Item 1. Business
Introduction
Phar-Mor, Inc., a Pennsylvania corporation ("Phar-Mor" or the "Company"), operates a chain of discount retail drugstores devoted to the sale of prescription and over-the-counter drugs, health and beauty care products, baby products, pet supplies, cosmetics, greeting cards, groceries, beer, wine, tobacco, soft drinks, video rental, seasonal and other general merchandise. As of July 1, 2000, the Company operated 139 stores in 24 states under the names of Phar-Mor, Rx Place and Pharmhouse. Approximately 57% of the Company's stores are located in New York, New Jersey, Pennsylvania and Ohio, and approximately 22% are located in Virginia, West Virginia, North Carolina and South Carolina. The Company's principal executive offices are located at 20 Federal Plaza West, Youngstown, Ohio 44501-0400. Unless otherwise stated, all statistics in this Item were compiled as of July 1, 2000.
Except for historical information contained herein, the matters discussed in this Annual Report on Form 10-K are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties including, but not limited to, economic, competitive, governmental and technological factors affecting the Company's operations, markets, products, services and prices and other factors discussed in the Company's filings with the Securities and Exchange Commission ("SEC").
History
Phar-Mor was founded in 1982 as a division of a subsidiary of the Giant Eagle, Inc. supermarket chain. The initial Phar-Mor concept was built on the premise that a drugstore offering additional, and at times unexpected, categories of merchandise could attract customers by featuring low prices made possible by acquiring inventory at relatively low cost through deal purchases of overstock, odd lot, discontinued, large unit size or slow-moving merchandise from manufacturers and distributors. The Company grew, rapidly expanding from 12 stores in August 1985 to 311 stores in August 1992. Store size also grew dramatically, increasing from an average of approximately 31,000 square feet in 1986 to approximately 58,500 square feet in 1992. Phar-Mor's rapid growth was mirrored by apparent extraordinary financial success.
However, in early August 1992, Phar-Mor publicly disclosed that it had discovered a scheme by certain senior executives to falsify certain financial results and divert funds to unrelated enterprises and for personal expenses. The officers involved, including Phar-Mor's former President and Chief Operating Officer, former Chief Financial Officer, former Vice President of Finance and former Controller were promptly dismissed. In an effort to restore support from its vendors and lenders and to implement a business turnaround plan, Phar-Mor and its fifteen wholly-owned subsidiaries filed petitions for protection under Chapter 11 of the United States Bankruptcy Code on August 17, 1992 (the "Petition Date").
The Company emerged from bankruptcy on September 11, 1995, the effective date (the "Effective Date") of Phar-Mor's Chapter 11 plan of reorganization (the "Plan of Reorganization") with a new President and Chief Operating Officer, Chief Financial Officer and Vice President and Corporate Controller hired after the Petition Date to replace those responsible for the fraud.
During the pendency of the Chapter 11 bankruptcy cases of pre-reorganized Phar-Mor and its subsidiaries (the "Chapter 11 Cases"), new management analyzed the performance and prospects of each store to identify a core group of high volume, profitable and geographically concentrated stores that would serve as the basis of reorganized Phar-Mor. Based on this analysis, Phar-Mor closed 209 stores in five stages between October 1992 and July 1995, thereby reducing the number of stores from 311 in September 1992 to 102 stores as of September 1995.
The Company also implemented a series of fundamental changes designed to achieve operating profitability and to position Phar-Mor for future growth. Following the Petition Date, Phar-Mor reduced the number of warehouses; introduced POS scanning in all stores; installed a new pharmacy software system; installed a warehouse logistics system; installed a state of the art mainframe computer; developed an EDI ordering and invoicing system; developed an electronic store merchandise receiving system; and reduced the number of corporate personnel by 75%.
In connection with the Company's Plan of Reorganization and its emergence from bankruptcy, the Company restructured its debt obligations and converted approximately $855 million of debt into equity. The Company also entered into a three-year, $100 million revolving credit facility (the "Revolving Credit Facility").
On March 15, 1999, the Company completed the merger of its wholly owned subsidiary Pharmacy Acquisition Corp. ("PAC") with and into Pharmhouse Corp. ("Pharmhouse"), pursuant to the Agreement and Plan of Merger dated as of December 17, 1998 among Phar-Mor, PAC and Pharmhouse (the "Merger Agreement"). As a result of the merger Pharmhouse became a wholly owned subsidiary of Phar-Mor. In addition, subject to the terms of the Merger Agreement, each share of the common stock of Pharmhouse was converted into the right to receive $2.88 per share in cash (the "Merger"). The total purchase price payable in connection with the Merger was approximately $34.2 million, consisting of $7.5 million in cash and the assumption of $26.7 million in debt.
The Company used its excess cash position and excess availability under its Revolving Credit Facility to pay off $26.7 million in debt that was assumed as part of the merger with Pharmhouse.
Pharmhouse operated 32 discount drug stores in eight mid-Atlantic and New England states under the names "Pharmhouse" and "Rx Place" and had annual revenues of approximately $200 million.
Operations
Typically, stores are open 95 hours per week; pharmacies are typically open 77 hours per week. The average store has approximately 50 employees, including a store manager and department managers, a pharmacy manager and pharmacists, and office and cashier supervision. Overall, the Company had 6,402 employees at July 1, 2000. Approximately 302 warehouse and distribution center employees in Youngstown are members of the Teamsters Union under a contract which expires March 2, 2003. Sixty-one employees at the Company's Niles, Ohio store are members of the United Food and Commercial Workers Union under a contract which expires October 12, 2000.
The Company is committed to customer service and encourages employees to be responsive to customer needs and concerns. The remerchandising and remodeling of stores (discussed below) is designed to make the customer's shopping experience easier and more enjoyable. The number of open checkout lanes is closely monitored to facilitate the efficient and comfortable checkout of customers. These philosophies are regularly communicated and reinforced by the Company to its employees.
Thorough education and training in store operations is provided to employees at every level. Computer-based training, on and off-site training, video training and teleconferences are a few of the training methods used. The Company believes that such training enables efficiency, understanding and responsiveness within store operations.
The typical trade area for a Company store includes approximately 105,000 people in 41,000 households within a radius of between five and seven miles. On average during the fiscal year ended July 1, 2000 ("Fiscal Year 2000"), each store served approximately 8,500 customers per week. The Company's customers are approximately 52% female, with a median age of 35.5 years, and a median household income of approximately $33,000. Approximately 24% of customer households have children 17 years old and under.
Company stores accept payment in cash, check, credit cards, debit cards and payment from third-party providers of prescription services.
The Company's purchasing, pricing, advertising, merchandising, accounting and supervisory activities are centrally directed from Phar-Mor's corporate headquarters. The Company purchases substantially all of its merchandise either directly from manufacturers or from wholesalers under various types of purchase arrangements. McKesson HBOC, Inc. ("McKesson"), a pharmaceutical distributor, accounted for approximately 28% of the Company's purchases during Fiscal Year 2000. During Fiscal Year 2000, no other single vendor accounted for more than 10% of the Company's purchases. Substantially all of the products the Company sells are purchased from approximately 1,200 outside vendors. Alternative sources of supply are generally available for all products sold by the Company.
Marketing and Merchandising
Phar-Mor's overall merchandising strategy is to offer (i) value to consumers by pricing its products below the prices charged by conventional drugstores and supermarkets and (ii) a broader array of products in each of its major product categories than is offered by mass merchant discounters. Phar-Mor's product strategy is focused on the traditional drugstore lines of prescription and over-the-counter drugs, health and beauty care products and cosmetics. Phar-Mor's stores also typically feature other product categories, including groceries, snacks and beverages, pet food and supplies, beer, wine and liquor (where permitted by law), tobacco, baby products, general merchandise, video and music sales and video rentals. Phar-Mor is one of the leading retailers of film, vitamins, soft drinks and batteries in the United States.
Ninety-five percent of the Company's advertising is print advertising, through circulars, newspapers, and point of sale materials. Newspaper advertisements and circulars appear in major newspapers in most market areas. The Company presently advertises through 75 newspapers and mailers.
Phar-Mor introduced the "Super Phar-Mor" concept during Fiscal Year 1997. In approximately 10,000 to 15,000 square feet, each "Super Phar-Mor" offers a variety of grocery items, including fresh, frozen, and refrigerated foods. The Company incorporated this concept into 8 stores during Fiscal Year 2000 bringing the total number of "Super Phar-Mor" stores to 39. The concept has been well received by customers and has improved overall sales in each such store. The Company plans to incorporate the "Super Phar-Mor" concept into 4 stores scheduled to be remodeled during the fiscal year ending June 30, 2001 ("Fiscal Year 2001"). During Fiscal Years 1997, 1998, 1999 and 2000, the Company also undertook a plan to remodel certain stores unable to accommodate the fresh, frozen and refrigerated foods included in the "Super Phar-Mor" concept due to their small size. This "four-wall" remodeling program includes remerchandising the stores to provide a more convenient shopping experience by creating product adjacencies; adding new and color coded decor and enhancing signage throughout the store; and further enhancing the "store within a store" idea with its signature departments. The Company has completed fourteen of the "four-wall" remodel projects. The Company plans to complete 4 "four-wall" remodels in Fiscal Year 2001.
Sales
The retail sale of traditional drugstore lines is a highly fragmented business, consisting of thousands of chain drugstores and independent drugstores that sell such products as well as mass merchandisers who sell such products as part of their overall product lines. In Fiscal Year 2000, revenues from sales of the Company's traditional drugstore products (i.e., prescription drugs, over-the-counter drugs, health and beauty care products, cosmetics and greeting cards) averaged approximately $5.4 million per store and all other merchandise averaged $3.9 million per store. The Company generated approximately $749.2 million in traditional drugstore product revenues and approximately $542.9 million in revenues from the sale of groceries and general merchandise in its stores in Fiscal Year 2000.
Set forth below is the percentage of sales by principal category of products for the continuing stores for the last three fiscal years.
Fiscal Year Ended
July 1, 2000 July 3, 1999 June 27, 1998 ------------ ------------ ------------- Category
Prescription, Health and Beauty Care Products, Cosmetics and Greeting Cards 58.0% 57.1% 56.7% All Other Merchandise 42.0% 42.9% 43.3%
The Company's business is seasonal to a certain extent. The highest volume of sales and net income usually occur in the second fiscal quarter (generally October, November and December). The following table summarizes the Company's sales by quarter during Fiscal Year 2000.
Sales by Quarter During Fiscal Year 2000
Percentage of Total Sales
First Quarter 24.6% Second Quarter 27.1% Third Quarter 23.9% Fourth Quarter 24.4% -------- 100.0% ========
Competition
Phar-Mor's stores compete primarily with conventional drugstores, supermarkets and mass merchant discounters. Many of these companies have greater financial resources than Phar-Mor. Phar-Mor competes with conventional drugstores by offering a broader product selection and generally lower prices than traditional drugstore lines. Phar-Mor believes it has these same competitive advantages against most supermarkets for non-grocery items. Phar-Mor competes with supermarkets in grocery product lines where Phar-Mor does not have a broader selection, by carrying an often changing mix of items priced lower than most supermarkets.
Phar-Mor does not attempt to compete against mass merchant discounters solely on the basis of price. In traditional drugstore lines, particularly health and beauty care products and greeting cards, Phar-Mor offers broader product selection than mass merchant discounters. Mass merchant discounters generally are unwilling to allocate as much display space as Phar-Mor devotes to these categories. The merchandising changes Phar-Mor has implemented, including the creation of "signature" departments in dedicated aisle space with distinguishing signage, such as health and beauty care products, cosmetics, groceries, perishable foods in certain stores and "The Card Shop," "Pet Place," "One Stop Baby Shop," and "Vitamin World," are designed in part to distinguish Phar-Mor from mass merchant discounters and to increase its strength in areas in which Phar-Mor's management believes such merchants do not excel.
Capital Expenditures
The Company's most significant capital needs are for seasonal purchases of inventories, technological improvements and remerchandising and remodeling of existing stores. The Company's capital expenditures totaled $17.1 million in Fiscal Year 2000, including $2.3 million for the construction of new stores, $6.6 million for remodeling existing stores, and $3.8 million for corporate and store information systems. The Company anticipates spending approximately $10.0 million for capital expenditures in Fiscal Year 2001, including costs of remodeling 8 additional stores and opening two new stores.
Real Estate and Growth
The Company opened two new stores in Fiscal Year 2000, and plans to open two new stores in Fiscal Year 2001. Expansion in the near future by the construction of new stores is expected to be minimal and in existing or contiguous markets in the Company's core areas of New York, New Jersey, Pennsylvania and Ohio. Expansion in existing markets improves the Company's operating margins by decreasing advertising costs on a per store basis, permitting more efficient distribution of products to stores and increasing utilization of existing supervisory and managerial staff.
The aggregate cost of any future expansion is dependent upon the method utilized to finance new stores. Build to suit (i.e., landlord constructed) leases cost approximately $750,000 per store for furniture, fixtures, and equipment and each new store requires approximately $1.25 million in inventory. Company-funded conversion of existing buildings is another possible method of expansion; however the cost of such expansion per store varies significantly depending upon the age, condition and configuration of such buildings.
Trademarks and Service Marks
The Company believes that its registered "Phar-Mor" trademark is well recognized by its customer base and the public at large in the markets where it has been advertised. The Company believes that the existing customer and public recognition of its trademark and related operational philosophy will be beneficial to its strategic plans to expand merchandise categories and add new stores. The Company has also introduced a number of private label brands of products under various registered trademarks and trademarks pending registration.
Regulation
The Company is subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime, and other working conditions. To the extent that pay scales for a portion of the Company's personnel relate to the federal minimum wage, increases in the minimum wage may increase the Company's labor costs.
The prescription drug business is subject to the federal Food, Drug and Cosmetic Act, Drug Abuse Prevention and Control Act and Fair Packaging and Labeling Act relating to the content and labeling of drug products, comparable state statutes and state regulation regarding recordkeeping and licensing matters with civil and criminal penalties for violations.
Item 2.
Item 2. Properties.
As of July 1, 2000, the Company operated 139 stores in 24 states. Approximately 57% of Phar-Mor's stores are located in New York, New Jersey, Pennsylvania and Ohio and approximately 22% are located in Virginia, West Virginia, North Carolina and South Carolina. The following is a breakdown by state of the locations of the Company's stores.
Alabama 1 Missouri 1 Colorado 2 New Jersey 12 Connecticut 1 New York 8 Florida 5 North Carolina 8 Georgia 2 Ohio 19 Illinois 4 Oklahoma 1 Indiana 3 Pennsylvania 40 Iowa 2 Rhode Island 2 Kansas 1 South Carolina 4 Kentucky 1 Virginia 14 Maryland 1 West Virginia 4 Massachusetts 2 Wisconsin 1
As of July 1, 2000, 138 of the Company's stores were leased. The Company owns the land and building of its retail store in Winchester, Virginia. All store leases are long-term; the original terms of 101 leases and the original terms plus options of sixteen leases expire on or before December 31, 2009. The remaining stores have longer lease terms. Most stores are located adjacent to or near shopping centers or are part of strip centers. Some stores are free standing. Depending on the location of a store, the sites may vary, with averages by type of location as follows: free-standing stores are located on sites averaging 2.84 acres; stores located in strip centers are found on sites averaging 23.7 acres; and stores in malls are on sites averaging 46.8 acres. A proto-typical store now includes approximately 40,000 square feet of sales space and 10,000 square feet of storage area and ample off-street parking. The stores are designed in a "supermarket" format familiar to customers and shopping is done with carts in wide aisles with attractive displays. Traffic design is intended to enhance the opportunity for impulse purchases.
The Company operates a distribution center in Youngstown, Ohio which it leases. This center delivered approximately 46% of all merchandise to the stores in Fiscal Year 2000, primarily using contract carriers. The balance of the products were delivered directly to the Company's stores by vendors.
The Company and a wholly-owned subsidiary of the Company are partners in an Ohio limited partnership, which owns the office building in which the Company leases approximately 141,000 square feet of space for its corporate offices in Youngstown, Ohio.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the fourth quarter of Fiscal Year 2000, through the solicitation of proxies or otherwise.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock, par value $.01 per share (the "Common Stock"), is included for quotation on the NASDAQ National Market under the symbol "PMOR." High and low prices of the Common Stock are shown in the table below:
Fiscal Year 2000 Fiscal Year 1999 ---------------- ---------------- High Low High Low ---- --- ---- --- 1st Quarter.................... $6 5/8 $4 1/4 $11 1/4 $6 1/8 2nd Quarter.................... 4 3/4 2 7/16 8 15/16 5 1/4 3rd Quarter.................... 4 3/4 2 1/2 8 3/4 5 1/2 4th Quarter.................... 3 1/4 1 1/4 6 7/8 4 1/16
As of September 15, 2000, there were 2,966 holders of record of the Common Stock. The Company has not declared or paid any cash dividends on the Common Stock and does not anticipate paying cash dividends in the foreseeable future. The Company currently intends to retain earnings for future operations and expansion of its business. In addition, the indenture pursuant to which the Company's senior notes were issued and the Company's amended revolving credit facility (the "Amended Revolving Credit Facility") restrict the payment of cash dividends on the Company's capital stock. See "Notes to Consolidated Financial Statements."
Item 6.
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)
Note: In accordance with fresh-start reporting, reorganization value was used to record the assets and liabilities of the Company at September 2, 1995. Accordingly, the selected consolidated financial data for the nine weeks ended September 2, 1995 is not comparable in material respects to such data for subsequent periods.
(a) Excludes extraordinary gain of $1.1 million on early retirement of debt.
(b) Amounts have been restated for the retroactive application of the equity method of accounting for the Company's investment in Avatex Corporation.
(c) Excludes extraordinary gain of $775 million on debt discharged pursuant to the Plan of Reorganization; and includes the gain for revaluation of assets and liabilities under fresh-start reporting of $8 million and reorganization costs of $16.8 million.
Item 7.
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 to. The discussion of liquidity and capital resources is based upon the Company's current financial position.
Recent Developments
On March 15, 1999, the Company completed the merger of its wholly owned subsidiary Pharmacy Acquisition Corp. ("PAC") with and into Pharmhouse Corp. ("Pharmhouse"), pursuant to the Agreement and Plan of Merger dated as of December 17, 1998 among Phar-Mor, PAC and Pharmhouse (the "Merger Agreement"). As a result of the merger Pharmhouse became a wholly owned subsidiary of Phar-Mor. In addition, subject to the terms of the Merger Agreement, each share of the common stock of Pharmhouse was converted into the right to receive $2.88 per share in cash (the "Merger"). The total purchase price payable in connection with the Merger was approximately $34,200, consisting of $7,500 in cash and the assumption of $26,700 in debt.
The Company used its excess cash position and excess availability under its Amended Revolving Credit Facility to pay off $26,700 in debt that was assumed as part of the Merger with Pharmhouse.
Pharmhouse operated 32 discount drug stores in eight mid-Atlantic and New England states under the names "Pharmhouse" and "Rx Place" and had annual revenues of approximately $200,000.
The Company's consolidated results of operations include the results of the acquired Pharmhouse stores from March 16, 1999 forward.
The Company set an aggressive schedule for the conversion of the acquired Pharmhouse stores to the Company's store systems and merchandising mix. As of July 3, 1999, all 32 of the Pharmhouse stores were converted to and trained on the Company's store systems. This allowed the Company to integrate the Pharmhouse stores into the Company's purchasing, warehousing, financial and management reporting systems which allowed the Company to eliminate all the Pharmhouse corporate office personnel and systems by July 3, 1999. The Company completed the conversion of the Pharmhouse stores to the Company's merchandising mix by October 31, 1999.
Results of Operations
The following table sets forth the number of retail stores operated each fiscal year:
52 weeks ended July 1, 2000 (Fiscal Year 2000) compared to the 53 weeks ended July 3, 1999 (Fiscal Year 1999) (all dollar amounts in thousands)
Fiscal Year 2000 sales increased $85,551 or 7.1% over Fiscal Year 1999. The increase in Fiscal Year 2000 sales was primarily due to a full year of Pharmhouse sales in Fiscal Year 2000 compared to three and a half months of Pharmhouse sales in Fiscal Year 1999, partially offset by one less week in Fiscal Year 2000, and a comparable store sales decrease of .4%. The comparable store sales decrease was primarily due to a 3.3% comparable store front end sales decrease partially offset by a 7.3% comparable store pharmacy sales increase.
Gross profit for Fiscal Year 2000 was 0.23% of sales lower than for Fiscal Year 1999. A 0.44% of sales increase in product gross margins was more than offset by lower cash discounts, higher third party receivable write offs and higher occupancy costs. Cash discounts declined as a percentage of sales primarily due to an increase in pharmacy sales as a percentage of total sales from 28.0% of sales in Fiscal Year 1999 to 30.9% of sales in Fiscal Year 2000. Occupancy costs increased as a percentage of sales primarily due to the inclusion of the lower volume Pharmhouse stores for a full year in Fiscal Year 2000 versus three and a half months in Fiscal Year 1999.
Selling, general and administrative expenses increased 0.79% of sales in Fiscal Year 2000 over Fiscal Year 1999. The increase in selling, general and administrative expenses was primarily due to higher wage costs, higher advertising expenditures and higher store expenses. The increase in wage costs
as a percentage of sales was primarily due to the full year effect of the addition of the Pharmhouse stores which have a higher store wage as a percentage of sales due to lower per store sales volume and an increase in the average hourly wage paid to store employees. The increase in advertising expenditures and store expenses as a percentage of sales was primarily due to the full year effect of the addition of the Pharmhouse stores which have a higher costs a percentage of sales due to lower per store sales volume.
Interest and investment income decreased $5,964 in fiscal year 2000 from fiscal year 1999. The decrease was primarily the result of a decline in interest income of $1,461 due to lower cash balances and a $5,500 investment loss resulting from an other than temporary impairment of one of the Company's investments.
The Company had an increase in equity in income of affiliates of $5,206 in fiscal year 2000 from fiscal year 1999, primarily due to investment gains by one of the affiliates.
The Company repurchased $10,149 of its 11.72% senior notes during Fiscal Year 2000 at a discount resulting in a extraordinary gain of $1,117.
53 weeks ended July 3, 1999 (Fiscal Year 1999) compared to the 52 weeks ended June 27, 1998 (Fiscal Year 1998) (all dollar amounts in thousands)
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 manufacturers, related to certain product overcharges to retailers. A 38% reduction in video rental sales was the primary cause of the decline in product gross margins.
Selling, general and administrative expenses decreased 0.18% of sales in Fiscal Year 1999 over Fiscal Year 1998. The decrease in selling, general and administrative expenses was primarily due to lower advertising expenditures partially offset by higher store wages. The increase in store wages as a percentage of sales is due to the addition of the Pharmhouse stores which have a higher store wage as a percentage of sales due to lower per store sales volume and an increase in the minimum wage.
Interest and investment income decreased $1,498 in fiscal year 1999 from fiscal year 1998. The decrease was mostly due to a decline in interest income of $1,566 as the result of lower cash balances.
Equity in income of affiliates increased $1,556 in fiscal year 1999 from fiscal year 1998, primarily due to investment gains by one of the affiliates.
Financial Condition and Liquidity (all dollar amounts in thousands)
The Company's cash position as of July 1, 2000 was $16,752.
On September 10, 1998, the Company entered into an Amended and Restated Revolving Credit Facility (the "Amended Revolving Credit Facility") with BankAmerica Business Credit, Inc. ("BABC"), as agent, and other financial institutions that established a credit facility in the maximum amount of $100,000.
Borrowings under the Amended Revolving Credit Facility may be used for working capital needs and general corporate purposes. Up to $50,000 of the facility at any time may be used for standby and documentary letters of credit. The facility includes restrictions on, among other things, additional debt, investments, dividends and other distributions, mergers and acquisitions. The facility contains no financial covenants.
Credit availability under the Amended Revolving Credit Facility at any time is the lesser of the Aggregate Availability (as defined in the Facility) or $100,000. The Amended Revolving Credit Facility establishes a first priority lien and security interest in the current assets of the Company, including, among other items, cash, accounts receivable and inventory.
Advances made under the Amended Revolving Credit Facility bear interest at the BankAmerica reference rate plus 1/2% or LIBOR plus 2.00% from January 1 to June 30 each year and the BankAmerica reference rate plus 3/4% or LIBOR plus 2.25% from July 1 to December 31 each year. Under the terms of the Amended Revolving Credit Facility, the Company is required to pay a commitment fee of between 0.25% and 0.35% per annum on the unused portion of the facility, letter of credit fees and certain other fees.
As of July 1, 2000, there were $60,283 in outstanding advances and letters of credit in the amount of $5,084 were outstanding under the Amended Revolving Credit Facility.
The Amended Revolving Credit Facility expires on March 14, 2002.
The Company's cash position decreased $594 during Fiscal Year 2000 as cash provided by operating activities of $9,641 and cash provided by financing activities of $19,786 was offset by $30,021 in cash used for investing activities.
Merchandise inventories decreased by $8,506 and accounts payable decreased $18,638 from the high levels at the end of Fiscal Year 1999. The high levels at the end of Fiscal Year 1999 resulted from large inventory purchases made in order to supply the Pharmhouse stores with products normally carried in the Company's stores.
The Company invested $5,724 during Fiscal Year 2000 in the common stock of Avatex Corporation, the Company's largest shareholder. The Company also invested $11,761 in equity securities of other privately held companies. The Company then sold $6,000 of those equity securities.
The Company's cash position decreased $27,309 during Fiscal Year 1999 as cash provided by operating activities of $7,294 and cash provided by financing activities of $4,940 was offset by $39,543 in cash used for investing activities.
Accounts receivable increased $5,750 and merchandise inventories increased $8,539 during Fiscal Year 1999 primarily due to the acquisition of the 32 Pharmhouse stores and the opening of two new stores.
The Company invested $1,001 during Fiscal Year 1999 in the common stock of Avatex Corporation, the Company's largest shareholder. The Company also invested $2,291 in equity securities of other privately held companies.
The Company's cash position decreased $35,192 during Fiscal Year 1998 as cash provided by operating activities of $10,054 was offset by $35,655 in cash used for investing activities and $9,591 in cash used for financing activities.
The Company invested $9,065 in marketable securities in Fiscal Year 1998 in an effort to increase its return on its excess cash position. Merchandise inventories increased $6,769 during Fiscal Year 1998 primarily due to the opening of three new stores.
The Company invested $4,000 in the common stock of Avatex Corporation in Fiscal Year 1998. The Company also invested $4,275 in equity securities of other privately held companies.
Trends, Demands, Commitments, Events or Uncertainties (all dollar amounts in thousands)
Management believes the availability of the Amended Revolving Credit Facility, together with the Company's current cash position, marketable securities and expected cash flows from operations for Fiscal Year 2001 will enable the Company to fund its working capital needs and capital expenditures. Achievement of expected cash flows from operations is dependent upon, among other things, the Company's attainment of sales, gross profit and expense levels that are consistent with its financial projections, and there can be no assurance that the Company will achieve its expected cash flows.
Investment activities for Fiscal Year 2001 are expected to total $11,300. The major expenditures are expected to be (i) video rental tapes ($1,400), (ii) remodeling of existing stores ($4,075), and (iii) new stores ($1,375). The Company expects to finance and meet its obligations for these capital expenditures through internally generated funds and the use of the Company's Amended Revolving Credit Facility.
Certain Company information systems have potential operational problems in connection with applications that contain a date and/or use a date in a comparative manner as the date transitions into the Year 2000. The Company implemented a comprehensive program to identify and remediate potential problems related to the Year 2000 in its information systems, infrastructure, logistics and retail facilities. In addition, the Company initiated formal communication with all of its significant vendors and other external interfaces to determine the extent to which the Company was vulnerable to a third-party's failure to remediate their own potential problems related to the Year 2000. The inability of the Company or significant vendors and/or external interfaces of the Company to adequately address Year 2000 issues could have caused disruption of the Company's systems.
The Company completed all of the software modifications necessary to make its systems Year 2000 compliant and as a result has not experienced any major operational problems or disruptions.
The Company incurred approximately $1,300 related to the assessment of, and efforts in connection with, its Year 2000 program and remediation plan. The Company accelerated by one year the purchase of approximately $5,000 in replacement hardware in order to ensure the associated system was Year 2000 compliant.
The Company is exposed to certain market risks from transactions that are entered into during the normal course of business. The Company's policies do not permit active trading of, or speculation in, derivative financial instruments. The Company's primary market risk exposure relates to interest rate risk. The Company manages its interest rate risk in order to balance its exposure between fixed and variable rates while attempting to minimize its interest costs.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value, with the potential effect on operations dependent upon certain conditions being met. SFAS No. 133 (as amended by SFAS No. 137) is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management does not believe that the adoption of SFAS No. 133 will have a material impact on its financial position or results of operations.
In November 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition". This Bulletin sets forth the SEC Staff's position regarding the point at which it is appropriate for a Registrant to recognize revenue. The Staff believes that revenue is realizable and earned when all of the following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or service has been rendered;
- The seller's price to the buyer is fixed or determinable; and
- Collectibility is reasonably assured.
The Company uses the above criteria to determine whether revenue can be recognized, and therefore believes that the issuance of SAB 101 does not have a material impact on the Company's financial statements.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See Index to Consolidated Financial Statements.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The executive officers and directors of the Company as of the date hereof are listed below:
Name Age Position(s) - ---- --- ----------- Abbey J. Butler 63 Co-Chairman and Co-Chief Executive Officer
Melvyn J. Estrin 58 Co-Chairman and Co-Chief Executive Officer
M. David Schwartz 55 President and Chief Operating Officer
Warren E. Jeffery 51 Executive Vice President - Merchandising, Marketing and Logistics
John R. Ficarro 48 Senior Vice President, Chief Administrative Officer, General Counsel and Secretary
Monroe Osterman 73 Director
Arthur G. Rosenberg 62 Director
John D. Shulman 37 Director
Abbey J . Butler has been a director of the Company since September 1995 and Co-Chairman of the Board and Co-Chief Executive Officer of the Company since October 1, 1997. Mr. Butler is Co-Chairman of the Board and Co-Chief Executive Officer of Avatex Corporation ("Avatex"), formerly known as FoxMeyer Health Corporation. He also serves as President and a director of C.B. Equities Corp., a private investment company. Mr. Butler presently serves as a director of GrandBanc, Inc., Carson, Inc., iLife Systems, Inc. ("iLife") and, in connection with our investments, as director of RAS Holding Corp. ("RAS") and its subsidiary, Presby Corp. and as a member of the Board of Managers of Chemlink and Cyclone Acquisition Company, LLC. Mr. Butler is a trustee of the Board of Trustees of the American University, and a director of the Starlight Foundation, a charitable organization. He was appointed by President George Bush to serve on the President's Advisory Committee on the Arts, and he now serves as President of the National Committee for the Performing Arts, John F. Kennedy Center, Washington, D.C. Mr. Butler also served as Co-Chairman of the Board of FoxMeyer Corporation since March 1991 and was its Co-Chief Executive Officer from May 1993 to November 1996, and also served as Co-Chairman of the Board of Ben Franklin from November 1991 until March 1997. FoxMeyer Corporation and Ben Franklin each filed for relief under the Bankruptcy Code in 1996.
Melvyn J. Estrin has been a director of the Company since September 1995 and Co-Chairman of the Board and Co-Chief Executive Officer of the Company since October 1, 1997. Melvyn J. Estrin is Co-Chairman of the Board and Co-Chief Executive Officer of Avatex. He also has served as Chairman of the Board and Chief Executive Officer of Human Service Group, Inc., a private management and investment firm, since 1983. Mr. Estrin presently serves as Chairman of GrandBanc, Inc. and a director of Washington Gas Light Company, Carson, Inc., RAS, iLife and, in connection with our investments, as a director of HPD Holdings Corp., and as a member of the Board of managers of Chemlink and Cyclone Acquisition Company, LLC. Mr. Estrin also served as a Trustee of the University of Pennsylvania and was appointed by President George Bush to serve as Commissioner of the National Capital Planning Commission. Mr. Estrin also served as Co-Chairman of the Board of FoxMeyer Corporation since March 1991 and was its
Co-Chief Executive Officer from May 1993 to November 1996, and also served as Co-Chairman of the Board of Ben Franklin from November 1991 until March 1997. FoxMeyer Corporation and Ben Franklin each filed for relief under Bankruptcy Code in 1996.
M. David Schwartz has served as President and Chief Operating Officer of the Company since February 1993. From 1991 to 1993, he was a Director and the President and Chief Executive Officer of Smitty's Super Valu, Inc., a food and general merchandising retailer, and between 1987 and 1991 Mr. Schwartz served as a Director and the President and Chief Operating Officer of Perry Drug Stores Inc., a regional chain of 200 drug stores. Mr. Schwartz was Vice President of Drug/General Manager for the Kroger Company between 1985 and 1987 and, between 1971 and 1985, held positions with Albertson's Inc. including Senior Vice President of Marketing, Senior Vice President of Non-Foods Merchandising, Distribution and Procurement, Vice President of Merchandising, and Non-Foods Merchandise Manager. Mr. Schwartz attended Arizona State University.
Warren E. Jeffery has served as Executive Vice President of Merchandising, Marketing and Logistics of the Company since February 1999. Prior to that, Mr. Jeffery served as Senior Vice President of Operations from April 1996 to February 1999 and Vice President of Operations, beginning February 1993. From 1992 to 1993, he served as Regional Director-Store Operations for Revco D.S., Inc., operator of one of the country's largest retail drug store chains. Mr. Jeffery was employed by Perry Drug Stores from 1976 until 1992, holding various management positions, including Vice President of Store Operations from 1988 to 1992. Mr. Jeffery received a B.S. degree in pharmacy from Ferris State University.
John R. Ficarro has served as Senior Vice President and Chief Administrative Officer (in addition to his existing duties as General Counsel and Secretary of the Company) since June 1997. Prior to that, Mr. Ficarro served as Vice President, General Counsel and Secretary of the Company beginning in February 1995. From 1981 to 1995, Mr. Ficarro was employed by General Host Corporation where he served as Vice President, General Counsel and Secretary since 1989 and prior to that time served as Counsel to several of its retail businesses. Prior to 1981, Mr. Ficarro practiced law at Titone & Roarke in Ft. Lauderdale, Florida. Mr. Ficarro received a B.A. from the Maxwell School at Syracuse University and a J.D. from its College of Law.
Monroe Osterman has been a director of the Company since September 25, 1997. Mr. Osterman has served as President of Gala Trading Corporation, an investment company specializing in large purchases of diamonds from Europe, since 1982. Prior to serving as President of Gala Trading Corporation, Mr. Osterman served as President of Paras USA and Bermont Corporation and was also a partner at J. Winston & Company, an importing and merchandising company.
Arthur G. Rosenberg has been a director of the Company since November 23, 1997. Mr. Rosenberg was a principal of The Associated Companies, a real estate development firm, from 1987 to 1998 and in 1999 became a principal of Millennium Development Group LLC, a commercial real estate developer. Prior thereto, Mr. Rosenberg was a practicing lawyer in Huntington, New York and served as General Counsel for ITT Levitt & Sons, Inc., an international builder.
John D. Shulman has been a director of the Company since November 23, 1997. Mr. Shulman has served as President and Chief Executive Officer of ONYX International, L.L.C., a merchant banking and venture firm focusing primarily on private equity placements in high growth companies, since 1994. Prior to serving as President and Chief Executive Officer of ONYX International, L.L.C., Mr. Shulman served as the Director of Development for Tower Companies, a diversified group of companies including real estate development, banking and related activities since 1986. Mr. Shulman currently serves on the Board of Directors of U.S. Interactive, Inc., Performance Distribution, Inc., Taiwan Mezzanine Fund I, L.P., Interactive Video Technologies, Inc., and on the Board of Managers of ChemLink Laboratories, LLC and is the Chairman of Juggernaut Partners, LLC. Mr. Shulman is the husband of Mr. Estrin's niece.
Item 11.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated herein by reference from the information set forth under the sections titled "Executive Compensation," "Committees of the Board; Meetings," "Executive Compensation Plans," "Compensation of Directors," "Employment Contracts and Termination of Employment and Change -In-Control Arrangements," "Compensation Committee Report on Executive Compensation," "Executive Summary Compensation Table," "Option Grants in Fiscal Year 2000," "Option Exercises and Values for Fiscal Year 2000," and "Performance Graph" of the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the close of its fiscal year.
Item 12.
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.
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.
ITEM 14. Financial Statements, Financial Statement Schedule, Exhibits and Reports on Form 8-K.
(a) Documents filed as part of this Form 10-K
1. Financial Statements
The Financial Statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Form 10-K.
2. Financial Statement Schedule
The Financial Statement Schedule listed in the accompanying Index to Consolidated Financial Statements is filed as part of this Form 10-K
3. Exhibits
The Exhibits filed as part of this Form 10-K are listed on the Exhibit Index immediately preceding such exhibits, incorporated herein by reference.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PHAR-MOR, INC.
Date: September 28, 2000 By: /s/ John R. Ficarro ----------------------------------------- John R. Ficarro Senior Vice President and Chief Administrative Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates listed below.
Date: September 28, 2000 /s/ M. David Schwartz ----------------------------------------- M. David Schwartz, President
Date: September 28, 2000 /s/ Abbey J. Butler ----------------------------------------- Abbey J. Butler, Co-Chairman and Co-Chief Executive Officer (Co-Principal executive officer)
Date: September 28, 2000 /s/ Melvyn J. Estrin ----------------------------------------- Melvyn J. Estrin, Co-Chairman and Co-Chief Executive Officer (Co-Principal executive officer)
Date: September 28, 2000 /s/ Monroe Osterman ----------------------------------------- Monroe Osterman, Director
Date: September 28, 2000 /s/ Arthur G. Rosenberg ----------------------------------------- Arthur G. Rosenberg, Director
Date: September 28, 2000 /s/ John D. Shulman ----------------------------------------- John D. Shulman, Director
Date: September 28, 2000 /s/ Martin S. Seekely ----------------------------------------- Martin S. Seekely Vice President and Controller (principal financial and accounting officer)
PHAR-MOR, INC.
INDEX TO EXHIBITS
Exhibit No.
*3.1 Amended and Restated Articles of Incorporation
**3.2 Amended and Restated By-laws
*4.1 Indenture dated September 11, 1995 between Phar-Mor, Inc. and IBJ Schroder Bank & Trust Company
*4.2 Warrant Agreement dated September 11, 1995 between Phar-Mor, Inc. and Society National Bank
10.1 Amendment No. 3 to Loan Security Agreement, dated June 27, 2000, by and among the financial institutions listed on the signature pages therein, BankAmerica Business Credit, Inc., as agent, and Phar-Mor, Inc., Phar-Mor, Inc. LLC, Phar-Mor of Delaware, Inc., Phar-Mor of Florida, Inc., Phar-Mor of Ohio, Inc., Phar-Mor of Virginia, Inc. and Phar-Mor of Wisconsin, Inc.
***10.2 Employment Agreement between Phar-Mor, Inc. and Abbey J. Butler, dated October 1, 1997
***10.3 Employment Agreement between Phar-Mor, Inc. and Melvyn J. Estrin, dated October 1, 1997
*****10.4 Second Amendment to Employment Agreement between Phar-Mor, Inc. and Warren E. Jeffery, dated February 10, 1999
*****10.5 Third Amendment to Employment Agreement between Phar-Mor, Inc. and M. David Schwartz, dated February 10, 1999
*****10.6 Third Amendment to Employment Agreement between Phar-Mor, Inc. and John R. Ficarro, dated February 10, 1999
*10.7 Form of Indemnification Agreement dated as of September 11,
**10.8 Phar-Mor, Inc. 1995 Amended and Restated Stock Incentive Plan
**10.9 Phar-Mor, Inc. 1995 Director Stock Plan, as Amended
**10.10 Phar-Mor, Inc. 1996 Director Retirement Plan
**10.11 Employee Stock Purchase Plan
******10.12 Amendment to the Supply Agreement dated November 5, 1999, between Phar-Mor and McKesson Drug Company
****21.1 List of Subsidiaries
23 Independent Auditors' Consent
27 Financial Data Schedule
- ----------------------------------------------------------------- * Previously filed in connection with the filing of Phar-Mor's Form 10, on October 23, 1995
** Previously filed in connection with the filing of Phar-Mor's quarterly report on Form 10-Q, on May 1, 1998
*** Previously filed in connection with the filing of Phar-Mor's annual report on Form 10-K405, on September 25, 1998
**** Previously filed in connection with the filing of Phar-Mor's quarterly report on Form 10-Q, on November 2, 1998
***** Previously filed in connection with the filing of Phar-Mor's annual report on Form 10-K405, on September 29, 1999
****** Previously filed in connection with the filing of Phar-Mor's quarterly report on Form 10-Q, on February 7, 2000
PHAR-MOR, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT F - 2
CONSOLIDATED BALANCE SHEETS AS OF JULY 1, 2000 AND JULY 3, 1999 F - 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FIFTY-TWO WEEKS ENDED JULY 1, 2000, THE FIFTY-THREE WEEKS ENDED JULY 3, 1999 AND THE FIFTY-TWO WEEKS ENDED JUNE 27, 1998 F - 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE FIFTY-TWO WEEKS ENDED JULY 1, 2000, THE FIFTY- THREE WEEKS ENDED JULY 3, 1999 AND THE FIFTY-TWO WEEKS ENDED JUNE 27, 1998 F - 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FIFTY-TWO WEEKS ENDED JULY 1, 2000, THE FIFTY-THREE WEEKS ENDED JULY 3, 1999 AND THE FIFTY-TWO WEEKS ENDED JUNE 27, 1998 F - 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 7
SCHEDULE II F - 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Phar-Mor, Inc. :
We have audited the accompanying consolidated balance sheets of Phar-Mor, Inc. and subsidiaries (the "Company") as of July 1, 2000 and July 3, 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the fifty-two weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999 and the fifty-two weeks ended June 27, 1998. Our audits also included consolidated financial statement Schedule II, Valuation and Qualifying Accounts. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Phar-Mor, Inc. and subsidiaries as of July 1, 2000 and July 3, 1999 and the results of their operations and their cash flows for the fifty-two weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999 and the fifty-two weeks ended June 27, 1998, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania September 26, 2000
PHAR-MOR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value) - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
PHAR-MOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
PHAR-MOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands) - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
PHAR-MOR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) - --------------------------------------------------------------------------------
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) - -------------------------------------------------------------------------------- 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Fiscal Periods Presented - The accompanying consolidated balance sheets were prepared as of July 1, 2000 and July 3, 1999. The accompanying consolidated statements of operations, changes in stockholders' equity and cash flows were prepared for the fifty-two weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999, and the fifty-two weeks ended June 27, 1998. The Company's year ends on the Saturday closest to June 30.
b. Business - The Company operates a chain of "deep discount" drugstores primarily located in the midwest and along the east coast of the continental United States in which it sells merchandise in various categories. The Company operates in one segment.
c. Principles of Consolidation - The consolidated financial statements include the accounts of Phar-Mor, Inc., its wholly-owned subsidiaries and its majority-owned partnerships. All intercompany accounts and transactions have been eliminated.
d. Cash and Cash Equivalents - The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents.
e. Marketable Securities - Under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," marketable securities are carried at fair market value as trading securities. The cost of the securities sold is determined using the specific identification method. Marketable securities consist primarily of equity instruments of corporations. Unrealized gains (losses) of $419, $(390) and $(1,363) are included in Investment loss in the Consolidated Statements of Operations for the fifty-two weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999 and the fifty-two weeks ended June 27, 1998, respectively.
f. Merchandise Inventories - Merchandise inventories are valued at the lower of first-in, first-out ("FIFO") cost or market.
g. Video Rental Tapes - Videotapes held for rental which are included in inventories, are recorded at cost and are amortized over their estimated economic lives with no provision for salvage value. With respect to "hit" titles for which four or more copies per store are purchased, the fourth and any succeeding copies are amortized over nine months on a straight-line basis. All other video cassette purchases up to three copies per store are amortized over thirty-six months on a straight-line basis.
h. Investments - Investments consist of equity interests in unconsolidated affiliates that do not have readily determinable market values. The Company uses the equity method of accounting for investments ($9,788 at July 1, 2000 and $6,134 at July 3, 1999) in which it has 20% or more interest in voting common stock and the cost method of accounting for investments ($3,894 at July 1, 2000 and $2,180 at July 3, 1999) in which it has less than a 20% interest in voting common stock or investments in preferred stock (see Note 9). During fiscal 2000 the Company recorded a $5,500 investment loss resulting from an other than temporary impairment of a cost basis investment.
i. Investment in Avatex - During the fifty-two weeks ended June 27, 1998, the fifty-three weeks ended July 3, 1999, and the fifty-two weeks ended July 1, 2000, the Company invested $4,000, $1,001, and $5,724 respectively, to purchase approximately 25.2% of Avatex Corporation, formerly known as FoxMeyer Health Corporation ("Avatex"), an affiliate of one of the Company's former largest suppliers and the largest stockholder of the Company (see Note 9). Accordingly, upon attaining a 20% or more interest in Avatex's common stock during the fiscal year ended July 1, 2000, the Company changed its method of accounting for the investment from the cost to the equity basis as required by generally accepted accounting principles. Because Avatex holds an approximate 39% interest in the Company's common stock, the Company treats Avatex's investment in the Company's common stock similar to treasury stock, with a reduction in the number of shares outstanding for calculating earnings per share of 1,207,979. The financial statements of prior years have been restated to reflect the adoption of the equity method in a manner consistent with the accounting for a step-by-step acquisition of Avatex. The effect of the restatement was to increase net
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- income for fiscal 1999 by $2,188, eliminate comprehensive income (loss) for all prior periods and reclassify all of the Company's investment in Avatex common stock prior to fiscal 2000 from Investment in Avatex to equity, through investment in Avatex, in cost of common stock of the Corporation held by Avatex, Inc. on the Condensed Consolidated Balance Sheets.
The Company's investment in Avatex includes the unamortized excess of the Company's investment over its equity in Avatex's net assets. This excess was $3,628 and is being amortized on a straight-line basis over 20 years.
j. Deferred Debt Expense - Deferred debt expense is included in other assets and is amortized on a straight-line basis over the term of the related debt.
k. Goodwill - Goodwill is amortized on a straight-line basis over its estimated useful life, which ranges between 25 and 40 years and is net of accumulated amortization of $962 and $318 at July 1, 2000 and July 3, 1999, respectively.
l. Purchased Pharmacy Files - Purchased pharmacy files are included in other assets and are recorded at fair value and amortized over their estimated useful lives, which range between 3 and 10 years.
m. Pre-Opening Costs - Expenses incurred for new stores prior to their opening are expensed as incurred.
n. Property and Equipment - The Company's policy is to record property and equipment (including leasehold improvements) at cost. Depreciation is recorded on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the estimated useful lives of the improvements or the lives of the leases, whichever is shorter. The Company capitalizes the costs of software and software upgrades purchased for use in its operations. The Company capitalizes the internal costs of software developed or modified for use in its operations. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized and depreciated over the remaining estimated useful life of the asset.
o. Leased Property Under Capital Leases - The Company accounts for capital leases, which transfer substantially all of the benefits and risks incident to the ownership of property to the Company, as the acquisition of an asset and the incurrence of an obligation. Under this method of accounting the cost of the leased asset is amortized principally using the straight-line method over its estimated useful life, and the obligation, including interest thereon, is liquidated over the life of the lease.
p. Operating Leases and Deferred Rent - Operating leases are accounted for on the straight-line method over the lease term. Deferred rent represents the difference between rents paid and the amounts expensed for operating leases.
q. Unfavorable Lease Liability - The unfavorable lease liability represents the excess of the present value of the liability related to lease commitments over the present value of market rate rents. This liability will be amortized as a reduction of rent expense over the remaining lease terms. The amounts were recorded as part of fresh-start reporting in conjunction with a Chapter 11 Bankruptcy proceeding in which the Company emerged from Chapter 11 on September 11, 1995, and related to purchase accounting for an acquisition.
r. Self Insurance Reserves - The Company is generally self-insured for losses and liabilities related primarily to workers' compensation and comprehensive general and product liability. Losses are accrued based upon the Company's estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on Company experience.
s. Income Taxes - The Company accounts for income taxes using the provisions of SFAS No. 109, "Accounting for Income Taxes".
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- t. Stock Based Compensation - The Company applies the provisions of APB No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation arrangements.
u. Revenue Recognition - Sales are recognized on merchandise inventories sold upon receipt by the customer and are recorded net of returns.
v. Reclassifications - Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation.
w. Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
x. Recent Accounting Pronouncements - In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value, with the potential effect on operations dependent upon certain conditions being met. SFAS No. 133 (as amended by SFAS No. 137) is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management does not believe that the adoption of SFAS No. 133 will have a material impact on its financial position or results of operations.
In November 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition". This Bulletin sets forth the SEC Staff's position regarding the point at which it is appropriate for a Registrant to recognize revenue. The Staff believes that revenue is realizable and earned when all of the following criteria are met:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or service has been rendered;
- The seller's price to the buyer is fixed or determinable; and
- Collectibility is reasonably assured.
The Company uses the above criteria to determine whether revenue can be recognized, and therefore believes that the issuance of SAB 101 does not have a material impact on the Company's financial statements.
y. Advertising Costs - Advertising costs are expensed when incurred. Advertising expenses for the fifty-two weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999 and the fifty-two weeks ended June 27, 1998 were $22,827, $19,392 and $23,381, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - --------------------------------------------------------------------------------
2. ACCOUNTS RECEIVABLE
The video rental tape inventory is net of accumulated amortization of $3,832 and $7,526 at July 1, 2000 and July 3, 1999, respectively.
4. PROPERTY AND EQUIPMENT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- 5. OTHER ASSETS
Deferred debt expense, liquor licenses and purchased pharmacy files are net of accumulated amortization of $1,430 and $1,315, at July 1, 2000 and July 3, 1999, respectively. The deferred debt expense consists of debt origination costs associated with the credit facility (See Note 6).
6. REVOLVING CREDIT FACILITIES
On September 10, 1999, the Company entered into an Amended and Restated Revolving Credit Facility (the "Amended Revolving Credit Facility") with BankAmerica Business Credit, Inc. ("BABC"), as agent, and other financial institutions that established a credit facility in the maximum amount of $100,000.
Borrowings under the Amended Revolving Credit Facility may be used for working capital needs and general corporate purposes. Up to $50,000 of the facility at any time may be used for standby and documentary letters of credit. The Facility includes restrictions on, among other things, additional debt, investments, dividends and other distributions, mergers and acquisitions. The facility contains no other financial covenants.
Credit availability under the Amended Revolving Credit Facility at any time is the lesser of the Aggregate Availability (as defined in the Facility) or $100,000. Availability under the Facility, after subtracting outstanding letters of credit, was $34,633 at July 1, 2000. The Amended Revolving Credit Facility establishes a first priority lien and security interest in the current assets of the Company, including, among other items, cash, accounts receivable and inventory.
Advances made under the Amended Revolving Credit Facility bear interest at the BankAmerica reference rate plus 1/2% or LIBOR plus 2.00% from January 1 to June 30 each year and the BankAmerica Reference rate plus 3/4% or LIBOR plus 2.25% from July 1 to December 31 each year. Under the terms of the Amended Revolving Credit Facility, the Company is required to pay a commitment fee of between 0.25% and 0.35% per annum on the unused portion of the facility, letter of credit fees and certain other fees.
At July 1, 2000 the BankAmerica reference rate (prime rate) was 9.5% and the LIBOR rate was 6.42%.
At July 1, 2000 there were letters of credit in the amount of $5,084 outstanding under the Amended Revolving Credit Facility.
The Amended Revolving Credit Facility expires on March 14, 2002.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - --------------------------------------------------------------------------------
7. LONG-TERM DEBT
The composition of the debt obligations included on the consolidated balance sheets is as follows:
The Company must offer to purchase the senior unsecured notes at a price equal to 101% of the principal amount upon the occurrence of a change in control. The senior notes contain restrictions on, among other things, incurrence of debt, payment of dividends and repurchases of common stock. During fiscal 2000, the Company recognized an extraordinary gain of $1,117 in connection with the retirement of $10,149 of senior unsecured notes.
The Company has mortgage notes and bonds payable collateralized by real estate with an aggregate net book value of $3,853 and $4,038 at July 1, 2000 and July 3, 1999, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - --------------------------------------------------------------------------------
Future maturities of long-term debt subsequent to July 1, 2000 are summarized as follows:
2001 $ 1,964 2002 63,597 2003 82,801 2004 554 2005 365 Thereafter 5,093 -------- $154,374 ========
8. LEASES
The Company leases its retail store properties, certain warehouse facilities and certain equipment under capital and operating leases. Generally, leases are net leases that require the payment of executory expenses such as real estate taxes, insurance, maintenance and other operating costs, in addition to minimum rentals. The initial terms of the leases range from three to twenty-five years and generally provide for renewal options.
Minimum annual rentals for all capital and operating leases having initial noncancelable lease terms in excess of one year at July 1, 2000 are as follows:
Capital Operating Leases Leases ------ ------
2001 $ 5,919 $ 42,816 2002 5,220 40,784 2003 3,388 36,753 2004 2,033 31,097 2005 2,055 26,832 Thereafter 6,394 103,775 ----- -------
Total minimum lease payments 25,009 $282,057 ======= Less amounts representing interest 5,028 ------- Present value of minimum lease payments 19,981 Less current portion 4,535 ------- Long-term capital lease obligations $15,446 =======
The operating leases on substantially all store properties provide for additional rentals when sales exceed specified levels and contain escalation clauses. Rent expense for the fifty-two weeks ended July 1, 2000, fifty-three weeks ended July 3, 1999, and the fifty-two weeks ended June 27, 1998 was $43,730, $37,306, and $31,921 respectively, including $206, $223, and $123 of additional rentals.
9. TRANSACTIONS WITH RELATED PARTIES
From September 11, 1995 to September 19, 1997, Hamilton Morgan LLC ("Hamilton Morgan") beneficially owned approximately 39.9% of the Company's common stock. During this period, (a) Avatex owned 69.8% of Hamilton Morgan, and Abbey J. Butler and Melvyn J. Estrin, Avatex's Co-Chairmen of the Board and Co-Chief Executive Officers, served as directors of the Company, and (b) Robert Haft owned 30.2% of Hamilton Morgan and served as Hamilton Morgan's President and the Company's Chairman of the Board and Chief Executive Officer. On September 19, 1997, under the terms of an agreement between Hamilton Morgan, Robert Haft and Avatex (the "Hamilton Morgan Agreement"), Avatex acquired the 3,750,000 shares of the Company's common stock previously owned by Hamilton Morgan in exchange for (i) the redemption of Avatex's membership interest in Hamilton
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- Morgan, (ii) the satisfaction of a certain promissory note from Hamilton Morgan to Avatex and (iii) the transfer of certain other assets from Avatex to Hamilton Morgan. Avatex now beneficially owns approximately 39.1% of the Company's common stock.
In conjunction with the Hamilton Morgan Agreement, the Company entered into a Severance Agreement with Robert Haft whereby he resigned his positions as Chairman of the Board of Directors and Chief Executive Officer and received a lump sum cash payment of $4,417. Under the terms of the Severance Agreement, the Company will continue to provide benefits to him through September 19, 2000. He is indemnified and entitled to tax reimbursement in respect to any payments that constitute excess parachute payments under Federal Income Tax laws. The Company is obligated to provide a letter of credit in the amount of approximately $2,900 to secure its contractual obligations under the Severance Agreement.
In March 1998 and December 1998, 13 persons and entities purchased (or committed to purchase) a total of $7,200 of Series A membership interests in Chemlink Acquisition Company, LLC, which in turn purchased a total of 50% of the membership interests in Chemlink Laboratories, LLC. These persons and entities included the Company; Avatex; two of the Company's executive officers, Abbey J. Butler and Melvyn J. Estrin (and/or their designees); one Avatex officer, Edward L. Massman; one non-officer director of Avatex; and five additional parties related to, or referred to by, Abbey J. Butler or Melvyn J. Estrin. Of the total amount invested, the Company's share was approximately 35.8%, Avatex's share was approximately 41.1%, the Avatex officers/designees' share (including Messrs. Butler and Estrin) was approximately 14.4%, the Avatex non-officer director's share was approximately 0.7%, and the related parties' share was approximately 8.0%. The largest share invested by a Company officer or director (or his designee) was approximately 6.1% of the total amount invested. Messrs. Butler, Estrin and Shulman serve on the Board of Managers of Chemlink Laboratories, LLC. The Company accounts for this investment using the equity method of accounting.
In April 1998, 13 persons and entities purchased (or committed to purchase) a total of $3,000 of Series B Non-voting Preferred Stock and warrants to purchase Series B Preferred Stock of RAS Holding Corp. These persons and entities included the Company; Avatex; two of the Company's executive officers, Melvyn J. Estrin and Abbey J. Butler; all of Avatex's executive officers and its Director of Accounting (and/or their designees); one non-officer director of Avatex; and two additional parties related to, or referred to by, Abbey J. Butler or Melvyn J. Estrin. Mr. Butler is also a director of RAS Holding Corp. Of the total amount invested, Avatex's share was approximately 46.7%, the Company's share was 25%, the Avatex officers/designees' share was 19.8%, the Avatex non-officer director's share was 1% and the related parties' share was approximately 7.5%. The largest share invested by an officer or director of the Company (or his designee) was 5% of the total amount invested. The Company accounts for this investment using the cost method of accounting.
In April 1998, the Company and Avatex each purchased $1,250 of preferred stock of HPD Holdings Corp. ("HPD") in connection with the acquisition by a HPD subsidiary of certain of the assets of Block Drug Company, Inc. ("Block") used in or related to the manufacture, sale or distribution of Block's household product lines. In addition, the Company and Avatex each acquired 2.5% of the common stock of HPD as part of the transaction. The largest shareholder of HPD is HPD Partners, LP, a Delaware limited partnership and Abbey J. Butler and Melvyn J. Estrin are limited partners of HPD Partners, LP and directors of HPD Laboratories, Inc., a wholly owned subsidiary of HPD. The Company accounts for this investment using the cost method of accounting.
The Company paid $95 and $77 to Human Service Group, Inc. during Fiscal Year 2000 and 1999, respectively, for secretarial services provided to Mr. Estrin. Human Service Group, Inc. is a corporation wholly owned by Mr. Estrin.
The Company purchased $319 and $314 of product from AM Cosmetics, Inc. during Fiscal Year 1999 and 1998, respectively. Mr. Butler and Mr. Estrin were directors of AM Cosmetics, Inc. until September, 1998.
The Company purchased $20 and $241 of product from Carson Products, a subsidiary of Carson, Inc. during Fiscal Year 1999 and 1998, respectively. Mr. Butler and Mr. Estrin are directors of Carson, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- The Company paid CB Equities Corporation $67, $74 and $52, during Fiscal Year 2000, 1999 and 1998, respectively, for office and equipment support for Mr. Butler. Mr. Butler is President of CB Equities Corporation.
10. WARRANTS AND OPTIONS
Warrants --------
There are warrants to purchase an aggregate of 1,250,000 of the Company's common shares outstanding as of July 1, 2000. Each warrant entitles the holder thereof to acquire one common share at a price of $13.50, subject to certain adjustments. The warrants are exercisable at any time until the close of business on September 10, 2002. As of July 1, 2000, no warrants had been exercised.
Stock Options -------------
The Company has an incentive stock option plan for officers and key employees which allows for the issuance of a maximum of 3,850,000 options. As of July 1, 2000, options for 155,367 common shares were reserved for future grant, and options for 3,694,633 shares were outstanding and are exercisable upon vesting. Under the terms of the option plan, all options have a seven-year term from date of grant. Generally, the options granted vest with respect to 20% or 33 1/3% of the underlying shares on the grant date, and will vest in additional increments of 20% or 33 1/3% of the underlying shares on each of the subsequent anniversaries of the grant date until 100% vested. To the extent then vested, the options are generally exercisable within one year following the death or disability of the holder of the option, and within six months of any termination event, except where a termination is for cause, in which case the option will then terminate. To the extent then not vested, the options generally will terminate upon the holders' death, disability or termination of employment. The employment agreements of certain executive officers provide for accelerated vesting of options upon specified termination events.
The Company has a stock option plan for directors. Before October 1, 1997, each director received an annual grant of an option to purchase 5,000 shares of Common Stock. Commencing with the grant on October 1, 1997, each director now receives an annual grant of an option to purchase 10,000 shares of Common Stock. The options vest immediately, expire five years after the grant date and are exercisable at an exercise price equal to the market price on the grant date. A maximum of 500,000 common shares may be granted under the stock option plan for directors. As of July 1, 2000, options for 235,000 shares were outstanding.
Each director may also elect to receive common stock, in lieu of all or portions of the director's annual retainer at a price equal to the market price as of October 1 of the year of the election.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- The Company applies APB No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation. Accordingly, for the fifty-two weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999, and the fifty-two weeks ended June 27, 1998, the Company recognized $95, $704, and $1,401 respectively, in compensation cost for the Company's stock option plans in the accompanying consolidated financial statements. Had compensation cost for the Company's plans been determined based on the fair value at the grant date instead of the intrinsic value method described above, the Company's net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below.
The fair value of each option has been estimated on the date of grant using the Black-Scholes options pricing model with the following assumptions for the periods presented: expected volatility of 30%; no dividend yield; expected life of 7 years; and a risk-free interest rate of 6.5%.
All of the Company's stock option plans are administered by the Compensation Committee of the Company's Board of Directors.
As of July 1, 2000, 3,527,968 options were exercisable at a weighted average exercise price per share of $6.79.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- The following table summarizes stock option activity under the plans:
On February 17, 1998, the Company granted options to purchase 375,000 shares at $5.4375 and options to purchase 400,000 shares at $6.84375. These options were issued at exercise prices below the market price of $9.6875 on this date. All of the remaining options were granted at the market price on the date of the grant. On April 13, 2000, the Company repriced options to purchase 93,600 shares from the original grant price of $9.625 and options to purchase 30,000 shares with an original grant price of $7.375 to $2.51625 per share.
The following table stratifies the options as of July 1, 2000:
EMPLOYEE STOCK PURCHASE PLAN ----------------------------
The Company sponsors an Employee Stock Purchase Plan ("ESPP") under which it is authorized to issue up to 500,000 shares of common stock to all employees with a minimum of three months of service. The ESPP allows eligible employees to contribute through payroll deductions up to 10% of their annual salary toward stock purchases. Stock purchases will be made quarterly at 90% of the closing price at the last day of any calendar quarter.
11. INCOME TAXES
Deferred income taxes at July 1, 2000 and July 3, 1999, reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are recognized to the extent that realization of such benefits is more likely than not.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- Changes in tax rates or laws will result in adjustments to the recorded deferred tax assets or liabilities in the period that the change is enacted.
The components of deferred tax assets and liabilities are as follows:
Deferred tax assets, arising both from future deductible temporary differences and net operating losses ("NOLs"), have been reduced by a valuation allowance to an amount more likely than not to be realized through the future reversal of existing taxable temporary differences. Any future reversal of the valuation allowance existing at the effective date of the Company's plan of reorganization to increase the net deferred tax asset will be added to additional paid-in capital.
There is no current income tax provision in fiscal 2000, 1999 or 1998 and a deferred tax provision in fiscal 1999 totaling $205. A reconciliation of the total tax provision with the amount computed by applying the statutory federal income tax rate to (loss) income before taxes is as follows:
The Company has approximately $378,000 of tax basis NOLs available to offset future taxable income. Approximately $347,000 of this amount ("Section 382 NOLs") is subject to restrictions enacted in the Internal Revenue Code of 1986, as amended, dealing specifically with stock ownership changes and debt cancellations that occurred in connection with the Company's emergence from bankruptcy. Additional restrictions imposed by Internal Revenue Code Section 382 (I)(6), and the regulations thereunder, could further limit the Company's ability to use its Section 382 NOLs to offset future income to an amount approximating $5,500 annually. The remaining $31,000 of NOLs were incurred subsequent to September 2, 1995, and may be used to offset future taxable income without restriction. The NOLs will expire beginning in 2008.
The Company also has $4,432 of federal targeted jobs tax credit carryovers, which will expire beginning in 2001.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- The Internal Revenue Service has completed its field examination of the Company's federal income tax returns for all years to and including June 1992.
12. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans --------------------------
The Company has defined contribution employee savings plans covering employees who meet the eligibility requirements as described in the plans. The Company contributes to the union employee savings plan an amount equal to 25% of an employee's contribution up to a maximum of 4% of the employee's compensation. The Company contributes to the nonunion employee savings plan an amount equal to 100% of the employee's contribution up to 2% of the employee's pay and a minimum of 20% of the employee's contribution in excess of 2% up to 4% of employee's pay based on the Company's financial performance. The Company contributes to the Pharmhouse Corp. employee savings plan an amount equal to 100% of the employee's contribution up to one dollar of an employee's pay each week and 25% of the employee's contribution in excess of one dollar each week up to 3% of employee's pay. Employee savings plan expenses for the fifty-two weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999 and the fifty-two weeks ended June 27, 1998, were $1,214, $1,087 and $1,009, respectively.
Health and Welfare Plans ------------------------
The Company also contributes to a multiemployer union sponsored health and welfare plan covering truck drivers and warehouse personnel. Total expenses for the fifty-two weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999, and the fifty-two weeks ended June 27, 1998, were $2,343, $2,050 and $1,858, respectively.
The Company has no postretirement health and welfare or benefits programs.
Defined Benefit Plans ---------------------
The Company provides pension benefits under noncontributory defined benefit pension plans to its union employees who have met the applicable age and service requirements specified in the plans.
Benefits are earned on the basis of credited service and average compensation over a period of years. Vesting occurs after five years of service as specified under the plans. The Company makes contributions to the plans as necessary to satisfy the minimum funding requirement of ERISA.
The Company provided pension benefits under noncontributory defined benefit pension plans to its non-union employees who had met the applicable age and service requirements specified in the plans. During fiscal 1996 the Company's Board of Directors voted to freeze the benefits accruing under its defined benefit plan that covers non-union personnel effective June 29, 1996 and to increase the Company's matching contribution to the defined contribution plan for those employees. The Company terminated its defined benefit plan that covers non-union personnel on April 30, 1998. Lump sum cash payments were made to the majority of plan participants prior to June 27, 1998. Annuities were purchased for the remaining participants during the fifty-three weeks ended July 3, 1999.
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- The projected benefit obligation, the accumulated benefit obligation, and the fair value of plan assets for the pension plan with the accumulated benefit obligations in excess of plan assets were $68, $51, and $30, respectively, as of July 1, 2000 and $58, $44, and $22, respectively, as of July 3, 1999.
13. REORGANIZATION ITEMS AND RELATED RESERVES
In August 1995 management identified 50 stores which were scheduled to be reduced in size (rightsized) and provided for the cost of rightsizing and provided a markdown reserve for the inventories which would be liquidated in the affected stores. In 1997, the rightsizing program was replaced with the "Super Phar-Mor" concept. The "Super Phar-Mor" concept involves liquidating slow-moving merchandise and utilizes the excess space to expand the existing grocery offering and adds frozen and refrigerated food.
In March 1999, the Company recorded a reserve of approximately $800 in purchase accounting related to the planned closure of a distribution facility acquired as part of the Pharmhouse acquisition (see note 18).
The activity in the reserve for costs of downsizing is as follows:
The remainder of the reserve for the costs of downsizing at July 1, 2000 is considered by management to be a reasonable estimate of the costs to be incurred related to the Pharmhouse acquisition.
14. FINANCIAL INSTRUMENTS
The Company has financial instruments which include marketable securities, investments and long-term debt. The carrying values of these instruments at July 1, 2000 approximated their fair market value except for the senior unsecured notes. The estimated fair value of the senior unsecured notes is $51,227 at July 1, 2000.
The fair values of the instruments were based upon quoted market prices of the same or similar instruments or on the rate available to the Company for instruments of the same maturities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - --------------------------------------------------------------------------------
16. (LOSS) INCOME PER SHARE
Basic earnings per share is computed by dividing net income (loss) by the average number of common shares outstanding during the period. The diluted earnings (loss) per share calculation assumes the conversion of dilutive stock options and warrants into common shares. The earnings per share calculations for all periods are as follows:
There were 4,346,300, 2,782,934 and 2,616,167 options for the fifty-two weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999, and the fifty-two weeks ended June 27, 1998, respectively, and 1,250,000 warrants for the fifty-two weeks ended July 1, 2000, the fifty-three weeks ended July 3, 1999 and the fifty-two weeks ended June 27, 1998 excluded from the calculation of diluted (loss) income per share as they would have had an anti-dilutive effect on (loss) income per share.
17. LITIGATION
The Company and its subsidiaries are involved in legal proceedings, claims and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such current legal proceedings, claims and litigation will not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
18. BUSINESS COMBINATIONS
On March 15, 1999, the Company completed the merger of its wholly owned subsidiary Pharmacy Acquisition Corp. ("PAC") with and into Pharmhouse Corp. ("Pharmhouse"), pursuant to the Agreement and Plan of Merger dated as of December 17, 1998 among Phar-Mor, PAC and Pharmhouse (the "Merger Agreement"). As a result of the merger Pharmhouse became a wholly owned subsidiary of Phar-Mor. In addition, subject to the terms of the Merger Agreement, each share of the common stock of Pharmhouse was converted into the right to receive $2.88 per share in cash (the "Merger"). The total purchase price payable in connection with the Merger was approximately $34,200, consisting of $7,500 in cash and the assumption of $26,700 in debt.
Phar-Mor and PAC financed the payment of the purchase price and all other fees and expenses associated with the Merger through cash from operations and from borrowings under the Company's Amended Revolving Credit Facility.
The Company used its excess cash position and excess availability under its Amended Revolving Credit Facility to pay off $26,700 in debt that was assumed as part of the merger with Pharmhouse.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts, continued) - -------------------------------------------------------------------------------- The Merger was accounted for under the purchase method of accounting. The results of operations of Pharmhouse from March 16, 1999 through July 3, 1999 have been included in the Consolidated Statements of Operations for the fifty-three weeks ended July 3, 1999. The total purchase price payable in connection with the Merger was approximately $34,200, consisting of $7,500 in cash and the assumption of $26,700 in debt. Goodwill is being amortized using the straight-line method over a period of 25 years. The fair value of the assets acquired and liabilities assumed was as follows:
Identifiable assets acquired $54,962 Liabilities assumed (61,954) Goodwill 14,866 ------- Cash paid $7,874 =======
The following supplemental pro forma information is presented as though the companies combined at the beginning of the respective periods:
Pharmhouse operated 32 discount drug stores in eight mid-Atlantic and New England states under the names "Pharmhouse" and "Rx Place".
19. EQUITY BASIS INVESTMENTS
Summarized financial information for the Company's equity basis investments in associated companies, combined, was as follows for fiscal 2000:
Income Statement Information: Revenue $ 0 Net Income 27,767
Balance Sheet Information: Assets $ 133,347 Liabilities 48,492