accrued expenses and other liabilities 2,596 2,628
----------- -----------
Total current liabilities 51,905 28,272
Long-term debt, net of current portion -- 19,154
Other liabilities 1,051 1,372
----------- -----------
Total liabilities 52,956 48,798
----------- -----------
COMMITMENTS AND CONTIGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.10 par; authorized
and unissued 2,500,000 shares
Common stock, $.01 par; authorized
25,000,000 shares; issued 2,608,553
and 2,594,841 shares, respectively 26 26
Additional paid-in capital 21,740 21,728
Accumulated deficit (24,717) (16,859)
----------- -----------
(2,951) 4,895
Treasury stock, at cost 1 1
----------- -----------
Total shareholders' equity (deficit) (2,952) 4,894
----------- -----------
Total liabilities and shareholders' equity (deficit) $ 50,004 $ 53,692
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
January 30, January 31, February 1,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Net sales $ 179,192 $ 194,658 $ 224,292
Video rental, service
and other income 4,769 6,093 7,437
---------- ---------- ----------
183,961 200,751 231,729
---------- ---------- ----------
Costs and Expenses:
Cost of merchandise and
services sold 141,588 155,393 176,390
Selling, general and
administrative expenses 48,608 47,548 56,344
Provision for store closure -- (185) 573
---------- ---------- ----------
190,196 202,756 233,307
---------- ---------- ----------
Operating loss (6,235) (2,005) (1,578)
Interest expense (2,776) (3,032) (4,230)
Other income, net 1,765 1,346 7,142
---------- ---------- ----------
Earnings (loss) before extraordinary item (7,246) (3,691) 1,334
Extraordinary item (612) -- --
---------- ---------- ----------
Net earnings (loss) $ (7,858) $ (3,691) $ 1,334
========== ========== ==========
Basic earnings (loss) per share:
Earnings (loss) before extraordinary item $ (2.81) $ (1.48) $ 0.59
Extraordinary item (0.24) -- --
---------- ---------- ----------
Net earnings (loss) $ (3.05) $ (1.48) $ 0.59
========== ========== ==========
Average number of shares 2,580 2,491 2,267
========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
January 30, January 31, February 1,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows provided (used) by Operating Activities:
Net earnings (loss) $ (7,858) $ (3,691) $ 1,334
Adjustments to reconcile net earnings (loss) to
net cash flows from operating activities:
Depreciation and amortization 2,678 3,135 2,775
Provision for store closure -- (185) 573
Increase (decrease) in other non-current liabilities (321) 1,128 (27)
Share grants to directors and restricted
share awards -- 69 113
Gain from litigation settlement (1,000) -- (7,142)
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable, net 1,579 2,788 (1,470)
Merchandise inventory 1,624 12,464 3,982
Prepaid expenses (800) 419 (211)
Other assets 164 (231) 949
(Decrease) increase in:
Accounts payable 865 (1,637) 2,614
Accrued expenses and other liabilities (32) (1,212) (905)
Provision for store closure (284) (1,146) --
--------- --------- ---------
Net Cash Flows (used) provided by
Operating Activities (3,385) 11,901 2,585
--------- --------- ---------
Cash Flows used by Investing Activities:
Capital expenditures (1,612) (373) (993)
Purchase of video rental inventory, net of disposals (745) (1,268) (2,036)
--------- --------- ---------
Net Cash Flows used by Investing Activities (2,357) (1,641) (3,029)
--------- --------- ---------
Cash Flows provided (used) by Financing Activities:
Net borrowings from New Senior Credit Facility 23,562 -- --
Proceeds from Subordinated Convertible Note 2,000 -- --
Payment of Prior Senior Credit Facility (21,401) -- --
Net borrowings from Prior Senior Credit Facility -- (7,639) 1,552
Proceeds from Subordinated Loan 1,038 -- --
Payment of Subordinated Loan (495) (600) (550)
Bank overdraft 226 (1,805) (608)
Proceeds from issuance of common stock and
exercise of stock options and warrants -- 165 81
--------- --------- ---------
Net Cash Flows provided (used) by Financing
Activities 4,930 (9,879) 475
--------- --------- ---------
Net (decrease) increase in cash (812) 381 31
Cash, beginning of year 3,296 2,915 2,884
--------- --------- ---------
Cash, end of year $ 2,484 $ 3,296 $ 2,915
========= ========= =========
Supplemental information:
Interest payments $ 2,768 $ 3,038 $ 3,381
Income taxes paid 14 -- --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
PHARMHOUSE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common stock issued Treasury Stock
------------------- Additional --------------
Number of Par paid-in Number of Accumulated
shares value capital shares Cost deficit Total
--------- ----- ------- ------ ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 3, 1996 2,245,715 $ 22 $21,305 (16,734) $ (1) $(14,502) 6,824
Fiscal 1997:
Exercise of warrants 85,867 1 80 81
Share grants to directors 10,000 38 38
Restricted share awards 17,500 75 75
Purchase of fractional shares (18) --
Net income for the year 1,334 1,334
--------- ----- ------- ------ ----- -------- -------
Balance, February 1, 1997 2,359,064 23 21,498 (16,734) (1) (13,168) 8,352
Fiscal 1998:
Exercise of warrants 209,195 2 111 113
Share grants to directors 10,000 69 69
Exercise of stock options 16,592 1 50 51
Purchase of fractional shares (10) --
Net loss for the year (3,691) (3,691)
--------- ----- ------- ------ ----- -------- -------
Balance, January 31, 1998 2,594,841 26 21,728 (16,734) (1) (16,859) 4,894
Fiscal 1999:
Share grants to directors 13,728 12 12
Purchase of fractional shares (16) --
Net loss for the year (7,858) (7,858)
--------- ----- ------- ------ ----- -------- -------
Balance, January 30, 1999 2,608,553 $ 26 $21,740 (16,734) $ (1) $(24,717) $(2,952)
========= ===== ======= ====== ===== ======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
PHARMHOUSE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION AND ACQUISITION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of Business and Background
Pharmhouse Corp. (the "Company") operates a chain of 32 discount drug stores
located in eight states in the mid-Atlantic and New England regions of the
United States, 13 of which operate under the name Pharmhouse (the "Pharmhouse
Stores") and 19 of which operate under the name Rx Place (the "Rx Stores"), the
latter stores having been acquired from F. W. Woolworth Co., a subsidiary of
Woolworth Corporation (collectively "Woolworth"), in April 1995. During the last
three fiscal years, the Company closed or returned to Woolworth seven stores and
did not open any new stores.
Acquisition of the Company
On December 17, 1998, the Company and Phar-Mor, Inc. ("Phar-Mor") signed a
definitive Agreement and Plan of Merger (the "Merger Agreement") to merge
Pharmacy Acquisition Corp., a Phar-Mor subsidiary, with the Company. The Merger
Agreement between the Company and Phar-Mor was consummated on March 15, 1999,
resulting in the Company being wholly-owned by Phar-Mor. The consideration for
the acquisition payable by Phar-Mor to the Company's shareholders consisted of
cash which, after giving effect to the adjustments provided for under the Merger
Agreement, amounted to $2.88 per share. In connection with the Merger Agreement,
the Company received a $2 million loan from Phar-Mor pursuant to a Subordinated
Convertible Note Purchase Agreement. In addition, subsequent to the merger
consummation date, Phar-Mor effectively paid the outstanding borrowings under
the New Senior Credit Facility and the Subordinated Loan (see Note 4).
These financial statements do not reflect any adjustments as a result of such
acquisition.
Significant Accounting Policies
Fiscal Year
The fiscal year is the 52 or 53 week reporting period ending on the Saturday
closest to January 31 of each year. References to fiscal 1999, 1998 and 1997
refer to the fiscal years ended January 30, 1999, January 31, 1998 and February
1, 1997, respectively, each of which comprised 52 weeks.
Principles of Consolidation
These consolidated financial statements include the accounts of Pharmhouse Corp.
and its two wholly-owned real estate subsidiaries, Nichols Realty, Inc. and Rx
Realty Corp. (collectively the "Company"). All inter-company transactions and
balances have been eliminated.
Reclassification
As a result of a review of the Company's fiscal 1998 and fiscal 1997 financial
statements by the Securities and Exchange Commission in connection with the
Merger Agreement, the Company revised the fiscal 1997 presentation of a
litigation settlement, which resulted in income in the amount of $7,142,000,
from extraordinary item, as originally reported, to other income, as reported
herein.
Certain other fiscal 1998 and fiscal 1997 amounts have been reclassified to
conform with the presentation used in fiscal 1999.
Use of Estimates
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements. Actual results could differ from these estimates. The
Company's merchandise inventory shrink accrual for fiscal 1999 was raised to
approximately 3% of sales and was adequate.
Receivables
Receivables are primarily generated by third party pharmacy revenues (i.e.,
Medicare, Medicaid and health insurance plans). Receivables also include vendor
coupons and advertising and promotional allowances receivable.
Merchandise Inventory
Merchandise inventory is carried at the lower of cost or market, with cost
determined on the first-in first-out retail inventory method.
Pre-opening Costs
Store pre-opening costs are expensed in the fiscal year in which the store is
opened.
Property, Fixtures and Equipment and Video Rental Inventory, Net
Property, fixtures and equipment, including significant improvements thereto,
are recorded at cost. Expenditures for repairs and maintenance are charged to
expense as incurred. The cost of property, fixtures and equipment is depreciated
over estimated useful lives of 5 to 25 years using the straight- line method.
Leasehold improvements are amortized over the shorter of the estimated useful
life of the asset or the remaining term of the lease. Video rental inventory is
amortized over two years.
Provision for Store Closure
Provision is made for net costs and expenses associated with store closures when
a decision is made to close the store.
Stock-Based Compensation
The Company accounts for stock-based compensation under the requirements of
Accounting Principles Board Opinion No. 25 and, in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Awards of
Stock-Based Compensation to Employees", which was adopted by the Company during
fiscal 1997, has provided the additional required disclosures in the Notes to
the Consolidated Financial Statements (see Note 6).
Income Taxes
Income taxes are provided based on the liability method of accounting pursuant
to SFAS No.109, "Accounting for Income Taxes". Deferred income taxes are
recorded to reflect the tax consequences on future years of differences between
the tax basis of assets and liabilities and their financial reporting amounts at
each year-end. Where appropriate, valuation reserves are recorded.
Basic and Diluted Earnings (Loss) per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share". SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. It is calculated as net income
available to common shareholders divided by the weighted average number of
common shares outstanding. All earnings (loss) per share amounts for all periods
have been presented to conform to SFAS 128 requirements. Diluted earnings (loss)
per share has not been presented because such amounts are anti-dilutive.
Leased Department Revenues
Leased department revenues of $50,000, $27,000 and $229,000 in fiscal 1999, 1998
and 1997, respectively, is included in video rental, service and other income.
Significant Supplier
Approximately 45%, 40% and 30% of the Company's total purchases in fiscal years
1999, 1998 and 1997, respectively, represented purchases from one unaffiliated
supplier.
NOTE 2 - FINAL DISPOSITION OF THE WOOLWORTH DISPUTE
In April 1995, the Company acquired, and accounted for as a purchase, the assets
and business of 24 Rx Place discount drug stores from Woolworth for a total cost
of $39.5 million, including $23.5 million in cash, $12.5 million in notes issued
to Woolworth (the "Purchase Money Notes") and $2.9 million for the related costs
of acquisition. The Company also assumed Woolworth's obligations under the
leases of the acquired stores. The assets acquired, consisting primarily of
merchandise inventory and store property and equipment, were financed through a
senior secured revolving credit facility (the "Prior Senior Credit Facility")
provided by a financial institution, a $3 million secured subordinated term loan
(the "Subordinated Loan") provided by an unaffiliated trade supplier and the
Purchase Money Notes. In January 1996, the Company instituted legal action
against Woolworth in the Supreme Court of the State of New York seeking, among
other relief, damages and indemnification arising out of Woolworth's alleged
fraud and breach of certain covenants, representations and warranties made by
Woolworth in connection with the acquisition. Pending resolution of the
Company's claims, the Company withheld payment of all further installments of
principal and interest arising out of the Purchase Money Notes held by
Woolworth.
On January 31, 1997, the Company and Woolworth entered into a Mutual Release and
Settlement Agreement resolving all outstanding disputes and settling all legal
proceedings arising out of the Acquisition. On June 24, 1997, the Company and
Woolworth amended the Mutual Release and Settlement Agreement (such agreement
and amendment are collectively referred to herein as the "Woolworth Settlement")
to provide for a final disposition of the seven Rx Stores (the "Affected
Stores") that were part of the dispute. The major aspects of the Woolworth
Settlement include:
- - Debt and Interest Forgiveness - Woolworth surrendered for cancellation two
of the three outstanding Purchase Money Notes in principal amounts totaling
$5.5 million and modified the third such Note (in the original principal
amount of $2.9 million, and originally due April 1998) so that such Note
constituted a non-interest bearing Contingent Note obligation of $1 million
which, upon the Company meeting specified conditions, was subsequently
surrendered by Woolworth for cancellation effective on July 30, 1998.
Woolworth also released the Company from its $1.1 million accrued interest
obligation on the Purchase Money Notes. By reason of the foregoing, in
fiscal 1997, the Company recorded other income of $7.1 million consisting
of $8.5 million in debt and interest forgiveness less certain costs and
provisions (including a $1 million store closure provision related to two
Affected Stores) and, in fiscal 1999, the Company recorded other income of
$1 million related to the cancellation of the Contingent Note which was
surrendered by Woolworth effective in July 1998 (see Note 4).
- - Return of Stores and Reimbursement of Rental and Occupancy Costs - The
Company received an option to terminate its occupancy and obligations under
the leases governing the Affected Stores, subject to certain conditions.
Woolworth further agreed to pay the rent and other fixed monthly charges
and occupancy costs for the Affected Stores through stipulated dates.
Pursuant to the Woolworth Settlement provisions, during fiscal 1997 and
fiscal 1998 the Company elected to close five of the Affected Stores and
reassigned to Woolworth the leases for these stores. Of the two remaining
Affected Stores, the Company operated one such store with the assistance of
the Woolworth subsidy until September 1997, at which time the Company
negotiated a new lease with the landlord of the property and has continued
to operate this store without any further subsidy or other obligation from
Woolworth. With respect to the last remaining Affected Store, Woolworth
exercised its option to recapture the premises of such store during fiscal
1999 pursuant to which the Company vacated the premises and returned this
store to Woolworth.
- - Use of "The Rx Place" Name - Woolworth agreed to extend the Company's
license to use the service mark "The Rx Place" for an additional three year
period through April 28, 2001, subject to the Company's right to extend
such license for one additional year upon proper notification, as defined
in the agreement.
<PAGE>
NOTE 3 - PROPERTY, FIXTURES AND EQUIPMENT AND VIDEO RENTAL INVENTORY, NET
A summary of property, fixtures and equipment and video rental inventory, net at
January 30, 1999 and January 31, 1998 follows (000's omitted):
January 30, January 31,
1999 1998
-------- --------
Property, fixtures and equipment $ 13,459 $ 11,874
Less accumulated depreciation
and amortization 8,204 7,079
-------- --------
$ 5,255 $ 4,795
======== ========
January 30, January 31,
1999 1998
-------- --------
Video rental inventory $ 5,501 $ 6,435
Less accumulated amortization 4,148 4,463
-------- --------
$ 1,353 $ 1,972
======== ========
Total depreciation and amortization expense of property, fixtures and equipment
and video rental inventory was $2,516,000, $2,985,000 and $2,775,000 in fiscal
1999, 1998 and 1997, respectively. Included in these amounts is amortization
expense of video rental inventory of $1,364,000, $1,827,000 and $1,629,000 in
fiscal 1999, 1998 and 1997, respectively.
At the date of acquisition in April 1995, the property, fixtures and equipment
located in the Rx Stores were recorded at zero value in the Company's
Consolidated Financial Statements pursuant to the purchase method of accounting
which requires allocation of the total acquisition cost to estimated fair values
of assets acquired. Substantially all of such costs were allocated by the
Company to merchandise inventory and video rental inventory, leaving no
available balance to allocate to property, fixtures and equipment.
For information concerning the return of stores to Woolworth and other
provisions of the Woolworth Settlement, see Note 2.
NOTE 4 - BORROWINGS
A summary of the Company's borrowings at January 30, 1999 and January 31, 1998
is set forth below (000's omitted):
<TABLE>
<CAPTION>
January 30, 1999 January31, 1998
-------------------------- ---------------------------
Current Non-current Current Non-current
Total portion portion Total portion portion
------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
New Senior Credit Facility $23,562 $23,562 $ -- $ -- $ -- $ --
Prior Senior Credit Facility -- -- -- 21,401 2,247 19,154
Subordinated Loan 1,943 1,943 -- 1,400 1,400 --
Subordinated Convertible Note 2,000 2,000 -- -- -- --
Contingent Note (see Note 2) -- -- -- 1,000 1,000 --
------- ------- --------- ------- ------- ---------
Total $27,505 $27,505 $ -- $23,801 $ 4,647 $19,154
======= ======= ========= ======= ======= =========
</TABLE>
New Senior Credit Facility
On May 14, 1998, the Company and Foothill Capital Corporation ("Foothill")
entered into a Loan and Security Agreement (the "New Senior Credit Facility" or
"New Facility") providing for aggregate credit to the Company of up to $35
million. The New Facility consists of: (i) a Term Loan up to $3 million and (ii)
revolving advances equal to the lesser of (a) 65% of eligible inventory (at
cost) or (b) $35 million less the outstanding principal amount of the Term Loan.
Under the New Facility, subject to the foregoing formula, the maximum revolving
advances could increase up to an aggregate of $35 million as the outstanding
principal amount of the Term Loan is reduced. The duration of both the revolving
and term loans under the New Senior Credit Facility is five years, subject to
minor amortization of the Term Loan during that period. The total loans which
may be advanced by Foothill to the Company is subject to an increase to an
aggregate of $40 million upon the satisfaction of certain conditions. The
initial funds advanced under the New Facility were used to pay outstanding
borrowings, charges, fees and temporary cash collateral account aggregating
$22.6 million owing by the Company to its prior senior secured lender ("Prior
Lender"). The cash collateral of $1 million, less any potential draw-downs, was
subsequently returned by the Prior Lender to the Company. In addition, the
Company incurred other transaction fees of approximately $1 million, the
unamortized balance of which at January 30, 1999 was $.9 million and is included
in prepaid expenses.
<PAGE>
Indebtedness under the New Senior Credit Facility is secured by a first priority
lien on substantially all of the Company's assets and, among other conditions,
restricts the payment of dividends and requires that the Company maintain
specified minimum tangible net worth and EBITDA (earnings before interest,
taxes, depreciation and amortization) levels. The New Facility is at a borrowing
rate of prime plus 1.125%, subject to decrease if the Company reaches certain
EBITDA levels during the term of the facility.
The Company did not meet the specified quarterly minimum tangible net worth and
EBITDA levels required under the New Senior Credit Facility at the end of fiscal
1999. However, in light of the Merger Agreement between the Company and Phar-Mor
which was consummated on March 15, 1999, the Company's non-compliance with its
debt covenants under the New Senior Credit Facility was effectively remedied
(see Note 1).
Prior Senior Credit Facility
The borrowing availability with the Company's Prior Lender was based on the
lesser of 60% of eligible inventory at cost or $45 million. The weighted average
interest rate under the Senior Credit Facility during fiscal 1999, including the
effect of facility fees, was 11.2%. On May 14, 1998, the Company entered into
the New Senior Credit Facility with Foothill and thereby repaid all outstanding
indebtedness to the Prior Lender, described above, including a $1.4 million
over-advance extended by Foothill to the Company during the first quarter of
fiscal 1999. In connection with the termination of the Prior Senior Credit
Facility, the Company incurred fees and costs of $.6 million which have been
recorded as an extraordinary item.
Subordinated Loan
During fiscal 1999, the Company and the subordinated lender re-negotiated the
terms of the Subordinated Loan. Under the revised Subordinated Loan terms, the
lender provided the Company with an additional $1 million loan and extended the
repayment terms of the entire outstanding loan balance. The loan is being repaid
in 62 monthly installments of $35,282 plus interest computed at prime plus 3%,
which approximates 10.75% as of January 30, 1999. The subordinated lender has
been granted a second priority lien on substantially all of the Company's
assets. The subordinated lender is an unaffiliated trade supplier.
Subordinated Convertible Note
In connection with the Merger Agreement, in December 1998, Phar-Mor loaned the
Company $2 million, bearing interest at the rate of 11% per annum and due June
30, 1999, pursuant to a Subordinated Convertible Note Purchase Agreement which
provided for the conversion of such note into Pharmhouse common shares under
certain conditions.
The weighted average interest rate, including the effect of facility fees, for
all of the Company's borrowings during fiscal 1999 was 10.7%.
NOTE 5 - INCOME TAXES
The Company is not subject to federal income taxes in fiscal 1999 as the Company
did not generate taxable earnings. The Company has significant net operating
loss carry-forwards which are available to offset future taxable income. State
and local income taxes, which are computed on a basis other than income (e.g.,
capital stock, etc.), are not material and such amounts are included in selling,
general and administrative expenses.
The Company has available two classes of net operating loss ("NOL") which may be
used to offset future taxable income. NOL Class #1 is the NOL generated
pre-petition (e.g., prior to the 1990 Chapter 11 filing of the Company). The
Company's use of NOL Class #1 is limited by formula, pursuant to the federal
income tax code, to $255,000 per annum, plus the unused carry-forward balance
(which, at January 30, 1999, was $697,000). The total available NOL Class #1 at
January 30, 1999 amounts to approximately $2.7 million and expires in 2006.
<PAGE>
NOL Class #2 is the NOL generated subsequent to the filing and is not subject to
annual limitation. The NOL Class #2 available at January 30, 1999 amounts to
approximately $17.7 million.
Deferred income tax temporary differences are determined in accordance with SFAS
No. 109. The temporary differences giving rise to deferred taxes primarily
relate to property and equipment, employee stock options and allowances for
doubtful accounts. At January 30, 1999 and January 31, 1998, the Company has
established a valuation allowance of 100% since it does not appear more likely
than not that a tax asset will be realized.
NOTE 6 - STOCK OPTION AND COMPENSATION PLANS
The Company has three stock option plans (a 1991 Non-Qualified Stock Option
Plan; a 1991 Incentive Stock Option Plan; and a 1995 Stock Option Plan
(collectively the "Stock Option Plans")) and one equity compensation plan in
effect, all of which have been approved by the Company's shareholders.
1991 Non-Qualified Stock Option Plan
Under the 1991 Non-Qualified Stock Option Plan (the "Non-Qualified Plan"), a
total of 274,604 Common Shares were reserved for issuance to employees of the
Company. The exercise price of such options is not less than 25% of the fair
market value of the Common Shares subject to such options on the date of grant.
Participation in the Non-Qualified Plan was voluntary but an election to
participate was irrevocable. Seven employees of the Company elected to
participate (two such employees are no longer employed by the Company), each of
whom specified the dollar amount by which his or her respective annual salary
was reduced during each of the Company's three fiscal years commencing February
2, 1992. In return for such salary reductions, each employee participating in
the Non-Qualified Plan received discounted stock options entitling each to
purchase Common Shares at 25% of the fair market value of such Common Shares on
the date of grant of the options. On June 30, 1992, 253,525 of the options
available for grant under the Non- Qualified Plan were granted at an exercise
price of $.544 per Common Share (equal to 25% of the fair market value on the
date of grant), of which 34,942 were subsequently forfeited. During fiscal 1997,
45,000 restricted Common Shares were granted to an executive at a nominal
purchase price. As a result of the termination of this executive's employment,
15,000 of such shares were issued to him and 30,000 were forfeited pursuant to
vesting provisions governing their issuance.
As of January 30, 1999, 71,011 of the options granted under the Non-Qualified
Plan were forfeited, 15,000 were exercised and 212,514 remain exercisable.
1991 Incentive Stock Option Plan
Under the 1991 Incentive Stock Option Plan (the "Incentive Plan"), a total of
298,850 Common Shares were reserved for issuance to employees of the Company.
Each of the options granted under the Incentive Plan is an incentive stock
option, as that term is defined in Section 422 of the Internal Revenue Code of
1986, as amended, the exercise price of which is the fair market value of the
Common Shares on the date the options were granted. Of the options available for
grant under the Incentive Plan, 286,902 were granted in December 1991 at an
exercise price of $1.914 per Common Share, of which 92,149 of such options were
subsequently canceled. During fiscal 1997, 70,415 options under the Incentive
Plan were granted at exercise prices per Common Share ranging from $3.19 to
$3.75, such amounts being equal to or above the fair market values on the dates
of the respective grants.
As of January 30, 1999, 122,035 of the options granted under the Incentive Plan
lapsed owing to the termination of optionees' employment, 19,879 were exercised
and 206,213 remain exercisable.
1995 Stock Option Plan
Under the 1995 Stock Option Plan (the "1995 Plan"), a total of 500,000 Common
Shares have been reserved for issuance upon the exercise of stock options and
related stock appreciation rights ("SARs").
<PAGE>
Pursuant to the 1995 Plan, the Company may grant incentive stock options
("ISOs"), non-qualified stock options ("NSOs") and SAR's to officers, directors
and key employees of the Company. The 1995 Plan is administered by the
Compensation Committee of the Company's Board of Directors which selects the
optionees, authorizes the grant of options and determines the exercise price and
other terms of the options, including the vesting schedule thereof, if any. The
per share exercise price of each ISO granted under the 1995 Plan must be at
least 100% of the fair market value of a Common Share (and not less than 110% of
the fair market value in the case of any optionee of an ISO who beneficially
owns more than 10% of the total combined voting power of the Company) on the
date such option is granted. The per share exercise price of an NSO must be at
least 25% of the fair market value of a Common Share on the date such option is
granted.
The 1995 Plan also provides for the grant of SAR's, which may be granted on a
stand-alone basis or in tandem with stock options, which may be surrendered to
the Company in exchange for cash, Common Shares or a combination thereof, as
determined by the committee administering the 1995 Plan, having a value equal to
the dollar amount obtained by multiplying (x) the number of shares subject to
the surrendered SAR or option by (y) the amount by which the fair market value
per Common Share exceeds the exercise price per share specified in the agreement
governing the surrendered SAR's or options.
As of January 30, 1999, 472,585 options had been issued under the 1995 Option
Plan, at exercise prices of $3.1875 to $5.8750 (such amounts being equal to the
fair market values on the date of grant), 49,000 lapsed owing to the termination
of optionees' employment resulting in 423,585 options outstanding.
The combined activity in the Stock Option Plans for the three fiscal years ended
January 30, 1999 was as follows:
Number of
shares Exercise price per share
--------- ------------------------
Outstanding at February 3, 1996 416,773 $0.544 - $1.914
Fiscal 1997 Activity:
Granted 588,000 $3.188 - $5.875
Exercised --
Canceled (16,724) $0.544 - $1.914
---------
Outstanding at February 1, 1997 988,049
Fiscal 1998 Activity:
Granted --
Exercised (31,592) $1.914 - $3.750
Canceled (62,655) $1.914 - $3.750
---------
Outstanding at January 31, 1998 893,802
Fiscal 1999 Activity:
Granted --
Exercised --
Canceled (51,490) $1.914 - $3.750
---------
Outstanding at January 30, 1999 842,312 $0.544 - $5.875
=========
Available for grant at January 30, 1999 196,264
=========
1992 Equity Compensation Plan for Non-Employee Directors
Under the 1992 Equity Compensation Plan for Non-Employee Directors, as amended
in fiscal 1996, (the "Independent Directors Plan"), a total of 50,000 Common
Shares were reserved for issuance to members of the Board of Directors of the
Company who do not serve as officers or employees of the Company or any of its
subsidiaries (the "Independent Directors"). The Independent Directors Plan
provides that each Independent Director elected by shareholders, commencing with
the shareholders meeting held June 30, 1992 through the 1998 shareholders'
meeting, shall be entitled to an award of 2,000 Common Shares (2,500 effective
in fiscal 1996) upon his or her election or re-election. The fair market value
of such shares is expensed upon issuance and added to Additional Paid-in
Capital.
<PAGE>
The Board of Directors further amended the Directors Plan to increase the number
of shares reserved under such plan to 80,000 and to provide that each
Independent Director, at his or her election, may receive, in lieu of cash fees
of $500 per Board Meeting, and in lieu of cash fees of $250 per Committee
Meeting, Common Shares of the Company for each Board Meeting and Committee
Meeting attended by such Independent Director during each year of his or her
incumbency as a Director. The number of such Common Shares per Board Meeting and
per Committee Meeting attended shall be determined by dividing the sum of $500
($250 for Committee Meetings) by the closing price of the Common Shares on the
NASDAQ SmallCap Market on the trading day immediately preceding each such
Meeting. This amendment, which is subject to shareholder ratification, became
effective as of the date of the Board of Directors Meeting held on January 22,
1998. All of the Independent Directors of the Company elected to accept Common
Shares in lieu of cash fees for attendance at that Board Meeting and for all
subsequent Board Meetings and Committee Meetings to be held during their current
terms as Directors. Pursuant to such amendment, the termination date of the
Directors Plan was extended to the date immediately preceding the date of the
Shareholders' meeting of the Company in the year 2001 in which directors are
elected. During fiscal 1999, the Company issued 3,432 Common Shares to each of
four non-employee directors (13,728 Common Shares in total were issued to
non-employee directors) consisting of an annual award of 2,500 Common Shares and
932 Common Shares issued in lieu of cash fees for attendance at Board Meetings
and Committee Meetings.
During fiscal 1997, the Company issued 2,500 Common Shares to a former director
for past services rendered to the Company.
Application of SFAS No.123 - Pro Forma Net Income and Net Income Per Common
Share
SFAS No. 123 requires the Company to disclose pro forma net income and net
income per share determined as if the Company had accounted for stock-based
compensation awards granted after December 31, 1994 under the fair value method
of that Statement. The fair values of options under SFAS No. 123 were estimated
at each grant date using a Black-Scholes option pricing model with the following
assumptions: a risk-free interest rate of 6.1%, a dividend yield of zero, a
volatility factor of the expected market price of the Company's common stock of
1.05 and an expected option life of seven and one-half years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For these pro forma disclosures, the estimated fair value of options and other
stock-based awards is amortized to expense over the award's vesting period. The
Company's fiscal 1999, fiscal 1998 and fiscal 1997 reported and pro forma
information is as follows:
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998 Fiscal 1997
------------ ------------- ------------
<S> <C> <C> <C>
Net (loss) income, as reported $ (7,858,000) $ (3,691,000) $ 1,334,000
Pro forma net (loss) income (8,194,000) (4,027,000) 1,007,000
Net (loss) income per share, as reported (3.05) (1.48) 0.59
Pro forma net (loss) income per share (3.18) (1.61) 0.44
</TABLE>
NOTE 7 - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) savings plan which allows
employees to contribute a percentage of compensation not to exceed amounts
permitted under the Internal Revenue Code. The Company matches 100% of the first
$1 of employee contribution each week plus 25% of any additional compensation
contributed, up to a maximum of 3% of annual compensation. The Company's
contribution into the 401(k) savings plan amounted to $111,000, $111,000 and
$105,000 in fiscal 1999, 1998 and 1997, respectively.
<PAGE>
NOTE 8 - RELATED PARTY TRANSACTIONS
One of the Company's directors is a member of a law firm which provided legal
services to the Company for fees and disbursements aggregating $173,000
(including $90,000 related to the acquisition of the Company by Phar-Mor, Inc.),
$79,000 and $71,000 in fiscal 1999, 1998 and 1997, respectively.
NOTE 9 - OTHER INCOME, NET
During fiscal 1999, the Company recorded other income totaling $1.8 million, net
of $.3 million of other expense, as follows:
The Company recorded other income of $1 million resulting from the cancellation
of a $1 million Contingent Note in connection with the Woolworth Settlement (see
Note 2).
The Company received $1.1 million in connection with a partial settlement of
certain Brand-Name Prescription Drug Antitrust Litigation. This class action
suit was brought by certain drug retailers, including the Company as a member of
the class, against certain name-brand drug manufacturers and wholesalers
pertaining to purchases made by the Company from these suppliers during the
period from October 1, 1989 to December 31, 1994. Additional income may be
received by the Company in the future as a result of this pending class action;
however, the amount of additional income and timing of payments related thereto,
if any, is not presently determinable.
The Company incurred other expenses of $.3 million during the fiscal 1999 fourth
quarter for costs related to the Merger Agreement with Phar-Mor.
NOTE 10 - PROVISION FOR STORE CLOSURE
During fiscal 1997, the Company recorded a $1.6 million provision for estimated
costs related to the closing of three stores, including two Rx stores which were
returned to Woolworth in connection with the Woolworth Settlement. The Company
closed three Rx Stores in fiscal 1998 and one Rx Store in fiscal 1999, all of
which were returned to Woolworth in connection with the Woolworth Settlement. No
additional provision for store closure was provided for these stores as the
unused provision remaining from fiscal 1997 was sufficient to cover the closure
costs for these four Rx Stores. The provision for store closure primarily
includes costs for inventory mark-downs, employee severance and miscellaneous
wind-down expenses. As of January 30, 1999, there was no remaining balance in
provision for store closure.
The following table summarizes activity during the last three fiscal years with
respect to the provision for store closure (000's):
Fiscal Fiscal Fiscal
1999 1998 1997
------ ------ ------
Balance, beginning of year $ 284 $1,615 $ --
Activity:
Provision -- -- 1,615
Amounts charged against accrual (284) (1,146) --
Reversal of prior year over-accrual -- (185) --
------ ------ ------
Balance, end of year $ -- $ 284 $1,615
====== ====== ======
For further information concerning the return of stores to Woolworth and other
provisions of the Woolworth Settlement, see Note 2.
<PAGE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company's operating leases are principally for retail store locations and a
distribution facility. At January 30, 1999, future minimum rental payments
required under operating leases that have initial or remaining non-cancelable
lease terms in excess of one year, without regard to potential sublease revenue,
is set forth below (000's):
Fiscal Year Amount
----------- ------
2000 $6,285
2001 6,045
2002 3,483
2003 1,986
2004 1,664
Thereafter 4,474
The Company operates two stores under month-to-month leases, each of which may
be canceled by the landlord of the respective store under appropriate notice
provisions. One such store lease may be canceled at the option of the Company.
During fiscal 1999, the lease for the Company's executive offices in New York
City expired, subsequent to which the Company operated such premises on a
month-to-month basis. In January 1999, the Company relocated its executive
offices to the Company's store located in East Brunswick, New Jersey. The
executive offices were constructed within the premises of this store and, as a
result, no additional leasing cost was incurred by the Company.
Rent expense, excluding certain real estate tax and maintenance costs, for all
operating leases is comprised of the following (000's):
Fiscal Fiscal Fiscal
1999 1998 1997
------ ------ ------
Minimum rentals $7,156 $7,198 $8,466
Contingent rentals 6 34 93
Sublease revenue (794) (788) (904)
------ ------ ------
$6,368 $6,444 $ 7,655
====== ====== ======
Legal Matters
In the normal course of business, the Company is subject to various legal
proceedings and claims. In the opinion of management, any ultimate liability
arising from or related to these claims should not have a material adverse
effect on future results of operations or the consolidated financial position of
the Company.
Supply Agreement
During fiscal 1999, the Company's supply agreement with McKesson Drug Company,
originally due to expire in April 1998, was extended for an additional five year
period through April 2003. The agreement requires the Company to purchase a
minimum of 90% of its pharmaceutical and certain other merchandise from
McKesson.
Letters of Credit
At January 30, 1999, the Company had letters of credit outstanding of
approximately $940,000.
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements give the effect to the acquisition of Pharmhouse Corp. ("Pharmhouse")
by Phar-Mor, Inc. (the "Company"), through its wholly owned subsidiary, Pharmacy
Acquisition Corp. The acquisition of Pharmhouse by the Company (the "Pharmhouse
Acquisition") was consummated pursuant to an Agreement and Plan of Merger, dated
as of December 17, 1998 by and among the Company, Pharmacy Acquisition Corp. and
Pharmhouse.
In consummation of the acquisition, a total of $31.8 million was
disbursed as follows:
i) $7.5 million to common shareholders
ii) $24.3 million to Foothill Financial Corp. in payment of the outstanding
Pharmhouse revolving credit facility
The Pharmhouse Acquisition was funded by the Company's excess cash and
the Company's Amended and Restated Revolving Credit Facility dated September 10,
1998 between BankAmerica Business Credit, Inc., as agent, the lenders party
thereto, and the Company.
The Pharmhouse Acquisition will be accounted for under the purchase
method of accounting, and as such, the final calculated purchase price will be
allocated to the fair value of the tangible net assets acquired and the
liabilities assumed with the excess recorded as goodwill (the excess cost over
net assets acquired).
The pro forma condensed consolidated balance sheet as of December 26,
1998 assumes the acquisition took place on that date and is based on the
unaudited historical condensed consolidated balance sheet prepared for the
Company as of that date and the audited historical consolidated balance sheet
for Pharmhouse as of January 30, 1999. The pro forma adjustments record the pro
forma purchase price of $7.9 million, which includes professional fees and other
costs, and allocates the pro forma purchase price to the net assets acquired and
the liabilities assumed based on their preliminary estimated fair values on the
date of acquisition.
The pro forma condensed consolidated statements of operations for the
twenty-six weeks ended December 26, 1998 and for the fifty-two weeks ended June
27, 1998 ("Fiscal 1998") assume that the transaction was consummated at the
beginning of Fiscal 1998, and are based on the respective historical
consolidated statements of operations reported on both the Company's and
Pharmhouse's Form 10-Q and Form 10-K.
The unaudited pro forma financial information and related notes are
provided for informational purposes only and are not necessarily indicative of
what the Company's actual financial position or results of operations would have
been had the foregoing transaction been consummated on such dates, nor does it
give effect to the synergies, cost savings and other charges expected to result
from the Pharmhouse Acquisition. Accordingly, the pro forma financial
information does not purport to be indicative of the Company's financial
position or results of operations as of the date hereof or for any period ended
on the date hereof or as of or for any other future dates or periods.
<PAGE>
Phar-Mor, Inc and Pharmhouse, Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of December 26, 1998
(In thousands)
<TABLE>
<CAPTION>
December January
26, 1998 30, 1999 Pro Forma Pro Forma
Phar-Mor Pharmhouse Adjustments (1) Consolidated
-------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 29,975 2,484 (15,379) (a) 17,080
Marketable securities 3,648 -- -- 3,648
Accounts receivable - net 28,573 2,939 (480) (b) 31,032
Merchandise inventories & video tapes, net 187,138 37,061 (2,125) (c) 222,074
Prepaid expenses & other current assets 2,085 1,942 (935) (d) 3,092
-------- -------- -------- ---------
Total current assets 251,419 44,426 (18,919) 276,926
Property and equipment, net 82,518 5,255 6,129 (e) 93,902
Deferred tax asset 8,923 -- -- 8,923
Investment in Avatex 1,695 -- -- 1,695
Investments 6,703 -- -- 6,703
Goodwill 1,645 -- 12,868 (f) 14,513
Other assets 1,473 323 3,632 (g) 5,428
-------- -------- -------- ---------
Total assets $354,376 $ 50,004 $ 3,710 $408,090
======== ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 76,784 21,804 457 (h) 99,045
Accrued expenses and other current liabilities 37,950 2,596 6,400 (i) 46,946
Current portion long-term debt & capital lease obligations 10,320 27,505 (27,505) (j) 10,320
-------- -------- -------- ---------
Total current liabilities 125,054 51,905 (20,648) 156,311
Long term debt & capital lease obligations 125,904 -- -- 125,904
Revolving credit facility -- -- 20,000 (k) 20,000
Long-term self insurance reserves 8,021 -- 380 (l) 8,401
Deferred rent & unfavorable lease liability - net 11,488 1,051 1,026 (m) 13,565
-------- -------- -------- ---------
Total liabilities 270,467 52,956 758 324,181
Minority interest 535 -- -- 535
Stockholders' equity 83,374 (2,952) 2,952 (n) 83,374
-------- -------- -------- ---------
Total liabilities and stockholders' equity $354,376 $ 50,004 $ 3,710 $408,090
======== ======== ======== =========
</TABLE>
(1) All letter references correspond to Note 1 of the Notes to the Unaudited
Pro Forma Condensed Consolidated Financial Statements.
<PAGE>
Phar-Mor, Inc and Pharmhouse, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Twenty-six weeks ended December 26, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Phar-Mor Pharmhouse
Twenty-six Twenty-six
weeks ended weeks ended Pro Forma Adjustments Pro forma
---------------------
December January
26, 1998 30, 1999 Conforming (2) Acquisition Consolidated
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 566,401 $ 93,677 $ -- $ -- $ 660,078
Less:
Cost of goods sold, including occupancy and
distribution costs 456,882 72,912 3,914 (a) (458) 533,250
Selling, general and administrative expenses 86,199 26,265 (5,079) (b) 107,385
Depreciation and amortization 11,278 -- 1,165 (c) 448 12,891
--------- --------- ---------- --------- ---------
Income from operations 12,042 (5,500) -- 10 6,552
Interest expense (7,884) (1,451) -- (d) 751 (8,584)
Investment loss (1,204) -- -- -- (1,204)
Interest income 771 -- -- (e) (384) 387
Other income -- 766 -- -- 766
--------- --------- ---------- --------- ---------
Income (loss) before taxes 3,725 (6,185) -- 377 (2,083)
Income taxes 1,490 -- -- (f) (1,490) 0
--------- --------- ---------- --------- ---------
Net income (loss) $ 2,235 $ (6,185) -- $ 1,867 $ (2,083)
========= ========= ========== ========= =========
BASIC NET INCOME (LOSS) PER COMMON SHARE
Income (loss) $ .18 $ (2.40) $ (.17)
========= ========= =========
Weighted average number of common shares
outstanding 12,240 2,578 12,240
========= ========= =========
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Loss $ .18 $ (.17)
========= =========
Weighted average number of common shares
outstanding 12,301 12,240
========= =========
</TABLE>
(2) All letter references correspond to Note 2 of the Notes to the Unaudited
Pro Forma Condensed Consolidated Financial Statements.
<PAGE>
Phar-Mor, Inc and Pharmhouse, Inc.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Fifty-two weeks ended June 27, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Phar-Mor Pharmhouse
Fifty-two Fifty-two
weeks ended weeks ended Pro Forma Adjustments Pro forma
---------------------
June August
27, 1998 1, 1998 Conforming (2) Acquisition Consolidated
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $1,100,851 $ 191,275 $ -- $ -- $1,292,126
Less:
Cost of goods sold, including occupancy and
distribution costs 887,657 148,445 8,070 (a) (916) 1,043,256
Selling, general and administrative expenses 173,982 46,668 (10,647) (b) -- 210,003
Executive severance 6,787 -- -- -- 6,787
Loss on disposal of equipment 4,615 -- -- -- 4,615
Depreciation and amortization 22,047 -- 2,577 (c) 895 25,519
--------- --------- ---------- --------- ---------
Income from operations 5,763 (3,838) -- 21 1,946
Interest expense (16,639) (2,776) -- (d) 1,376 (18,039)
Investment loss (1,105) -- -- -- (1,105)
Interest income 3,151 -- -- (e) (769) 2,382
Other income -- 2,346 -- -- 2,346
--------- --------- ---------- --------- ---------
Net loss from continuing operations
(8,830) (4,268) -- 628 (12,470)
========= ========= ========== ========= =========
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Loss $ (.72) $ (1.02)
========= =========
Weighted average number of common shares
outstanding 12,197 12,197
========= =========
</TABLE>
(2) All letter references correspond to Note 2 of the Notes to the Unaudited
Pro Forma Condensed Consolidated Financial Statements.
<PAGE>
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements.
Note 1 - Pro forma adjustments as of December 26, 1998.
The pro forma adjustments to the unaudited pro forma condensed consolidated
balance sheet reflect the purchase of Pharmhouse and the allocation of the pro
forma purchase price to the acquired assets and the assumed liabilities based on
the preliminary estimate of their fair value at the date of the acquisition. The
pro forma adjustments include the impact of conforming Pharmhouse's accounting
policies to those of the Company.
(a) Cash and cash equivalents -The adjustment reflects the excess cash used in
connection with the purchase of the Pharmhouse common stock and the payoff
of the outstanding Pharmhouse revolving credit facility.
(b) Receivables - The adjustment reflects a writedown for anticipated
unrealizable receivables that are not expected to be collected post
acquisition as a result of discontinued business relationships.
(c) Merchandise inventories - The adjustment reflects the write down of
inventory to be discontinued to the value expected to be realized and a
reserve to reduce the inventory to replacement cost.
(d) Prepaid expenses and other current assets - The adjustment reflects the
write off of prepaid financing fees recorded in connection with the
Pharmhouse revolving credit facility.
(e) Property and equipment, net - The adjustment reflects the write up of land,
buildings, leasehold improvements, fixtures and computer equipment to fair
value.
(f) Goodwill- The adjustment reflects the purchase price in excess of fair
value of net assets acquired recorded in connection with the Pharmhouse
acquisition.
(g) Other assets - The adjustment reflects the value assigned to the Pharmhouse
pharmacy prescription customer files.
(h) Accounts payable - The adjustment reflects the anticipated vendor claims
that are expected to be paid post acquisition as a result of the
termination of Pharmhouse administrative personnel.
(i) Accrued expenses - The adjustment reflects the severance pay, transaction
fees and the anticipated costs associated with the closing of the warehouse
expected to be incurred in connection with the Pharmhouse Acquisition.
(j) Current portion of long-term debt and capital lease obligations -- The
adjustment reflects the payoff of the outstanding Pharmhouse revolving
credit facility.
(k) Revolving credit facility - The adjustment reflects the anticipated
borrowing on the Company's revolving credit facility in connection with the
purchase of the Pharmhouse common stock and the payoff of the outstanding
Pharmhouse revolving credit facility.
(l) Long-term self insurance reserves - The adjustment reflects the value
assigned to the Pharmhouse self insured workers compensation and general
liability reserves
(m) Deferred rent and unfavorable lease liability, net - The adjustment
reflects the net unfavorable lease value assigned to the Pharmhouse leases.
(n) Stockholders' equity - The adjustment reflects the elimination of the
historical stockholders' equity of Pharmhouse.
<PAGE>
Note 2 - Pro forma adjustments for the twenty-six weeks ended December 26, 1998
and the fifty-two weeks ended June 27, 1998 (dollars in thousands).
The pro forma adjustments to the unaudited pro forma condensed consolidated
statements of operations reflect the purchase of Pharmhouse and the conforming
of Pharmhouse's financial statements presentation to that of the Company.
(a) Cost of goods sold - The adjustments reflect the following:
<TABLE>
<CAPTION>
Twenty-six Fifty-two
weeks ended weeks ended
December 26, 1998 June 27, 1998
--------------- ---------------
<S> <C> <C>
Occupancy costs reclassified from Selling,
General and Administrative Expenses $ 3,911 $ 8,399
Warehouse costs reclassified from Selling,
General and Administrative Expenses 652 1,245
Video rental tape amortization reclassified to
Depreciation and Amortization Expense (649) (1,574)
--------------- ---------------
Total Reclassifications $ 3,914 $ 8,070
=============== ===============
Cost of Goods Sold was adjusted to reflect the
fair value revaluation of the Pharmhouse
leases $ (458) $ (916)
</TABLE>
(b) Selling, General and Administrative Expenses - The adjustments reflect the
following:
<TABLE>
<CAPTION>
Twenty-six Fifty-two
weeks ended weeks ended
December 26, 1998 June 27, 1998
--------------- ---------------
<S> <C> <C>
Occupancy costs reclassified to Cost of
Goods Sold $ (3,911) $ (8,399)
Warehouse costs reclassified to Cost of
Goods Sold (652) (1,245)
Depreciation and amortization reclassified to
Depreciation and Amortization Expense (516) (1,003)
--------------- ---------------
Total Reclassifications $ (5,079) $ (10,647)
=============== ===============
</TABLE>
(c) Depreciation and Amortization - The adjustments reflect the following:
<TABLE>
<CAPTION>
Twenty-six Fifty-two
weeks ended weeks ended
December 26, 1998 June 27, 1998
--------------- ---------------
<S> <C> <C>
Video rental tape amortization reclassified from
Cost of Goods Sold $ 649 $ 1,574
Depreciation and amortization reclassified from
Selling, General and Administrative Expense 516 1,003
--------------- ---------------
Total Reclassifications $ 1,165 $ 2,577
=============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Twenty-six Fifty-two
weeks ended weeks ended
December 26, 1998 June 27, 1998
--------------- ---------------
<S> <C> <C>
Amortization of goodwill
(25 year amortization period) $ 257 $ 514
Amortization of Pharmacy prescription customer files
(20 year amortization period) 91 182
Depreciation and amortization expense adjustment
to reflect the fair value adjustment of
property and equipment 100 199
--------------- ------------
Total adjustments $ 448 $ 895
=============== ============
</TABLE>
(d) Interest Expense was adjusted to reflect the elimination of the Pharmhouse
revolving credit facility and the addition of interest expense on $20,000
of borrowings under the Company's revolving credit facility at an assumed
interest rate of 7%.
(e) Interest Income was adjusted to reflect the elimination of the interest
income at an assumed 5% interest rate on $15,379 excess cash that was used
to fund the transaction.
(f) Income taxes were eliminated since the combined operations reflect a net
loss and a full valuation reserve would be recorded against deferred tax
assets.
Note 3
The costs of closing the Pharmhouse warehouse and corporate office have been
accrued in the pro forma condensed consolidated balance sheet. The pro forma
condensed consolidated statements of operations have not been adjusted to
reflect the impact that closing these facilities will have on ongoing
operations.
<PAGE>
SIGNATURES
Pursuant to the requirements 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: May 10, 1999 By: /s/ Sankar Krishnan
Sankar Krishnan
Senior Vice President and Chief
Financial Officer
Date: May 10, 1999 By: /s/ John R. Ficarro
John R. Ficarro
Senior Vice President and Chief
Administrative Officer
<PAGE>
Phar-Mor, Inc.
INDEX TO EXHIBITS
Ehibit No.
23 Consent Of Independent Accountants
Consent of Independent Accountants
We hereby consent to the inclusion in the Current Report on Form 8-K/A of
Phar-Mor, Inc. dated May 10, 1999 of our report dated April 9, 1999 relating to
the financial statements of Pharmhouse Corp. as of January 30, 1999 and January
30, 1998 and for each of the three years in the period ended January 30, 1999.
PricewaterhouseCoopers LLP
May 10, 1999
New York, New York