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 1, 2000 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 15, 2000 was $9,067,915 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 15, 2000, 12,240,865 shares of the
Registrant's Common Stock were outstanding before deducting 1,256,603 shares
which represent the Company's 25.2% equity interest in common stock of the
Company owned by Avatex, Inc.
<PAGE>2
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, seasonal and other general merchandise. As
of July 1, 2000, the Company operated 139 stores in 24 states under the names of
Phar-Mor, Rx Place and Pharmhouse. Approximately 57% 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 1, 2000.
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 between October 1992 and July 1995,
thereby reducing the number of stores from 311 in September 1992 to 102 stores
as of September 1995.
<PAGE>3
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 6,402
employees at July 1, 2000. Approximately 302 warehouse and distribution center
employees in Youngstown are members of the Teamsters Union under a contract
which expires March 2, 2003. Sixty-one 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 1, 2000 ("Fiscal Year
2000"), each store served approximately 8,500 customers per week. The Company's
customers are approximately 52% female, with a median age of 35.5 years, and a
median household income of approximately $33,000. Approximately 24% of customer
households have children 17 years old and under.
Company stores accept payment in cash, check, credit cards, debit cards
and payment from third-party providers of prescription services.
<PAGE>4
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 28% of the Company's
purchases during Fiscal Year 2000. During Fiscal Year 2000, 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
2000 bringing the total number of "Super Phar-Mor" stores to 39. 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 4
stores scheduled to be remodeled during the fiscal year ending June 30, 2001
("Fiscal Year 2001"). During Fiscal Years 1997, 1998, 1999 and 2000, 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 fourteen of the "four-wall"
remodel projects. The Company plans to complete 4 "four-wall" remodels in Fiscal
Year 2001.
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 2000, revenues from sales of
the Company's traditional drugstore products (i.e., prescription drugs,
over-the-counter drugs, health and beauty care products, cosmetics and greeting
cards) averaged approximately $5.4 million per store and all other merchandise
averaged $3.9 million per store. The Company generated approximately $749.2
million in traditional drugstore product revenues and approximately $542.9
million in revenues from the sale of groceries and general merchandise in its
stores in Fiscal Year 2000.
<PAGE>5
Set forth below is the percentage of sales by principal category of
products for the continuing stores for the last three fiscal years.
Fiscal Year Ended
July 1, 2000 July 3, 1999 June 27, 1998
------------ ------------ -------------
Category
Prescription, Health and
Beauty Care Products,
Cosmetics and Greeting Cards 58.0% 57.1% 56.7%
All Other Merchandise 42.0% 42.9% 43.3%
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 2000.
Sales by Quarter During Fiscal Year 2000
Percentage of
Total Sales
First Quarter 24.6%
Second Quarter 27.1%
Third Quarter 23.9%
Fourth Quarter 24.4%
--------
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,
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 $17.1 million in Fiscal Year
2000, including $2.3 million for the construction of new stores, $6.6 million
for remodeling existing stores, and $3.8 million for corporate and store
information systems. The Company anticipates spending approximately $10.0
million for capital expenditures in Fiscal Year 2001, including costs of
remodeling 8 additional stores and opening two new stores.
Real Estate and Growth
The Company opened two new stores in Fiscal Year 2000, and plans to
open two new stores in Fiscal Year 2001. 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 $1.25 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>7
Item 2. Properties.
As of July 1, 2000, the Company operated 139 stores in 24 states.
Approximately 57% 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 8
Georgia 2 Ohio 19
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 1, 2000, 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 101 leases and the
original terms plus options of sixteen 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 46% of all merchandise to the stores
in Fiscal Year 2000, 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 leases 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 2000, through the solicitation of proxies or
otherwise.
<PAGE>8
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 2000 Fiscal Year 1999
---------------- ----------------
High Low High Low
---- --- ---- ---
1st Quarter.................... $6 5/8 $4 1/4 $11 1/4 $6 1/8
2nd Quarter.................... 4 3/4 2 7/16 8 15/16 5 1/4
3rd Quarter.................... 4 3/4 2 1/2 8 3/4 5 1/2
4th Quarter.................... 3 1/4 1 1/4 6 7/8 4 1/16
As of September 15, 2000, there were 2,966 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.
(In thousands except per share data)
<TABLE>
<CAPTION>
52 Weeks 53 Weeks 52 Weeks 52 Weeks 43 Weeks 9 Weeks
Ended Ended Ended Ended Ended Ended
July 1, 2000 July 3,1999(b) June 27, 1998(b) June 28, 1997 June 29, 1996 September 2, 1995
------------ -------------- ---------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 1,292,090 $ 1,206,539 $ 1,100,851 $ 1,074,828 $ 874,284 | $ 181,968
|
(Loss) income from |
continuing operations (12,140)(a) 596 (8,830) (2,281) 2,526 | (10,389)(c)
|
Diluted (loss) income |
per share from |
continuing operations (1.08) .05 (.73) (.19) .21 | (.19)
</TABLE>
<TABLE>
<CAPTION>
As of As of As of As of As of
----- ----- ----- ----- -----
July 1, 2000 July 3,1999(b) June 27, 1998 June 28, 1997 June 29, 1996
------------ -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total assets 397,904 407,724 349,455 362,605 363,463
Long-term debt & capital
leases 167,856 142,947 130,993 140,213 149,163
</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 for the nine weeks ended
September 2, 1995 is not comparable in material respects to such data for
subsequent periods.
(a) Excludes extraordinary gain of $1.1 million on early retirement of
debt.
(b) Amounts have been restated for the retroactive application of the
equity method of accounting for the Company's investment in Avatex
Corporation.
<PAGE>9
(c) 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.
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 forward.
The Company 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
completed the conversion of the Pharmhouse stores to the Company's merchandising
mix by October 31, 1999.
<PAGE>10
Results of Operations
The following table sets forth the number of retail stores operated each fiscal
year:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
July 1, 2000 July 3, 1999 June 27, 1998
------------ ------------ -------------
<S> <C> <C> <C>
Stores, beginning of period 139 106 103
Stores acquired - 32 -
Stores opened 2 2 3
Stores closed (2) (1) -
--- --- ---
Stores, end of period 139 139 106
=== === ===
</TABLE>
52 weeks ended July 1, 2000 (Fiscal Year 2000) compared to the 53 weeks ended
July 3, 1999 (Fiscal Year 1999) (all dollar amounts in thousands)
<TABLE>
<CAPTION>
Fiscal Year 2000 Fiscal Year 1999
---------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 1,292,090 100.00% $ 1,206,539 100.00%
Less:
Cost of goods sold, including occupancy
and distribution costs 1,050,208 81.28% 977,878 81.05%
--------- -------
Gross Profit 241,882 18.72% 228,661 18.95%
Selling, general and administrative
expenses 211,833 16.39% 188,264 15.60%
Depreciation and amortization 24,708 1.91% 25,386 2.10%
------ ------
Operating income 5,341 0.41% 15,011 1.24%
Interest expense (18,851) 1.46% (16,338) 1.35%
Interest and investment (loss) income (5,404) (0.42)% 560 0.05%
------ ------
(Loss) income before equity in income of
affiliates, income taxes and (18,914) (1.46)% (767) (0.06%)
extraordinary item
Equity in income of affiliates 6,774 0.52% 1,568 0.13%
------ ------
(Loss) income before income taxes and
extraordinary item (12,140) (0.94)% 801 0.07%
Income tax provision -- -- 205 0.02%
------ ------
(Loss) income before extraordinary item (12,140) (0.94)% 596 0.05%
Extraordinary item 1,117 0.09% -- --
------ ------
Net (loss) income $ (11,023) (0.85)% $ 596 0.05%
=========== ===========
</TABLE>
Fiscal Year 2000 sales increased $85,551 or 7.1% over Fiscal Year 1999.
The increase in Fiscal Year 2000 sales was primarily due to a full year of
Pharmhouse sales in Fiscal Year 2000 compared to three and a half months of
Pharmhouse sales in Fiscal Year 1999, partially offset by one less week in
Fiscal Year 2000, and a comparable store sales decrease of .4%. The comparable
store sales decrease was primarily due to a 3.3% comparable store front end
sales decrease partially offset by a 7.3% comparable store pharmacy sales
increase.
Gross profit for Fiscal Year 2000 was 0.23% of sales lower than for
Fiscal Year 1999. A 0.44% of sales increase in product gross margins was more
than offset by lower cash discounts, higher third party receivable write offs
and higher occupancy costs. Cash discounts declined as a percentage of sales
primarily due to an increase in pharmacy sales as a percentage of total sales
from 28.0% of sales in Fiscal Year 1999 to 30.9% of sales in Fiscal Year 2000.
Occupancy costs increased as a percentage of sales primarily due to the
inclusion of the lower volume Pharmhouse stores for a full year in Fiscal Year
2000 versus three and a half months in Fiscal Year 1999.
Selling, general and administrative expenses increased 0.79% of sales
in Fiscal Year 2000 over Fiscal Year 1999. The increase in selling, general and
administrative expenses was primarily due to higher wage costs, higher
advertising expenditures and higher store expenses. The increase in wage costs
<PAGE>11
as a percentage of sales was primarily due to the full year effect of 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 average
hourly wage paid to store employees. The increase in advertising expenditures
and store expenses as a percentage of sales was primarily due to the full year
effect of the addition of the Pharmhouse stores which have a higher costs a
percentage of sales due to lower per store sales volume.
Interest and investment income decreased $5,964 in fiscal year 2000
from fiscal year 1999. The decrease was primarily the result of a decline in
interest income of $1,461 due to lower cash balances and a $5,500 investment
loss resulting from an other than temporary impairment of one of the Company's
investments.
The Company had an increase in equity in income of affiliates of $5,206
in fiscal year 2000 from fiscal year 1999, primarily due to investment gains by
one of the affiliates.
The Company repurchased $10,149 of its 11.72% senior notes during
Fiscal Year 2000 at a discount resulting in a extraordinary gain of $1,117.
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 188,264 15.60% 173,736 15.78%
Executive severance -- -- 6,787 0.62%
Loss on disposal of equipment -- -- 4,615 0.42%
Depreciation and amortization 25,386 2.10% 22,293 2.02%
------- -------
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%
Interest and investment income 560 0.05% 2,058 0.19%
------- -------
(Loss) income before equity in income
(loss) of affiliates, and income taxes (767) (0.06%) (8,818) (0.80%)
Equity in income (loss) of affiliates 1,568 0.13% (12) 0.00%
------- -------
Income (loss) before taxes 801 0.07% (8,830) (0.80%)
Income tax provision 205 0.02% -- --
------- -------
Net income (loss) $ 596 0.05% $ (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
<PAGE>12
income from a partial settlement received from 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 0.18% 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.
Interest and investment income decreased $1,498 in fiscal year 1999
from fiscal year 1998. The decrease was mostly due to a decline in interest
income of $1,566 as the result of lower cash balances.
Equity in income of affiliates increased $1,556 in fiscal year 1999
from fiscal year 1998, primarily due to investment gains by one of the
affiliates.
Financial Condition and Liquidity (all dollar amounts in thousands)
The Company's cash position as of July 1, 2000 was $16,752.
On September 10, 1998, the Company entered into an Amended and Restated
Revolving Credit Facility (the "Amended Revolving Credit Facility") with
BankAmerica Business Credit, Inc. ("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% from January 1
to June 30 each year and the BankAmerica reference rate plus 3/4% or LIBOR plus
2.25% from July 1 to December 31 each year. 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 1, 2000, there were $60,283 in outstanding advances and
letters of credit in the amount of $5,084 were outstanding under the Amended
Revolving Credit Facility.
The Amended Revolving Credit Facility expires on March 14, 2002.
The Company's cash position decreased $594 during Fiscal Year 2000 as
cash provided by operating activities of $9,641 and cash provided by financing
activities of $19,786 was offset by $30,021 in cash used for investing
activities.
Merchandise inventories decreased by $8,506 and accounts payable
decreased $18,638 from the high levels at the end of Fiscal Year 1999. The high
levels at the end of Fiscal Year 1999 resulted from large inventory purchases
made in order to supply the Pharmhouse stores with products normally carried in
the Company's stores.
The Company invested $5,724 during Fiscal Year 2000 in the common stock
of Avatex Corporation, the Company's largest shareholder. The Company also
invested $11,761 in equity securities of other privately held companies. The
Company then sold $6,000 of those equity securities.
<PAGE>13
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 $1,001 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.
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, marketable
securities and expected cash flows from operations for Fiscal Year 2001 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 2001 are expected to total
$11,300. The major expenditures are expected to be (i) video rental tapes
($1,400), (ii) remodeling of existing stores ($4,075), and (iii) new stores
($1,375). 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
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 initiated formal communication
with all of its significant vendors and other external interfaces to determine
the extent to which the Company was 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 have caused disruption of the
Company's systems.
The Company completed all of the software modifications necessary to
make its systems Year 2000 compliant and as a result has not experienced any
major operational problems or disruptions.
The Company incurred approximately $1,300 related to the assessment of,
and efforts in connection with, its Year 2000 program and remediation plan. The
Company accelerated by one year the purchase of approximately $5,000 in
replacement hardware in order to ensure the associated system was Year 2000
compliant.
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.
<PAGE>14
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.
In November 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue
Recognition". This Bulletin sets forth the SEC Staff's position regarding the
point at which it is appropriate for a Registrant to recognize revenue. The
Staff believes that revenue is realizable and earned when all of the following
criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or service has been rendered;
- The seller's price to the buyer is fixed or determinable; and
- Collectibility is reasonably assured.
The Company uses the above criteria to determine whether revenue can be
recognized, and therefore believes that the issuance of SAB 101 does not have a
material impact on the Company's financial statements.
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>15
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 63 Co-Chairman and Co-Chief Executive Officer
Melvyn J. Estrin 58 Co-Chairman and Co-Chief Executive Officer
M. David Schwartz 55 President and Chief Operating Officer
Warren E. Jeffery 51 Executive Vice President - Merchandising,
Marketing and Logistics
John R. Ficarro 48 Senior Vice President, Chief Administrative
Officer, General Counsel and Secretary
Monroe Osterman 73 Director
Arthur G. Rosenberg 62 Director
John D. Shulman 37 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. He also serves as President and a director of C.B. Equities
Corp., a private investment company. Mr. Butler presently serves as a director
of GrandBanc, Inc., Carson, Inc., iLife Systems, Inc. ("iLife") and, in
connection with our investments, as director of RAS Holding Corp. ("RAS") and
its subsidiary, Presby Corp. and as a member of the Board of Managers of
Chemlink and Cyclone Acquisition Company, LLC. Mr. Butler is a trustee 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
President of the National Committee for the Performing Arts, John F. Kennedy
Center, Washington, D.C. Mr. Butler also served as Co-Chairman of the Board of
FoxMeyer Corporation since March 1991 and was its Co-Chief Executive Officer
from May 1993 to November 1996, and also served as Co-Chairman of the Board of
Ben Franklin from November 1991 until March 1997. FoxMeyer Corporation and Ben
Franklin each filed for relief under the Bankruptcy Code in 1996.
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. He also has served as Chairman of the Board and
Chief Executive Officer of Human Service Group, Inc., a private management and
investment firm, since 1983. Mr. Estrin presently serves as Chairman of
GrandBanc, Inc. and a director of Washington Gas Light Company, Carson, Inc.,
RAS, iLife and, in connection with our investments, as a director of HPD
Holdings Corp., and as a member of the Board of managers of Chemlink and Cyclone
Acquisition Company, LLC. Mr. Estrin also 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. Mr. Estrin also served
as Co-Chairman of the Board of FoxMeyer Corporation since March 1991 and was its
<PAGE>16
Co-Chief Executive Officer from May 1993 to November 1996, and also served as
Co-Chairman of the Board of Ben Franklin from November 1991 until March 1997.
FoxMeyer Corporation and Ben Franklin each filed for relief under Bankruptcy
Code in 1996.
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.
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, a commercial real estate developer. 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.
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.
<PAGE>17
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 2000," "Option Exercises and Values for Fiscal Year 2000,"
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>18
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
None.
<PAGE>19
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 28, 2000 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 28, 2000 /s/ M. David Schwartz
-----------------------------------------
M. David Schwartz, President
Date: September 28, 2000 /s/ Abbey J. Butler
-----------------------------------------
Abbey J. Butler, Co-Chairman and
Co-Chief Executive Officer
(Co-Principal executive officer)
Date: September 28, 2000 /s/ Melvyn J. Estrin
-----------------------------------------
Melvyn J. Estrin, Co-Chairman
and Co-Chief Executive Officer
(Co-Principal executive officer)
Date: September 28, 2000 /s/ Monroe Osterman
-----------------------------------------
Monroe Osterman, Director
Date: September 28, 2000 /s/ Arthur G. Rosenberg
-----------------------------------------
Arthur G. Rosenberg, Director
Date: September 28, 2000 /s/ John D. Shulman
-----------------------------------------
John D. Shulman, Director
Date: September 28, 2000 /s/ Martin S. Seekely
-----------------------------------------
Martin S. Seekely
Vice President and Controller
(principal financial and
accounting officer)
<PAGE>
PHAR-MOR, INC.
INDEX TO EXHIBITS
Exhibit No.
*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 Amendment No. 3 to Loan Security Agreement, dated June 27,
2000, 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 Employment Agreement between Phar-Mor, Inc. and Abbey J.
Butler, dated October 1, 1997
***10.3 Employment Agreement between Phar-Mor, Inc. and Melvyn J.
Estrin, dated October 1, 1997
*****10.4 Second Amendment to Employment Agreement between Phar-Mor,
Inc. and Warren E. Jeffery, dated February 10, 1999
*****10.5 Third Amendment to Employment Agreement between Phar-Mor, Inc.
and M. David Schwartz, dated February 10, 1999
*****10.6 Third Amendment to Employment Agreement between Phar-Mor, Inc.
and John R. Ficarro, dated February 10, 1999
*10.7 Form of Indemnification Agreement dated as of September 11,
1995
**10.8 Phar-Mor, Inc. 1995 Amended and Restated Stock Incentive Plan
**10.9 Phar-Mor, Inc. 1995 Director Stock Plan, as Amended
**10.10 Phar-Mor, Inc. 1996 Director Retirement Plan
**10.11 Employee Stock Purchase Plan
******10.12 Amendment to the Supply Agreement dated November 5, 1999,
between Phar-Mor and McKesson Drug Company
****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 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-K405, on September 25, 1998
**** 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-K405, on September 29, 1999
****** Previously filed in connection with the filing of Phar-Mor's quarterly
report on Form 10-Q, on February 7, 2000
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F - 2
CONSOLIDATED BALANCE SHEETS AS OF JULY 1, 2000 AND JULY 3, 1999 F - 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FIFTY-TWO WEEKS
ENDED JULY 1, 2000, THE FIFTY-THREE WEEKS ENDED JULY 3, 1999 AND THE
FIFTY-TWO WEEKS ENDED JUNE 27, 1998 F - 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FIFTY-TWO WEEKS ENDED JULY 1, 2000, THE FIFTY- THREE WEEKS
ENDED JULY 3, 1999 AND THE FIFTY-TWO WEEKS ENDED JUNE 27, 1998 F - 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FIFTY-TWO WEEKS
ENDED JULY 1, 2000, THE FIFTY-THREE WEEKS ENDED JULY 3, 1999 AND THE
FIFTY-TWO WEEKS ENDED JUNE 27, 1998 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 1, 2000 and July 3, 1999, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the fifty-two weeks ended July 1, 2000, the fifty-three weeks
ended July 3, 1999 and the fifty-two weeks ended June 27, 1998. 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 auditing standards generally accepted
in the United States of America. 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 1, 2000 and July 3, 1999 and the results of their
operations and their cash flows for the fifty-two weeks ended July 1, 2000, the
fifty-three weeks ended July 3, 1999 and the fifty-two weeks ended June 27,
1998, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such 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 26, 2000
F-2
<PAGE>
PHAR-MOR, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 1, July 3,
2000 1999
----------- -----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 16,752 $ 17,346
Marketable securities 3,019 3,254
Accounts receivable - net 25,017 28,293
Merchandise inventories 207,228 218,945
Prepaid expenses 6,099 6,902
Deferred tax asset 439 516
------- -------
Total current assets 258,554 275,256
Property and equipment - net 91,801 93,738
Goodwill 15,809 16,234
Deferred tax asset 9,126 9,049
Investments 13,682 8,314
Investment in Avatex 3,691 --
Other assets 5,241 5,133
------- -------
Total assets $ 397,904 $ 407,724
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 97,461 $ 119,843
Accrued expenses 38,840 34,926
Current portion of self insurance reserves 1,781 2,178
Current portion of long-term debt 1,964 1,751
Current portion of capital lease obligations 4,535 7,195
------- -------
Total current liabilities 144,581 165,893
Long-term debt 152,410 122,804
Capital lease obligations 15,446 20,143
Long-term self insurance reserves 7,335 8,032
Unfavorable lease liability - net 10,639 11,073
------- -------
Total liabilities 330,411 327,945
------- -------
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, 12,240,865 122 122
Additional paid-in capital 90,007 90,007
Stock options outstanding 2,200 2,105
Retained deficit (19,012) (7,989)
------- -------
73,317 84,245
Less: equity, through investment in Avatex, in cost of common stock
of the Company held by Avatex, Inc (6,359) (5,001)
------- -------
Total stockholders' equity 66,958 79,244
------- -------
Total liabilities and stockholders' equity $ 397,904 $ 407,724
========= =========
</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-two Fifty-three Fifty-two
weeks ended weeks ended weeks ended
July 1, 2000 July 3, 1999 June 27, 1998
------------ ------------ -------------
<S> <C> <C> <C>
Sales $ 1,292,090 $ 1,206,539 $ 1,100,851
Less:
Cost of goods sold, including occupancy and
distribution costs 1,050,208 977,878 887,657
Selling, general and administrative expenses 211,833 188,264 173,736
Executive severance -- -- 6,787
Loss on disposal of equipment -- -- 4,615
Depreciation and amortization 24,708 25,386 22,293
------ ------ ------
Income from operations before interest expense,
investment (loss), interest income, equity in
income (loss) of affiliates, income taxes and
extraordinary item 5,341 15,011 5,763
Interest expense (18,851) (16,338) (16,639)
Investment loss (5,528) (1,025) (1,093)
Interest income 124 1,585 3,151
------ ------ ------
Loss before equity in income (loss) of affiliates,
income taxes and extraordinary item (18,914) (767) (8,818)
Equity in income (loss) of affiliates 6,774 1,568 (12)
------ ------ ------
(Loss) income before income taxes and extraordinary
item (12,140) 801 (8,830)
Income tax provision -- 205 --
------ ------ ------
(Loss) income before extraordinary item (12,140) 596 (8,830)
Extraordinary item - gain on extinguishment of debt 1,117 -- --
------ ------ ------
Net (loss) income $ (11,023) $ 596 $ (8,830)
============ ============ ============
(Loss) income per basic share:
(Loss) income before extraordinary item $ (1.08) $ .05 $ (.73)
Extraordinary item $ .10 $ -- $ --
------------ ------------ ------------
Net (loss) income $ (.98) $ .05 $ (.73)
============ ============ ============
(Loss) income per diluted share:
(Loss) income before extraordinary item $ (1.08) $ .05 $ (.73)
Extraordinary item $ .10 $ -- $ --
------------ ------------ ------------
Net (loss) income $ (.98) $ .05 $ (.73)
============ ============ ============
Weighted average number of basic shares outstanding 11,241,342 11,522,800 12,117,683
============ ============ ============
Weighted average number of diluted shares
outstanding 11,241,342 11,570,955 12,117,683
============ ============ ============
</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>
Equity,
Through
Investment
in Avatex,
Common Stock in Cost of
------------ Common Stock
of the
Par Additional Stock Company Retained Total
Value Paid-in Options Held by (Deficit) Stockholders'
Shares Amount Capital Outstanding Avatex, Inc. Earnings Equity
------ ------ ------- ----------- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Purchase of Avatex shares -- -- -- -- $ (4,000) -- (4,000)
Shares issued 77 -- 574 -- -- -- 574
-------- -------- -------- -------- -------- -------- --------
Balance at June 27, 1998 12,236 122 89,976 1,401 (4,000) (8,585) 78,914
Net income -- -- -- -- -- 596 596
Stock options outstanding -- -- -- 704 -- -- 704
Purchase of Avatex shares -- -- -- -- (1,001) -- (1,001)
Shares issued 5 -- 31 -- -- -- 31
-------- -------- -------- -------- -------- -------- --------
Balance at July 3, 1999 12,241 122 90,007 2,105 (5,001) (7,989) 79,244
Net loss -- -- -- -- -- (11,023) (11,023)
Stock options outstanding
-- -- -- 95 -- -- 95
Purchase of Avatex shares -- -- -- -- (1,358) -- (1,358)
-------- -------- -------- -------- -------- -------- --------
Balance at July 1, 2000 12,241 $ 122 $ 90,007 $ 2,200 $ (6,359) $(19,012) $ 66,958
======== ======== ======== ======== ======== ======== ========
</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-two Fifty-three Fifty-two
weeks ended weeks ended weeks ended
July 1, 2000 July 3, 1999 June 27, 1998
------------ ------------ -------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (11,023) $ 596 $ (8,830)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Items not requiring the outlay of cash:
Depreciation 18,682 17,028 14,030
Loss on disposal of equipment -- -- 4,615
Stock option expense 95 704 1,401
Amortization of video rental tapes 4,696 7,784 7,970
Amortization of deferred financing costs and goodwill 1,594 446 467
Deferred taxes -- 205 --
Unrealized (gain)loss on equity investments 1,111 (1,748) --
Gain on extinguishment of debt (1,117) -- --
Deferred rent and unfavorable lease liabilities (434) (1,059) (1,419)
Changes in assets and liabilities:
Accounts receivable 3,232 (5,750) 687
Marketable securities 235 5,811 (9,065)
Merchandise inventories 8,506 (8,539) (6,769)
Prepaid expenses 803 (4,385) 3,014
Other assets (1,277) 181 298
Accounts payable (18,638) 8,174 5,283
Accrued expenses 4,543 (11,175) 58
Other (1,367) (979) (1,686)
-------- -------- --------
Net cash provided by operating activities 9,641 7,294 10,054
-------- -------- --------
INVESTING ACTIVITIES
Additions to rental videotapes (1,485) (7,445) (8,167)
Additions to property and equipment (17,051) (23,968) (19,213)
Investment in Avatex (5,724) (1,001) (4,000)
Investment in Pharmhouse Corp., net of $3,292 cash
acquired -- (4,838) --
Proceeds from sale of equity securities 6,000 -- --
Investment in equity securities (11,761) (2,291) (4,275)
-------- -------- --------
Net cash used for investing activities (30,021) (39,543) (35,655)
-------- -------- --------
FINANCING ACTIVITIES
Borrowings under revolving credit facility 40,217 20,066 --
Retirement of senior notes (9,032) -- --
Principal payments on term debt (1,397) (29,592) (3,043)
Principal payments on capital lease obligations (7,357) (6,847) (7,122)
Bank overdrafts (3,793) 21,032 --
Other additions to long-term debt 1,148 250 --
Issuance of common stock -- 31 574
-------- -------- --------
Net cash provided by (used for) financing activities 19,786 4,940 (9,591)
-------- -------- --------
Decrease in cash and cash equivalents (594) (27,309) (35,192)
Cash and cash equivalents, beginning of period 17,346 44,655 79,847
-------- -------- --------
Cash and cash equivalents, end of period $ 16,752 $ 17,346 $ 44,655
======== ======== ========
Supplemental Information
Interest paid $ 13,602 $ 21,744 $ 16,155
Income tax refunds 53 47 48
</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 1, 2000 and July 3,
1999. The accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows were prepared
for the fifty-two weeks ended July 1, 2000, the fifty-three
weeks ended July 3, 1999, and the fifty-two weeks ended June
27, 1998. 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. The Company operates in one
segment.
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. Unrealized gains (losses) of $419, $(390) and
$(1,363) are included in Investment loss in the Consolidated
Statements of Operations for the fifty-two weeks ended July 1,
2000, 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 ($9,788 at July 1, 2000 and
$6,134 at July 3, 1999) in which it has 20% or more interest
in voting common stock and the cost method of accounting for
investments ($3,894 at July 1, 2000 and $2,180 at July 3,
1999) in which it has less than a 20% interest in voting
common stock or investments in preferred stock (see Note 9).
During fiscal 2000 the Company recorded a $5,500 investment
loss resulting from an other than temporary impairment of a
cost basis investment.
i. Investment in Avatex - During the fifty-two weeks ended June
27, 1998, the fifty-three weeks ended July 3, 1999, and the
fifty-two weeks ended July 1, 2000, the Company invested
$4,000, $1,001, and $5,724 respectively, to purchase
approximately 25.2% 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). Accordingly, upon
attaining a 20% or more interest in Avatex's common stock
during the fiscal year ended July 1, 2000, the Company changed
its method of accounting for the investment from the cost to
the equity basis as required by generally accepted accounting
principles. Because Avatex holds an approximate 39% interest
in the Company's common stock, the Company treats Avatex's
investment in the Company's common stock similar to treasury
stock, with a reduction in the number of shares outstanding
for calculating earnings per share of 1,207,979. The financial
statements of prior years have been restated to reflect the
adoption of the equity method in a manner consistent with the
accounting for a step-by-step acquisition of Avatex. The
effect of the restatement was to increase net
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
income for fiscal 1999 by $2,188, eliminate comprehensive
income (loss) for all prior periods and reclassify all of the
Company's investment in Avatex common stock prior to fiscal
2000 from Investment in Avatex to equity, through investment
in Avatex, in cost of common stock of the Corporation held by
Avatex, Inc. on the Condensed Consolidated Balance Sheets.
The Company's investment in Avatex includes the unamortized
excess of the Company's investment over its equity in Avatex's
net assets. This excess was $3,628 and is being amortized on a
straight-line basis over 20 years.
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 $962 and $318
at July 1, 2000 and July 3, 1999, 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 10 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 capitalizes 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".
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
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.
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. Recent Accounting Pronouncements - 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.
In November 1999, the SEC issued Staff Accounting Bulletin
("SAB") 101, "Revenue Recognition". This Bulletin sets forth
the SEC Staff's position regarding the point at which it is
appropriate for a Registrant to recognize revenue. The Staff
believes that revenue is realizable and earned when all of the
following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or service has been rendered;
- The seller's price to the buyer is fixed or
determinable; and
- Collectibility is reasonably assured.
The Company uses the above criteria to determine whether
revenue can be recognized, and therefore believes that the
issuance of SAB 101 does not have a material impact on the
Company's financial statements.
y. Advertising Costs - Advertising costs are expensed when
incurred. Advertising expenses for the fifty-two weeks ended
July 1, 2000, the fifty-three weeks ended July 3, 1999 and the
fifty-two weeks ended June 27, 1998 were $22,827, $19,392 and
$23,381, respectively.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
2. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
Accounts receivable consists of the following:
July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Accounts receivable - vendors $ 10,315 $ 13,587
Third-party prescriptions 14,944 14,038
Vendor coupons 711 1,015
Other 551 1,397
------ ------
26,521 30,037
Less allowance for doubtful accounts 1,504 1,744
------ ------
$ 25,017 $ 28,293
======== ========
</TABLE>
<TABLE>
<CAPTION>
3. MERCHANDISE INVENTORIES
Merchandise inventories consists of the following:
July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Store inventories $189,423 $187,197
Warehouse inventories 29,476 41,624
Video rental tapes - net 1,019 5,080
------- -------
219,918 233,901
Less reserves for markdowns, shrinkage
and vendor rebates 12,690 14,956
-------- --------
$207,228 $218,945
======== ========
</TABLE>
The video rental tape inventory is net of accumulated amortization of
$3,832 and $7,526 at July 1, 2000 and July 3, 1999, respectively.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consists of the following:
July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Furniture, fixtures and equipment $ 70,171 $ 60,534
Building improvements to leased property 52,559 45,804
Land 497 497
Building 1,517 1,517
Capital leases:
Buildings 11,076 11,076
Furniture, fixtures and equipment 22,072 22,072
------- -------
157,892 141,500
Less accumulated depreciation and
amortization 66,091 47,762
------- -------
$ 91,801 $ 93,738
======== ========
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
5. OTHER ASSETS
<TABLE>
<CAPTION>
Other assets consists of the following:
July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Purchased pharmacy files $3,313 $4,001
Liquor licenses 1,117 45
Deferred debt expense 291 456
Utility and other deposits 388 396
Other 132 235
------ ------
$5,241 $5,133
====== ======
</TABLE>
Deferred debt expense, liquor licenses and purchased pharmacy files are
net of accumulated amortization of $1,430 and $1,315, at July 1, 2000
and July 3, 1999, respectively. The deferred debt expense consists of
debt origination costs associated with the credit facility (See Note
6).
6. REVOLVING CREDIT FACILITIES
On September 10, 1999, the Company entered into an Amended and Restated
Revolving Credit Facility (the "Amended Revolving Credit Facility")
with BankAmerica Business Credit, Inc. ("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 other
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 $34,633 at July 1, 2000.
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% from
January 1 to June 30 each year and the BankAmerica Reference rate plus
3/4% or LIBOR plus 2.25% from July 1 to December 31 each year. 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 1, 2000 the BankAmerica reference rate (prime rate) was 9.5%
and the LIBOR rate was 6.42%.
At July 1, 2000 there were letters of credit in the amount of $5,084
outstanding under the Amended Revolving Credit Facility.
The Amended Revolving Credit Facility expires on March 14, 2002.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
7. LONG-TERM DEBT
The composition of the debt obligations included on the consolidated
balance sheets is as follows:
<TABLE>
<CAPTION>
July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Senior unsecured notes, interest rate of 11.72%,
due September 2002 $ 81,313 $ 91,462
Amended Revolving Credit Facility 60,283 20,066
Equipment notes, interest rate of 7%, due in installments
through October 2003 3,926 3,785
Tax notes, interest rates at 5.89% to 8%, due
through September 2001 4,455 4,575
Real estate mortgage notes and bonds payable at rates ranging
from 3% to 9.98% and the prime rate plus 1% 4,397 4,667
------- -------
Total debt 154,374 124,555
Less current portion 1,964 1,751
------- -------
Total long-term debt $152,410 $122,804
======== ========
</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 senior notes contain restrictions on, among
other things, incurrence of debt, payment of dividends and repurchases
of common stock. During fiscal 2000, the Company recognized an
extraordinary gain of $1,117 in connection with the retirement of
$10,149 of senior unsecured notes.
The Company has mortgage notes and bonds payable collateralized by real
estate with an aggregate net book value of $3,853 and $4,038 at July 1,
2000 and July 3, 1999, 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 1, 2000 are
summarized as follows:
2001 $ 1,964
2002 63,597
2003 82,801
2004 554
2005 365
Thereafter 5,093
--------
$154,374
========
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 1, 2000
are as follows:
Capital Operating
Leases Leases
------ ------
2001 $ 5,919 $ 42,816
2002 5,220 40,784
2003 3,388 36,753
2004 2,033 31,097
2005 2,055 26,832
Thereafter 6,394 103,775
----- -------
Total minimum lease payments 25,009 $282,057
=======
Less amounts representing interest 5,028
-------
Present value of minimum lease payments 19,981
Less current portion 4,535
-------
Long-term capital lease obligations $15,446
=======
The operating leases on substantially all store properties provide for
additional rentals when sales exceed specified levels and contain
escalation clauses. Rent expense for the fifty-two weeks ended July 1,
2000, fifty-three weeks ended July 3, 1999, and the fifty-two weeks
ended June 27, 1998 was $43,730, $37,306, and $31,921 respectively,
including $206, $223, and $123 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.
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.
The Company paid $95 and $77 to Human Service Group, Inc. during Fiscal
Year 2000 and 1999, respectively, for secretarial services provided to
Mr. Estrin. Human Service Group, Inc. is a corporation wholly owned by
Mr. Estrin.
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.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
The Company paid CB Equities Corporation $67, $74 and $52, during
Fiscal Year 2000, 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 of the
Company's common shares outstanding as of July 1, 2000. 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
1, 2000, 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 3,850,000
options. As of July 1, 2000, options for 155,367 common shares were
reserved for future grant, and options for 3,694,633 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 1, 2000, 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-two weeks ended
July 1, 2000, the fifty-three weeks ended July 3, 1999, and the
fifty-two weeks ended June 27, 1998, the Company recognized $95, $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, 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-two weeks Fifty-three weeks Fifty-two weeks
ended July 1, 2000 ended July 3, 1999 ended June 27, 1998
------------------ ------------------ -------------------
<S> <C> <C> <C>
Net (loss) income:
As reported $(11,023) $ 596 $ (8,830)
Pro forma $(13,734) $ (2,160) $(11,654)
Basic and diluted (loss) earnings
per share:
As reported $(0.98) $ .05 $(0.73)
Pro forma $(1.22) $(0.19) $(0.96)
</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 1, 2000, 3,527,968 options were exercisable at a weighted
average exercise price per share of $6.79.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
The following table summarizes stock option activity under the plans:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Average Remaining Average
Options Exercise Exercise Price Contractual Grant Date
Outstanding Price Per Share per Share Life (Years) Fair Value
----------- --------------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
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
Granted 810,300 $ 2.55 $ 2.52 - $5.34 1.20
Forfeited (174,234) $ 4.87 $ 2.52 - $9.63
---------
Balance at July 1, 2000 4,346,300 $ 6.16 $ 2.52 - $9.63 4.72
=========
</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. On April 13, 2000, the Company
repriced options to purchase 93,600 shares from the original grant
price of $9.625 and options to purchase 30,000 shares with an original
grant price of $7.375 to $2.51625 per share.
The following table stratifies the options as of July 1, 2000:
<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 1,525,767 $ 8.85 3.65 1,525,600 $ 8.85
$ 6.17 - $ 7.75 767,733 $ 7.04 3.67 725,567 $ 7.02
$ 4.25 - $ 5.44 1,312,800 $ 4.57 5.4 1,010,268 $ 4.65
$ 2.52 - $ 3.16 740,000 $ 2.52 6.79 266,533 $ 2.52
</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 1, 2000 and July 3, 1999, 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.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
Changes in tax rates or laws will result in adjustments to the recorded
deferred tax assets or liabilities in the period that the change is
enacted.
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Deferred Tax Assets:
Operating and restructuring reserves $ 5,090 $ 5,977
Net operating losses 135,272 131,807
Depreciation and amortization 29,947 29,578
Lease escalation accruals 4,299 4,454
Jobs tax credit 4,432 4,432
Other items 3,069 4,458
--------- ---------
182,109 180,706
Valuation allowance (172,544) (171,141)
--------- ---------
Net deferred tax assets $ 9,565 $ 9,565
========= =========
Composition of amounts in Consolidated
Balance Sheet:
Deferred tax assets - current $ 439 $ 516
Deferred tax liabilities - current -- --
--------- ---------
Net deferred tax assets - current $ 439 $ 516
========= =========
Deferred tax assets - noncurrent $ 9,126 $ 9,049
Deferred tax liabilities - noncurrent -- --
--------- ---------
Net deferred tax assets - noncurrent $ 9,126 $ 9,049
========= =========
</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 in fiscal 2000, 1999 or 1998
and a deferred tax provision in fiscal 1999 totaling $205. 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-two Fifty-three Fifty-two
weeks ended weeks ended weeks ended
July 1, 2000 July 3, 1999 June 27, 1998
------------ ------------ -------------
<S> <C> <C> <C>
Statutory tax rate (35.0%) 35.0% (35.0%)
State income taxes, net of federal benefit -- 5.2% --
Tax effect of permanent differences -- (14.6)% --
Change in valuation allowance 35.0% -- 35.0%
---- ---- ----
Effective tax rate 0.0% 25.6% 0.0%
==== ==== ====
</TABLE>
The Company has approximately $378,000 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 $31,000 of NOLs were
incurred subsequent to September 2, 1995, and may be used to offset
future taxable income without restriction. The 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.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
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.
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 Corp. 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-two weeks ended July 1, 2000, the fifty-three
weeks ended July 3, 1999 and the fifty-two weeks ended June 27, 1998,
were $1,214, $1,087 and $1,009, respectively.
Health and Welfare Plans
------------------------
The Company also contributes to a multiemployer union sponsored health
and welfare plan covering truck drivers and warehouse personnel. Total
expenses for the fifty-two weeks ended July 1, 2000, the fifty-three
weeks ended July 3, 1999, and the fifty-two weeks ended June 27, 1998,
were $2,343, $2,050 and $1,858, respectively.
The Company has no postretirement health and welfare or benefits
programs.
Defined Benefit Plans
---------------------
The Company provides pension benefits under noncontributory defined
benefit pension plans to its union employees who have met the
applicable age and service requirements specified in the plans.
Benefits are earned on the basis of credited service and average
compensation over a period of years. Vesting occurs after five years of
service as specified under the plans. The Company makes contributions
to the plans as necessary to satisfy the minimum funding requirement of
ERISA.
The Company provided pension benefits under noncontributory defined
benefit pension plans to its 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)
--------------------------------------------------------------------------------
The following table sets forth the funded status of the Company's
defined benefit pension plans and the amounts recognized in the
Company's consolidated balance sheets:
<TABLE>
<CAPTION>
July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Change in benefit obligation
Benefit obligation at the beginning of the year $ 4,592 $ 5,175
Service costs with expenses 339 287
Interest cost 309 264
Actuarial (gain)/loss 173 907
Benefits paid (31) (2,041)
------- -------
Benefit obligation at end of year 5,382 4,592
------- -------
Change in plan assets
Fair value of plan assets at beginning of year 3,190 3,589
Actual return on plan assets 129 437
Employer contributions 416 1,205
Benefits paid (31) (2,041)
------- -------
Fair value of plan assets at end of year 3,704 3,190
------- -------
Funded status (1,678) (1,402)
Unrecognized net actuarial loss 1,220 929
Unrecognized prior service cost 1 1
------- -------
Net amount recognized $ (457) $ (472)
======= =======
Amounts recognized in the statement of financial
position consist of:
Accrued benefit liability $ (463) $ (479)
Intangible asset 6 7
------- -------
Net amount recognized $ (457) $ (472)
======= =======
</TABLE>
<TABLE>
<CAPTION>
July 1, 2000 July 3, 1999
------------ ------------
<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-two Fifty-three Fifty-two
weeks ended weeks ended weeks ended
July 1, 2000 July 3, 1999 June 27, 1998
------------ ------------ -------------
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 339 $ 287 $ 170
Interest cost 309 264 668
Expected return on plan assets (290) (244) (773)
Recognized actuarial loss 42 45 (1)
------- ------- -------
Net periodic pension cost 400 352 64
Settlement effect from lump sum cashouts -- -- (1,446)
------- ------- -------
Net pension (income) expense $ 400 $ 352 $(1,382)
======= ======= =======
</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 $68, $51,
and $30, respectively, as of July 1, 2000 and $58, $44, and $22,
respectively, as of July 3, 1999.
13. REORGANIZATION ITEMS AND RELATED RESERVES
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-two Fifty-three Fifty-two
weeks ended weeks ended weeks ended
July 1, 2000 July 3, 1999 June 27, 1998
------------ ------------ -------------
<S> <C> <C> <C>
Balance, beginning of period $ 918 $ 967 $ 1,866
Costs incurred in connection with the
Pharmhouse acquisition (542) 800 --
Store rightsizing costs (36) (849) (899)
------- ------- -------
Balance, end of period $ 340 $ 918 $ 967
======= ======= =======
</TABLE>
The remainder of the reserve for the costs of downsizing at July 1,
2000 is considered by management to be a reasonable estimate of the
costs to be incurred related to the Pharmhouse acquisition.
14. FINANCIAL INSTRUMENTS
The Company has financial instruments which include marketable
securities, investments and long-term debt. The carrying values of
these instruments at July 1, 2000 approximated their fair market value
except for the senior unsecured notes. The estimated fair value of the
senior unsecured notes is $51,227 at July 1, 2000.
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 2000
-----------
Thirteen Thirteen Thirteen Thirteen
weeks ended weeks ended weeks ended weeks ended
October 2, 1999 January 1, 2000 April 1, 2000 July 1, 2000
--------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Sales $ 317,835 $ 350,411 $ 308,663 $ 315,181
Gross profit $ 61,052 $ 70,061 $ 54,560 $ 56,209
Net (loss) income $ (4,191) $ 8,118 $ (1,839) $ (13,111)
Net (loss) income per basic share $ (0.36) $ 0.71 $ (0.17) $ (1.19)
Weighted average number of basic
shares outstanding 11,516,185 11,383,411 11,032,886 11,032,886
Net (loss) income per diluted share $ (0.36) $ 0.71 $ (0.17) $ (1.19)
Weighted average number of diluted shares
outstanding 11,516,185 11,383,411 11,032,886 11,032,886
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999
-----------
Thirteen Thirteen Thirteen Fourteen
weeks ended weeks ended weeks ended weeks ended
September 26, 1998 December 26, 1998 March 27, 1999 July 3, 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 $ (2,806)
Net (loss) income per basic share $ (0.13) $ 0.33 $ 0.10 $ (0.24)
Weighted average number of basic
shares outstanding
11,542,000 11,516,220 11,516,185 11,516,185
Net (loss) income per diluted share $ (0.13) $ 0.32 $ 0.10 $ (0.24)
Weighted average number of diluted shares
outstanding 11,542,000 11,637,444 11,592,371 11,516,185
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
16. (LOSS) INCOME PER SHARE
Basic earnings per share is computed by dividing net income (loss) by
the average number of common shares outstanding during the period. The
diluted earnings (loss) 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-two Fifty-three Fifty-two
weeks ended weeks ended weeks ended
July 1, 2000 July 3, 1999 June 27, 1998
------------ ------------ -------------
BASIC (LOSS) EARNINGS PER SHARE
-------------------------------
<S> <C> <C> <C>
Net (loss) income available for common shares $ (11,023) $ 596 $ (8,830)
Basic weighted average common shares outstanding 11,241,342 11,522,800 12,117,683
Basic earnings (loss) per share $ (.98) $ .05 $ (.73)
DILUTED (LOSS) EARNINGS PER SHARE
---------------------------------
Net (loss) income available for common shares $ (11,023) $ 596 $ (8,830)
Diluted weighted average common shares 11,241,342 11,570,955 12,117,683
Diluted earnings per share $ (.98) $ .05 $ (.73)
</TABLE>
There were 4,346,300, 2,782,934 and 2,616,167 options for the fifty-two
weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999, and
the fifty-two weeks ended June 27, 1998, respectively, and 1,250,000
warrants for the fifty-two weeks ended July 1, 2000, the fifty-three
weeks ended July 3, 1999 and the fifty-two weeks ended June 27, 1998
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, results of operations or
cash flows.
18. BUSINESS COMBINATIONS
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.
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.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, continued)
--------------------------------------------------------------------------------
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 $ (7,983) $ (13,377)
================== ===================
Basic and diluted loss per common share $ (.69) $ (1.10)
================== ===================
</TABLE>
Pharmhouse operated 32 discount drug stores in eight mid-Atlantic and
New England states under the names "Pharmhouse" and "Rx Place".
19. EQUITY BASIS INVESTMENTS
Summarized financial information for the Company's equity basis
investments in associated companies, combined, was as follows for
fiscal 2000:
Income Statement Information:
Revenue $ 0
Net Income 27,767
Balance Sheet Information:
Assets $ 133,347
Liabilities 48,492
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 27, 1998 $ 2,703 $ (186) $ (1,115) $ 1,402
53 weeks ended July 3 1999 1,402 2,097 (1,755) 1,744
52 weeks ended July 1, 2000 1,744 4,049 (4,289) 1,504
Inventory shrink reserve
------------------------
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
52 weeks ended July 1, 2000 5,826 11,155 (12,800) 4,181
Inventory markdown reserve
--------------------------
52 weeks ended June 27, 1998 745 -- (745) --
53 weeks ended July 3, 1999 -- -- -- --
52 weeks ended July 1, 2000 -- -- -- --
</TABLE>
F-25
