-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CdfuqooxFk6/GWOoRktAXqj9yYLvaKYfELOvF4i4QLzw1zG147xw2/E1kXmh6AVB 35vP8LXYbROy1OYJn9Wk4w== 0000764960-99-000012.txt : 20000211 0000764960-99-000012.hdr.sgml : 20000211 ACCESSION NUMBER: 0000764960-99-000012 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990930 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHAR MOR INC CENTRAL INDEX KEY: 0000764960 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DRUG STORES AND PROPRIETARY STORES [5912] IRS NUMBER: 251466309 STATE OF INCORPORATION: PA FISCAL YEAR END: 0629 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-27050 FILM NUMBER: 99720955 BUSINESS ADDRESS: STREET 1: 20 FEDERAL PLZ W CITY: YOUNGSTOWN STATE: OH ZIP: 44501 BUSINESS PHONE: 3307466641 MAIL ADDRESS: STREET 1: 20 FEDERAL PLAZA WEST STREET 2: 20 FEDERAL PLAZA WEST CITY: YOUNGSTOWN STATE: OH ZIP: 44503 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X Annual report pursuant to Section 13 or 15(d) of the Securities - -------- Exchange Act of 1934 For the fiscal year ended July 3, 1999 Commission File Number 0-27050 ------- Transition report pursuant to Section 13 or 15(d) of the Securities - ---------Exchange Act of 1934 For the transition period from ________ to _______ PHAR-MOR, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1466309 - ------------------------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 Federal Plaza West, Youngstown, Ohio 44501-0400 - ------------------------------------------------- -------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (330) 746-6641 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which registered --------------------- ----------------------------------------- Common Stock, Par Value $0.01 per share NASDAQ Warrants to purchase Common Stock NASDAQ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES No X ------ ------ APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES X No ------ ------ The aggregate market value of voting stock held by non-affiliates of the registrant as of September 20, 1999 was $64,264,541 (based on the last reported sale price of the Registrant's Common Stock on the NASDAQ National Market System on such date). As of close of business on September 20, 1999, 12,240,865 shares of the Registrant's Common Stock were outstanding. PART I Item 1. Business Introduction Phar-Mor, Inc., a Pennsylvania corporation ("Phar-Mor" or the "Company"), operates a chain of discount retail drugstores devoted to the sale of prescription and over-the-counter drugs, health and beauty care products, baby products, pet supplies, cosmetics, greeting cards, groceries, beer, wine, tobacco, soft drinks, video rental and seasonal and other general merchandise. As of July 3, 1999, the Company operated 139 stores in 24 states under the names of Phar-Mor, Rx Place and Pharmhouse. Approximately 55% of the Company's stores are located in New York, New Jersey, Pennsylvania and Ohio, and approximately 22% are located in Virginia, West Virginia, North Carolina and South Carolina. The Company's principal executive offices are located at 20 Federal Plaza West, Youngstown, Ohio 44501-0400. Unless otherwise stated, all statistics in this Item were compiled as of July 3, 1999. Except for historical information contained herein, the matters discussed in this Annual Report on Form 10-K are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties including, but not limited to, economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices and other factors discussed in the Company's filings with the Securities and Exchange Commission ("SEC"). History Phar-Mor was founded in 1982 as a division of a subsidiary of the Giant Eagle, Inc. supermarket chain. The initial Phar-Mor concept was built on the premise that a drugstore offering additional, and at times unexpected, categories of merchandise could attract customers by featuring low prices made possible by acquiring inventory at relatively low cost through deal purchases of overstock, odd lot, discontinued, large unit size or slow-moving merchandise from manufacturers and distributors. The Company grew, rapidly expanding from 12 stores in August 1985 to 311 stores in August 1992. Store size also grew dramatically, increasing from an average of approximately 31,000 square feet in 1986 to approximately 58,500 square feet in 1992. Phar-Mor's rapid growth was mirrored by apparent extraordinary financial success. However, in early August 1992, Phar-Mor publicly disclosed that it had discovered a scheme by certain senior executives to falsify certain financial results and divert funds to unrelated enterprises and for personal expenses. The officers involved, including Phar-Mor's former President and Chief Operating Officer, former Chief Financial Officer, former Vice President of Finance and former Controller were promptly dismissed. In an effort to restore support from its vendors and lenders and to implement a business turnaround plan, Phar-Mor and its fifteen wholly-owned subsidiaries filed petitions for protection under Chapter 11 of the United States Bankruptcy Code on August 17, 1992 (the "Petition Date"). The Company emerged from bankruptcy on September 11, 1995, the effective date (the "Effective Date") of Phar-Mor's Chapter 11 plan of reorganization (the "Plan of Reorganization") with a new President and Chief Operating Officer, Chief Financial Officer and Vice President and Corporate Controller hired after the Petition Date to replace those responsible for the fraud. During the pendency of the Chapter 11 bankruptcy cases of pre-reorganized Phar-Mor and its subsidiaries (the "Chapter 11 Cases"), new management analyzed the performance and prospects of each store to identify a core group of high volume, profitable and geographically concentrated stores that would serve as the basis of reorganized Phar-Mor. Based on this analysis, Phar-Mor closed 209 stores in five stages: 54 stores between October 1992 and December 1992, 34 stores between March 1993 and June 1993, 55 stores in July 1993, 25 stores in October 1994 and 41 stores in July 1995, thereby reducing the number of stores from 311 in September 1992 to 102 stores as of September 1995. The Company also implemented a series of fundamental changes designed to achieve operating profitability and to position Phar-Mor for future growth. Following the Petition Date, Phar-Mor reduced the number of warehouses; introduced POS scanning in all stores; installed a new pharmacy software system; installed a warehouse logistics system; installed a state of the art mainframe computer; developed an EDI ordering and invoicing system; developed an electronic store merchandise receiving system; and reduced the number of corporate personnel by 75%. In connection with the Company's Plan of Reorganization and its emergence from bankruptcy, the Company restructured its debt obligations and converted approximately $855 million of debt into equity. The Company also entered into a three-year, $100 million revolving credit facility (the "Revolving Credit Facility"). On March 15, 1999, the Company completed the merger of its wholly owned subsidiary Pharmacy Acquisition Corp. ("PAC") with and into Pharmhouse Corp. ("Pharmhouse"), pursuant to the Agreement and Plan of Merger dated as of December 17, 1998 among Phar-Mor, PAC and Pharmhouse (the "Merger Agreement"). As a result of the merger Pharmhouse became a wholly owned subsidiary of Phar-Mor. In addition, subject to the terms of the Merger Agreement, each share of the common stock of Pharmhouse was converted into the right to receive $2.88 per share in cash (the "Merger"). The total purchase price payable in connection with the Merger was approximately $34.2 million, consisting of $7.5 million in cash and the assumption of $26.7 million in debt. The Company used its excess cash position and excess availability under its Revolving Credit Facility to pay off $26.7 million in debt that was assumed as part of the merger with Pharmhouse. Pharmhouse operated 32 discount drug stores in eight mid-Atlantic and New England states under the names "Pharmhouse" and "Rx Place" and had annual revenues of approximately $200 million. Operations Typically, stores are open 95 hours per week; pharmacies are typically open 77 hours per week. The average store has approximately 50 employees, including a store manager and department managers, a pharmacy manager and pharmacists, and office and cashier supervision. Overall, the Company had 6,643 employees at July 3, 1999. Approximately 302 warehouse and distribution center employees in Youngstown are members of the Teamsters Union under a contract which expires March 4, 2000. Seventy-five employees at the Company's Niles, Ohio store are members of the United Food and Commercial Workers Union under a contract which expires October 12, 2000. The Company is committed to customer service and encourages employees to be responsive to customer needs and concerns. The remerchandising and remodeling of stores (discussed below) is designed to make the customer's shopping experience easier and more enjoyable. The number of open checkout lanes is closely monitored to facilitate the efficient and comfortable checkout of customers. These philosophies are regularly communicated and reinforced by the Company to its employees. Thorough education and training in store operations is provided to employees at every level. Computer-based training, on and off-site training, video training, and teleconferences are a few of the training methods used. The Company believes that such training enables efficiency, understanding and responsiveness within store operations. The typical trade area for a Company store includes approximately 105,000 people in 41,000 households within a radius of between five and seven miles. On average during the fiscal year ended July 3, 1999 ("Fiscal Year 1999"), each store served approximately 10,600 customers per week. The Company's customers are approximately 52% female, with a median age of 35.5 years, and a median household income of approximately $33,000. Approximately 24% of customer households have children 17 years old and under. Company stores accept payment in cash, check, credit cards, debit cards and payment from third-party providers of prescription services. The Company's purchasing, pricing, advertising, merchandising, accounting and supervisory activities are centrally directed from Phar-Mor's corporate headquarters. The Company purchases substantially all of its merchandise either directly from manufacturers or from wholesalers under various types of purchase arrangements. McKesson HBOC, Inc. ("McKesson"), a pharmaceutical distributor, accounted for approximately 26% of the Company's purchases during Fiscal Year 1999. During Fiscal Year 1999, no other single vendor accounted for more than 10% of the Company's purchases. Substantially all of the products the Company sells are purchased from approximately 1,200 outside vendors. Alternative sources of supply are generally available for all products sold by the Company. Marketing and Merchandising Phar-Mor's overall merchandising strategy is to offer (i) value to consumers by pricing its products below the prices charged by conventional drugstores and supermarkets and (ii) a broader array of products in each of its major product categories than is offered by mass merchant discounters. Phar-Mor's product strategy is focused on the traditional drugstore lines of prescription and over-the-counter drugs, health and beauty care products and cosmetics. Phar-Mor's stores also typically feature other product categories, including groceries, snacks and beverages, pet food and supplies, beer, wine and liquor (where permitted by law), tobacco, baby products, general merchandise, video and music sales and video rentals. Phar-Mor is one of the leading retailers of film, vitamins, soft drinks and batteries in the United States. Ninety-five percent of the Company's advertising is print advertising, through circulars, newspapers, and point of sale materials. Newspaper advertisements and circulars appear in major newspapers in most market areas. The Company presently advertises through 75 newspapers and mailers. Phar-Mor introduced the "Super Phar-Mor" concept during Fiscal Year 1997. In approximately 10,000 to 15,000 square feet, each "Super Phar-Mor" offers a variety of grocery items, including fresh, frozen, and refrigerated foods. The Company incorporated this concept into 8 stores during Fiscal Year 1999 bringing the total number of "Super Phar-Mor" stores to 31. The concept has been well received by customers and has improved overall sales in each such store. The Company plans to incorporate the "Super Phar-Mor" concept into 11 stores scheduled to be remodeled during the fiscal year ending July 1, 2000 ("Fiscal Year 2000"). During Fiscal Years 1997, 1998 and 1999, the Company also undertook a plan to remodel certain stores unable to accommodate the fresh, frozen and refrigerated foods included in the "Super Phar-Mor" concept due to their small size. This "four-wall" remodeling program includes remerchandising the stores to provide a more convenient shopping experience by creating product adjacencies; adding new and color coded decor and enhancing signage throughout the store; and further enhancing the "store within a store" idea with its signature departments. The Company has completed eleven of the "four-wall" remodel projects. The Company plans to complete 12 "four-wall" remodels in Fiscal Year 2000. Sales The retail sale of traditional drugstore lines is a highly fragmented business, consisting of thousands of chain drugstores and independent drugstores that sell such products as well as mass merchandisers who sell such products as part of their overall product lines. In Fiscal Year 1999, revenues from sales of the Company's traditional drugstore products (i.e., prescription drugs, over-the-counter drugs, health and beauty care products, cosmetics and greeting cards) averaged approximately $6.1 million per store and all other merchandise averaged $4.7 million per store in its 107 Phar-Mor stores. The Company generated approximately $688.8 million in traditional drugstore product revenues and approximately $517.7 million in revenues from the sale of groceries and general merchandise in all its stores in Fiscal Year 1999. 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 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- Category Prescription, Health and Beauty Care Products, Cosmetics and Greeting Cards 57.1% 56.7% 57.0% All Other Merchandise 42.9% 43.3% 43.0%
The Company's business is seasonal to a certain extent. The highest volume of sales and net income usually occur in the second fiscal quarter (generally October, November and December). The following table summarizes the Company's sales by quarter during Fiscal Year 1999. Sales by Quarter During Fiscal Year 1999 (107 Phar-Mor stores) Percentage of Total Sales ----------- First Quarter (13 weeks) 23.3% Second Quarter (13 weeks) 25.7% Third Quarter (13 weeks) 24.6% Fourth Quarter (14 weeks) 26.4% -------- 100.0% ======== Competition Phar-Mor's stores compete primarily with conventional drugstores, supermarkets and mass merchant discounters. Many of these companies have greater financial resources than Phar-Mor. Phar-Mor competes with conventional drugstores by offering a broader product selection and generally lower prices than traditional drugstore lines. Phar-Mor believes it has these same competitive advantages against most supermarkets for non-grocery items. Phar-Mor competes with supermarkets in grocery product lines where Phar-Mor does not have a broader selection, by carrying an often changing mix of items priced lower than most supermarkets. Phar-Mor does not attempt to compete against mass merchant discounters solely on the basis of price. In traditional drugstore lines, particularly health and beauty care products and greeting cards, Phar-Mor offers broader product selection than mass merchant discounters. Mass merchant discounters generally are unwilling to allocate as much display space as Phar-Mor devotes to these categories. The merchandising changes Phar-Mor has implemented, including the creation of "signature" departments in dedicated aisle space with distinguishing signage, such as health and beauty care products, cosmetics, video rentals, groceries, perishable foods in certain stores and "The Card Shop," "Pet Place," "One Stop Baby Shop," and "Vitamin World," are designed in part to distinguish Phar-Mor from mass merchant discounters and to increase its strength in areas in which Phar-Mor's management believes such merchants do not excel. Capital Expenditures The Company's most significant capital needs are for seasonal purchases of inventories, technological improvements and remerchandising and remodeling of existing stores. The Company's capital expenditures totaled $24.0 million in Fiscal Year 1999, including $3.4 million for the construction of new stores, $8.4 million for remodeling existing stores, and $8.5 million for corporate and store information systems. The Company anticipates spending approximately $16.9 million for capital expenditures in Fiscal Year 2000, including costs of remodeling 23 additional stores and opening two new stores. Real Estate and Growth The Company opened two new stores in Fiscal Year 1999, and plans to open two new stores in Fiscal Year 2000. Expansion in the near future by the construction of new stores is expected to be minimal and in existing or contiguous markets in the Company's core areas of New York, New Jersey, Pennsylvania and Ohio. Expansion in existing markets improves the Company's operating margins by decreasing advertising costs on a per store basis, permitting more efficient distribution of products to stores and increasing utilization of existing supervisory and managerial staff. The aggregate cost of any future expansion is dependent upon the method utilized to finance new stores. Build to suit (i.e., landlord constructed) leases cost approximately $750,000 per store for furniture, fixtures, and equipment and each new store requires approximately $1.3 million in inventory. Company-funded conversion of existing buildings is another possible method of expansion; however the cost of such expansion per store varies significantly depending upon the age, condition and configuration of such buildings. Trademarks and Service Marks The Company believes that its registered "Phar-Mor" trademark is well recognized by its customer base and the public at large in the markets where it has been advertised. The Company believes that the existing customer and public recognition of its trademark and related operational philosophy will be beneficial to its strategic plans to expand merchandise categories and add new stores. The Company has also introduced a number of private label brands of products under various registered trademarks and trademarks pending registration. Regulation The Company is subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime, and other working conditions. To the extent that pay scales for a portion of the Company's personnel relate to the federal minimum wage, increases in the minimum wage may increase the Company's labor costs. The prescription drug business is subject to the federal Food, Drug and Cosmetic Act, Drug Abuse Prevention and Control Act and Fair Packaging and Labeling Act relating to the content and labeling of drug products, comparable state statutes and state regulation regarding recordkeeping and licensing matters with civil and criminal penalties for violations. Item 2. Properties. As of July 3, 1999, the Company operated 139 stores in 24 states. Approximately 55% of Phar-Mor's stores are located in New York, New Jersey, Pennsylvania and Ohio and approximately 22% are located in Virginia, West Virginia, North Carolina and South Carolina. The following is a breakdown by state of the locations of the Company's stores. Alabama 1 Missouri 1 Colorado 2 New Jersey 12 Connecticut 1 New York 8 Florida 5 North Carolina 9 Georgia 3 Ohio 17 Illinois 4 Oklahoma 1 Indiana 3 Pennsylvania 40 Iowa 2 Rhode Island 2 Kansas 1 South Carolina 4 Kentucky 1 Virginia 14 Maryland 1 West Virginia 4 Massachusetts 2 Wisconsin 1 As of July 3, 1999, 138 of the Company's stores were leased. The Company owns the land and building of its retail store in Winchester, Virginia. All store leases are long-term; the original terms of 106 leases and the original terms plus options of thirteen leases expire on or before December 31, 2009. The remaining stores have longer lease terms. Most stores are located adjacent to or near shopping centers or are part of strip centers. Some stores are free standing. Depending on the location of a store, the sites may vary, with averages by type of location as follows: free-standing stores are located on sites averaging 2.84 acres; stores located in strip centers are found on sites averaging 23.7 acres; and stores in malls are on sites averaging 46.8 acres. A proto-typical store now includes approximately 40,000 square feet of sales space and 10,000 square feet of storage area and ample off-street parking. The stores are designed in a "supermarket" format familiar to customers and shopping is done with carts in wide aisles with attractive displays. Traffic design is intended to enhance the opportunity for impulse purchases. The Company operates a distribution center in Youngstown, Ohio which it leases. This center delivered approximately 47% of all merchandise to the stores in Fiscal Year 1999, primarily using contract carriers. The balance of the products were delivered directly to the Company's stores by vendors. The Company and a wholly-owned subsidiary of the Company are partners in an Ohio limited partnership, which owns the office building in which the Company occupies approximately 141,000 square feet of space for its corporate offices in Youngstown, Ohio. Item 3. Legal Proceedings In the normal course of business, the Company is subject to various claims. In the opinion of management, any ultimate liability arising from or related to these claims should not have a material adverse effect on future results of operations, cash flows or the consolidated financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders. There were no matters submitted to a vote of security holders during the fourth quarter of Fiscal Year 1999, through the solicitation of proxies or otherwise. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's common stock, par value $.01 per share (the "Common Stock"), is included for quotation on the NASDAQ National Market under the symbol "PMOR." High and low prices of the Common Stock are shown in the table below: Fiscal Year 1999 Fiscal Year 1998 ---------------- ---------------- High Low High Low ---- --- ---- --- 1st Quarter.....................$11 1/4 $6 1/8 $7 3/4 $6 1/8 2nd Quarter..................... 8 15/16 5 1/4 9 5/8 6 3/8 3rd Quarter..................... 8 3/4 5 1/2 11 3/4 8 4th Quarter..................... 6 7/8 4 1/16 11 11/16 8 3/8 As of September 20, 1999, there were 2,904 holders of record of the Common Stock. The Company has not declared or paid any cash dividends on the Common Stock and does not anticipate paying cash dividends in the foreseeable future. The Company currently intends to retain earnings for future operations and expansion of its business. In addition, the indenture pursuant to which the Company's senior notes were issued and the Company's amended revolving credit facility(the "Amended Revolving Credit Facility") restrict the payment of cash dividends on the Company's capital stock. See "Notes to Consolidated Financial Statements." Item 6. Selected Financial Data. The following selected consolidated financial data of Phar-Mor and its subsidiaries should be read in conjunction with the consolidated financial statements and related footnotes appearing elsewhere in this Form 10-K.
(In thousands except per share data) -------------------------------------------------------------------------------------- 53 Weeks 52 Weeks 52 Weeks 43 Weeks 9 Weeks 52 Weeks Ended Ended Ended Ended Ended Ended July 3, June 27, June 28, June 29, September 2, July 1, 1999 1998 1997 1996 1995 1995(b) ---- ---- ---- ---- ---- ------- Net sales $ 1,206,539 $ 1,100,851 $ 1,074,828 $ 874,284 | $ 181,968 $ 1,412,661 | (Loss) income from | continuing operations (1,592) (8,830) (2,281) 2,526 | (10,389)(a) (53,144)(c) | Diluted (loss) income | per share from | continuing operations (.13) (.72) (.19) .21 | (.19) (.98) | As of As of As of As of As of As of July 3, June 27, June 28, June 29, September 2, July 1, 1999 1998 1997 1996 1995 1995 ---- ---- ---- ---- ---- ---- | Total assets 410,537 349,455 362,605 363,463 390,207 | 531,332 | Long-term debt & capital | leases 142,947 130,993 140,213 149,163 151,047 | -- | Liabilities subject to | settlement - - - - - | 1,154,959 |
Note: In accordance with fresh-start reporting, reorganization value was used to record the assets and liabilities of the Company at September 2, 1995. Accordingly, the selected consolidated financial data as of July 1, 1995 and for the nine weeks ended September 2, 1995 and the 52 weeks ended July 1, 1995 are not comparable in material respects to such data for subsequent periods. (a) Excludes extraordinary gain of $775 million on debt discharged pursuant to the Plan of Reorganization; and includes the gain for revaluation of assets and liabilities under fresh-start reporting of $8 million and reorganization costs of $16.8 million. (b) Excludes the results of 25 stores after July 2, 1994 and the results of 41 stores after May 6, 1995, closed as part of the Company's restructuring prior to emergence from the Chapter 11 Cases. (c) Includes reorganization costs of $51.2 million, including $53.7 million for costs of downsizing, less $7.6 million gain on sale of assets held for sale. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (All dollar amounts in thousands, unless otherwise stated) Introduction The discussion of results of operations that follows is based upon the Company's consolidated financial statements set forth on pages F-1 to F-25. The discussion of liquidity and capital resources is based upon the Company's current financial position. Recent Developments On March 15, 1999, the Company completed the merger of its wholly owned subsidiary Pharmacy Acquisition Corp. ("PAC") with and into Pharmhouse Corp. ("Pharmhouse"), pursuant to the Agreement and Plan of Merger dated as of December 17, 1998 among Phar-Mor, PAC and Pharmhouse (the "Merger Agreement"). As a result of the merger Pharmhouse became a wholly owned subsidiary of Phar-Mor. In addition, subject to the terms of the Merger Agreement, each share of the common stock of Pharmhouse was converted into the right to receive $2.88 per share in cash (the "Merger"). The total purchase price payable in connection with the Merger was approximately $34,200, consisting of $7,500 in cash and the assumption of $26,700 in debt. The Company used its excess cash position and excess availability under its Amended Revolving Credit Facility to pay off $26,700 in debt that was assumed as part of the Merger with Pharmhouse. Pharmhouse operated 32 discount drug stores in eight mid-Atlantic and New England states under the names "Pharmhouse" and "Rx Place" and had annual revenues of approximately $200,000. The Company's consolidated results of operations include the results of the acquired Pharmhouse stores from March 16, 1999 to July 3, 1999. The Company has set an aggressive schedule for the conversion of the acquired Pharmhouse stores to the Company's store systems and merchandising mix. As of July 3, 1999, all 32 of the Pharmhouse stores were converted to and trained on the Company's store systems. This allowed the Company to integrate the Pharmhouse stores into the Company's purchasing, warehousing, financial and management reporting systems which allowed the Company to eliminate all the Pharmhouse corporate office personnel and systems by July 3, 1999. The Company expects to complete the conversion to the Company's merchandising mix by October 31, 1999. Results of Operations The following table sets forth the number of retail stores operated each fiscal year:
Fiscal Year Ended --------------------------------------------- July 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- Stores, beginning of period 106 103 102 Stores acquired 32 -- -- Stores opened 2 3 1 Stores closed (1) -- -- ------------ ------------ ------------ Stores, end of period 139 106 103 ============ ============ ============
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)
Fiscal Year 1999 Fiscal Year 1998 ------------------------- -------------------------- Sales $ 1,206,539 100.00% $ 1,100,851 100.00% Less: Cost of goods sold, including occupancy and distribution costs 977,878 81.05% 887,657 80.63% ----------- ----------- Gross Profit 228,661 18.95% 213,194 19.37% Selling, general and administrative expenses 188,641 15.63% 173,982 15.80% Terminated business combination expenses -- -- -- -- Executive severance -- -- 6,787 0.62% Loss on disposal of equipment -- -- 4,615 0.42% Depreciation and amortization 25,009 2.07% 22,047 2.00% ----------- ----------- Income from operations before interest and income taxes 15,011 1.24% 5,763 0.52% Interest expense (16,338) 1.35% (16,639) 1.51% Avatex impairment write-down (2,393) 0.20% -- -- Interest and investment income 2,128 0.18% 2,046 0.19% ----------- ----------- Income (loss) before taxes (1,592) (0.13)% (8,830) (0.80)% Income tax provision -- -- -- -- ----------- ----------- Net income (loss) $ (1,592) (0.13)% $ (8,830) (0.80)% =========== ===========
Fiscal Year 1999 sales increased $105,688 or 9.6% over Fiscal Year 1998. Fiscal Year 1999 sales were favorably impacted by the inclusion of one more week, $26,832, three and a half months of Pharmhouse sales, $46,280, and a comparable store sales increase of $25,426, or 2.4%. The comparable store sales increase was primarily due to the success of the store remodel and reformatting program and a 9.7% comparable store pharmacy sales increase. The Company incorporated the "Super Phar-Mor" food and drug format into 8 stores during Fiscal Year 1999 bringing the total number of "Super Phar-Mor" stores to 31. The Company's "Super Phar-Mor" format expands the existing grocery offering and adds fresh, frozen and refrigerated food. Gross profit for Fiscal Year 1999 was 0.42% of sales lower than for Fiscal Year 1998. A 0.16% of sales increase in promotional costs and a 0.33% reduction in product gross margins more than offset $2,505 in additional vendor income from a partial settlement received from a class action lawsuit against pharmaceutical manufacturers, related to certain product overcharges to retailers. A 38% reduction in video rental sales was the primary cause of the decline in product gross margins. Selling, general and administrative expenses decreased 0.17% of sales in Fiscal Year 1999 over Fiscal Year 1998. The decrease in selling, general and administrative expenses was primarily due to lower advertising expenditures partially offset by higher store wages. The increase in store wages as a percentage of sales is due to the addition of the Pharmhouse stores which have a higher store wage as a percentage of sales due to lower per store sales volume and an increase in the minimum wage. Investment income increased by $82 in Fiscal Year 1999 from Fiscal Year 1998. The increase in investment income was due to a $543 return on the Company's equity investments, a $1,648 increase over Fiscal Year 1998, offset by a decline in interest income due to lower cash balances. At the end of Fiscal Year 1999 the Company determined that the Avatex investment had experienced an other than temporary decline in value and wrote down the value of the Avatex investment by $2,393 to $1.25 per share. 52 weeks ended June 27, 1998 (Fiscal Year 1998) compared to the 52 weeks ended June 28, 1997 (Fiscal Year 1997) (all dollar amounts in thousands)
Fiscal Year 1998 Fiscal Year 1997 ---------------------- --------------------- Sales $ 1,100,851 100.00% $ 1,074,828 100.00% Less: Cost of goods sold, including occupancy and distribution costs 887,657 80.63% 873,095 81.23% ----------- ----------- Gross Profit 213,194 19.37% 201,733 18.77% Selling, general and administrative expenses 173,982 15.80% 168,218 15.65% Terminated business combination expenses -- -- 3,076 0.29% Executive severance 6,787 0.62% -- -- Loss on disposal of equipment 4,615 0.42% -- -- Depreciation and amortization 22,047 2.00% 20,982 1.95% ----------- ----------- Income from operations before interest and income taxes 5,763 0.52% 9,457 0.88% Interest expense (16,639) 1.51% (17,175) 1.60% Interest and investment income 2,046 0.19% 5,437 0.51% ----------- ----------- Loss before taxes (8,830) (0.80)% (2,281) (0.21)% Income tax provision -- -- -- -- ----------- ----------- Net loss $ (8,830) (0.80)% $ (2,281) (0.21)% =========== ===========
Comparable store sales for Fiscal Year 1998 increased $4,919, or 0.5% from Fiscal Year 1997. This increase was primarily due to the success of the store remodel and reformatting program partially offset by the impact of discontinuing certain promotional discount programs since the beginning of Fiscal Year 1997. The Company incorporated the "Super Phar-Mor" food and drug format into 18 stores during Fiscal Year 1998 bringing the total number of "Super Phar-Mor" stores to 23. The Company's "Super Phar-Mor" format expands the existing grocery offering and adds fresh, frozen and refrigerated food. Sales in the stores that were remodeled to include the "Super Phar-Mor" format in the first nine months of Fiscal Year 1998 increased 23% for the thirteen weeks ended June 27, 1998, over the comparable period of the prior year. Gross profit for Fiscal Year 1998 was 0.60% of sales higher than for Fiscal Year 1997. A 0.65% of sales reduction in inventory shrink expense and a 0.55% of sales increase in vendor income were partially offset by lower product gross margins. Selling, general and administrative expenses increased 0.15% of sales in Fiscal Year 1998 over Fiscal Year 1997. The increase in selling, general and administrative expenses was primarily due to increases in store wage expense due to increases in the minimum wage. During Fiscal Year 1998 the Company incurred $6,787 in severance costs associated with the departure of the Company's former Chairman and Chief Executive Officer. The Company recorded a charge of $4,615 associated with the write off of the Company's old mainframe computer and other equipment which was replaced with the latest technology IBM mainframe computer equipment. The new mainframe computer has lower operating and maintenance costs and provides the Company greater capacity for growth and expansion over the next three to five years. Investment income declined by $3,391 in Fiscal Year 1998 from Fiscal Year 1997. The decrease in investment income was due to a $2,286 decline in interest income due to lower cash balances and $1,105 in investment losses incurred on the Company's equity investments. Financial Condition and Liquidity (all dollar amounts in thousands) The Company's cash position as of July 3, 1999 was $17,346. On September 11, 1995, the Company entered into a three-year Revolving Credit Facility (the "Facility") with BankAmerica Business Credit, Inc. ("BABC"), as agent, and other financial institutions (collectively, the "Lenders"), that established a credit facility in the maximum amount of $100,000. Borrowings under the Revolving Credit Facility could have been used for working capital needs and general corporate purposes. Up to $50,000 of the Facility at any time could have been used for standby and documentary letters of credit. The Facility included restrictions on, among other things, additional debt, capital expenditures, investments, dividends and other distributions, mergers and acquisitions, and contained covenants requiring the Company to meet a specified quarterly minimum EBITDA Coverage Ratio (the sum of earnings before interest, taxes, depreciation and amortization, as defined, divided by interest expense), calculated on a rolling four quarter basis, and a monthly minimum net worth test. Credit availability under the Revolving Credit Facility at any time was the lesser of the Aggregate Availability (as defined in the Facility) or $100,000. The Revolving Credit Facility established a first priority lien and security interest in the current assets of the Company, including, among other items, cash, accounts receivable and inventory. Advances made under the Revolving Credit Facility would have borne interest at the BankAmerica reference rate plus 1/2% or London Interbank Offered Rate ("LIBOR") plus the applicable margin (as defined in the Facility), which ranged between 1.50% and 2.00%. Under the terms of the Revolving Credit Facility, the Company was required to pay a commitment fee of 0.28125% per annum on the unused portion of the facility, letter of credit fees and certain other fees. The Company entered into an Amended and Restated Revolving Credit Facility (the "Amended Revolving Credit Facility") effective September 10, 1998 with BABC, as agent, and other financial institutions that established a credit facility in the maximum amount of $100,000. Borrowings under the Amended Revolving Credit Facility may be used for working capital needs and general corporate purposes. Up to $50,000 of the facility at any time may be used for standby and documentary letters of credit. The facility includes restrictions on, among other things, additional debt, investments, dividends and other distributions, mergers and acquisitions. The facility contains no financial covenants. Credit availability under the Amended Revolving Credit Facility at any time is the lesser of the Aggregate Availability (as defined in the Facility) or $100,000. The Amended Revolving Credit Facility establishes a first priority lien and security interest in the current assets of the Company, including, among other items, cash, accounts receivable and inventory. Advances made under the Amended Revolving Credit Facility bear interest at the BankAmerica reference rate plus 1/2% or LIBOR plus 2.00%. Under the terms of the Amended Revolving Credit Facility, the Company is required to pay a commitment fee of between 0.25% and 0.35% per annum on the unused portion of the facility, letter of credit fees and certain other fees. As of July 3, 1999, there were $20,066 in outstanding advances and letters of credit in the amount of $4,709 were outstanding under the Amended Revolving Credit Facility. The Amended Revolving Credit Facility expires on March 14, 2002. The Company's cash position decreased $27,309 during Fiscal Year 1999 as cash provided by operating activities of $7,294 and cash provided by financing activities of $4,940 was offset by $39,543 in cash used for investing activities. Accounts receivable increased $5,750 and merchandise inventories increased $8,539 during Fiscal Year 1999 primarily due to the acquisition of the 32 Pharmhouse stores and the opening of two new stores. The Company invested $1,000 during Fiscal Year 1999 in the common stock of Avatex Corporation, the Company's largest shareholder. The Company also invested $2,291 in equity securities of other privately held companies. The Company's cash position decreased $35,192 during Fiscal Year 1998 as cash provided by operating activities of $10,054 was offset by $35,655 in cash used for investing activities and $9,591 in cash used for financing activities. The Company invested $9,065 in marketable securities in Fiscal Year 1998 in an effort to increase its return on its excess cash position. Merchandise inventories increased $6,769 during Fiscal Year 1998 primarily due to the opening of three new stores. The Company invested $4,000 in the common stock of Avatex Corporation in Fiscal Year 1998. The Company also invested $4,275 in equity securities of other privately held companies. The Company's cash position decreased $24,418 during Fiscal Year 1997 as cash provided by operating activities of $11,443 was offset by $27,161 in cash used for investing activities and $8,700 in cash used for financing activities. Merchandise inventories increased $16,258 during Fiscal Year 1997 due to the opening of one new store, the stocking of an additional store that opened in early July 1997 and increases in warehouse inventory levels as a result of deal purchases that were made in June 1997. Trends, Demands, Commitments, Events or Uncertainties (all dollar amounts in thousands) Management believes the availability of the Amended Revolving Credit Facility, together with the Company's current cash position and expected cash flows from operations for Fiscal Year 1999 will enable the Company to fund its working capital needs and capital expenditures. Achievement of expected cash flows from operations is dependent upon, among other things, the Company's attainment of sales, gross profit and expense levels that are consistent with its financial projections, and there can be no assurance that the Company will achieve its expected cash flows. Investment activities for Fiscal Year 2000 are expected to total $26,600. The major expenditures are expected to be (i) video rental tapes ($1,500), (ii) remodeling of existing stores ($8,850), (iii) systems and technology ($3,400), (iv) new stores ($2,000), (v) an additional investment in the common stock of Avatex ($5,725), and (vi) an investment in Vitamins.com, an internet startup company ($2,600). The Company expects to finance and meet its obligations for these capital expenditures through internally generated funds and the use of the Company's Amended Revolving Credit Facility. Certain Company information systems have potential operational problems in connection with applications that contain a date and/or use a date in a comparative manner as the date transitions into the Year 2000. The Company has implemented a comprehensive program to identify and remediate potential problems related to the Year 2000 in its information systems, infrastructure, logistics and retail facilities. In addition, the Company has initiated formal communication with all of its significant vendors and other external interfaces to determine the extent to which the Company is vulnerable to a third-party's failure to remediate their own potential problems related to the Year 2000. The inability of the Company or significant vendors and/or external interfaces of the Company to adequately address Year 2000 issues could cause disruption of the Company's systems. Management believes, based on its assessment of all of its systems, that it has completed all of the software modifications necessary to make its systems year 2000 compliant. The Company will replace certain personal computer related hardware before December 31, 1999 to ensure that those systems will be Year 2000 compliant. The Company has developed or is in the process of developing contingency plans that include manually performing work in place of affected systems and the renting of back-up systems and generators. As of July 3, 1999, the Company has incurred approximately $1,100 related to the assessment of, and efforts in connection with, its Year 2000 program and remediation plan. The Company has completed all of the software modifications necessary to make its systems Year 2000 compliant and anticipates no future expenditures for software modifications will be necessary. Future spending for hardware purchases required for Year 2000 are currently estimated to be approximately $400. The Company has accelerated by one year the purchase of approximately $5,000 in replacement hardware in order to ensure the associated system is Year 2000 compliant. These expenditures are not expected to have a material impact on the Company's operating results, liquidity and capital resources. The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company's policies do not permit active trading of, or speculation in, derivative financial instruments. The Company's primary market risk exposure relates to interest rate risk. The Company manages its interest rate risk in order to balance its exposure between fixed and variable rates while attempting to minimize its interest costs. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value, with the potential effect on operations dependent upon certain conditions being met. SFAS No. 133 (as amended by SFAS No. 137) is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management does not believe that the adoption of SFAS No. 133 will have a material impact on its financial position or results of operations. Item 8. Financial Statements and Supplementary Data. See Index to Consolidated Financial Statements. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. The executive officers and directors of the Company as of the date hereof are listed below: Name Age Position(s) - ---- --- ----------- Abbey J. Butler 62 Co-Chairman and Co-Chief Executive Officer Melvyn J. Estrin 57 Co-Chairman and Co-Chief Executive Officer M. David Schwartz 54 President and Chief Operating Officer Warren E. Jeffery 50 Executive Vice President - Merchandising, Marketing and Logistics Sankar Krishnan 52 Senior Vice President and Chief Financial Officer John R. Ficarro 47 Senior Vice President, Chief Administrative Officer, General Counsel and Secretary Monroe Osterman 72 Director Arthur G. Rosenberg 61 Director John D. Shulman 36 Director Abbey J . Butler has been a director of the Company since September 1995 and Co-Chairman of the Board and Co-Chief Executive Officer of the Company since October 1, 1997. Mr. Butler is Co-Chairman of the Board and Co-Chief Executive Officer of Avatex Corporation ("Avatex"), formerly known as FoxMeyer Health Corporation. Mr. Butler also serves as managing partner of Centaur Partners, L.P., an investment partnership with ownership interests in Avatex, and as President and a director of C.B. Equities Corp., a private investment company. Mr. Butler presently serves as a director and a member of the Executive Committee of GrandBanc, Inc.; and as a director of Carson, Inc., a global manufacturer of ethnic hair care products for African-Americans and persons of African descent; Cyclone, Incorporated, a distributor and installer of chain link fence systems, highway guard rails and industrial gates and posts; iLife Systems, Inc., a manufacturer of miniature continuous-wear vital signs monitors and in conjunction with investments by the Company, as a director of RAS Holding Corp. and HPD Holdings Corp. and as a member of the Board of Managers of Chemlink Laboratories. LLC. Mr. Butler is a trustee and a member of the Executive Committee of the Board of Trustees of the American University, and a director of the Starlight Foundation, a charitable organization. He was appointed by President George Bush to serve on the President's Advisory Committee on the Arts, and he now serves as the president and chief executive officer of the National Committee for the Performing Arts, John F. Kennedy Center, Washington, D.C. On August 27, 1996, FoxMeyer Corporation and FoxMeyer Drug Company, subsidiaries of Avatex, each filed a petition under Chapter 11 of the United States Bankruptcy Code. At the time of the filing Mr. Butler was an executive officer and director of FoxMeyer Corporation and FoxMeyer Drug Company. On July 26, 1996, Ben Franklin Retail Stores, Inc. filed a petition for protection under Chapter 11 of the United State Bankruptcy Code. At the time of the filing, Mr. Butler was a director of Ben Franklin Retail Stores, Inc. Melvyn J. Estrin has been a director of the Company since September 1995 and Co-Chairman of the Board and Co-Chief Executive Officer of the Company since October 1, 1997. Melvyn J. Estrin is Co-Chairman of the Board and Co-Chief Executive Officer of Avatex. Mr. Estrin also serves as Chairman of the Board and Chief Executive Officer of Human Service Group, Inc., a private management and investment firm, and of University Research Corporation, a consulting firm. Mr. Estrin presently serves as a director and a member of the Executive Committee of GrandBanc, Inc.; as a director of Washington Gas Light Company, Carson, Inc., a global manufacturer of ethnic hair care products for African-Americans and persons of African descent; i Life Systems,Inc., a manufacturer of miniature continuous-wear vital signs monitors and in conjunction with investments by the Company, as a director of RAS Holding Corp. and HPD Holdings Corp. and as a member of the Board of Managers of Chemlink Laboratories. LLC. Mr. Estrin has served as a Trustee of the University of Pennsylvania and was appointed by President George Bush to serve as Commissioner of the National Capital Planning Commission. On August 27, 1996, FoxMeyer Corporation and FoxMeyer Drug Company, subsidiaries of Avatex Corporation, each filed a petition under Chapter 11 of the United States Bankruptcy Code. At the time of the filing Mr. Estrin was an executive officer and director of FoxMeyer Corporation and FoxMeyer Drug Company. On July 26, 1996, Ben Franklin Retail Stores, Inc. filed a petition for protection under Chapter 11 of the United States Bankruptcy Code. At the time of the filing, Mr. Estrin was a director of Ben Franklin Retail Stores, Inc. M. David Schwartz has served as President and Chief Operating Officer of the Company since February 1993. From 1991 to 1993, he was a Director and the President and Chief Executive Officer of Smitty's Super Valu, Inc., a food and general merchandising retailer, and between 1987 and 1991 Mr. Schwartz served as a Director and the President and Chief Operating Officer of Perry Drug Stores Inc., a regional chain of 200 drug stores. Mr. Schwartz was Vice President of Drug/General Manager for the Kroger Company between 1985 and 1987 and, between 1971 and 1985, held positions with Albertson's Inc. including Senior Vice President of Marketing, Senior Vice President of Non-Foods Merchandising, Distribution and Procurement, Vice President of Merchandising, and Non-Foods Merchandise Manager. Mr. Schwartz attended Arizona State University. Warren E. Jeffery has served as Executive Vice President of Merchandising, Marketing and Logistics of the Company since February 1999. Prior to that, Mr. Jeffery served as Senior Vice President of Operations from April 1996 to February 1999 and Vice President of Operations, beginning February 1993. From 1992 to 1993, he served as Regional Director-Store Operations for Revco D.S., Inc., operator of one of the country's largest retail drug store chains. Mr. Jeffery was employed by Perry Drug Stores from 1976 until 1992, holding various management positions, including Vice President of Store Operations from 1988 to 1992. Mr. Jeffery received a B.S. degree in pharmacy from Ferris State University. Sankar Krishnan has served as Senior Vice President and Chief Financial Officer of the Company since June 1997. From August 1993 to June 1997, Mr. Krishnan served as Vice President - Corporate Controller of the Company. From February until August 1993, Mr. Krishnan served as Pharmacy Business Administrator of the Company. From 1991 until the time he joined Phar-Mor, Mr. Krishnan served as Senior Vice President and Chief Financial Officer of Thrifty Drug Stores. From 1988 to 1991, he served as Senior Vice President and Chief Financial Officer of Lord & Taylor, a division of May Department Stores. He was employed with Macy's from 1970 to 1988, serving as Senior Vice President and Chief Financial Officer of Macy's New Jersey division from 1983 to 1988. In September 1994, Mr. Krishnan filed a petition under Chapter 7 of the United States Bankruptcy Code which was discharged in March 1995. Mr. Krishnan received a Masters degree in Applied Science from the University of Waterloo in Ontario, Canada, and a Bachelor of Technology degree from the University of Madras, India. John R. Ficarro has served as Senior Vice President and Chief Administrative Officer (in addition to his existing duties as General Counsel and Secretary of the Company) since June 1997. Prior to that, Mr. Ficarro served as Vice President, General Counsel and Secretary of the Company beginning in February 1995. From 1981 to 1995, Mr. Ficarro was employed by General Host Corporation where he served as Vice President, General Counsel and Secretary since 1989 and prior to that time served as Counsel to several of its retail businesses. Prior to 1981, Mr. Ficarro practiced law at Titone & Roarke in Ft. Lauderdale, Florida. Mr. Ficarro received a B.A. from the Maxwell School at Syracuse University and a J.D. from its College of Law. Monroe Osterman has been a director of the Company since September 25, 1997. Mr. Osterman has served as President of Gala Trading Corporation, an investment company specializing in large purchases of diamonds from Europe, since 1982. Prior to serving as President of Gala Trading Corporation, Mr. Osterman served as President of Paras USA and Bermont Corporation and was also a partner at J. Winston & Company, an importing and merchandising company. Arthur G. Rosenberg has been a director of the Company since November 23, 1997. Mr. Rosenberg was a principal of The Associated Companies, a real estate development firm, from 1987 to 1998 and in 1999 became a principal of Millennium Development Group LLC. Prior thereto, Mr. Rosenberg was a practicing lawyer in Huntington, New York and served as General Counsel for ITT Levitt & Sons, Inc., an international builder. Mr. Rosenberg currently serves on the Board of Directors of New Yorker Marketing Corp., Inc. and Antra Holding Company. John D. Shulman has been a director of the Company since November 23, 1997. Mr. Shulman has served as President and Chief Executive Officer of ONYX International, L.L.C., a merchant banking and venture firm focusing primarily on private equity placements in high growth companies, since 1994. Prior to serving as President and Chief Executive Officer of ONYX International, L.L.C., Mr. Shulman served as the Director of Development for Tower Companies, a diversified group of companies including real estate development, banking and related activities since 1986. Mr. Shulman currently serves on the Board of Directors of U.S. Interactive, Inc., Performance Distribution, Inc., Taiwan Mezzanine Fund I, L.P., Interactive Video Technologies, Inc., and on the Board of Managers of ChemLink Laboratories, LLC and is the Chairman of Juggernaut Partners, LLC. Mr. Shulman is the husband of Mr. Estrin's niece. Item 11. Executive Compensation. The information required by Item 11 is incorporated herein by reference from the information set forth under the sections titled "Executive Compensation," "Committees of the Board; Meetings," "Executive Compensation Plans," "Compensation of Directors," "Employment Contracts and Termination of Employment and Change -In-Control Arrangements," "Compensation Committee Report on Executive Compensation," "Executive Summary Compensation Table," "Option Grants in Fiscal Year 1999," "Option Exercises and Values for Fiscal Year 1999," and "Performance Graph" of the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the close of its fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by Item 12 is incorporated herein by reference from the information set forth under sections titled "Voting Securities and Principal Holders Thereof" of the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the close of its fiscal year. Item 13. Certain Relationships and Related Transactions. The information required by Item 13 is incorporated herein by reference from the information set forth under the section titled "Certain Relationships and Related Transactions" of the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the close of its fiscal year. PART IV ITEM 14. Financial Statements, Financial Statement Schedule, Exhibits and Reports on Form 8-K. (a) Documents filed as part of this Form 10-K 1. Financial Statements The Financial Statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Form 10-K. 2. Financial Statement Schedule The Financial Statement Schedule listed in the accompanying Index to Consolidated Financial Statements is filed as part of this Form 10-K 3. Exhibits The Exhibits filed as part of this Form 10-K are listed on the Exhibit Index immediately preceding such exhibits, incorporated herein by reference. (b) Reports on Form 8-K Date of Report Date of Filing Description -------------- -------------- ----------- December 17, 1998 December 22, 1998 Agreement and plan of Merger between the Company and Pharmhouse Corp. March 15, 1999 March 15, 1999 Completion of acquisi- tion of Pharmhouse Corp. May 10, 1999 May 10, 1999 Financial statements relating to the acqui- sition of Pharmhouse Corp. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PHAR-MOR, INC. Date: September 29, 1999 By: /s/ John R. Ficarro ----------------------------------- John R. Ficarro Senior Vice President and Chief Administrative Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates listed below. Date: September 29, 1999 /s/ M. David Schwartz ----------------------------------- M. David Schwartz, President Date: September 29, 1999 /s/ Abbey J. Butler ----------------------------------- Abbey J. Butler, Co-Chairman and Co-Chief Executive Officer (Co-Principal executive officer) Date: September 29, 1999 /s/ Melvyn J. Estrin ----------------------------------- Melvyn J. Estrin, Co-Chairman and Co-Chief Executive Officer (Co-Principal executive officer) Date: September 29, 1999 /s/ Monroe Osterman ----------------------------------- Monroe Osterman, Director Date: September 29, 1999 /s/ Arthur G. Rosenberg ----------------------------------- Arthur G. Rosenberg, Director Date: September 29, 1999 /s/ John D. Shulman ----------------------------------- John D. Shulman, Director Date: September 29, 1999 /s/ Sankar Krishnan ----------------------------------- Sankar Krishnan Senior Vice President and Chief Financial Officer (principal financial and accounting officer) PHAR-MOR, INC. INDEX TO EXHIBITS Exhibit No. *2.1 Third Amended Joint Plan of Reorganization of Phar-Mor, Inc. and certain affiliated entities dated May 25, 1995, as modified **2.2 Disclosure Statement in Support of Plan of Reorganization **2.3 Exhibits to Third Amended Plan of Reorganization *3.1 Amended and Restated Articles of Incorporation *****3.2 Amended and Restated By-laws *4.1 Indenture dated September 11, 1995 between Phar-Mor, Inc. and IBJ Schroder Bank & Trust Company *4.2 Warrant Agreement dated September 11, 1995 between Phar-Mor, Inc. and Society National Bank *10.1 New Security Agreements and New Equipment Notes entered into and issued by Phar-Mor, Inc. with the CIT Group/Equipment Financing, Inc., Ford Equipment Leasing Corp./General Electrical Capital Corporation, NBD Bank Evanston, N.A., Heleasco Twenty-Three, Inc., HCFS Business Equipment Corp., Romulus Holdings, Inc. and FINOVA Capital/Corporation ***10.2 Loan Security Agreement, dated September 10, 1998, by and among the financial institutions listed on the signature pages therein, BankAmerica Business Credit, Inc., as agent, and Phar-Mor, Inc., Phar-Mor, Inc. LLC, Phar-Mor of Delaware, Inc., Phar-Mor of Florida, Inc., Phar-Mor of Ohio, Inc., Phar-Mor of Virginia, Inc. and Phar-Mor of Wisconsin, Inc. **10.2.1 Exhibits to Loan and Security Agreement 10.2.2 Amendment No. 1 to Loan Security Agreement, dated March 3, 1999, by and among the financial institutions listed on the signature pages therein, BankAmerica Business Credit, Inc., as agent, and Phar-Mor, Inc., Phar-Mor, Inc. LLC, Phar-Mor of Delaware, Inc., Phar-Mor of Florida, Inc., Phar-Mor of Ohio, Inc., Phar-Mor of Virginia, Inc. and Phar-Mor of Wisconsin, Inc. 10.2.3 Amendment No. 2 to Loan Security Agreement, dated March 15, 1999, by and among the financial institutions listed on the signature pages therein, BankAmerica Business Credit, Inc., as agent, and Phar-Mor, Inc., Phar-Mor, Inc. LLC, Phar-Mor of Delaware, Inc., Phar-Mor of Florida, Inc., Phar-Mor of Ohio, Inc., Phar-Mor of Virginia, Inc. and Phar-Mor of Wisconsin, Inc. ****10.3 Employment Agreement between Phar-Mor, Inc. and M. David Schwartz, dated June 5, 1997 ****10.4 Employment Agreement between Phar-Mor, Inc. and John R. Ficarro, dated June 5, 1997 ******10.5 Employment Agreement between Phar-Mor, Inc. and Sankar Krishnan, dated June 13, 1997 ******10.6 Employment Agreement between Phar-Mor, Inc. and Abbey J. Butler, dated October 1, 1997 ******10.7 Employment Agreement between Phar-Mor, Inc. and Melvyn J. Estrin, dated October 1, 1997 ******10.8 Employment Agreement between Phar-Mor, Inc. and Warren E. Jeffery, dated June 23, 1998 ******10.9 Amendment to Employment Agreement between Phar-Mor, Inc. and M. David Schwartz, dated June 23, 1998 ******10.10 Amendment to Employment Agreement between Phar-Mor, Inc. and Sankar Krishnan, dated June 23, 1998 ******10.11 Amendment to Employment Agreement between Phar-Mor, Inc. and John R. Ficarro, dated June 23, 1998 ******10.12 Amendment to Employment Agreement between Phar-Mor, Inc. and Warren E. Jeffery, dated August 27, 1998 ******10.13 Second Amendment to Employment Agreement between Phar-Mor, Inc. and M. David Schwartz, dated August 27, 1998 ******10.14 Second Amendment to Employment Agreement between Phar-Mor, Inc. and Sankar Krishnan, dated August 27, 1998 ******10.15 Second Amendment to Employment Agreement between Phar-Mor, Inc. and John R. Ficarro, dated August 27, 1998 10.16 Second Amendment to Employment Agreement between Phar-Mor, Inc. and Warren E. Jeffery, dated February 10, 1999 10.17 Third Amendment to Employment Agreement between Phar-Mor, Inc. and M. David Schwartz, dated February 10, 1999 10.18 Third Amendment to Employment Agreement between Phar-Mor, Inc. and Sankar Krishnan, dated February 10, 1999 10.19 Third Amendment to Employment Agreement between Phar-Mor, Inc. and John R. Ficarro, dated February 10, 1999 *10.20 Form of Indemnification Agreement dated as of September 11, 1995 *****10.21 Phar-Mor, Inc. 1995 Amended and Restated Stock Incentive Plan *****10.22 Phar-Mor, Inc. 1995 Director Stock Plan, as Amended *****10.23 Phar-Mor, Inc. 1996 Director Retirement Plan *****10.24 Employee Stock Purchase Plan ****10.25 Supply Agreement dated as of June 19, 1997 between Phar-Mor and McKesson Drug Company ****10.26 Severance Agreement between Phar-Mor, Inc. and Robert M. Haft dated September 19, 1997 ***21.1 List of Subsidiaries 23 Independent Auditors' Consent 27 Financial Data Schedule - ----------------------------------------------------------------- * Previously filed in connection with the filing of Phar-Mor's Form 10, on October 23, 1995 ** Previously filed in connection with the filing of Amendment No. 1 to Phar-Mor's Form 10, on December 15, 1995 *** Previously filed in connection with the filing of Phar-Mor's quarterly report on Form 10-Q, on November 2, 1998 **** Previously filed in connection with the filing of Phar-Mor's annual report on Form 10-K 405, on September 25, 1997 ***** Previously filed in connection with the filing of Phar-Mor's quarterly report on Form 10-Q, on May 1, 1998 ****** Previously filed in connection with the filing of Phar-Mor's annual report on Form 10-K 405, on September 25, 1998 PHAR-MOR, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Page INDEPENDENT AUDITORS' REPORT F - 2 CONSOLIDATED BALANCE SHEETS AS OF JULY 3, 1999 AND JUNE 27, 1998 F - 3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FIFTY-THREE WEEKS ENDED JULY 3, 1999, THE FIFTY-TWO WEEKS ENDED JUNE 27, 1998 AND THE FIFTY-TWO WEEKS ENDED JUNE 28, 1997 F - 4 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE FIFTY-THREE WEEKS ENDED JULY 3, 1999, THE FIFTY- TWO WEEKS ENDED JUNE 27, 1998 AND THE FIFTY-TWO WEEKS ENDED JUNE 28, 1997 F - 5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FIFTY-THREE WEEKS ENDED JULY 3, 1999, THE FIFTY-TWO WEEKS ENDED JUNE 27, 1998 AND THE FIFTY-TWO WEEKS ENDED JUNE 28, 1997 F - 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 7 SCHEDULE II F - 25 F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Phar-Mor, Inc. : We have audited the accompanying consolidated balance sheets of Phar-Mor, Inc. and subsidiaries (the "Company") as of July 3, 1999 and June 27, 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the fifty-three weeks ended July 3, 1999, the fifty-two weeks ended June 27, 1998 and the fifty-two weeks ended June 28, 1997. Our audits also included consolidated financial statement Schedule II, Valuation and Qualifying Accounts. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Phar-Mor, Inc. and subsidiaries as of July 3, 1999 and June 27, 1998 and the results of their operations and their cash flows for the fifty-three weeks ended July 3, 1999, the fifty-two weeks ended June 27, 1998 and the fifty-two weeks ended June 28, 1997, in conformity with generally accepted accounting principles. In our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Pittsburgh, Pennsylvania September 17, 1999 F-2 PHAR-MOR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value) - --------------------------------------------------------------------------------
July 3, June 27, 1999 1998 ------- ------- ASSETS Current assets: Cash and cash equivalents $ 17,346 $ 44,655 Marketable securities 3,254 9,065 Accounts receivable - net 28,293 20,927 Merchandise inventories 218,945 176,069 Prepaid expenses 6,902 2,214 Deferred tax asset 516 489 ------- ------- Total current assets 275,256 253,419 Property and equipment - net 93,738 75,512 Goodwill 16,234 1,667 Deferred tax asset 9,254 9,281 Investments 8,314 4,275 Investment in Avatex 2,608 3,525 Other assets 5,133 1,776 ------- ------- Total assets $410,537 $349,455 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $119,843 $ 67,091 Accrued expenses 34,926 37,036 Current portion of self insurance reserves 2,178 2,280 Current portion of long-term debt 1,751 3,276 Current portion of capital lease obligation 7,195 7,051 ------- ------- Total current liabilities 165,893 116,734 Long-term debt 122,804 103,859 Capital lease obligations 20,143 27,134 Long-term self insurance reserves 8,032 7,680 Unfavorable lease liability - net 11,073 11,074 ------- ------- Total liabilities 327,945 266,481 ------- ------- Commitments and contingencies Minority interests 535 535 ------- ------- Stockholders' equity: Preferred stock, $.01 par value, authorized shares, 10,000,000, none outstanding - - Common stock, $.01 par value, authorized shares, 40,000,000; issued and outstanding shares, 12,240,865 at July 3, 1999, and 12,235,865 at June 27, 1998 122 122 Additional paid-in capital 90,007 89,976 Stock options outstanding 2,105 1,401 Unrealized loss on investment in Avatex -- (475) Retained deficit (10,177) (8,585) ------- ------- Total stockholders' equity 82,057 82,439 ------- ------- Total liabilities and stockholders' equity $ 410,537 $ 349,455 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 PHAR-MOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) - --------------------------------------------------------------------------------
Fifty-three Fifty-two Fifty-two weeks ended weeks ended weeks ended July 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- Sales $ 1,206,539 $ 1,100,851 $ 1,074,828 Less: Cost of goods sold, including occupancy and distribution costs 977,878 887,657 873,095 Selling, general and administrative expenses 188,641 173,982 168,218 Executive severance -- 6,787 -- Loss on disposal of equipment -- 4,615 -- Business combination expenses -- -- 3,076 Depreciation and amortization 25,009 22,047 20,982 ------ ------ ------ Income from operations before interest expense, Avatex impairment write-down, investment income (loss), interest income and income taxes 15,011 5,763 9,457 Interest expense (16,338) (16,639) (17,175) Avatex impairment write-down (2,393) -- -- Investment income (loss) 543 (1,105) -- Interest income 1,585 3,151 5,437 ----- ----- ----- Loss before income taxes (1,592) (8,830) (2,281) Income tax provision -- -- -- ----- ----- ----- Net loss $ (1,592) $ (8,830) $ (2,281) ============ ============ ============ Basic and diluted loss per common share $ (.13) $ (.72) $ (.19) ============ ============ ============ Weighted average number of common shares outstanding 12,240,595 12,197,371 12,157,419 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-4 PHAR-MOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands) - --------------------------------------------------------------------------------
Common Stock ------------ Par Additional Stock Unrealized Retained Total Value Paid-in Options Loss on (Deficit) Stockholders' Shares Amount Capital Outstanding Investment Earnings Equity ------ ------ ------- ----------- ---------- -------- ------ Balance at June 29, 1996 12,157 $ 122 $ 89,385 $ -- $ -- $ 2,526 $ 92,033 Net loss -- -- -- -- -- (2,281) (2,281) Shares issued 2 -- 17 -- -- -- 17 ------ ------ -------- ----------- ---------- -------- ------ Balance at June 28, 1997 12,159 122 89,402 -- -- 245 89,769 Net loss -- -- -- -- -- (8,830) (8,830) Stock options outstanding -- -- -- 1,401 -- -- 1,401 Unrealized loss on investments -- -- -- -- (475) -- (475) Shares issued 77 -- 574 -- -- -- 574 ------ ------ -------- ----------- ---------- -------- ------ Balance at June 27, 1998 12,236 122 89,976 1,401 (475) (8,585) 82,439 Net loss -- -- -- -- -- (1,592) (1,592) Stock options outstanding -- -- -- 704 -- -- 704 Avatex impairment write-down -- -- -- -- 475 -- 475 Shares issued 5 -- 31 -- -- -- 31 ------ ------ -------- ----------- ---------- -------- ------ Balance at July 3, 1999 12,241 $ 122 $ 90,007 $ 2,105 $ -- $ (10,177) $ 82,057 ====== ======== ========== ========== =========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-5 PHAR-MOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) - --------------------------------------------------------------------------------
Fifty-three Fifty-two Fifty-two weeks ended weeks ended weeks ended July 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- OPERATING ACTIVITIES Net loss $ (1,592) $ (8,830) $ (2,281) Adjustments to reconcile net loss to net cash provided by operating activities: Items not requiring the outlay of cash: Depreciation 17,028 14,030 12,182 Loss on disposal of equipment -- 4,615 -- Stock option expense 704 1,401 -- Amortization of video rental tapes 7,784 7,970 8,800 Amortization of deferred financing costs and goodwill 446 467 408 Avatex impairment write-down 2,393 -- -- Unrealized gain on equity investments (1,748) -- -- Deferred rent and unfavorable lease liabilities (1,059) (1,419) 1,412 Changes in assets and liabilities: Accounts receivable (5,750) 687 (780) Marketable securities 5,811 (9,065) -- Merchandise inventories (8,539) (6,769) (16,258) Prepaid expenses (4,385) 3,014 (44) Other assets 181 298 (707) Accounts payable 8,174 5,283 8,047 Accrued expenses (11,175) 58 2,610 Accrued bankruptcy professional fees -- -- (181) Reserve for costs of rightsizing program (849) (899) (1,585) Self insurance reserves (130) (787) (180) ---- ---- ---- Net cash provided by operating activities 7,294 10,054 11,443 ----- ------ ------ INVESTING ACTIVITIES Additions to rental videotapes (7,446) (8,167) (8,694) Additions to property and equipment (23,968) (19,213) (18,467) Investment in Avatex (1,000) (4,000) -- Investment in Pharmhouse Corp., net of $3,292 cash acquired (4,838) -- -- Investment in equity securities (2,291) (4,275) -- ------ ------ ------ Net cash used for investing activities (39,543) (35,655) (27,161) ------- ------- ------- FINANCING ACTIVITIES Borrowings under revolving credit facility 20,066 -- -- Principal payments on term debt (29,592) (3,043) (2,698) Principal payments on capital lease obligations (6,847) (7,122) (6,019) Bank overdrafts 21,032 -- -- Additions to long-term debt 250 -- -- Issuance of common stock 31 574 17 ----- ------ ------ Net cash provided by (used for) financing activities 4,940 (9,591) (8,700) ----- ------ ------ Decrease in cash and cash equivalents (27,309) (35,192) (24,418) Cash and cash equivalents, beginning of period 44,655 79,847 104,265 ------ ------ ------- Cash and cash equivalents, end of period $ 17,346 $ 44,655 $ 79,847 ============= ============= ============= Supplemental Information - ------------------------ Interest paid $ 21,744 $ 16,155 $ 16,762 Income tax refunds 47 48 86
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) - -------------------------------------------------------------------------------- 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Fiscal Periods Presented - The accompanying consolidated balance sheets were prepared as of July 3, 1999 and June 27, 1998. The accompanying consolidated statements of operations, changes in stockholders' equity and cash flows were prepared for the fifty-three weeks ended July 3, 1999, the fifty-two weeks ended June 27, 1998, and the fifty-two weeks ended June 28, 1997. The Company's year ends on the Saturday closest to June 30. b. Business - The Company operates a chain of "deep discount" drugstores primarily located in the midwest and along the east coast of the continental United States in which it sells merchandise in various categories. c. Principles of Consolidation - The consolidated financial statements include the accounts of Phar-Mor, Inc., its wholly-owned subsidiaries and its majority-owned partnerships. All intercompany accounts and transactions have been eliminated. d. Cash and Cash Equivalents - The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. e. Marketable Securities - Under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," marketable securities are carried at fair market value as trading securities. The cost of the securities sold is determined using the specific identification method. Marketable securities consist primarily of equity instruments of corporations and real estate investment trusts. Unrealized losses of $390 and $1,363 are included in Investment income (loss) in the Consolidated Statements of Operations for the fifty-three weeks ended July 3, 1999 and the fifty-two weeks ended June 27, 1998, respectively. f. Merchandise Inventories - Merchandise inventories are valued at the lower of first-in, first-out ("FIFO") cost or market. g. Video Rental Tapes - Videotapes held for rental which are included in inventories, are recorded at cost and are amortized over their estimated economic lives with no provision for salvage value. With respect to "hit" titles for which four or more copies per store are purchased, the fourth and any succeeding copies are amortized over nine months on a straight-line basis. All other video cassette purchases up to three copies per store are amortized over thirty-six months on a straight-line basis. h. Investments - Investments consist of equity interests in unconsolidated affiliates that do not have readily determinable market values. The Company uses the equity method of accounting for investments in which it has 20% or more interest in voting common stock and the cost method of accounting for investments in which it has less than a 20% interest in voting common stock or investments in preferred stock (see Note 9). i. Investment in Avatex - During the fifty-three weeks ended July 3, 1999 and the fifty-two weeks ended June 27, 1998, the Company invested $1,000 and $4,000, respectively, to purchase approximately 15.1% of Avatex Corporation, formerly known as FoxMeyer Health Corporation ("Avatex"), an affiliate of one of the Company's former largest suppliers and the largest stockholder of the Company (see Note 9). Under the provisions of SFAS No. 115, this investment was carried at market value as available-for-sale securities. Unrealized losses on these securities were excluded from earnings and were reported as a separate component of stockholders' equity until realized. In the fourth quarter of fiscal year 1999, management determined the investment sustained an other than temporary impairment as defined in SFAS No. 115. As such, the Company recorded a charge of $2,393 in the Consolidated Statement of Operations. On June 18, 1999, the Company entered into an agreement with certain preferred shareholders of Avatex to purchase approximately 2.8 million shares of Avatex common stock at a price of $2.00 per share. The transaction is expected to close in the second quarter of fiscal year 2000 after which Phar-Mor will own approximately 4.95 million shares of Avatex common stock (representing approximately 36% of Avatex common stock). As a result of the transaction and in accordance with Accounting Principles Board Opinion ("APB") No. 18, the Company will revise its method of accounting for the investment to the equity method of accounting. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- j. Deferred Debt Expense - Deferred debt expense is included in other assets and is amortized on a straight-line basis over the term of the related debt. k. Goodwill - Goodwill is amortized on a straight-line basis over its estimated useful life, which ranges between 25 and 40 years and is net of accumulated amortization of $318 and $123 at July 3, 1999 and June 27, 1998, respectively. l. Purchased Pharmacy Files - Purchased pharmacy files are included in other assets and are recorded at fair value and amortized over their estimated useful lives, which range between 3 and 20 years. m. Pre-Opening Costs - Expenses incurred for new stores prior to their opening are expensed as incurred. n. Property and Equipment - The Company's policy is to record property and equipment (including leasehold improvements) at cost. Depreciation is recorded on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the estimated useful lives of the improvements or the lives of the leases, whichever is shorter. The Company capitalizes the costs of software and software upgrades purchased for use in its operations. The Company expenses the internal costs of software developed or modified for use in its operations. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized and depreciated over the remaining estimated useful life of the asset . o. Leased Property Under Capital Leases - The Company accounts for capital leases, which transfer substantially all of the benefits and risks incident to the ownership of property to the Company, as the acquisition of an asset and the incurrence of an obligation. Under this method of accounting the cost of the leased asset is amortized principally using the straight-line method over its estimated useful life, and the obligation, including interest thereon, is liquidated over the life of the lease. p. Operating Leases and Deferred Rent - Operating leases are accounted for on the straight-line method over the lease term. Deferred rent represents the difference between rents paid and the amounts expensed for operating leases. q. Unfavorable Lease Liability - The unfavorable lease liability represents the excess of the present value of the liability related to lease commitments over the present value of market rate rents. This liability will be amortized as a reduction of rent expense over the remaining lease terms. The amounts were recorded as part of fresh-start reporting in conjunction with a Chapter 11 Bankruptcy proceeding in which the Company emerged from Chapter 11 on September 11, 1995, and related to purchase accounting for an acquisition. r. Self Insurance Reserves - The Company is generally self-insured for losses and liabilities related primarily to workers' compensation and comprehensive general and product liability. Losses are accrued based upon the Company's estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience. s. Income Taxes - The Company accounts for income taxes using the provisions of SFAS No. 109, "Accounting for Income Taxes". t. Stock Based Compensation - The Company applies the provisions of APB No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation arrangements. u. Revenue Recognition - Sales are recognized on merchandise inventories sold upon receipt by the customer and are recorded net of returns. F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- v. Reclassifications - Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation. w. Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. x. New Accounting Pronouncements - In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components, some of which have been historically excluded from the Consolidated Statement of Operations and recorded directly to the equity section of an entity's statement of financial position. SFAS No. 130 also requires that the cumulative balance of these items of other comprehensive income are reported separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. This statement is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 130 in fiscal year 1999. As a result of the accounting related to the Avatex transaction there are no components of other comprehensive income for the fifty-three weeks ended July 3, 1999. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value, with the potential effect on operations dependent upon certain conditions being met. SFAS No. 133 (as amended by SFAS No. 137) is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management does not believe that the adoption of SFAS No. 133 will have a material impact on its financial position or results of operations. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - --------------------------------------------------------------------------------
2. ACCOUNTS RECEIVABLE Accounts receivable consists of the following: July 3, 1999 June 27, 1998 ------------ ------------- Accounts receivable - vendors $ 13,587 $ 11,712 Third-party prescriptions 14,038 9,205 Vendor coupons 1,015 1,238 Other 1,397 174 ------ ------ 30,037 22,329 Less allowance for doubtful accounts 1,744 1,402 ------ ------ $ 28,293 $ 20,927 ============= =============
3. MERCHANDISE INVENTORIES Merchandise inventories consists of the following: July 3, 1999 June 27, 1998 ------------ ------------- Store inventories $ 187,197 $ 146,969 Warehouse inventories 41,624 34,659 Video rental tapes - net 5,080 6,065 ------- ------- 233,901 187,693 Less reserves for markdowns, shrinkage and vendor rebates 14,956 11,624 ------- ------- $ 218,945 $ 176,069 ============= =============
The video rental tape inventory is net of accumulated amortization of $7,526 and $13,340 at July 3, 1999 and June 27, 1998, respectively.
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following: July 3, 1999 June 27, 1998 ------------ ------------- Furniture, fixtures and equipment $ 60,534 $ 40,083 Building improvements to leased property 45,804 33,622 Land 497 166 Building 1,517 -- Capital leases: Buildings 11,076 11,076 Furniture, fixtures and equipment 22,072 21,860 ------ ------ 141,500 106,807 Less accumulated depreciation and amortization 47,539 30,923 Less allowance for disposal of property and equipment 223 372 ------ ------ $ 93,738 $ 75,512 ============= =============
F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - --------------------------------------------------------------------------------
5. OTHER ASSETS Other assets consists of the following: July 3, 1999 June 27, 1998 ------------ ------------- Purchased pharmacy files $ 4,001 $ 496 Deferred debt expense 456 79 Utility and other deposits 396 664 Other 280 537 ----- ----- $ 5,133 $ 1,776 ============= =============
Deferred debt expense and purchased pharmacy files are net of accumulated amortization of $171 and $803, respectively, at July 3, 1999 and $989 and $425, respectively, at June 27, 1998. The deferred debt expense consists of debt origination costs associated with the credit facility (See Note 6). 6. REVOLVING CREDIT FACILITIES On September 11, 1995, the Company entered into a Loan and Security Agreement (the "Facility") with BankAmerica Business Credit, Inc. ("BABC"), as agent, and other financial institutions (collectively, the "Lenders"), that established a credit facility in the maximum amount of $100,000. Borrowings under the Facility could have been used for working capital needs and general corporate purposes. Up to $50,000 of the Facility at any time could have been used for standby and documentary letters of credit. The Facility included restrictions on, among other things, additional debt, capital expenditures, investments, restricted payments and other distributions, mergers and acquisitions, and contained covenants requiring the Company to meet a specified quarterly minimum EBITDA Coverage Ratio (the sum of earnings before interest, taxes, depreciation and amortization, as defined, divided by interest expense), calculated on a rolling four quarter basis, and a monthly minimum net worth test. Credit availability under the Facility at any time was the lesser of the Aggregate Availability (as defined in the Facility) or $100,000. Availability under the Facility, after subtracting amounts used for outstanding letters of credit, was $91,704 at June 27, 1998. The Facility established a first priority lien and security interest in the current assets of the Company, including, among other items, cash, accounts receivable and inventory. Advances made under the Facility would have borne interest at the BankAmerica reference rate plus 1/2% or London Interbank Offered Rate ("LIBOR") plus the applicable margin. The applicable margin ranged between 1.50% and 2.00% and was determined by a formula based on a ratio of (a) the Company's earnings before interest, taxes, depreciation and amortization to (b) interest. Under the terms of the Facility, the Company was required to pay a commitment fee of 0.28125% per annum on the unused portion of the Facility, letter of credit fees and certain other fees. There were no borrowings under the Facility. At June 27, 1998 there were letters of credit in the amount of $5,709 outstanding under the Facility. The Company entered into an Amended and Restated Revolving Credit Facility (the "Amended Revolving Credit Facility") effective September 10, 1998 with BABC, as agent, and other financial institutions that established a credit facility in the maximum amount of $100,000. F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- Borrowings under the Amended Revolving Credit Facility may be used for working capital needs and general corporate purposes. Up to $50,000 of the facility at any time may be used for standby and documentary letters of credit. The Facility includes restrictions on, among other things, additional debt, investments, dividends and other distributions, mergers and acquisitions. The facility contains no financial covenants. Credit availability under the Amended Revolving Credit Facility at any time is the lesser of the Aggregate Availability (as defined in the Facility) or $100,000. Availability under the Facility, after subtracting outstanding letters of credit, was $75,225 at July 3, 1999. The Amended Revolving Credit Facility establishes a first priority lien and security interest in the current assets of the Company, including, among other items, cash, accounts receivable and inventory. Advances made under the Amended Revolving Credit Facility bear interest at the BankAmerica reference rate plus 1/2% or LIBOR plus 2.00%. Under the terms of the Amended Revolving Credit Facility, the Company is required to pay a commitment fee of between 0.25% and 0.35% per annum on the unused portion of the facility, letter of credit fees and certain other fees. At July 3, 1999 the BankAmerica reference rate (prime rate) was 8.0% and the LIBOR rate was 5.18%. At July 3, 1999 there were letters of credit in the amount of $4,709 outstanding under the Amended Revolving Credit Facility. The Amended Revolving Credit Facility expires on March 14, 2002. 7. LONG-TERM DEBT The composition of the debt obligations included on the consolidated balance sheets is as follows:
July 3, 1999 June 27, 1998 ------------ ------------- Senior unsecured notes, interest rate of 11.72%, due September 2002 $ 91,462 $ 91,462 Amended Revolving Credit Facility 20,066 -- Equipment notes, interest rate of 7%, due in installments through October 2003 3,785 5,484 Tax notes, interest rates at 5.89% to 8%, due through September 2001 4,575 5,257 Real estate mortgage notes and bonds payable at rates ranging from 3% to 9.98% and the prime rate plus 1% 4,667 4,932 ------- ------- Total debt 124,555 107,135 Less current portion 1,751 3,276 ------- ------- Total long-term debt $ 122,804 $ 103,859 ============= =============
The Company must offer to purchase the senior unsecured notes at a price equal to 101% of the principal amount upon the occurrence of a change in control. The new senior notes contain restrictions on, among other things, incurrence of debt, payment of dividends and repurchases of common stock. The Company has mortgage notes and bonds payable collateralized by real estate with an aggregate net book value of $4,038 and $4,222 at July 3, 1999 and June 27, 1998, respectively. F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- Future maturities of long-term debt subsequent to July 3, 1999 are summarized as follows: 2000 $ 1,751 2001 1,139 2002 23,159 2003 92,604 2004 525 Thereafter 5,377 ----- $124,555 ======== 8. LEASES The Company leases its retail store properties, certain warehouse facilities and certain equipment under capital and operating leases. Generally, leases are net leases that require the payment of executory expenses such as real estate taxes, insurance, maintenance and other operating costs, in addition to minimum rentals. The initial terms of the leases range from three to twenty-five years and generally provide for renewal options. Minimum annual rentals for all capital and operating leases having initial noncancelable lease terms in excess of one year at July 3, 1999 are as follows: Capital Operating Leases Leases ------ ------ 2000 $ 9,036 $ 44,767 2001 5,989 42,350 2002 5,291 39,996 2003 3,423 36,088 2004 2,033 30,582 Thereafter 8,449 145,016 ----- ------- Total minimum lease payments 34,221 $338,799 Less amounts representing interest 6,883 ======== ----- Present value of minimum lease payments 27,338 Less current portion 7,195 ----- Long-term capital lease obligations $20,143 ======= The operating leases on substantially all store properties provide for additional rentals when sales exceed specified levels and contain escalation clauses. Rent expense for the fifty-three weeks ended July 3, 1999, fifty-two weeks ended June 27, 1998, and the fifty-two weeks ended June 28, 1997 was $37,306, $31,921, and $32,557 respectively, including $223, $123, and $145 of additional rentals. 9. TRANSACTIONS WITH RELATED PARTIES From September 11, 1995 to September 19, 1997, Hamilton Morgan LLC ("Hamilton Morgan") beneficially owned approximately 39.9% of the Company's common stock. During this period, (a) Avatex owned 69.8% of Hamilton Morgan, and Abbey J. Butler and Melvyn J. Estrin, Avatex's Co-Chairmen of the Board and Co-Chief Executive Officers, served as directors of the Company, and (b) Robert Haft owned 30.2% of Hamilton Morgan and served as Hamilton Morgan's President and the Company's Chairman of the Board and Chief Executive Officer. On September 19, 1997, under the terms of an agreement between Hamilton Morgan, Robert Haft and Avatex (the "Hamilton Morgan Agreement"), Avatex acquired the 3,750,000 shares of the Company's common stock previously owned by Hamilton Morgan in exchange for (i) the redemption of Avatex's membership interest in Hamilton F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- Morgan, (ii) the satisfaction of a certain promissory note from Hamilton Morgan to Avatex and (iii) the transfer of certain other assets from Avatex to Hamilton Morgan. Avatex now beneficially owns approximately 39.1% of the Company's common stock. In conjunction with the Hamilton Morgan Agreement, the Company entered into a Severance Agreement with Robert Haft whereby he resigned his positions as Chairman of the Board of Directors and Chief Executive Officer and received a lump sum cash payment of $4,417. Under the terms of the Severance Agreement, the Company will continue to provide benefits to him through September 19, 2000. He is indemnified and entitled to tax reimbursement in respect to any payments that constitute excess parachute payments under Federal Income Tax laws. The Company is obligated to provide a letter of credit in the amount of approximately $2,900 to secure its contractual obligations under the Severance Agreement. A subsidiary of Avatex, FoxMeyer Drug Company, supplied the Company with pharmaceuticals and health and beauty care products under a long term contract until November 1996, when substantially all of FoxMeyer Drug Company's assets were acquired by McKesson Corporation. For the fifty-two weeks ended June 28, 1997 the Company purchased $71,298 of products from FoxMeyer Drug Company under the contract. In March 1998 and December 1998, 13 persons and entities purchased (or committed to purchase) a total of $7,200 of Series A membership interests in Chemlink Acquisition Company, LLC, which in turn purchased a total of 50% of the membership interests in Chemlink Laboratories, LLC. These persons and entities included the Company; Avatex; two of the Company's executive officers, Abbey J. Butler and Melvyn J. Estrin (and/or their designees); one Avatex officer, Edward L. Massman; one non-officer director of Avatex; and five additional parties related to, or referred to by, Abbey J. Butler or Melvyn J. Estrin. Of the total amount invested, the Company's share was approximately 35.8%, Avatex's share was approximately 41.1%, the Avatex officers/designees' share (including Messrs. Butler and Estrin) was approximately 14.4%, the Avatex non-officer director's share was approximately 0.7%, and the related parties' share was approximately 8.0%. The largest share invested by a Company officer or director (or his designee) was approximately 6.1% of the total amount invested. Messrs. Butler, Estrin and Shulman serve on the Board of Managers of Chemlink Laboratories, LLC. The Company accounts for this investment using the equity method of accounting. In April 1998, 13 persons and entities purchased (or committed to purchase) a total of $3,000 of Series B Non-voting Preferred Stock and warrants to purchase Series B Preferred Stock of RAS Holding Corp. These persons and entities included the Company; Avatex; two of the Company's executive officers, Melvyn J. Estrin and Abbey J. Butler; all of Avatex's executive officers and its Director of Accounting (and/or their designees); one non-officer director of Avatex; and two additional parties related to, or referred to by, Abbey J. Butler or Melvyn J. Estrin. Mr. Butler is also a director of RAS Holding Corp. Of the total amount invested, Avatex's share was approximately 46.7%, the Company's share was 25%, the Avatex officers/designees' share was 19.8%, the Avatex non-officer director's share was 1% and the related parties' share was approximately 7.5%. The largest share invested by an officer or director of the Company (or his designee) was 5% of the total amount invested. The Company accounts for this investment using the cost method of accounting. In April 1998, the Company and Avatex each purchased $1,250 of preferred stock of HPD Holdings Corp. ("HPD") in connection with the acquisition by a HPD subsidiary of certain of the assets of Block Drug Company, Inc. ("Block") used in or related to the manufacture, sale or distribution of Block's household product lines. In addition, the Company and Avatex each acquired 2.5% of the common stock of HPD as part of the transaction. The largest shareholder of HPD is HPD Partners, LP, a Delaware limited partnership and Abbey J. Butler and Melvyn J. Estrin are limited partners of HPD Partners, LP and directors of HPD Laboratories, Inc., a wholly owned subsidiary of HPD. The Company accounts for this investment using the cost method of accounting. During Fiscal Year 1999, the Company paid $77 to Human Service Group, Inc. for secretarial services provided to Mr. Estrin. Human Service Group, Inc. is a corporation wholly owned by Mr. Estrin. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- The Company purchased $319 and $314 of product from AM Cosmetics, Inc. during Fiscal Year 1999 and 1998, respectively. Mr. Butler and Mr. Estrin were directors of AM Cosmetics, Inc. until September, 1998. The Company purchased $20 and $241 of product from Carson Products, a subsidiary of Carson, Inc. during Fiscal Year 1999 and 1998, respectively. Mr. Butler and Mr. Estrin are directors of Carson, Inc. A subsidiary of Avatex purchased a total of 372,000 shares of Carson Class A common stock in December 1997 and January 1998. The Company paid CB Equities Corporation $74 and $52, during Fiscal Year 1999 and 1998, respectively, for office and equipment support for Mr. Butler. Mr. Butler is President of CB Equities Corporation. 10. WARRANTS AND OPTIONS Warrants -------- There are warrants to purchase an aggregate of 1,250,000 common shares outstanding as of July 3, 1999. Each warrant entitles the holder thereof to acquire one common share at a price of $13.50, subject to certain adjustments. The warrants are exercisable at any time until the close of business on September 10, 2002. As of July 3, 1999, no warrants had been exercised. Stock Options ------------- The Company has an incentive stock option plan for officers and key employees which allows for the issuance of a maximum of 3,500,000 options. As of July 3, 1999, options for 441,433 common shares were reserved for future grant, and options for 3,058,567 shares were outstanding and are exercisable upon vesting. Under the terms of the option plan, all options have a seven-year term from date of grant. Generally, the options granted vest with respect to 20% or 33 1/3% of the underlying shares on the grant date, and will vest in additional increments of 20% or 33 1/3% of the underlying shares on each of the subsequent anniversaries of the grant date until 100% vested. To the extent then vested, the options are generally exercisable within one year following the death or disability of the holder of the option, and within six months of any termination event, except where a termination is for cause, in which case the option will then terminate. To the extent then not vested, the options generally will terminate upon the holders death, disability or termination of employment. The employment agreements of certain executive officers provide for accelerated vesting of options upon specified termination events. The Company has a stock option plan for directors. Before October 1, 1997, each director received an annual grant of an option to purchase 5,000 shares of Common Stock. Commencing with the grant on October 1, 1997, each director now receives an annual grant of an option to purchase 10,000 shares of Common Stock. The options vest immediately, expire five years after the grant date and are exercisable at an exercise price equal to the market price on the grant date. A maximum of 500,000 common shares may be granted under the stock option plan for directors. As of July 3, 1999, options for 235,000 shares were outstanding. Each director may also elect to receive common stock, in lieu of all or portions of the director's annual retainer at a price equal to the market price as of October 1 of the year of the election. F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts,continued) - -------------------------------------------------------------------------------- The Company applies APB No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation. Accordingly, for the fifty-three weeks ended July 3, 1999 and the fifty-two weeks ended June 27, 1998, the Company recognized $704 and $1,401, respectively, in compensation cost for the Company's stock option plans in the accompanying consolidated financial statements. Had compensation cost for the Company's plans been determined based on the fair value at the grant date instead of the intrinsic value method described above for the awards granted in 1997, 1998, and 1999 the Company's net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below.
Fifty-three weeks Fifty-two weeks Fifty-two weeks ended July 3, 1999 ended June 27, 1998 ended June 28, 1997 ------------------ ------------------- ------------------- Net loss As reported $(1,592) $ (8,830) $ (2,281) Pro forma $(3,849) $ (11,654) $ (2,541) Basic and diluted earnings per share As reported $(0.13) $(0.72) $ (0.19) Pro forma $(0.31) $(0.96) $ (0.21)
The fair value of each option has been estimated on the date of grant using the Black-Scholes options pricing model with the following assumptions for the periods presented: expected volatility of 30%; no dividend yield; expected life of 7 years; and a risk-free interest rate of 6.5%. All of the Company's stock option plans are administered by the Compensation Committee of the Company's Board of Directors. As of July 3, 1999, 2,499,273 options were exercisable at a weighted average exercise price per share of $7.23. F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - --------------------------------------------------------------------------------
The following table summarizes stock option activity under the plans: Weighted Weighted Average Weighted Average Exercise Remaining Average Options Exercise Price Contractual Grant Date Outstanding Price Per Share per Share Life (Years) Fair Value ----------- --------------- --------- ------------ ---------- Balance at June 29, 1996 1,358,617 $ 7.91 $ 7.06 - $ 8.00 6.22 Granted 100,000 $ 5.66 $ 5.44 - $6.17 2.68 Forfeited (137,800) $ 7.82 $ 7.06 - $8.00 --------- Balance at June 28, 1997 1,320,817 $ 7.75 $ 5.44 - $8.00 5.30 Granted 1,840,000 $ 7.83 $ 5.44 - $9.63 3.55 Forfeited (467,984) $ 7.00 $ 5.44 - $8.00 Exercised (76,666) $ 7.50 $ 6.50 - $8.00 --------- Balance at June 27, 1998 2,616,167 $ 7.92 $ 5.44 - $9.63 5.71 Granted 1,120,300 $ 4.47 $ 4.25 - $8.13 2.11 Forfeited (21,233) $ 7.88 $ 7.22 - $9.63 Exercised (5,000) $ 6.17 $ 6.17 --------- Balance at July 3, 1999 3,710,234 $ 6.88 $ 4.25 - $9.63 5.32 =========
On February 17, 1998, the Company granted options to purchase 375,000 shares at $5.4375 and options to purchase 400,000 shares at $6.84375. These options were issued at exercise prices below the market price of $9.6875 on this date. All of the remaining options were granted at the market price on the date of the grant. The following table stratifies the options as of July 3, 1999:
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 --------- ----------- --------------- ------------ ----------- --------------- $ 8.00 - $ 9.63 1,554,934 $ 8.86 4.67 1,218,101 $ 8.73 $ 6.17 - $ 7.75 785,300 $ 7.04 4.67 571,172 $ 7.06 $ 4.25 - $ 5.44 1,370,000 $ 4.55 6.42 710,000 $ 4.80
EMPLOYEE STOCK PURCHASE PLAN ---------------------------- The Company sponsors an Employee Stock Purchase Plan ("ESPP") under which it is authorized to issue up to 500,000 shares of common stock to all employees with a minimum of three months of service. The ESPP allows eligible employees to contribute through payroll deductions up to 10% of their annual salary toward stock purchases. Stock purchases will be made quarterly at 90% of the closing price at the last day of any calendar quarter. 11. INCOME TAXES Deferred income taxes at July 3, 1999 and June 27, 1998, reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are recognized to the extent that realization of such benefits is more likely than not. Changes in tax rates or laws will result in adjustments to the recorded deferred tax assets or liabilities in the period that the change is enacted. F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - --------------------------------------------------------------------------------
The components of deferred tax assets and liabilities are as follows: July 3, 1999 June 27, 1998 ------------ ------------- Deferred Tax Assets: Operating and restructuring reserves $ 5,977 $ 5,495 Net operating losses 131,807 114,293 Depreciation and amortization 29,578 28,411 Lease escalation accruals 4,454 4,470 Jobs tax credit 4,432 4,432 Other items 4,458 3,730 ----- ----- 180,706 160,831 Valuation allowance (170,936) (151,061) -------- -------- Net deferred tax assets $ 9,770 $ 9,770 ========= ========= Composition of amounts in Consolidated Balance Sheet: Deferred tax assets - current $ 516 $ 489 Deferred tax liabilities - current -- -- -------- -------- Net deferred tax assets - current $ 516 $ 489 ========= ========= Deferred tax assets - noncurrent $ 9,254 $ 9,281 Deferred tax liabilities - noncurrent -- -- -------- -------- Net deferred tax assets - noncurrent $ 9,254 $ 9,281 ========= =========
Deferred tax assets, arising both from future deductible temporary differences and net operating losses ("NOLs"), have been reduced by a valuation allowance to an amount more likely than not to be realized through the future reversal of existing taxable temporary differences. Any future reversal of the valuation allowance existing at the effective date of the Company's plan of reorganization to increase the net deferred tax asset will be added to additional paid-in capital. There is no current income tax provision. A reconciliation of the total tax provision with the amount computed by applying the statutory federal income tax rate to (loss) income before taxes is as follows:
Fifty-three Fifty-two Fifty-two weeks ended weeks ended weeks ended July 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- Statutory tax rate (35.0%) (35.0%) (35.0%) Change in valuation allowance 35.0% 35.0% 35.0% ---- ---- ---- Effective tax rate 0.0% 0.0% 0.0% === === ===
The Company has approximately $363,000 of tax basis NOLs available to offset future taxable income. Approximately $347,000 of this amount ("Section 382 NOLs") is subject to restrictions enacted in the Internal Revenue Code of 1986, as amended, dealing specifically with stock ownership changes and debt cancellations that occurred in connection with the Company's emergence from bankruptcy. Additional restrictions imposed by Internal Revenue Code Section 382 (I)(6), and the regulations thereunder, could further limit the Company's ability to use its Section 382 NOLs to offset future income to an amount approximating $5,500 annually. The remaining $16,000 of NOLs were incurred subsequent to September 2, 1995, and may be used to offset future taxable income without restriction. These NOLs will expire beginning in 2008. The Company also has $4,432 of federal targeted jobs tax credit carryovers, which will expire beginning in 2001. The Internal Revenue Service has completed its field examination of the Company's federal income tax returns for all years to and including June 1992. F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- 12. EMPLOYEE BENEFIT PLANS Defined Contribution Plans -------------------------- The Company has defined contribution employee savings plans covering employees who meet the eligibility requirements as described in the plans. The Company contributes to the union employee savings plan an amount equal to 25% of an employee's contribution up to a maximum of 4% of the employee's compensation. The Company contributes to the nonunion employee savings plan an amount equal to 100% of the employee's contribution up to 2% of the employee's pay and a minimum of 20% of the employee's contribution in excess of 2% up to 4% of employee's pay based on the Company's financial performance. The Company contributes to the Pharmhouse employee savings plan an amount equal to 100% of the employee's contribution up to one dollar of an employee's pay each week and 25% of the employee's contribution in excess of one dollar each week up to 3% of employee's pay. Employee savings plan expenses for the fifty-three weeks ended July 3, 1999, the fifty-two weeks ended June 27, 1998 and the fifty-two weeks ended June 28, 1997, were $1,087, $1,009 and $980, respectively. Health and Welfare Plans ------------------------ The Company also contributes to a multiemployer union sponsored health and welfare plan covering truck drivers and warehouse personnel. Total expenses for the fifty-three weeks ended July 3, 1999, the fifty-two weeks ended June 27, 1998, and the fifty-two weeks ended June 28, 1997, were $2,050, $1,858, and $1,303, respectively. The Company has no postretirement health and welfare or benefits programs. Defined Benefit Plans --------------------- During the fifty-three weeks ended July 3, 1999, the Company adopted SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits", which standardizes the disclosure requirements for pensions and other postretirement benefits, requires additional information on changes in the benefit obligations and the fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures no longer considered useful. It does not change the recognition or measurement of these plans. As required, the presentation of information for years prior to July 3, 1999 have been restated for comparative purposes. The Company provides pension benefits under noncontributory defined benefit pension plans to its union employees who have met the applicable age and service requirements specified in the plans. Benefits are earned on the basis of credited service and average compensation over a period of years. Vesting occurs after five years of service as specified under the plans. The Company makes contributions to the plans as necessary to satisfy the minimum funding requirement of ERISA. The Company provided pension benefits under noncontributory defined benefit pension plans to its non-union employees who had met the applicable age and service requirements specified in the plans. During fiscal 1996 the Company's Board of Directors voted to freeze the benefits accruing under its defined benefit plan that covers non-union personnel effective June 29, 1996 and to increase the Company's matching contribution to the defined contribution plan for those employees. The Company terminated its defined benefit plan that covers non-union personnel on April 30, 1998. Lump sum cash payments were made to the majority of plan participants prior to June 27, 1998. Annuities were purchased for the remaining participants during the fifty-three weeks ended July 3, 1999. F-19 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: July 3, 1999 June 27, 1998 ------------ ------------- Change in benefit obligation Benefit obligation at the beginning of the year $ 5,175 $ 10,262 Service costs with expenses 287 170 Interest cost 264 668 Actuarial (gain)/loss 907 (235) Benefits paid (2,041) (7,136) Settlements -- 1,446 ----- ----- Benefit obligation at end of year 4,592 5,175 ----- ----- Change in plan assets Fair value of plan assets at beginning of year 3,589 8,829 Actual return on plan assets 437 1,783 Employer contributions 1,205 113 Benefits paid (2,041) (7,136) ------ ------ Fair value of plan assets at end of year 3,190 3,589 ----- ----- Funded status (1,402) (1,586) Unrecognized transitional (asset) -- (1) Unrecognized net actuarial loss 929 309 Unrecognized prior service cost 1 1 ----- ----- Net amount recognized $ (472) $ (1,277) ========== ========== Amounts recognized in the statement of financial position consist of: Accrued benefit liability $ (479) $ (1,277) Intangible asset 1 -- Accumulated other comprehensive incom 6 -- ----- ----- Net amount recognized $ (472) $ (1,277) ========== ==========
July 3, 1999 June 27, 1998 ------------ ------------- 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 %
Fifty-three Fifty-two Fifty-two weeks ended weeks ended weeks ended July 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- Components of net periodic benefit cost Service cost $ 286 $ 170 $ 85 Interest cost 264 668 622 Expected return on plan assets (244) (773) (651) Amortization of transition asset -- -- -- Amortization of prior service cost -- -- -- Recognized actuarial loss 46 (1) -- ---- ---- ---- Net periodic pension cost 352 64 56 Settlement effect from lump sum cashouts -- (1,446) -- ---- ---- ---- Net pension (income) expense $ 352 $ (1,382) $ 56 ========== =========== ==========
F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- The projected benefit obligation, the accumulated benefit obligation, and the fair value of plan assets for the pension plan with the accumulated benefit obligations in excess of plan assets were $58, $44, and $22, respectively, as of July 3, 1999 and $34, $20, and $14, respectively, as of June 27, 1998. 13. REORGANIZATION ITEMS AND RELATED RESERVES In September 1992, the Company made a decision to downsize the chain, and in October 1992 commenced a store closing program. The program involved the closing of 143 of the Company's stores that management considered not viable. In conjunction with the program to downsize the chain, the Company also consolidated its distribution centers into one location in Youngstown, Ohio and reduced corporate overhead. The Company identified for closure an additional 25 stores in fiscal 1994 and 41 stores in fiscal 1995. In August 1995 management identified 50 stores which were scheduled to be reduced in size (rightsized) and provided for the cost of rightsizing and provided a markdown reserve for the inventories which would be liquidated in the affected stores. In 1997, the rightsizing program was replaced with the "Super Phar-Mor" concept. The "Super Phar-Mor" concept involves liquidating slow-moving merchandise and utilizes the excess space to expand the existing grocery offering and adds frozen and refrigerated food. In March 1999, the Company recorded a reserve of approximately $800 in purchase accounting related to the planned closure of a distribution facility acquired as part of the Pharmhouse acquisition (see note 18). The activity in the reserve for costs of downsizing is as follows:
Fifty-three Fifty-two Fifty-two weeks ended weeks ended weeks ended July 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- Balance, beginning of period $ 967 $ 1,866 $ 3,451 Costs incurred in connection with the Pharmhouse 800 -- -- acquisition Charges associated with closed stores -- -- (462) Store rightsizing costs (849) (899) (895) Corporate and distribution center costs -- -- (228) ----- ----- ----- Balance, end of period $ 918 $ 967 $ 1,866 =========== =========== ===========
The remainder of the reserve for the costs of downsizing at July 3, 1999 is considered by management to be a reasonable estimate of the costs to be incurred related to the downsizings. To the extent additional stores or distribution centers are identified for closure at a later date or the estimates for write-downs or reserves for the current downsizing program require adjustment, such adjustments will be recognized in future periods. 14. FINANCIAL INSTRUMENTS The Company has financial instruments which include marketable securities, investments and long-term debt. The carrying values of all instruments at July 3, 1999 approximated their fair market value. The fair values of the instruments were based upon quoted market prices of the same or similar instruments or on the rate available to the Company for instruments of the same maturities. F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 1999 ----------- Thirteen Thirteen Thirteen Fourteen weeks ended weeks ended weeks ended weeks ended September 26, December 26, March 27, July 3, 1998 1998 1999 1999 ---- ---- ---- ---- Sales $ 269,412 $ 296,989 $ 290,928 $ 349,210 Gross profit $ 50,815 $ 58,704 $ 55,018 $ 64,124 Net (loss) income $ (1,512) $ 3,747 $ 1,167 $ (4,994) Net (loss) income per basic share $ (0.12) $ 0.31 $ 0.10 $ (0.41) Weighted average number of basic shares outstanding 12,239,821 12,240,865 12,240,865 12,240,865 Net (loss) income per diluted share $ (0.12) $ 0.30 $ 0.09 $ (0.41) Weighted average number of diluted shares outstanding 12,239,821 12,362,089 12,317,051 12,240,865
Fiscal 1998 ----------- Thirteen Thirteen Thirteen Thirteen weeks ended weeks ended weeks ended weeks ended September 27, December 27, March 28, June 27, 1997 1997 1998 1998 ---- ---- ---- ---- Sales $ 256,332 $ 292,212 $ 277,319 $ 274,988 Gross profit $ 48,130 $ 57,992 $ 53,623 $ 53,449 Net (loss) income $ (7,571) $ 2,778 $ (4,712) $ 675 Net (loss) income per basic share $ (0.62) $ 0.23 $ (0.39) $ 0.06 Weighted average number of basic shares outstanding 12,159,199 12,165,353 12,229,071 12,235,865 Net (loss) income per diluted share $ (0.62) $ 0.23 $ (0.39) $ 0.05 Weighted average number of diluted shares outstanding 12,159,199 12,212,527 12,229,071 12,790,933
F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- 16. (LOSS) INCOME PER SHARE During 1997, the Company adopted SFAS No. 128 "Earnings per Share." This standard requires the Company to present basic and diluted earnings per share. Basic earnings per share is computed by dividing net income by the average number of common shares outstanding during the period. The diluted earnings per share calculation assumes the conversion of dilutive stock options and warrants into common shares. The earnings per share calculations for all periods are as follows:
Fifty-three Fifty-two Fifty-two weeks ended weeks ended weeks ended July 3, 1999 June 27, 1998 June 28, 1997 ------------ ------------- ------------- BASIC (LOSS) EARNINGS PER SHARE ------------------------------- Net loss available for common shares $ (1,592) $ (8,830) $ (2,281) Basic weighted average common shares outstanding 12,240,595 12,197,371 12,157,419 Basic earnings per share $ (.13) $ (.72) $ (.19) DILUTED (LOSS) EARNINGS PER SHARE --------------------------------- Net loss available for common shares $ (1,592) $ (8,830) $ (2,281) Diluted weighted average common shares 12,240,595 12,197,371 12,157,419 Diluted earnings per share $ (.13) $ (.72) $ (.19)
There were 3,710,234, 2,616,167 and 1,320,817 options for the fifty-three weeks ended July 3, 1999, the fifty-two weeks ended June 27, 1998 and the fifty-two weeks ended June 28, 1997, respectively, and 1,250,000 warrants for the fifty-three weeks ended July 3, 1999, the fifty-two weeks ended June 27, 1998 and the fifty-two weeks ended June 28, 1997 excluded from the calculation of diluted (loss) income per share as they would have had an anti-dilutive effect on (loss) income per share. 17. LITIGATION The Company and its subsidiaries are involved in legal proceedings, claims and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such current legal proceedings, claims and litigation will not have a material impact on the Company's consolidated financial position. 18. BUSINESS COMBINATIONS The Company entered into an Agreement and Plan of Reorganization dated September 7, 1996 (as amended as of October 9, 1996) with ShopKo Stores, Inc. ("ShopKo") and Cabot Noble, Inc. ("Cabot Noble"). On April 1, 1997, the Company, ShopKo and Cabot Noble entered into a Termination Agreement mutually terminating the Agreement Plan of Reorganization effective as of April 1, 1997. On March 15, 1999, the Company completed the merger of its wholly owned subsidiary Pharmacy Acquisition Corp. ("PAC") with and into Pharmhouse Corp. ("Pharmhouse"), pursuant to the Agreement and Plan of Merger dated as of December 17, 1998 among Phar-Mor, PAC and Pharmhouse (the "Merger Agreement"). As a result of the merger Pharmhouse became a wholly owned subsidiary of Phar-Mor. In addition, subject to the terms of the Merger Agreement, each share of the common stock of Pharmhouse was converted into the right to receive $2.88 per share in cash (the "Merger"). The total purchase price payable in connection with the Merger was approximately $34,200, consisting of $7,500 in cash and the assumption of $26,700 in debt. F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- Phar-Mor and PAC financed the payment of the purchase price and all other fees and expenses associated with the Merger through cash from operations and from borrowings under the Company's Amended Revolving Credit Facility. The Company used its excess cash position and excess availability under its Amended Revolving Credit Facility to pay off $26,700 in debt that was assumed as part of the merger with Pharmhouse. The Merger was accounted for under the purchase method of accounting. The results of operations of Pharmhouse from March 16, 1999 through July 3, 1999 have been included in the Consolidated Statements of Operations for the fifty-three weeks ended July 3, 1999. The total purchase price payable in connection with the Merger was approximately $34,200, consisting of $7,500 in cash and the assumption of $26,700 in debt. Goodwill is being amortized using the straight-line method over a period of 25 years. The fair value of the assets acquired and liabilities assumed was as follows: Identifiable assets acquired $54,962 Liabilities assumed (61,954) Goodwill 14,866 ------ Cash paid $7,874 ====== The following supplemental pro forma information is presented as though the companies combined at the beginning of the respective periods:
Fifty-three weeks Fifty-two weeks ended July 3, 1999 ended June 27, 1998 ------------------ ------------------- Sales $ 1,337,222 $ 1,293,956 =========== =========== Net loss $ (10,171) $ (13,377) =========== =========== Basic and diluted loss per common share $ (.83) $ (1.10) =========== ===========
Pharmhouse operated 32 discount drug stores in eight mid-Atlantic and New England states under the names "Pharmhouse" and "Rx Place". F-24
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 ----------- --------- ------- ----------- ------ Allowance for doubtful accounts ------------------------------- 52 weeks ended June 28, 1997 4,191 1,382 (2,870) 2,703 52 weeks ended June 27, 1998 2,703 (186) (1,115) 1,402 53 weeks ended July 3 1999 1,402 2,097 (1,755) 1,744 Inventory shrink reserve ------------------------ 52 weeks ended June 28, 1997 6,469 13,122 (13,968) 5,623 52 weeks ended June 27, 1998 5,623 6,310 (8,009) 3,924 53 weeks ended July 3, 1999 3,924 9,741 (7,839) 5,826 Inventory markdown reserve -------------------------- 52 weeks ended June 28, 1997 5,361 - (4,616) 745 52 weeks ended June 27, 1998 745 - (745) - 53 weeks ended July 3, 1999 - - - -
F-25 EX-10.2.2 2 AMENDMENT NO.1 TO LOAN SECURITY AGREEMENT Amendment No.1, dated as of March 3, 1999, (this "Amendment"), to the Amended and Restated Loan and Security Agreement, dated as of September 10, 1998 (as heretofore or hereafter amended, supplemented or otherwise modified, the "Agreement") among (i) the financial institutions listed on the signature pages hereof, (ii) BankAmerica Business Credit, Inc., a Delaware corporation ("BABC"), as agent for such financial institutions (in its capacity as agent, the "Agent") and Phar-Mor, Inc., a Pennsylvania corporation, ("Phar-Mor"), Phar-Mor of Florida, Inc., a Pennsylvania corporation, Phar-Mor of Ohio, Inc., an Ohio corporation, Phar-Mor of Virginia, Inc., a Virginia corporation, Phar-Mor of Wisconsin, Inc., a Wisconsin corporation, Phar-Mor of Delaware, Inc., a Delaware corporation, Phar-Mor, Inc., LLC, a Pennsylvania limited liability company, (each individually, including Phar-Mor, a "Borrower" and collectively the "Borrowers") WITNESSETH: WHEREAS, the Borrowers have requested that the Lenders amend certain covenants concerning restricted investments; WHEREAS, pursuant to this Amendment certain covenants will be modified on the terms and conditions as hereinafter set forth, NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein have the respective meanings ascribed thereto in the Agreement. 2. Amendments to the Agreement. The Agreement is hereby amended as follows: (a) Section 9.9 is hereby amended by deleting from clause (iii) thereof the dollar figure "$20,000,000" and inserting in its place the dollar figure "$40,000,000," (b) Clause (ii) of Section 9.13 is hereby amended in its entirety as follows: "an aggregate investment of up to $20,000,000 in Avatex Corporation by Phar-Mor, Inc., may be made and maintained." 3. Representations and Warranties. To induce Lender to enter into this Amendment, Borrowers hereby represent and warrant as follows, with the same effect as if such representations and warranties were set forth in the Agreement: (a) each Borrower has the power and authority to enter into this Amendment and has taken all corporate action required to authorized its execution, delivery and performance of this Amendment. This amendment has been duly executed and delivered by each Borrower and the Agreement, as amended hereby, constitutes the valid and binding obligation of Borrowers, enforceable against each Borrower in accordance with its terms. The execution, delivery and performance of this Amendment and the Agreement, as amended hereby, by each Borrower, will not violate its respective certificate of incorporation or by-laws or any agreement or legal requirement binding on such Borrower. (b) On the date hereof and after giving effect to the terms of this Amendment, (i) the Agreement and the other loan Documents are in full force and effect and, to the extent that a Borrower is a party thereto, constitutes its binding obligation, enforceable against it in accordance with their respective terms; (ii) no Default or Event of Default has occurred and is continuing; and (iii) no Borrower has any defense to or setoff, counterclaim or claim against payment of the Obligations and enforcement of the Loan Documents based upon a fact or circumstance existing occurring on or prior to the date hereof. (c) The Collateral is entirely free and clear of all security interests, liens, pledges and other charges and encumbrances, except those (A) created by the Agreement as amended hereby, or (B) permitted pursuant to the terms of the Agreement as so amended, and the Borrowers have not entered into any agreement pursuant to which any security interests, liens, pledges, or other charges or encumbrances will be imposed or created directly, or as a result of any act or event, upon any of the Collateral. Without limiting the generality of the foregoing, the Collateral does and shall continue to secure the payment of all Obligations. 4. Limited Effect. Except as expressly amended hereby, all of the covenants and provisions of the Agreement are and shall continue to be in full force and effect. Upon the effectiveness of this Amendment, each reference in the Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import and each reference in the other Loan Documents to the Agreement shall mean and be a reference to the Agreement as amended hereby. 5. Conditions of Effectiveness. This Amendment shall become effective when and only when: (i) this Amendment shall be executed by the Borrowers; (ii) Payment to Agent of the fee set forth in the fee Letter dated February 26, 1999, between Agent and Phar-Mor, Inc; and (iii) the Agent shall have received such other documents, as the Agent shall request. 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF NEW YORK. 7. Counterparts. this Amendment may be executed by the parties hereto in any number of separate counterparts, each of which shall be an original, and all of which taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. PHARMOR, INC. By:________________________________ Name: Title: PHAR-MOR OF DELAWARE, INC. By:_______________________________ Name: Title: PHARMOR OF FLORIDA, INC. By:________________________________ Name: Title: PHARMOR OF OHIO, INC. By:________________________________ Name: Title: PHARMOR OF VIRGINIA, INC. By:________________________________ Name: Title: PHARMOR OF WISCONSIN, INC. By:________________________________ Name: Title: PHAR-MOR, INC., LLC By:________________________________ Name: Title: PHARMHOUSE CORP. By:________________________________ Name: Title: BANKAMERICA BUSINESS CREDIT, INC., as the Agent By:________________________________ Name: Title: BANKAMERICA BUSINESS CREDIT, INC., as a Lender By:________________________________ Name: Title: HELLER FINANCIAL, INC., as a Lender By:________________________________ Name: Title: LASALLE BUSINESS CREDIT, INC., as a Lender By:________________________________ Name: Title: BNY FINANCIAL CORP., as a Lender By:________________________________ Name: Title: EX-10.2.3 3 AMENDMENT NO. 2 TO LOAN SECURITY AGREEMENT AMENDMENT No. 2, dated as of March 15, 1999, (this "Amendment"), to the Amended and Restated Loan and Security Agreement, dated as of September 10, 1998 (as heretofore or hereafter amended, supplemented or otherwise modified, the "Agreement") among (i) the financial institutions listed on the signature pages hereof, (ii) BankAmerica Business Credit, Inc., a Delaware corporation ("BABC"), as agent for such financial institutions (in its capacity as agent, the "Agent") and Phar-Mor, Inc., a Pennsylvania corporation, ("Phar-Mor"), Phar-Mor of Florida, Inc., a Pennsylvania corporation, Phar-Mor of Ohio, Inc., an Ohio corporation, Phar-Mor of Virginia, Inc., a Virginia corporation, Phar-Mor of Wisconsin, Inc., a Wisconsin corporation, Phar-Mor of Delaware, Inc., a Delaware corporation, Phar-Mor, Inc., LLC, a Pennsylvania limited liability company and Pharmhouse Corp., a New York corporation (each individually, including Phar-Mor, a "Borrower" and collectively the "Borrowers"). W I T N E S S E T H : WHEREAS, the Agreement requires the adding of new subsidiaries as borrowers; WHEREAS, pursuant to this Amendment new subsidiaries shall be added as borrowers and certain provisions of the Agreement will be modified and/or waived on the terms and conditions as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein have the respective meanings ascribed thereto in the Agreement. 2. Amendments to the Agreement. The Agreement is hereby amended as follows: (a) The words "LOAN AND SECURITY AGREEMENT" on the cover page of the Agreement are hereby amended to read "AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT". (b) Clause (iii) of the first paragraph of the first page of the Agreement is hereby amended as follows: "Phar-Mor, Inc., a Pennsylvania corporation, ("Phar-Mor"), Phar-Mor of Florida, Inc., a Pennsylvania corporation, Phar-Mor of Ohio, Inc., an Ohio corporation, Phar-Mor of Virginia, Inc., a Virginia corporation, Phar-Mor of Wisconsin, Inc., a Wisconsin corporation, Phar-Mor of Delaware, Inc., a Delaware corporation and Phar-Mor, Inc., LLC, a Pennsylvania limited liability company, Pharmhouse Corp., a New York corporation, (each individually, including Phar-Mor, a "Borrower" and collectively the "Borrowers")". (c) The following definition is added to Article 1: "Merger Agreement" means the Agreement and Plan of Merger among Pharmhouse Corp., Phar-Mor, Inc. and Pharmacy Acquisition Corp., pursuant to which Pharmacy Acquisition Corp. will be merged with and into Pharmhouse Corp. (the "Merger"). (d) The definition of "Reaffirmation of Guaranty and Stock Pledge Agreement" is hereby amended in its entirety as follows: "Reaffirmation of Guaranty and Stock Pledge Agreement means the Reaffirmation of Guaranty and Stock Pledge Agreement, dated as of March 15, 1999, and delivered by the Borrowers party thereto to Agent on March 15, 1999." (e) The definition of "Joint and Several Guaranty" is amended by inserting the following words immediately after the word Agreement in the last line of such definition: "dated September 10, 1998, and as further reaffirmed and amended by the Reaffirmation of Guaranty and Stock Pledge Agreement dated March 15, 1999". (f) The definition "Stated Termination Date" is amended by replacing the date "September 10, 2001" with the date "March 14, 2002." (g) The definition of Stock Pledge Agreement is amended by deleting the words "the date of this Agreement" on the last line of such definition and inserting in place thereof the following: "September 10, 1998, and as further reaffirmed and amended by the Reaffirmation of Guaranty and Stock Pledge Agreement dated March 15, 1999". (h) Clause (g) of the definition of Permitted Liens is amended as follows: (i) The letter "s" at the end of the word "clauses", the word "and" and the parenthetical "(h)" in the last line of Section 6.12 are hereby deleted. (j) Section 8.4 is hereby amended by changing the capitalization of the word "Each" to "each" and inserting the following words and punctuation immediately before such word: "Except as set forth on Schedule 8.4," (k) Section 8.7 is hereby amended by deleting the word "othe" in the first line of such definition and replacing it with the word "the". (l) Clause (iv) of Section 8.9 is hereby amended by adding immediately after the word "Reorganization" the following: "and Debt incurred in connection with the Merger" (m) Section 8.10 is hereby amended by changing the word "Since" to "since" and adding the following words and punctuation immediately before such word: "Except as set forth in Schedule 8.10," (n) Section 9.12 is hereby amended by deleting the word "and" that immediately precedes clause "(iii)" and adding the following punctuation and words immediately after the word "sales" in the last sentence thereof: ", and (iv) up to $30,000,000 of Debt consisting of high yield bonds or notes ("Permitted Bonds Prepayment"); provided that, (a) at the time of such Permitted Bonds Prepayment, average daily Aggregate Availability (without giving effect to clause (a) (i) thereof) was not less than $60,000,000 for the 90 days immediately prior to such Permitted Bonds Prepayment, (b) after giving effect to such Permitted Bonds Prepayment, Aggregate Availability (without giving effect to clause (a)(i) thereof) is not less than $30,000,000, (c) no Default or Event of Default shall exist at the time of such Permitted Bonds Prepayment or after giving effect thereto, and (d) Phar-Mor shall have provided Agent with at least three (and not more than five) days prior written notice, which notice shall include a statement as to the amount of such Permitted Bonds Prepayment, the total of all Permitted Bonds Prepayments after giving effect to such Permitted Bonds Prepayment, and that no Default or Event of Default exists as of the date thereof before or after giving effect to such Permitted Bonds Prepayment". (o) Section 9.20 is hereby amended by adding the following immediately after the dollar figure $30,000,000 in the eighth line thereof: ", for the 90 days immediately prior to the closing date of such acquisition, average daily Aggregate Availability (without giving effect to clause (a)(i) thereof) was not less than $60,000,000, and immediately after giving effect to such Permitted Acquisition, Aggregate Availability (without giving effect to clause (a)(i) thereof) is not less than $30,000,000" (p) Section 9.23 is hereby amended by changing the word "Such" to "such" and adding the following words and punctuation immediately before such word: "Except for the Merger," (q) Section 11.1(p) is hereby amended by deleting from the fifth line thereof the letter "s" from the word "clauses", the word "and" and the parenthetical "(h)". 3. Joinder of New Borrower to Loan Documents. From and after the date hereof, the new Borrower is and shall be subject to and bound by, and shall be entitled to all the benefits of the Loan Documents, and shall be a party thereto, all as if such new Borrower had been a "Borrower" party to the original execution and delivery thereof, and all references in the Loan Documents to "Borrower", the "Borrowers", shall hereafter be deemed to be references to and include the new Borrower. The new Borrower confirms that the Obligations are and shall be joint and several Obligations and assumes all rights, duties and obligations under and grants a continuing security interest to the Agent for the benefit of the Agent and the ratable benefit of the Lenders in all of their Property (as defined in the Agreement) that would constitute Collateral under the Agreement and any of the Loan Documents as if it had been an original signatory to the Agreement. To the extent not otherwise modified, the preamble to the Agreement and each other applicable Loan Document, and any other applicable provisions of the Loan Documents, shall hereafter be deemed modified to reflect the provisions of this paragraph. 4. Representations and Warranties. To induce Lender to enter into this Amendment, Borrowers hereby represent and warrant as follows, with the same effect as if such representations and warranties were set forth in the Agreement: (a) Each Borrower has the power and authority to enter into this Amendment and has taken all corporate action required to authorize its execution, delivery and performance of this Amendment. This Amendment has been duly executed and delivered by each Borrower and the Agreement, as amended hereby, constitutes the valid and binding obligation of Borrowers, enforceable against each Borrower in accordance with its terms. The execution, delivery, and performance of this Amendment and the Agreement, as amended hereby, by each Borrower, will not violate its respective certificate of incorporation or bylaws or any agreement or legal requirement binding on such Borrower. (b) On the date hereof and after giving effect to the terms of this Amendment, (i) the Agreement and the other Loan Documents are in full force and effect and, to the extent that a Borrower is a party thereto, constitutes its binding obligation, enforceable against it in accordance with their respective terms; (ii) no Default or Event of Default has occurred and is continuing; and (iii) no Borrower has any defense to or setoff, counterclaim or claim against payment of the Obligations and enforcement of the Loan Documents based upon a fact or circumstance existing or occurring on or prior to the date hereof. (c) The Collateral is entirely free and clear of all security interests, liens, pledges and other charges and encumbrances, except those (A) created by the Agreement as amended hereby, or (B) permitted pursuant to the terms of the Agreement as so amended, and the Borrowers have not entered into any agreement pursuant to which any security interests, liens, pledges, or other charges or encumbrances will be imposed or created directly, or as a result of any act or event, upon any of the Collateral. Without limiting the generality of the foregoing, the Collateral does and shall continue to secure the payment of all Obligations. 5. Opinions. To induce the Lender to enter into this Amendment, the Borrowers shall deliver an opinion of counsel for the Borrowers, satisfactory to the Agent, covering matters satisfactory to the Agent. 6. Limited Effect. Except as expressly amended hereby, all of the covenants and provisions of the Agreement are and shall continue to be in full force and effect. Upon the effectiveness of this Amendment, each reference in the Agreement to this Agreement , hereunder , hereof , herein or words of like import and each reference in the other Loan Documents to the Agreement shall mean and be a reference to the Agreement as amended hereby. 7. Conditions of Effectiveness. This Amendment shall become effective when and only when: (i) this Amendment shall be executed by the Borrowers; (ii) the Agent shall have received the Merger Agreement and related closing documents as in effect on the date hereof, certified by an authorized officer of Phar-Mor to be true and correct copies (there shall have been no amendments or modifications to the Merger Agreement from the copy thereof previously delivered to Agent that are not acceptable to Agent); (iii) the Agent shall have received a copy of the certificate of merger to be filed with the Secretary of State of New York in order to consummate the Merger and such proof of filing and acceptance of such certificate as shall be reasonably satisfactory to Agent; (iv) the Agent shall have received a release and termination of the financing arrangements with Foothill Capital Corporation, satisfactory to Agent; and (v) the Agent shall have received such other documents, as the Agent shall request. 8. Post Effectiveness. Phar-Mor agrees to provide the Agent with the following, not later than 30 days after the effective date of this Amendment: (i) a copy certified by an authorized officer of a certificate of qualification and good standing for Pharmhouse Corp.; (ii) original stock certificates or other equity interests, with signed blank stock powers for Pharmhouse Corp.; (iii) duly executed UCC-3 Termination Statements and other instruments, in form and substance satisfactory to Agent, as shall be necessary to terminate and satisfy all liens of prior lenders on Pharmhouse Collateral; (iv) duly executed UCC-1 financing statements for Pharmhouse Corp., duly filed under the UCC of all jurisdictions that the Agent may deem necessary or desirable in order to perfect the Agent's lien; (v) the following updated Schedules: (1.1(D)) - Premises; (6.3) - Location of Collateral; (6.4) - Permitted Liens on Collateral; (8.5) - Subsidiaries and Affiliates; (8.7) Capitalization; (8.11) - Title to Property; (8.13) - Proprietary Rights; (8.17) Labor Disputes; (8.18) - Environmental Laws; (8.21) - ERISA Compliance; (8.27) Material Agreements; (8.28) - Bank Accounts; (9.5) - Insurance; (9.9) - Management Agreements; (vi) the opinion of counsel for the Borrowers required by Section 5 of this Amendment; and (vii) such other documents as the Agent shall reasonably request. 9. Waiver. Solely for purposes of consummating the Merger, the Lenders hereby waive Sections 9.8, 9.9, 9.18 and 9.20. 10. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF NEW YORK. 11. Counterparts. This Amendment may be executed by the parties hereto in any number of separate counterparts, each of which shall be an original, and all of which taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. PHARMOR, INC. By:________________________________ Name: Title: PHAR-MOR OF DELAWARE, INC. By:_______________________________ Name: Title: PHARMOR OF FLORIDA, INC. By:________________________________ Name: Title: PHARMOR OF OHIO, INC. By:________________________________ Name: Title: PHARMOR OF VIRGINIA, INC. By:________________________________ Name: Title: PHARMOR OF WISCONSIN, INC. By:________________________________ Name: Title: PHAR-MOR, INC., LLC By:________________________________ Name: Title: PHARMHOUSE CORP. By:________________________________ Name: Title: BANKAMERICA BUSINESS CREDIT, INC., as the Agent By:________________________________ Name: Title: BANKAMERICA BUSINESS CREDIT, INC., as a Lender By:________________________________ Name: Title: HELLER FINANCIAL, INC., as a Lender By:________________________________ Name: Title: LASALLE BUSINESS CREDIT, INC., as a Lender By:________________________________ Name: Title: BNY FINANCIAL CORP., as a Lender By:________________________________ Name: Title: EX-10.16 4 2ND AMENDMENT WARREN E. JEFFERY EMPLOY AGREEMENT SECOND AMENDMENT TO EMPLOYMENT AGREEMENT This Second Amendment to Employment Agreement (the "Second Amendment") is entered into by and between Phar-Mor, Inc., a Pennsylvania corporation (the "Company") and Warren E. Jeffery (the "Employee") as of February 10, 1999 (the "Effective Date"). WHEREAS, Employee is currently employed by the Company pursuant to a written Employment Agreement dated as of June 23, 1998 (the "Existing Agreement") as amended as of August 27, 1998 (the "First Amendment"); and WHEREAS, the Company and the Employee desire to further amend the Existing Agreement, as amended. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties agree as follows: 1. All terms, conditions and provisions of the Existing Agreement, as amended by the First Amendment shall remain the same to the extent not modified or amended herein in which event the terms, conditions and provisions of this Second Amendment shall prevail. 2. Section II., DUTIES, sub-paragraph A., shall be amended to provide that the Company shall employ Employee and Employee shall serve the Company for the stated term (the "Term") in the capacity of Executive Vice President of Merchandising, Marketing and Logistics of the Company. 3. Section I., EMPLOYMENT TERM, of the Existing Agreement, as amended, is further amended to provide that the Term shall be two years and shall be automatically extended daily, it being the intent of the parties that the Existing Agreement, as amended, shall have a Term that is a "rolling term" of two years. 4. Section III., COMPENSATION, sub-paragraph A., Base Salary, shall be amended to provide that the minimum annual base salary paid to the Employee shall be $250,000 until the year beginning June 1, 1999 when such minimum annual base salary shall increase to $300,000. Such minimum annual salary shall be payable weekly to the Employee and shall be subject to increase effective on each June 1 thereafter beginning with June 1, 2000. The amount of the increase, if any, shall be determined by the Company based upon the individual performance of the Employee and the Company. In no event shall such minimum annual salary be decreased. 5. Section IV., TERMINATION, sub-paragraph F.3., Other Than for Cause or by Reason of Death or Disability, shall be amended to provide that notwithstanding anything to the contrary contained in the Existing Agreement, as amended, should a Change of Control occur during the first year of the rolling two-year term of the Agreement, then, as provided in the Existing Agreement, the Employee shall be receive two times total annual compensation (in addition to any other benefits the Employee is entitled to thereunder) as described therein. This shall supersede any changes to this provision previously made in the First Amendment. c:\wp51\ficarro\empamnd2.wj 2/10/99 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. PHAR-MOR, INC. By: Abbey J. Butler Warren E. Jeffery Co-Chairman and Chief Executive Officer By: Melvyn J. Estrin Co-Chairman and Chief Executive Officer c:\wp51\ficarro\empamnd2.wj 2/10/99 - Page 2 - EX-10.17 5 3RD AMENDMENT TO M.DAVID SCHWARTZ EMPLOY AGREEMENT THIRD AMENDMENT TO EMPLOYMENT AGREEMENT This Third Amendment to Employment Agreement (the "Third Amendment") is entered into by and between Phar-Mor, Inc., a Pennsylvania corporation (the "Company") and M. David Schwartz (the "Employee") as of February 10, 1999 (the "Effective Date"). WHEREAS, Employee is currently employed by the Company pursuant to a written Employment Agreement dated as of June 5, 1997 (the "Existing Agreement") as amended as of June 23, 1998 (the "First Amendment") and as further amended as of August 27, 1998 (the "Second Amendment"); and WHEREAS, the Company and the Employee desire to further amend the Existing Agreement, as amended. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties agree as follows: 1. All terms, conditions and provisions of the Existing Agreement, as amended by the First Amendment and Second Amendment shall remain the same to the extent not modified or amended herein in which event the terms, conditions and provisions of this Third Amendment shall prevail. 2. Section I., EMPLOYMENT TERM, of the Existing Agreement, as amended, is further amended to provide that the stated term (the "Term") shall be two years and shall be automatically extended daily, it being the intent of the parties that the Existing Agreement, as amended, shall have a Term that is a "rolling term" of two years. 3. Section III., COMPENSATION, sub-paragraph A., Base Salary, shall be amended to provide that the minimum annual base salary of $715,500 to be paid to the Employee for the year beginning June 1, 1999 shall be payable weekly to the Employee and shall be subject to increase effective on each June 1 thereafter beginning with June 1, 2000. The amount of the increase, if any, shall be determined by the Company based upon the individual performance of the Employee and the Company. In no event shall such minimum annual salary be decreased. 4. Section IV., TERMINATION, sub-paragraph F.3., Other Than for Cause or by Reason of Death or Disability, shall be amended to provide that notwithstanding anything to the contrary contained in the Existing Agreement, as amended, should a Change of Control occur during the first year of the rolling two-year term of the Agreement, then, as provided in the Existing Agreement, the Employee shall be receive two times total annual compensation (in addition to any other benefits the Employee is entitled to thereunder) as described therein. This shall supersede any changes to this provision previously made in the First and Second Amendments. c:\wp51\ficarro\empamnd3.ds 2/10/99 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. PHAR-MOR, INC. By: Abbey J. Butler M. David Schwartz Co-Chairman and Chief Executive Officer By: Melvyn J. Estrin Co-Chairman and Chief Executive Officer c:\wp51\ficarro\empamnd3.ds 2/10/99 - Page 2 - EX-10.18 6 3RD AMENDMENT TO SANKAR KRISHNAN EMPLOY AGREEMENT THIRD AMENDMENT TO EMPLOYMENT AGREEMENT This Third Amendment to Employment Agreement (the "Third Amendment") is entered into by and between Phar-Mor, Inc., a Pennsylvania corporation (the "Company") and Sankar Krishnan (the "Employee") as of February 10, 1999 (the "Effective Date"). WHEREAS, Employee is currently employed by the Company pursuant to a written Employment Agreement dated as of June 13, 1997 (the "Existing Agreement") as amended as of June 23, 1998 (the "First Amendment") and as further amended as of August 27, 1998 (the "Second Amendment"); and WHEREAS, the Company and the Employee desire to further amend the Existing Agreement, as amended. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties agree as follows: 1. All terms, conditions and provisions of the Existing Agreement, as amended by the First Amendment and Second Amendment shall remain the same to the extent not modified or amended herein in which event the terms, conditions and provisions of this Third Amendment shall prevail. 2. Section I., EMPLOYMENT TERM, of the Existing Agreement, as amended, is further amended to provide that the stated term (the "Term") shall be two years and shall be automatically extended daily, it being the intent of the parties that the Existing Agreement, as amended, shall have a Term that is a "rolling term" of two years. 3. Section III., COMPENSATION, sub-paragraph A., Base Salary, shall be amended to provide that the base salary paid to the Employee for the year beginning June 1, 1999 shall be $270,000. Such minimum annual salary shall be payable weekly to the Employee and shall be subject to increase effective on each June 1 thereafter beginning with June 1, 2000. The amount of the increase, if any, shall be determined by the Company based upon the individual performance of the Employee and the Company. In no event shall such minimum annual salary be decreased. 4. Section IV., TERMINATION, sub-paragraph F.3., Other Than for Cause or by Reason of Death or Disability, shall be amended to provide that notwithstanding anything to the contrary contained in the Existing Agreement, as amended, should a Change of Control occur during the first year of the rolling two-year term of the Agreement, then, as provided in the Existing Agreement, the Employee shall be receive two times total annual compensation (in addition to any other benefits the Employee is entitled to thereunder) as described therein. This shall supersede any changes to this provision previously made in the First and Second Amendments. 5. Upon execution hereof, the Employee shall receive a signing bonus of $25,000 payable immediately. c:\wp51\ficarro\empamnd3.sk 2/10/99 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. PHAR-MOR, INC. By: Abbey J. Butler Sankar Krishnan Co-Chairman and Chief Executive Officer By: Melvyn J. Estrin Co-Chairman and Chief Executive Officer c:\wp51\ficarro\empamnd3.sk 2/10/99 - Page 2 - EX-10.19 7 3RD AMENDMENT TO JOHN R. FICARRO EMPLOY AGREEMENT THIRD AMENDMENT TO EMPLOYMENT AGREEMENT This Third Amendment to Employment Agreement (the "Third Amendment") is entered into by and between Phar-Mor, Inc., a Pennsylvania corporation (the "Company") and John R. Ficarro (the "Employee") as of February 10, 1999 (the "Effective Date"). WHEREAS, Employee is currently employed by the Company pursuant to a written Employment Agreement dated as of June 5, 1997 (the "Existing Agreement") as amended as of June 23, 1998 (the "First Amendment") and as further amended as of August 27, 1998 (the "Second Amendment"); and WHEREAS, the Company and the Employee desire to further amend the Existing Agreement, as amended. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties agree as follows: 1. All terms, conditions and provisions of the Existing Agreement, as amended by the First Amendment and Second Amendment shall remain the same to the extent not modified or amended herein in which event the terms, conditions and provisions of this Third Amendment shall prevail. 2. Section I., EMPLOYMENT TERM, of the Existing Agreement, as amended, is further amended to provide that the stated term (the "Term") shall be two years and shall be automatically extended daily, it being the intent of the parties that the Existing Agreement, as amended, shall have a Term that is a "rolling term" of two years. 3. Section III., COMPENSATION, sub-paragraph A., Base Salary, shall be amended to provide that the base salary paid to the Employee for the year beginning June 1, 1999 shall be $230,000. Such minimum annual salary shall be payable weekly to the Employee and shall be subject to increase effective on each June 1 thereafter beginning with June 1, 2000. The amount of the increase, if any, shall be determined by the Company based upon the individual performance of the Employee and the Company. In no event shall such minimum annual salary be decreased. 4. Section IV., TERMINATION, sub-paragraph F.3., Other Than for Cause or by Reason of Death or Disability, shall be amended to provide that notwithstanding anything to the contrary contained in the Existing Agreement, as amended, should a Change of Control occur during the first year of the rolling two-year term of the Agreement, then, as provided in the Existing Agreement, the Employee shall be receive two times total annual compensation (in addition to any other benefits the Employee is entitled to thereunder) as described therein. This shall supersede any changes to this provision previously made in the First and Second Amendments. 5. Upon execution hereof, the Employee shall receive a signing bonus of $25,000 payable immediately. c:\wp51\ficarro\empamnd3.jf 2/10/99 IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. PHAR-MOR, INC. By: Abbey J. Butler John R. Ficarro Co-Chairman and Chief Executive Officer By: Melvyn J. Estrin Co-Chairman and Chief Executive Officer c:\wp51\ficarro\empamnd3.jf 2/10/99 - Page 2 - EX-23 8 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Stetement No. 333-30895 of Phar-Mor, Inc. on Form S-8 of our report dated September 17, 1999, appearing in the Annual Report on form 10-K of Phar-Mor, Inc. for the fiscal year ended July 3, 1999. Deloitte & Touche LLP Pittsburgh, Pennsylvania September 30, 1999 EX-27 9 ART. 5 FDS FOR 1999 10-K
5 1,000 12-MOS JUL-03-1999 JUL-03-1999 17,346 3,254 30,037 1,744 218,945 275,256 141,500 47,762 410,537 165,893 142,947 0 0 122 81,935 410,537 1,206,539 1,206,539 977,878 977,878 0 0 16,338 (1,592) 0 (1,592) 0 0 0 (1,592) (0.13) (0.13)
-----END PRIVACY-ENHANCED MESSAGE-----