ITEM 1. BUSINESS
INTRODUCTION
Phar-Mor, Inc., a Pennsylvania corporation ("Phar-Mor" or the "Company"), operated 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, seasonal and other general merchandise. As of June 29, 2002, the Company operated 73 stores in 8 states under the names of Phar-Mor, Rx Place and Pharmhouse. The Company has since closed all of its stores as of September 10, 2002 and ceased continuing operations. The Company continues to liquidate its remaining assets and certain bankruptcy court-required financial reports have been filed with the Securities and Exchange Commission ("SEC"). 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 June 29, 2002.
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 SEC.
Following the Company's Chapter 11 bankruptcy filing on September 24, 2001, the Nasdaq Stock Market immediately suspended trading in the Company's securities. On October 2, 2001, the NASDAQ notified the Company that as a result of the Company's bankruptcy it was delisting the Company's securities from the NASDAQ as of October 10, 2001, subject to the Company's right of appeal. The Company has determined not to appeal the NASDAQ'S decision.
On March 27, 2002, the Bankruptcy Court, pursuant to the Company's Motion, issued an Order Enjoining the Transfer of Certain Stock in the Debtors Until Confirmation of the Plan of Reorganization on or after March 27, 2002. Copies of such Motion and Order were mailed to the shareholders of record on February 28, 2002 and March 29, 2002, respectively.
BANKRUPTCY
On September 24, 2001, the Company and certain of its affiliates filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code to restructure their operations in an effort to return to profitability. On that same date, the Company secured a $135 million Debtor-In-Possession Revolving Credit Facility (the "DIP Credit Facility") financing through Fleet Retail Finance, the Company's principal secured lender, which was used to fund the Company's operations through its attempted reorganization process.
Management determined that the reorganization was necessary to rectify operational and liquidity difficulties resulting from the slowing economy, changes in consumer buying habits, increased competition from larger retail chains, the geographic diversity of some Phar-Mor locations, the reduction of credit terms by vendors and the service of high-cost debt. See related discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations.
Phar-Mor closed 65 of its 139 stores in November of 2001 after identifying these stores as either under-performing or outside the Company's core markets. The Company focused on continuing operations on the 74 remaining stores, while reducing corporate overhead and attempting to solidify its position in the markets it served. Based on continued losses, the Company and its Official Committee of General Unsecured Creditors determined in June 2002 that a sale or liquidation of the Company was in the best interest of all creditors and shareholders.
On July 18, 2002, the Company entered into an Agency Agreement for the sale of substantially all of its inventory, pharmacy prescription files and fixed assets with a joint venture comprised of Hilco Merchant Resources, LLC and the Ozer Group, LLC. The joint venture was the highest bidder at a bankruptcy-court-
approved auction held on July 16, 2002. The Agency Agreement was subsequently approved by the Bankruptcy Court and the Company is currently liquidating all of its remaining assets.
OPERATIONS
The Company no longer has any continuing operations. In November 2001, 65 stores were closed and the remaining stores closed by September 10, 2002.
Typically, stores were open 95 hours per week; pharmacies were typically open 77 hours per week. The average store had approximately 50 employees, including a store manager and department managers, a pharmacy manager and pharmacists, and office and cashier supervision. Overall, the Company had 3,580 employees at June 29, 2002. Approximately 195 warehouse and distribution center employees in Youngstown were members of the Teamsters Union under a contract which expires March 2, 2003. Thirty-four employees at the Company's Niles, Ohio store were members of the United Food and Commercial Workers Union under a contract which expires October 12, 2003. The Company's relationship with its union employees was good.
The Company was committed to customer service and encouraged employees to be responsive to customer needs and concerns. The remerchandising and remodeling of stores (discussed below) was designed to make the customer's shopping experience easier and more enjoyable. The number of open checkout lanes was closely monitored to facilitate the efficient and comfortable checkout of customers. These philosophies were regularly communicated and reinforced by the Company to its employees.
Thorough education and training in store operations was provided to employees at every level. Computer-based training, on and off-site training, video training and teleconferences were a few of the training methods used. The Company believed that such training enabled efficiency, understanding and responsiveness within store operations.
The typical trade area for a Company store included approximately 105,000 people in 41,000 households within a radius of between five and seven miles. On average during the fiscal year ended June 29, 2002 ("Fiscal Year 2002"), each store served approximately 8,500 customers per week. The Company's customers were 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 had children 17 years old and under.
Company stores accepted 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 were centrally directed from Phar-Mor's corporate headquarters. The Company purchased 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 32% of the Company's purchases during Fiscal Year 2002. During Fiscal Year 2002, no other single vendor accounted for more than 10% of the Company's purchases. Substantially all of the products the Company sold were purchased from approximately 1,200 outside vendors. Alternative sources of supply were generally available for all products sold by the Company. The Company was heavily dependent on obtaining satisfactory trade payment terms from its vendors as a source of funding its inventory purchases.
MARKETING AND MERCHANDISING
Phar-Mor's overall merchandising strategy was 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 was offered by mass merchant discounters. Phar-Mor's product strategy was 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 featured 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. Phar-Mor was one of the leading retailers of film, vitamins, soft drinks and batteries in the United States.
Ninety-five percent of the Company's advertising was print advertising, through circulars, newspapers, and point of sale materials. Newspaper advertisements and circulars appeared in major newspapers in most market areas. The Company advertised 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" offered a variety of grocery items, including fresh, frozen, and refrigerated foods. The Company incorporated this concept into 40 stores. During the past six fiscal years, 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 included 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 had completed sixteen of the "four-wall" remodel projects.
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 2002, 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, on an annual basis, approximately $5.6 million per store and all other merchandise averaged, on an annual basis, approximately $3.6 million per store. The Company generated approximately $518.6 million in traditional drugstore product revenues and approximately $327.7 million in revenues from the sale of groceries and general merchandise in its stores in Fiscal Year 2002.
Set forth below is the percentage of sales by principal category of products for the last three fiscal years.
The Company's business was seasonal to a certain extent. The highest volume of sales and net income usually occurred in the second fiscal quarter (generally October, November and December) due to seasonal sales for the Christmas holiday for greeting cards, general merchandise and grocery products. The following table summarizes the Company's sales by quarter during Fiscal Year 2002, which sales were impacted by the closing of 65 stores in November 2001.
SALES BY QUARTER DURING FISCAL YEAR 2002
Percentage of Total Sales ----------- First Quarter 33.0% Second Quarter 23.6% Third Quarter 21.5% Fourth Quarter 21.9% ------ 100.0% ====== COMPETITION
Phar-Mor's stores competed primarily with conventional drugstores, supermarkets and mass merchant discounters. Many of these companies had greater financial resources than Phar-Mor. Phar-Mor competed with conventional drugstores by offering a broader product selection and generally lower prices than traditional drugstore lines. Phar-Mor believed it had these same competitive advantages against most supermarkets for non-grocery items. Phar-Mor competed with supermarkets in grocery product lines where Phar-Mor did not have a broader selection, by carrying an often changing mix of items priced lower than most supermarkets.
Phar-Mor did 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 offered broader product selection than mass merchant discounters. Mass merchant discounters generally are unwilling to allocate as much display space as Phar-Mor devoted to these categories. The merchandising changes Phar-Mor had implemented, included 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," were designed in part to distinguish Phar-Mor from mass merchant discounters and to increase its strength in areas in which Phar-Mor's management believed such merchants did not excel.
CAPITAL EXPENDITURES
The Company's most significant capital needs were remerchandising and remodeling of existing stores and equipment replacement.
The Company's capital expenditures totaled $2.2 million in Fiscal Year 2002, including $800,000 for remodeling existing stores and $1.4 million for other store improvements and equipment replacement.
REAL ESTATE AND GROWTH
The Company did not open any new stores in Fiscal Year 2002, and ceased continuing operations in September 2002.
TRADEMARKS AND SERVICE MARKS
The Company believed that its registered "Phar-Mor" trademark was well recognized by its customer base and the public at large in the markets where it had been advertised. The Company believed that the existing customer and public recognition of its trademark and related operational philosophy would be beneficial to its strategic plans to expand merchandise categories and add new stores. The Company had also introduced a number of private label brands of products under various registered trademarks and trademarks pending registration.
REGULATION
The Company was subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime, and other working conditions.
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 record keeping and licensing matters with civil and criminal penalties for violations.
ITEM 2.
ITEM 2. PROPERTIES.
As of June 29, 2002, the Company operated 73 stores in 8 states:
Florida 1 Illinois 3 Indiana 2 North Carolina 7 Ohio 11 Pennsylvania 37 Virginia 11 West Virginia 1
All stores were closed by September 10, 2002.
As of June 29, 2002, 72 of the Company's stores were leased. The Company owns the land and building of its former retail store in Winchester, Virginia which property is currently being marketed for sale. All store leases were long-term with the original terms plus options of all but 16 leases expiring after January 2010. Most stores were located adjacent to or near shopping centers or were part of strip centers. Some stores were free standing. Depending on the location of a store, the sites may vary, with averages by type of location as follows: free-standing stores were located on sites averaging 2.84 acres; stores located in strip centers were found on sites averaging 23.7 acres; and stores in malls were on sites averaging 46.8 acres. A proto-typical store included approximately 40,000 square feet of sales space and 10,000 square feet of storage area and ample off-street parking. The stores were designed in a "supermarket" format familiar to customers and shopping was done with carts in wide aisles with attractive displays. Traffic design was intended to enhance the opportunity for impulse purchases.
The Company operated a distribution center in Youngstown, Ohio which was leased. This center delivered approximately 43% of all merchandise to the stores in Fiscal Year 2002, 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. The Company still occupies a portion of this building and has reduced its rental obligation under the lease proportionately.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company was subject to various claims. Any litigation relating to events occurring prior to the bankruptcy filing is being handled in the bankruptcy proceedings and is not material individually or in the aggregate. See Item I., Business-Bankruptcy, above.
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 2002, through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
During the fiscal year ended June 30, 2001 and during Fiscal Year 2002 (through October 10, 2001) the Company's common stock, par value $.01 per share (the "Common Stock"), was included for quotation on the NASDAQ National Market under the symbol "PMOR." Following the Company's Chapter 11 bankruptcy filing on September 24, 2001, the Nasdaq Stock Market immediately suspended trading in the Company's securities. On October 2, 2001, the NASDAQ notified the Company that as a result of the Company's bankruptcy it was delisting the Company's securities from the NASDAQ as of October 10, 2001, subject to the Company's right of appeal. The Company has determined not to appeal the NASDAQ's decision. High and low prices of the Common Stock are shown in the table below:
As of September 16, 2002, there were 2,611 holders of record of the Common Stock. The Company has not declared or paid any cash dividends on the Common Stock and will not pay cash dividends in the foreseeable future. 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."
On March 27, 2002, the Bankruptcy Court, pursuant to the Company's Motion, issued an Order Enjoining the Transfer of Certain Stock in the Debtors until confirmation of the Plan of Reorganization on or after March 27, 2002. Copies of such Motion and Order were mailed to the shareholders of record on February 28, 2002 and March 29, 2002, respectively.
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.
(a) Total assets were valued on a liquidation basis and are not comparable to prior periods. Because of the Company's change to liquidation accounting, no liabilities are reported as long-term. (b) Excludes extraordinary gain of $19.7 million on early retirement of debt and equity in extraordinary item of affiliate of $1.8 million. (c) Excludes extraordinary gain of $1.1 million on early retirement of debt.
(d) Amounts have been restated for the retroactive application of the equity method of accounting for the Company's investment in Avatex Corporation.
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 unaudited consolidated financial statements set forth on pages to, which with respect to the current fiscal year are unaudited. The discussion of liquidity and capital resources is based upon the Company's financial position as of June 29, 2002.
CHAPTER 11 FILING
On September 24, 2001 the Company and eight of its subsidiaries (collectively, the "Debtors") filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the Northern District of Ohio (the "Bankruptcy Court"). The Chapter 11 cases Nos. 01-44007 (REG) through 01-44015 (REG) (the "Chapter 11 Cases") have been consolidated for the purpose of joint administration.
In an attempt to restructure, Phar-Mor closed 65 of its 139 stores in November of 2001. These stores were identified as either under-performing or outside the Company's core markets. On October 3, 2001 the Company sold its pharmacy prescription files for the stores that closed through a court approved auction for $23,475. The Company also sold the pharmacy inventory in the closing stores as part of the pharmacy prescription file sale for $8,619, 100% of cost, and sold the remaining inventory in the closing stores to a liquidator on October 11, 2001 for $30,630, approximately 65% of cost. The Company focused on continuing operations on the 74 remaining stores, while reducing corporate overhead and attempting to solidify its position in the markets it served. Based on continued losses, the Company and its Official Committee of General Unsecured Creditors determined in June 2002 that a sale or liquidation of the Company was in the best interest of all creditors and shareholders.
On July 18, 2002, the Company entered into an Agency Agreement to sell substantially all of the assets of the remaining stores and distribution center to a joint venture comprised of Hilco Merchant Resources, LLC and The Ozer Group, LLC. This agreement was approved by the Bankruptcy Court on July 18, 2002 and the Company then commenced an orderly liquidation of its assets and wind down of its operations, including termination of employees, selling its assets and settling its obligations. The Company's remaining executive officers, management team and personnel are conducting such activities as are necessary for the orderly wind down. The liquidation sales commenced on July 19, 2002 and all stores were closed by September 10, 2002. As a result, the Company has recorded the following adjustments to its balance sheet to write down its assets to expected liquidation value, record lease rejection claims and estimated expenses to be incurred through the liquidation:
Write down accounts receivable to amount expected to be realized in liquidation (5,591) Write down inventory to expected liquidation value (34,304) Write down other assets to expected liquidation value (1,618) Accrue potential lease rejection claims (19,111) Write down property and equipment to liquidation value (42,921) Increase in value of pharmacy files to net realizable value 30,355 Estimated expenses to be incurred through liquidation (19,778)
The valuation of assets and liabilities at their estimated net realizable values and anticipated settlement amounts necessarily requires many estimates and assumptions and there are substantial uncertainties in carrying out the orderly wind down of operations. The actual values and costs are expected to differ from the amounts shown herein and could be higher or lower than the amounts recorded. Therefore, the amount that will be available to satisfy the obligations the Company has to its unsecured creditors is not presently determinable. Any differences in realized values and actual cash transactions will be recognized in the period in which they can be reasonably estimated. Further, it is not possible at this time to determine the timing of any such distribution.
AFTER THE ORDERLY WIND DOWN OF OPERATIONS THERE WILL BE NO CASH TO DISTRIBUTE TO THE COMPANY'S SHAREHOLDERS.
Under its Chapter 11 proceedings, the Company has the right, subject to Court approval, to assume or reject executory contracts and unexpired leases. In this context, "assumption" means that the Company agrees to perform its obligations under the contract or lease but is subject to a claim of damages for the breach thereof. With respect to the orderly wind down of operations, the Company, with Court approval, engaged a third party to market substantially all of its unexpired leases. Those leases which were successfully sold were assigned to and assumed by the purchasing parties, with Court approval. The remaining unexpired leases were rejected and may be subject to a claim of damages for breach thereof.
Until a plan of liquidation is confirmed by the Court and becomes effective, it is not possible to predict with certainty the ultimate recoveries for creditors, or the timing of any such distribution of recoveries. While management currently believes the Company has made adequate provision for the liabilities to be incurred in connection with Chapter 11 claims, there can be no assurance as to the final amount of such liabilities or the final impact on such liabilities of a confirmed plan of liquidation. As of October 9, 2002, no plan of reorganization or liquidation had been submitted to the Court. Substantially all of the Company's pre-petition liabilities are subject to compromise under the bankruptcy proceedings.
As of September 10, 2002, all merchantable inventory, pharmacy prescription files, fixtures and equipment in the Company's store locations had been sold.
RESULTS OF OPERATIONS
DISCONTINUATION OF OPERATIONS
As previously discussed, the Company is currently in the process of effecting an orderly wind down of operations. Based on its continued losses, management of the Company advised the Company's Board of Directors and Official Committee of General Unsecured Creditors in June 2002 that management believed that liquidation would provide the best means to recover amounts due to the Company's creditors.
The Company adopted the liquidation basis of accounting at the end of its fiscal year, June 29, 2002. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. The valuation of assets and liabilities at their estimated net realizable values and anticipated settlement amounts necessarily requires many estimates and assumptions and there are substantial uncertainties in carrying out the orderly wind down of operations. The actual values and costs are dependent upon a variety of factors, including, without limitation, the actual proceeds realizable from the sale of the Company's assets, the ultimate settlement amounts of the Company's liabilities and obligations, actual costs incurred in connection with the orderly wind down of operations and administrative costs during the liquidation period, the timing of the potential filing and confirmation of a liquidating Chapter 11 plan and the timing of any distributions to creditors. Consequently, the actual values and costs are expected to differ from the amounts shown herein and could be higher or lower than the amounts recorded.
The Company has not yet filed a liquidating Chapter 11 plan with the Court but intends to file such plan by the end of October 2002. Once a liquidating Chapter 11 plan has been finalized and filed with the Court, the plan must be submitted to a vote of the Company's creditors for their approval and confirmed by the Court. There can be no assurance that a liquidating Chapter 11 plan filed by the Company will receive the requisite votes or confirmation. Until a liquidating Chapter 11 plan has been confirmed, the liquidation has been completed and all claims against the Company fixed, the Company is not able to determine or predict the amount that will be available to pay its prepetition creditors. As a result of these filings, actions to collect pre-petition indebtedness are stayed and other contractual obligations against the Debtors may not be enforceable. In addition, under the Bankruptcy Code, the Debtors may assume or reject executory contracts, including real estate leases, employment contracts, personal property leases, service contracts and other unexpired executory pre-petition contracts, subject to Bankruptcy Court approval. Parties affected by these rejections may file claims with the Bankruptcy Court in accordance with the Bankruptcy Code. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from the filing of claims for all contracts that may be rejected. Substantially all pre-petition
liabilities are subject to settlement under a plan of reorganization to be voted on by the creditors and equity holders and approved by the Bankruptcy Court.
Schedules have been filed with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the filing date as shown by the Company's accounting records. Differences between amounts shown by the Company and claims filed by creditors will be investigated and, if necessary, unresolved disputes will be determined by the Bankruptcy Court. The ultimate settlement terms for such liabilities are subject to a plan of reorganization, and accordingly, are not presently determinable.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements in this report contain "forward-looking" information that involves risk and uncertainty, including the timeframe for filing a plan of liquidation. This forward-looking information is based upon a number of assumptions including assumptions relating to our negotiations with creditors, a plan of liquidation will be timely proposed or consummated and general economic conditions.
RESULTS OF OPERATIONS
The following table sets forth the number of retail stores operated each fiscal year:
52 WEEKS ENDED JUNE 29, 2002 (FISCAL YEAR 2002) COMPARED TO THE 52 WEEKS ENDED JUNE 30, 2001 (FISCAL YEAR 2001) (ALL DOLLAR AMOUNTS IN THOUSANDS) (GOING CONCERN BASIS)
Fiscal Year 2002 sales decreased $394,649 or 31.8% from Fiscal Year 2001. The decrease in Fiscal Year 2002 sales was primarily due to the closing of 66 stores during the year and a comparable store sales decrease of 9.3%. The comparable store sales decrease was primarily due to the Company's bankruptcy filing on September 24, 2001.
Gross profit for Fiscal Year 2002 was 1.93% of sales lower than for Fiscal Year 2001 primarily due to a 1.16% of sales decrease in product gross margins and a 1.23% of sales decrease in vendor promotional allowances
and rebates partially offset by a 0.47% of sales decrease in inventory shrink expense. The reduced product gross margins and vendor rebates were primarily due to reduced vendor support due to the Company's bankruptcy filing.
Selling, general and administrative expenses increased 1.25% of sales in Fiscal Year 2002 over Fiscal Year 2001 primarily due to a 0.55% of sales increase in store wage costs, a 0.49% of sales increase in advertising expense and a 0.31% increase in corporate overhead costs. The increases as a percentage of sales were due to the lower levels of sales in Fiscal Year 2002.
Impairment of long-lived assets in Fiscal 2001 resulted from the write-down of goodwill and fixed assets in stores that had current year operating losses and are projected to have future losses.
Net interest income and investment income (loss) increased $3,696 to income of $648 in fiscal year 2002 from a loss of $3,048 in fiscal year 2001. The increase was primarily the result of interest income of $708 primarily from a personal property tax refund and reduced investment losses.
In Fiscal Year 2002 the Company recorded a provision for reorganization items that were directly associated with the Company's Chapter 11 reorganization proceedings and the resulting restructuring of its operations. The reorganization provision consisted of the following:
The Company had a decrease in equity in loss of affiliates of $2,855 in fiscal year 2002 from fiscal year 2001, primarily due to an other than temporary impairment of the Company's investment in Avatex Corporation that was recorded in Fiscal Year 2001.
The income tax provision is the result of the write-off of the net deferred tax asset in Fiscal Year 2001.
The Company repurchased $40,001 of its 11.72% senior notes during Fiscal Year 2001 at a discount resulting in a extraordinary gain of $19,731 and Avatex recognized an extraordinary gain related to the extinguishment of debt for which Phar-Mor's portion was $1,824.
52 WEEKS ENDED JUNE 30, 2001 (FISCAL YEAR 2001) COMPARED TO THE 52 WEEKS ENDED JULY 1, 2000 (FISCAL YEAR 2000) (ALL DOLLAR AMOUNTS IN THOUSANDS)
Fiscal Year 2001 sales decreased $51,078 or 3.9% from Fiscal Year 2000. The decrease in Fiscal Year 2001 sales was primarily due to a comparable store sales decrease of 3.9%. The comparable store sales decrease was primarily due to a 8.2% comparable store front end sales decrease partially offset by a 5.6% comparable store pharmacy sales increase.
Gross profit for Fiscal Year 2001 was 1.55% of sales lower than for Fiscal Year 2000 primarily due to a 0.41% of sales decrease in product gross margins, a 0.45% of sales increase in inventory shrink expense, a 0.40% of sales decrease in vendor promotional allowances and rebates and higher occupancy costs as a percentage of sales. Vendor promotional allowances and rebates were higher in Fiscal 2000 primarily due to the receipt of new store merchandise allowances for the Pharmhouse stores. Occupancy costs increased as a percentage of sales primarily due to the decrease in sales.
Selling, general and administrative expenses increased 0.01% of sales in Fiscal Year 2001 over Fiscal Year 2000. A 0.11% of sales increase in health insurance costs were offset by a 0.11% of sales decrease in incentive compensation costs for store and corporate personnel.
Impairment of long-lived assets in Fiscal 2001 resulted from the write-down of goodwill and fixed assets in stores that had current year operating losses and are projected to have future losses.
Interest income and investment loss decreased $2,356 in fiscal year 2001 from fiscal year 2000. The decrease was primarily the result of investment losses of $1,000 and $5,500 in Fiscal Years 2001 and 2000, respectively, resulting from an other than temporary impairment of the Company's investment in more.com.
The Company had a decrease in equity in income of affiliates of $12,338 in fiscal year 2001 from fiscal year 2000, primarily due to an other than temporary impairment of the Company's investment in Avatex Corporation in Fiscal Year 2001 and investment gains by one of the affiliates in Fiscal Year 2000.
The income tax provision is the result of the write-off of the net deferred tax asset in Fiscal Year 2001.
The Company repurchased $40,001 of its 11.72% senior notes during Fiscal Year 2001 at a discount resulting in a extraordinary gain of $19,731 and Avatex recognized an extraordinary gain related to the extinguishment of debt for which Phar-Mor's portion was $1,824.
FINANCIAL CONDITION AND LIQUIDITY (ALL DOLLAR AMOUNTS IN THOUSANDS)
The Company's cash position as of June 29, 2002 was $9,239.
The Company entered into an Amended and Restated Revolving Credit Facility (the "Amended Facility") effective September 10, 1998 with BankAmerica Business Credit, as agent, and other financial institutions that established a credit facility in the maximum amount of $100,000. The Amended Facility was terminated on November 16, 2000.
Credit availability under the Amended Facility at any time was the lesser of the aggregate availability (as defined in the Amended Facility) or $100,000. The Amended Facility established a first priority lien and security interest in the current assets of the Company, including, among other items, cash, accounts receivable and inventory.
Advances made under the Amended Facility bore 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 Facility, the Company was 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.
The Company entered into a Loan and Security Agreement (the "Credit Facility") effective November 16, 2000 with Fleet Retail Finance Inc., as agent, and other financial institutions that established a credit facility in the maximum amount of $150,000. The Credit Facility was terminated on September 24, 2001.
Borrowings under the Credit Facility were used for working capital needs and general corporate purposes. Up to $20,000 of the Credit Facility at any time could have been used for standby and documentary letters of credit. The Credit Facility included restrictions on, among other things, additional debt, investments, dividends and other distributions, mergers and acquisitions and contains no financial covenants as long as unused credit availability is at least $20,000.
Credit availability under the Credit Facility at any time was the lesser of the aggregate availability (as defined in the Credit Facility) or $150,000. The Credit Facility established a first priority lien and security interest in all the assets of the Company excluding real property and equipment.
Advances made under the Credit Facility bore interest at the Fleet National Bank prime rate or LIBOR plus 2.00% to LIBOR plus 2.50% depending on the average unused credit availability in the preceding quarter. Under the terms of the Credit Facility, the Company was required to pay a commitment fee of 0.25% per annum on the unused portion of the facility, letter of credit fees and certain other fees.
The Company filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code on September 24, 2001.
On September 24, 2001, the Company entered into a Debtor-in-Possession Revolving Credit Facility (the "DIP" Credit Facility") with Fleet Retail Finance, Inc., as agent, and other financial institutions that established a credit facility in the maximum amount of $135,000 with $97,022 used to repay amounts outstanding under the Credit Facility. The DIP Credit Facility was terminated July 19, 2002 and repaid using the proceeds from the sale of substantially all of the store and distribution center assets.
Borrowings under the DIP Credit Facility could be used for working capital needs and general corporate purposes. Up to $20,000 of the facility at any time could be used for standby and documentary letters of credit. The facility included restrictions on, among other things, additional debt, investments, dividends and other distributions, mergers and acquisitions. The facility contained a financial covenant that required the Company to maintain a minimum excess availability of the greater of $8,000 or 7% of total availability.
Credit availability under the DIP Credit Facility at any time was the lesser of the Availability (as defined in the Facility) or $135,000. Maximum credit availability under the DIP Credit Facility declined to $100,000 on
November 1, 2001 at the Company's election. The DIP Credit Facility established a first priority lien and security interest in all of the assets of the Company
Advances made under the DIP Credit Facility bore interest at the Fleet National Bank prime rate plus 0% to .5% or LIBOR plus 2% to 2.5% depending on the average unused credit availability during the preceding quarter. Under the terms of the DIP Credit Facility, the Company was required to pay a commitment fee of 0.375% per annum on the unused portion of the facility, letter of credit fees, a termination fee of $1,000 and certain other fees.
At June 29, 2002 the Fleet reference rate (prime rate) was 4.75% and the LIBOR rate was 1.836%.
At June 29, 2002 there were letters of credit in the amount of $8,201 outstanding under the DIP Credit Facility.
The Company's cash position decreased $5,154 during Fiscal Year 2002 as cash provided by operating activities of $53,795 and cash provided by investing activities of $22,543 was offset by cash used for financing activities of $81,492.
Merchandise inventories decreased by $55,730 due to the closure of 66 of the Company's stores and accounts payable increased $38,812 during Fiscal Year 2002 due to the Company's bankruptcy filing.
The Company received $23,475 through the sale of the pharmacy prescription files for the 66 stores that it closed during Fiscal Year 2002.
The Company made payments of $64,168 under the Company's revolving credit facility during Fiscal Year 2002 from the proceeds of the inventory and pharmacy prescription sales of the 66 stores that were closed during the year.
The Company's cash position decreased $2,359 during Fiscal Year 2001 as cash used by operating activities of $16,734 and was partially offset by cash provided by financing activities of $10,978 and cash provided by investing activities of $3,397.
Merchandise inventories decreased by $20,534 due to the success of the new automatic replenishment system and accounts payable decreased $16,437 from the high levels at the end of Fiscal Year 2000.
The Company received $9,298 through the sale of equity securities that it had held as an investment during fiscal year 2001.
The Company repurchased $40,001 of its Senior Notes at a discount from face value and recognized an extraordinary gain of $19,731 in Fiscal Year 2001. This was funded by borrowings of $20,270 under the Company's Credit Facility. These notes were purchased to reduce future interest costs and retire a portion of the Senior Notes which are due in September 2002.
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 Credit Facility.
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.
TRENDS, DEMANDS, COMMITMENTS, EVENTS OR UNCERTAINTIES (ALL DOLLAR AMOUNTS IN THOUSANDS)
Management believes the proceeds from the liquidation of closed stores together with the collection of outstanding accounts receivable will enable the Company to fund its working capital needs during the wind down of the Company's affairs.
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.
Management determined that the liquidation was necessary due to operational and liquidity difficulties resulting from the slowing economy, changes in consumer buying habits, increased competition from larger retail chains, the geographic diversity of some Phar-Mor locations, the reduction of credit terms by vendors and the service of high-cost debt.
The Company adopted the liquidation basis of accounting at the end of its fiscal year, June 29, 2002. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. The valuation of assets and liabilities at their estimated net realizable values and anticipated settlement amounts necessarily requires many estimates and assumptions and there are substantial uncertainties in carrying out the orderly wind down of operations. The actual values and costs are dependent upon a variety of factors, including, without limitation, the actual proceeds realizable from the sale of the Company's assets, the ultimate settlement amounts of the Company's liabilities and obligations, actual costs incurred in connection with the orderly wind down of operations and administrative costs during the liquidation period, the timing of the potential filing and confirmation of a liquidating Chapter 11 plan and the timing of any distributions to creditors. Consequently, the actual values and costs are expected to differ from the amounts shown herein and could be higher or lower than the amounts recorded. Therefore, it is not presently determinable whether the amounts realizable from the disposition of the remaining assets will be sufficient to satisfy the obligations the Company has to its unsecured creditors. Any differences in realized values and actual cash transactions will be recognized in the period in which they can be reasonably estimated. Further, it is not possible at this time to determine the timing of any such distribution.
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 June 29, 2002, unless otherwise indicated, are listed below:
ABBEY J. BUTLER had 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 Presby Corp. ("Presby"), formerly RAS Holding Corp., and iLife Systems, Inc. ("iLife") and as a member of the Board of Managers of Chemlink and Cyclone Acquisition Company, LLC ( "Cyclone"). Mr. Butler is a member of the Executive Committee of the Board of Trustees of The American University, and a director of the Starlight Foundation, a charitable organization. Pursuant to a Settlement Agreement by and among Mr. Butler, Mr. Estrin, the Company and the Company's Official Committee of General Unsecured Creditors, Mr. Butler resigned from his positions with the Company effective as of July 8, 2002.
MELVYN J. ESTRIN had 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 and is also Chairman and CEO of University Research Co., LLC. Mr. Estrin presently serves as a director of Washington Gas Light Company and its parent, WGL Company, Presby and iLife and as a member of the board of managers of Chemlink and Cyclone. Mr. Estrin also served as a Trustee of the University of Pennsylvania and was appointed by President George H.W. Bush to serve as Commissioner of the National Capital Planning Commission. Mr. Estrin was recently appointed by President George W. Bush as a trustee of the John F. Kennedy Center for the Performing Arts . Pursuant to a Settlement Agreement by and among Mr. Estrin, Mr. Butler, the Company and the Company's Official Committee of General Unsecured Creditors, Mr. Estrin resigned from his positions with the Company effective July 8, 2002.
M. DAVID SCHWARTZ had 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. Mr. Schwartz resigned from his positions with the Company effective as of August 17, 2002.
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 served as counsel to several of its retail businesses. Prior to 1981, Mr. Ficarro was engaged in private practice in Florida. Mr. Ficarro received a B.A. from the Maxwell School at Syracuse University and a J.D. from its College of Law.
MARTIN S. SEEKELY has served as Vice President and Chief Financial Officer since October 2000. Prior to that, Mr. Seekely served as Vice President and Controller from June 1997 to October 2000 and Assistant Controller from April 1993. From 1990 to 1993, he served as Controller for Boston Distributors, Inc. Mr. Seekely was employed by Riser Foods, Inc. from 1988 to 1989 as Controller. From 1979 to 1988, Mr. Seekely was employed by Fisher Foods, Inc., in a variety of positions, including, Assistant Controller. Mr. Seekely received a B. S. degree in Business Administration from John Carroll University and he is a Certified Public Accountant.
MONROE OSTERMAN has been a director of the Company since September 25, 1997. Mr. Osterman has served as President of Gala Trading Corporation, an investment company specializing in large purchases of diamonds from Europe, since 1982. Prior to serving as President of Gala Trading Corporation, Mr. Osterman served as President of Paras USA and Bermont Corporation and was also a partner at J. Winston & Company, an importing and merchandising company.
ARTHUR G. ROSENBERG has been a director of the Company since November 23, 1997. Mr. Rosenberg was a principal of The Associated Companies, a real estate development firm, from 1987 to 1998 and in 1999 became a principal of Millennium Development Group LLC. Prior thereto, Mr. Rosenberg was a practicing lawyer in Huntington, New York and served as General Counsel of ITT Levitt & Sons, Inc., an international builder.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
PHAR-MOR, INC. 1995 AMENDED AND RESTATED STOCK INCENTIVE PLAN. The Phar-Mor Stock Incentive Plan was adopted in order to attract, reward and retain key personnel (including officers, whether or not directors) of the Company and its subsidiaries and certain other closely related eligible persons who provided substantial services to such entities ("Eligible Persons") and to provide them with long-term incentives that were linked to the Company's stock performance. Approximately nine officers and approximately 450 other employees of the Company and its subsidiaries were eligible to participate under the Phar-Mor Stock Incentive Plan.
The Phar-Mor Stock Incentive Plan was administered by the Compensation Committee of the Board (the "Administrator"). A maximum of 5.0 million shares of the Company's Common Stock (subject to adjustment) were issuable upon the exercise of awards granted under the Phar-Mor Stock Incentive Plan. As of June 29, 2002, a total of 4,465,567 shares of the Company's Common Stock were subject to options granted under the Phar-Mor Stock Incentive Plan.
The Phar-Mor Stock Incentive Plan authorized the issuance of options and (subject to plan limitations) certain stock appreciation rights ("SARs"). As is customary in incentive plans of this nature, the number and kind of shares available under the Phar-Mor Stock Incentive Plan, share limits, and shares subject to outstanding awards were subject to adjustment in the event of certain reorganizations, recapitalizations, stock splits, stock dividends, spin-offs, property distributions or other similar extraordinary transactions or events in respect of the Company or the shares of the Company. Shares relating to options or SARs that are not exercised or that expire or are canceled will again become available for grant purposes under the Phar-Mor Stock Incentive Plan to the extent permitted by law and the plan. Awards may be repriced or otherwise amended after grant, provided that the amendment does not adversely affect the holder's rights without his or her consent. A maximum of 277,778 shares of the Company's Common Stock may be subject to options that during any calendar year are granted to any Eligible Person under the Phar-Mor Stock Incentive Plan.
The exercise price of the options granted under the Phar-Mor Stock Incentive Plan generally were never less than the fair market value of the Company's Common Stock on the date of grant. An option may either be an incentive stock option, as defined in the Code, or a non-qualified stock option. All options granted pursuant to the Phar-Mor Stock Incentive Plan as of June 29, 2002 were non-qualified stock options, except the options granted to Messrs. Butler and Estrin which are incentive stock options. The aggregate fair market value of the Common Stock (determined at the time the option is granted) for which incentive stock options may be first exercisable by an option holder during any calendar year under the Phar-Mor Stock Incentive Plan or any other plan of the Company or its subsidiaries may not exceed $100,000. A non-qualified stock option is not subject to any of these limitations.
Subject to early termination or acceleration provisions (which are summarized below), an option generally was exercisable, in whole or in part, from the date specified in the related award agreement until the expiration date, all as determined by the Administrator. Earlier expiration may occur following a termination of service. In no event, however, was an option under the Phar-Mor Stock Incentive Plan exercisable more than seven years after its date of grant.
Upon the occurrence of either (A) a Change in Control Event (as defined in the Phar-Mor Stock Incentive Plan to include, but not be limited to, (i) the approval by the shareholders of the Company of a dissolution or liquidation, (ii) certain agreements of merger or consolidation resulting in the Company's shareholders, or entities associated or affiliated with them, holding less than 50% of the voting stock of the surviving entity, (iii) the sale of substantially all the assets of the Company as an entirety to a person that is not an affiliated person of the Company, (iv) a person or group (other than Robert M. Haft, Hamilton Morgan, LLC ("Hamilton Morgan") or other 25% owners as of September 11, 1995 and certain related entities) acquiring beneficial ownership of over 50% of the voting power, or (v) certain changes in the composition of the Board, or (B) under other circumstances (such as a termination of service), the Administrator, in its discretion, may provide for acceleration or extension of the exercisability of awards, or provide for certain other limited benefits, which may include SARs, under some or all awards and may determine the extent, duration and other conditions of such additional rights by amendment to outstanding awards or otherwise. The Board may terminate or amend the Phar-Mor Stock Incentive Plan, subject to the rights of holders of outstanding options. If an amendment would (i) materially increase the benefits accruing to Eligible Persons under the Phar-Mor Stock Incentive Plan, (ii) materially increase the aggregate number of shares that may be issued under the Phar-Mor Stock Incentive Plan, or (iii) materially modify the eligibility
requirements for participation under the Phar-Mor Stock Incentive Plan, the amendment, to the extent deemed necessary by the Board or the Administrator or then required by applicable law, must be approved by the shareholders.
CORPORATE EXECUTIVE BONUS PLAN. Due to the Company's filing for protection under Chapter 11 of the United States Bankruptcy Code, there was no bonus plan in place for the first half of Fiscal Year 2002. Under the Company's Corporate Executive Bonus Plan for the second half of Fiscal Year 2002 (the "2002 Bonus Plan"), certain executive officers were eligible to receive a cash bonus if the Company achieved a pre-established level of performance for the fiscal year. The participating executive would receive at least 60% of his or her individual targeted percentage bonus ("target bonus") if this performance were at target, and 35% of the target bonus (e.g., if the target bonus is 50%, 35% of 50%) if the Company's performance were at entry level; the remaining amount (up to 40%) was subject to the discretion of the Board. If the Company did not achieve the targeted level of performance, but achieved an "entry level" or minimum performance threshold for payment of bonuses established by the Board, the specific bonus amount between minimum and target bonus levels would be extrapolated, pro rata, based on the relationship of actual performance to the entry and target levels of performance; 60% of such amount would be mandatory and up to 40% discretionary. As a result of the Company exceeding its pre-established level of performance for the second half of Fiscal Year 2002, total bonuses of $1,515,708 were paid to 93 employees under the 2002 Bonus Plan. Payment of all such bonuses was approved by the Bankruptcy Court.
The employment agreements between the Company and each of Messrs. Butler and Estrin provided for an annual incentive bonus under a Company-sponsored bonus plan (if a bonus plan is approved, or otherwise as provided under a separate agreement between the Company and each of Messrs. Butler and Estrin), if reasonable performance objectives approved by the Board are achieved, with a maximum bonus of 60% and a minimum bonus of 21% of annual base salary, commencing in Fiscal Year 1998; provided, however, that if the performance objectives are exceeded, then such bonus will be increased to a level commensurate with the amount of bonuses payable to senior officers of the Company who are situated similarly to Messrs. Butler and Estrin. No bonuses were paid to either Mr. Butler or Mr. Estrin under the 2002 Bonus Plan. See "Employment Contracts and Termination of Employment and Change-In-Control Arrangements--Messrs. Butler and Estrin."
RETENTION PLAN. During the course of the Company's bankruptcy proceedings, the Company and its Official Committee of General Unsecured Creditors agreed to create a retention plan (the "Retention Plan") for certain key employees, including certain executive officers, for the purpose of retaining their employment with the Company until conclusion of the bankruptcy proceedings. The Bankruptcy Court approved the Retention Plan for these key employees in November and December 2001 and payments thereunder have been made to the employees. Total bonuses of $1,883,495 were paid to 43 corporate employees under the Retention Plan.
401(k) EMPLOYEE SAVINGS PLAN. Employees of the Company are eligible to participate in the 401(k) Employee Savings Plan (the "401(k) Plan"). The 401(k) Plan is a tax-qualified profit sharing plan that provides for pre-tax deferrals by employees and employer matching and profit-sharing contributions. In addition, warehouse employees and drivers are eligible to participate in a separate 401(k) savings plan.
RETIREMENT AND PENSION PLANS. The Company provided pension benefits under noncontributory defined benefit pension plans to its non-union employees who have 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 nonunion 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 the plan participants by June 27, 1998. Annuities were purchased for the remaining participants during Fiscal Year 1999.
In addition, the Company maintained two pension plans for various groups of employees: (i) the Phar-Mor, Inc. Retirement Plan for Hourly Employees at Niles, Ohio Store and (ii) the Tamco Distributors Company Warehouse and Drivers Pension Plan (collectively, the "Pension Plans"). The Pension Plans are defined benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). During Fiscal Year 2002, the Niles Pension Plan was terminated by mutual agreement. Due to the Company's bankruptcy, the Tamco Pension Plan will be terminated, subject to the rights of all participants thereunder.
To the extent permitted by law, the minimum eligibility and vesting provisions under these and other retirement, health and welfare benefit plans were waived for Messrs. Estrin and Butler under the terms of their respective employment agreements.
EMPLOYEE STOCK PURCHASE PLAN. The Company sponsored an Employee Stock Purchase Plan ("ESPP") under which was authorized to grant up to 500,000 shares, in the aggregate, of Common Stock obtained by open market purchases. Employees, including executive officers, with a minimum of three months of service were eligible to participate in the ESPP. The ESPP allowed eligible employees to contribute, through payroll deductions, up to 10% (not to exceed $25,000) of their annual salary toward stock purchases. Stock purchases were made quarterly and purchased by participants at 90% of the closing price on the last day of the calendar quarter. The Company suspended the ESPP after the Company's bankruptcy filing retroactive to June 30, 2001, after which employees were not permitted to contribute and purchase stock.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS
The Company had entered into employment agreements with Messrs. Butler, Estrin, Schwartz, Ficarro and Seekely, each of which is described below.
Messrs. Abbey J. Butler and Melvyn J. Estrin. The employment agreements with Messrs. Butler and Estrin had a rolling three-year term commencing on October 1, 1997 that provided for Messrs. Butler and Estrin to serve as Co-Chief Executive Officers and Co-Chairmen of the Board. The initial annual base salary of each of Messrs. Butler and Estrin was $425,000 subject to annual increases of 8%. This increase was waived by each of Mr. Butler and Mr. Estrin for the contract year ending September 30, 2002. For the contract year ending September 30, 2001, the annual base salary of each of Messrs. Butler and Estrin was $535,378. The agreements provided for an annual incentive bonus under a Company-sponsored bonus plan (if a bonus plan is approved, or otherwise as provided under a separate agreement between the Company and each of Messrs. Butler and Estrin), if reasonable performance objectives approved by the Board were achieved, with a maximum bonus of 60% and a minimum bonus of 21% of annual base salary; provided, however, that if the performance objectives were exceeded, then such bonus would increase to a level commensurate with the amount of bonuses payable to senior officers of the Company who are situated similarly to Messrs. Butler and Estrin.
Each of Messrs. Butler and Estrin was also granted options to purchase 200,000 shares of Common Stock at an exercise price of $6.84375 per share under the Phar-Mor Stock Incentive Plan, which options vested with respect to 33.34% of the underlying shares on the date of grant (October 1, 1997), and with respect to an additional 33.33% on each of the first and second anniversaries of the date of grant. The term of the options was seven years and unless Messrs. Butler and Estrin elected otherwise, to the fullest extent permitted by law and under the plan, such options shall be treated and reported as incentive stock options. Messrs. Butler and Estrin were also each granted incentive stock options to purchase 200,000 shares of Common Stock at an exercise price of $9.625 per share on June 23, 1998, 200,000 shares of Common Stock at an exercise price of $4.28125 per share on June 29, 1999; 180,000 shares of Common Stock at an exercise price of $2.51625 per share on April 14, 2000; and 275,000 shares of Common Stock at an exercise price of $0.825 on March 16, 2001 on terms similar to the earlier grants.
Pursuant to their respective employment agreements, Messrs. Butler and Estrin were permitted to engage in activities (except certain activities that are competitive with the Company's business), in addition to serving as Co-Chief Executive Officers and Co-Chairmen of the Board, and pursue other investments (except ownership of more than a 10% interest in an entity that derives more than 50% of its gross revenues from the retail sale, at a discount, of pharmaceuticals, unless Messrs. Butler and Estrin or their respective immediate families owned or controlled, directly or indirectly, an ownership interest of at least 1% in the entity as of October 1, 1997). The agreements did not require Messrs. Butler and Estrin to provide services at the Company's principal locations.
The employment agreements with Messrs. Butler and Estrin also provided for long-term performance payouts to each of them, commencing with the three-year period ending September 30, 2000 and each third year thereafter during the term of the employment agreement, in an amount (subject to the offset referred to in the last sentence of this paragraph) equal to 1.5% of any excess of (i) the aggregate market value of the publicly traded shares of Common Stock based on the average closing price for the thirty (30)-day period ending on the last day of the subject period (less the sum of (a) the proceeds from the exercise during such period of any options or warrants plus (b) any cash or property consideration actually received by the Company during such period from the issuance
of any shares of its Common Stock) over (ii) the aggregate market value of the publicly traded shares of Common Stock based on the average closing price for the thirty (30)-day period ending on the last day of the immediately prior subject period (provided that for the first day of the period ending on September 30, 2000, such average closing price shall be deemed to be $6.84375 per share). One-half of the aggregate annual bonuses paid or payable in respect of the applicable three-year period will be offset against the long-term payout amount.
The employment agreements with Messrs. Butler and Estrin further provided for various employee benefits and perquisites, including but not limited to payment, on a tax reimbursed, "grossed up" basis, for a $1,500,000 whole life insurance policy on Messrs. Butler and Estrin's lives or, at the election of either of them, a term policy requiring an equivalent premium; disability insurance adequate to pay Messrs. Butler and Estrin 60% of their respective base salaries until age 75; reimbursement of all medical, hospitalization and dental costs for Messrs. Butler and Estrin and their families; the use of a car owned or leased by the Company and the provision of other transportation for Messrs. Butler and Estrin's travel requirements; and business expenses at locations other than the Company's headquarters.
Each of the agreements with Messrs. Butler and Estrin provided that, if it is terminated without cause (as defined), such officer will be entitled to the present value of his base salary, discounted at 5%, for the remaining contract term, annual and long-term incentive payments payable for the remainder of the term, all compensation, benefits, stock options, health and disability benefits accruing under the agreement for the remainder of the term (or at their option, the value of such stock options determined in accordance with the "Black-Scholes' Formula"), tax reimbursement in respect of any termination payments that constitute excess parachute payments under Federal income tax laws, and pursuant to an Amendment to the agreements dated as of June 1, 2001, the accelerated vesting (and extended post-termination exercise periods) of all stock options. Under each agreement, termination with cause by the Company is limited to the entry of a felony conviction, voluntary resignation, death, or permanent disability (as defined).
Pursuant to a Settlement Agreement by and among Mr. Butler, Mr. Estrin, the Company and the Company's Official Committee of Unsecured Creditors, Messrs. Butler and Estrin resigned from their positions with the Company effective as of July 8, 2002. In addition to general mutual releases, they each received: (i) $1.5 million; (ii) continuing medical benefits until confirmation of a Plan of Reorganization; (iii) their respective Company-leased vehicles until December 2002; (iv) life insurance coverage for up to one year; and (v) one-half of the Company's holdings in Avatex Corporation, Chemlink Acquisition Company, and Presby Corporation and its affiliates.
Mr. M. David Schwartz. The employment agreement with Mr. Schwartz, as amended, had a rolling term of two years commencing on February 10, 1999 and provided for Mr. Schwartz to serve as the Company's President and Chief Operating Officer. Mr. Schwartz's annual base salary was increased to $795,000 on June 1, 2001. On September 11, 1995, Mr. Schwartz received a confirmation bonus of $450,000 and 6,250 shares of Common Stock, and was granted options under the Phar-Mor Stock Incentive Plan to purchase 175,000 shares of Common Stock at an exercise price of $8.00 per share. Pursuant to the Phar-Mor Stock Incentive Plan, Mr. Schwartz was granted additional options on June 5, 1997, to purchase 100,000 shares of Common Stock at an exercise price of $5.4375 per share; on June 23, 1998, to purchase 100,000 shares of Common Stock at an exercise price of $9.625 per share; on June 29, 1999, to purchase 150,000 shares of Common Stock at an exercise price of $4.28125 per share; and on April 14, 2000, 135,000 shares at an exercise price of $2.51625 per share; and on March 16, 2001, 175,000 shares at an exercise price of $0.825 per share.
Due to the Company's filing for protection under Chapter 11 of the United States Bankruptcy Code, the Company and Mr. Schwartz entered into an Amended and Restated Employment Agreement (the "New Agreement") effective as February 15, 2002. This Agreement was negotiated by and among the Company, Mr. Schwartz and the Company's Official Committee of Unsecured Creditors and subsequently approved by the Bankruptcy Court. The New Agreement provided for a reduction of Mr. Schwartz' salary of as of June 1, 2002 to $695,500. It also provided for a reduction in the period from two years to one year of continuing benefits thereunder in the event of termination of Mr. Schwartz' employment for reasons other than cause and reduction in severance benefits from approximately $2.4 million to $1.2 million in the event of termination of Mr. Schwartz' employment as a result of a change of control, as defined therein.
The New Agreement also provided for a "retention bonus" which bonus was approved by the Company's Official Committee of General Unsecured Creditors and the Bankruptcy Court and available to Mr. Schwartz in the amount of $650,000 payable during the course of the Company's bankruptcy proceedings as follows: (i) one-third due and payable on December 15, 2001; and (ii) two-thirds due and payable upon confirmation of a plan of reorganization or the sale of substantially all of the Company's assets which occurred on July 19, 2002. As a result of Mr. Schwartz' resignation from the Company as of August 17, 2002, all of the foregoing benefits were paid to him in full.
Mr. John R. Ficarro. The employment agreement with Mr. Ficarro, as amended, has a rolling term of two years commencing on February 10, 1999, and provides for Mr. Ficarro to serve as the Company's Senior Vice President/Chief Administrative Officer and General Counsel. Mr. Ficarro's annual base salary was increased to $270,000 on June 1, 2001. On September 11, 1995, Mr. Ficarro was granted options under the Phar-Mor Stock Incentive Plan to purchase 15,000 shares of Common Stock at an exercise price of $8.00 per share. Pursuant to the Phar-Mor Stock Incentive Plan, Mr. Ficarro was granted additional options on June 5, 1997, to purchase 75,000 shares of Common Stock at an exercise price of $5.4375 per share; on June 23, 1998, to purchase 75,000 shares of Common Stock at an exercise price of $9.625 per share; on June 29, 1999, to purchase 100,000 shares of Common Stock at an exercise price of $4.28125 per share; on April 14, 2000, to purchase 90,000 of Common Stock shares at an exercise price of $4.28125 per share; and on March 16, 2001, 150,000 shares at an exercise price of $0.825 per share.
Due to the Company's filing for protection under Chapter 11 of the United States Bankruptcy Code, the Company and Mr. Ficarro entered into an Amended and Restated Employment Agreement (the "New Agreement") effective as February 15, 2002. This New Agreement was negotiated by and among the Company, Mr. Ficarro and the Company's Official Committee of Unsecured Creditors and subsequently approved by the Bankruptcy Court. The New Agreement provided for a reduction in the period from two years to one year of continuing benefits thereunder in the event of termination of Mr. Ficarro's employment for reasons other than cause and reduction in severance benefits from approximately $810,000 to $650,000 in the event of termination of Mr. Ficarro's employment as a result of a change of control, as defined therein.
The New Agreement also provided for a "retention bonus" which bonus was approved by the Company's Official Committee of General Unsecured Creditors and the Bankruptcy Court and available to Mr. Ficarro in the amount of $375,000 payable during the course of the Company's bankruptcy proceedings as follows: (i) one-third due and payable on December 15, 2001; and (ii) two-thirds due and payable upon confirmation of a plan of reorganization or the sale of substantially all of the Company's assets which occurred on July 19, 2002.
Mr. Martin S. Seekely. Mr. Seekely was promoted to the position of Vice President and Chief Financial Officer effective October 18, 2000. He was previously the Company's Vice President and Controller. On February 15, 2002, the Company entered into an Amended and Restated Employment Agreement with Mr. Seekely relative to his employment. The Agreement with Mr. Seekely has a rolling term of two years commending on February 15, 2002 and contains similar benefits and perquisites to those contained in the Employment Agreements between the Company and Messrs. Schwartz and Ficarro. Mr. Seekely's current salary is $175,000 and Mr. Seekely also was the beneficiary of "retention bonus" which bonus was approved by the Company's Official Committee of General Unsecured Creditors and the Bankruptcy Court of $275,000 and payable to him during the course of the Company's bankruptcy proceedings one-third on December 15, 2001 and two-thirds upon the sale of substantially all of the Company's assets or upon confirmation of a plan of reorganization, which occurred on July 19, 2002. Mr. Seekely also is entitled to receive a lump-sum severance payment under certain conditions of $425,000.
During his employment with the Company, pursuant to the Phar-Mor Stock Incentive Plan, Mr. Seekely has been granted options on May 14, 1996, to purchase 700 shares of Common Stock at an exercise price of $7.5625 per share; on June 5, 1997, to purchase 10,000 shares of Common Stock at an exercise price of $5.4375 per share; on June 23, 1998, to purchase 5,000 shares of Common Stock at an exercise price of $2.51625 per share; on June 29, 1999, to purchase 20,000 shares of Common Stock at an exercise price of $4.28125 per share; on April 14, 2000, to purchase 5,000 shares of Common Stock at an exercise price of $2.51625 per share; on October 19, 2000, to purchase 100,000 shares of Common Stock at an exercise price of $1.190 per share; and on March 16, 2001, to purchase 30,000 shares of Common Stock at an exercise price of $0.825 per share. All options (except the 1995 option which provided for vesting at 20% per year) vest one-third immediately and one third on each of the first and second anniversary of the grant date.
The employment agreement with Mr. Schwartz provided for an annual incentive bonus if the Company achieves certain performance objectives approved by the Board, with a target bonus of not less than 60% of annual base salary and a maximum of 100% of annual base salary. The employment agreements with Mr. Ficarro and Mr. Seekely provide for an annual incentive bonus if the Company achieves certain performance objectives approved by the Board, with a target bonus of not less than 50% of annual base salary and a maximum of 100% of annual base salary. The options granted to Messrs. Schwartz, Ficarro and Seekely on September 11, 1995, have a term of seven years from the date of grant and vest with respect to 20% of the underlying shares on the date of grant and 20% on each of the first through the fourth anniversaries of the date of grant. The options granted to Messrs. Schwartz, Ficarro and Seekely on June 5, 1997, June 23, 1998 and June 29, 1999, April 14, 2000 and March 16, 2001 have a term of seven years from the date of grant and vest with respect to one-third of the underlying shares on the date of grant and one-third on each of the first and second anniversaries of the date of grant. The options granted to Messrs. Butler and Estrin in October 1997 and to Messrs. Schwartz and Ficarro in June 1997 were subject to shareholder approval, which approval was obtained in February 1998. Pursuant to amendment dated as of June 1, 2001, each of the employment agreements provides for accelerated vesting and exercisability of all options if the employee is terminated without cause or if he terminates for "good reason" because of certain unilateral material changes to certain terms of service or other events (as more fully defined in the agreements).
Loans. The Phar-Mor Stock Incentive Plan authorized the Administrator to make loans to optionees to pay the exercise price of options, subject to specified conditions. No loans have been made under this Plan.
Under the terms of the employment agreements with Messrs. Butler and Estrin, the Company had agreed to loan Messrs. Butler and Estrin an amount equal to the exercise price of their options (upon exercise). Such loan or loans would have become due on the first to occur of (i) the fifth anniversary of the date that the loan was made, (ii) to the extent of net proceeds of sale, after payment of related taxes, five business days after the sale of the shares so acquired, (iii) 30 days after a termination of their employment by the Company with cause (other than by death or permanent disability) or his voluntary resignation (except if his resignation is a result of certain delineated reasons), or (iv) by way of offset, upon the payment of settlement amounts to him upon a termination without cause by the Company. The loans would have borne interest, payable semi-annually, on the outstanding principal balance at the mid-term applicable federal rate in effect on the date such loans were made and shall be subject to compliance with applicable laws. No loans have ever been made to Mr. Estrin or Mr. Butler under these provisions.
Severance Plan. The Company's existing severance plan as of June 29, 2002, as it applies to executive officers generally, provides for payment of severance pay equal to salary at the time of termination for a period of 26 weeks, plus one additional week for each year of service, up to ten years. The severance plan provides for similar severance benefits based upon position and tenure for other employees of the Company. Due to the Company's filing for protection under Chapter 11 of the United States Bankruptcy Code, the severance plan was modified in September 2001 reducing overall benefits to employees.
Change in Control Consequences for Messrs. Butler, Estrin, Schwartz, Ficarro and Seekely. The employment agreements with Messrs. Butler and Estrin provided that upon a change in control (as defined) Messrs. Butler and Estrin have the right for 90 days to terminate their agreements without cause and realize the present value of the full (and certain accelerated) benefits under the agreements for what would otherwise be the remaining term, as in the case of a termination by the Company without cause. A change in control under the agreements includes (among other events) the acquisition by any person or group (other than persons affiliated with Messrs. Butler or Estrin) of 40% or more of the voting capital stock of the Company, the approval by the shareholders of certain transactions resulting in a change in ownership of 40% or more control of the voting capital stock of the Company, including a merger, consolidation, or sale or disposal of all or substantially all of the Company's assets (including a plan of liquidation or dissolution), or a fundamental alteration in the nature of its business. Such a termination by Messrs. Butler or Estrin is deemed a termination without cause by the Company and entitles them to the rights attendant thereto.
The employment agreements with Messrs. Schwartz, Ficarro and Seekely provide that upon a change in control (as defined), subject to certain exceptions more fully described in the employment agreements or amendments thereto, each named executive will have the right to terminate the agreement for "good reason" and receive the full benefits thereunder as in the case of a termination by the Company without cause. A change in
control under each agreement may include (among other events) (a) the acquisition by any individual, entity or group of beneficial ownership of 20% or more of either (i) the then outstanding shares of Common Stock of the Company or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors of the Company; (b) any event that results in the replacement of a majority of the members of the Board as composed on the date of the employment agreement; (c) approval by the shareholders of the Company of a reorganization, merger or consolidation (i) which results in a change of ownership and/or voting rights of 30% or more of the then outstanding shares of Common Stock of the Company or (ii) in which the members of the Board do not become members of the Board of the entity resulting from such reorganization, merger or consolidation; or (d) approval by the shareholders of the Company of a liquidation or a dissolution of the Company, or the sale or other disposition or substantially all of the assets of the Company which occurred on July 19, 2002.
The employment agreements for Messrs. Schwartz, Ficarro and Seekely provide, in the case of a termination by the Company for each individual, without cause or by them "for good reason," for lump sum severance payments plus other benefits as heretofore described.
EXECUTIVE SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation of the Chief Executive Officers and the other three most highly compensated executive officers of the Company who served in those capacities as of June 29, 2002 (the "Named Officers").
- -------------------- (1) Bonuses are shown for the fiscal year earned, but may be paid in the following year. Information provided in the column labeled "Bonus" for Fiscal Year 2002 includes retention bonuses paid to each of the Named Officers as follows: Mr. Schwartz, $216,667; Mr. Ficarro, $125,000 and Mr. Seekely, $91,667. See also Part III, Item 11, Executive Compensation.
(2) No information is provided in the column labeled "Other Annual Compensation" since the aggregate amount of perquisites and other personal benefits for the periods indicated is less than the lesser of $50,000 or 10% of the total annual salary and bonus reported for each of the Named Officers.
(3) Information provided in the column labeled "All Other Compensation" for Fiscal Year 2002 includes the following: (i) the value of insurance premiums paid by the Company for the benefit of each of the Named Officers as follows: Mr. Butler, $165,528; Mr. Estrin, $204,660; Mr. Schwartz, $195,931; Mr. Ficarro, $17,266; and Mr. Seekely $14,435; (ii) matching contributions to the Company's 401(k) Employee Savings and Retirement Plan to each of the Named Officers as follows: Mr. Schwartz, $4,800; Mr. Ficarro $6,472; and Mr. Seekely $4,281; (iii) matching contributions to the Company's non-qualified deferred compensation plan as follows: Mr. Butler $1,482 and Mr. Estrin $1,482.
Information provided in the column labeled "All Other Compensation" for Fiscal Year 2001 includes the following: (i) the value of insurance premiums paid by the Company for the benefit of each of the Named Officers as follows: Mr. Butler, $87,511; Mr. Estrin, $172,190; Mr. Schwartz, $59,189; Mr. Ficarro, $1,324; and Mr. Seekely, $838; (ii) matching contributions to the Company's 401(k) Employee Savings and Retirement Plan to each of the Named Officers as follows: Mr. Schwartz, $6,656; Mr. Ficarro,
$5,725; and Mr. Seekely, $3,747; (iii) matching contributions to the Company's non-qualified deferred compensation plan as follows: Mr. Butler $12,839 and Mr. Estrin $12,839.
Information provided in the column labeled "All Other Compensation" for Fiscal Year 2000 includes the following: (i) the value of insurance premiums paid by the Company for the benefit of each of the Named Officers as follows: Mr. Butler, $96,488; Mr. Estrin, $157,233; Mr. Schwartz, $4,925; and Mr. Ficarro, $790; (ii) matching contributions to the Company's 401(k) Employee Savings and Retirement Plan to each of the Named Officers as follows: Mr. Schwartz, $5,944; Mr. Ficarro, $6,468 and Mr. Seekely $2,925; (iii) matching contributions to the Company's non-qualified deferred compensation plan as follows: Mr. Butler $11,680 and Mr. Estrin $11,680.
(4) Pursuant to a Settlement Agreement by and among Mr. Butler, Mr. Estrin, the Company and the Company's Official Committee of General Unsecured Creditors, Messrs. Butler and Estrin resigned from their positions with the Company effective as of July 8, 2002. See Item 11. Executive Compensation and Employment Contracts and Termination of Employment and Change-In-Control Arrangements.
(5) Mr. Schwartz resigned from his positions with the Company effective as of August 17, 2002.
(6) Mr. Seekely was named Vice President and Chief Financial Officer effective October 18, 2000.
OPTION GRANTS IN FISCAL YEAR 2002
Option Grants. There were no options granted during Fiscal Year 2002. As of July 1, 2001, no stock appreciation rights ("SARs") were outstanding.
OPTION EXERCISES AND VALUES FOR FISCAL YEAR 2002
The following table sets forth certain information concerning the exercise of stock options, the number of unexercised options, and the values of unexercised options at June 29, 2002 for the Named Officers. Value is considered to be, in the case of exercised options, the difference between the exercise price and the market price on the date of exercise and, in the case of unexercised options, the difference between the exercise price and the market price on June 29, 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
(1) Options are "in the money" if the fair market value of the underlying securities exceeds the exercise price of the options. The amounts set forth represent the difference between .00 per share, the market value of the Common Stock at June 29, 2002 issuable upon exercise of options, and the exercise price of the option, multiplied by the applicable number of shares underlying the options.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Set forth in the table below is information, as of September 30, 2002, with respect to the number of shares of Common Stock beneficially owned by (i) each person or entity known by the Company to own more than five percent of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each of the Named Officers and (iv) all directors and executive officers of the Company as a group. A person or entity is considered to "beneficially own" any shares (i) over which such person or entity exercises sole or shared voting or investment power or (ii) which such person or entity has the right to acquire at any time within 60 days (e.g., through the exercise of options or warrants).
On March 27, 2002, the Bankruptcy Court, pursuant to the Company's Motion, issued an Order Enjoining the Transfer of Certain Stock in the Debtors Until Confirmation of the Plan of Reorganization on or after March 27, 2002. Copies of such Motion and Order were mailed to the shareholders of record on February 28, 2002 and March 29, 2002, respectively.
- -----------------
* Less than 1%.
(1) No director or executive officer is the beneficial owner of other equity securities of the Company or any of its subsidiaries.
(2) Unless otherwise indicated, each person or entity has sole investment power and sole voting power with respect to the Common Stock beneficially owned by such person or entity.
(3) This column lists the number of shares of Common Stock which the named person or entity has the right to acquire within 60 days after September 30, 2002, through the exercise of stock options and warrants. The shares shown in this column are included in the Amount and Nature of Beneficial Ownership column.
(4) Includes (i) 4,704,033 shares of Common Stock owned by Avatex's subsidiary, Avatex Funding, Inc., and (ii) 1,178,600 shares of Common Stock owned by Avatex's subsidiary, National Intergroup Realty Holdings, Inc., as successor by merger to M&A Investments, Inc.
(5) The information provided is based on information provided to the Company by Dimensional Fund Advisors, Inc. ("Dimensional") in its Schedule 13G filed with the SEC in January 2002. Dimensional is an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, serves as investment manager to certain other investment vehicles, including commingled group trusts. (These investment companies and investment vehicles are the "Portfolios"). The Portfolios own all securities and Dimensional disclaims beneficial ownership of such securities.
(6) All such shares of Common Stock are subject to purchase by the indicated person within 60 days upon exercise of options awarded under the Phar-Mor Stock Incentive Plan.
(7) Messrs. Butler and Estrin are Co-Chairmen of the Board, Co-Chief Executive Officers and major shareholders of Avatex.
(8) All such shares are subject to purchase within 60 days by the indicated person upon exercise of options under the Phar-Mor Director Stock Plan and/or Phar-Mor Stock Incentive Plan.
(9) All such shares are subject to purchase within 60 days by the indicated person upon exercise of options awarded under the Phar-Mor Director Stock Plan.
Avatex Funding, Inc. has pledged the 4,704,033 shares of Common Stock it owns as collateral to Wells Fargo Bank Minnesota, N.A., as indenture trustee, to secure repayment of 6.75% notes issued by Avatex Funding, Inc. that mature on December 7, 2002. In the event of a default, the trustee may acquire such shares by foreclosing on the collateral.
EQUITY COMPENSATION PLAN INFORMATION
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Purchase of Company Stock by Avatex Corporation. Since the beginning of Fiscal Year 2002, a subsidiary of the Company's controlling shareholder, Avatex Corporation, purchased 56,600 shares of the Company's common stock in the open market, increasing its beneficial ownership level to 48.1% of the Company's common stock as of September 30, 2002.
Co-CEO Office Expenses. During Fiscal Year 2002, the Company paid $106,000 to Human Service Group, Inc. for secretarial services provided to Mr. Estrin. Human Service Group, Inc. is a corporation wholly owned by Mr. Estrin. During Fiscal Year 2002, the Company paid CB Equities Corporation $17,000 for office and equipment support for Mr. Butler. Mr. Butler is President of CB Equities Corporation.
Co-Chief Executive Officer Resignations. Pursuant to a Settlement Agreement by and among Mr. Butler, Mr. Estrin, the Company and the Company's Official Committee of Unsecured Creditors, Messrs. Butler and Estrin resigned from their positions with the Company effective as of July 8, 2002. In addition to general mutual releases given among such parties, Messrs. Butler and Estrin each received: (i) $1.5 million; (ii) continuing medical benefits until confirmation of a Plan of Reorganization; (iii) use of their respective Company-leased vehicles until December 2002; (iv) life insurance coverage for up to one year; and (v) one-half of the Company's holdings in Avatex Corporation, Chemlink Acquisition Company, and Presby Corporation and its affiliates. These investments were valued at approximately $100,000 in total.
President and Chief Operating Officer Severance. Mr. Schwartz resigned his positions from the Company as of August 17, 2002. The resignation was a result of a "change of control" as defined in his employment agreement which included the sale of substantially all of the Company's assets, which occurred on July 19, 2002. His employment agreement provided for certain severance payments and other benefits, including a lump-sum severance of $1.2 million and one year of continuing benefits from his date of termination. The Company elected to pay Mr. Schwartz the value of most of these benefits which was $47,368. He continues to receive Company-paid medical benefits. Other than the foregoing, the Company owes no further obligations to Mr. Schwartz.
PART IV
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES.
Not Applicable.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE 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: October 15, 2002 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: October 15, 2002 By: /s/ John R. Ficarro ------------------- John R. Ficarro, Senior Vice President and Chief Administrative Officer (principal executive officer)
Date: October 15, 2002 /s/ Monroe Osterman --------------- Monroe Osterman, Director
Date: October 15, 2002 /s/ Arthur G. Rosenberg ------------------- Arthur G. Rosenberg, Director
Date: October 15, 2002 /s/ Martin S. Seekely ----------------- Martin S. Seekely Vice President and Chief Financial Officer (principal financial and accounting officer)
CERTIFICATION
I, John R. Ficarro, certify that:
1. I have reviewed this annual report on Form 10-K of Phar-Mor, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this annual report;
Date: October 15, 2002
/s/ John R. Ficarro - -------------------- John R. Ficarro Senior Vice President Chief Administrative Officer
CERTIFICATION
I, Martin S. Seekely, certify that:
1. I have reviewed this annual report on Form 10-K of Phar-Mor, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this annual report;
Date: October 15, 2002
/s/ Martin S. Seekely - ---------------------- Martin S. Seekely Vice President, Chief Financial Officer
PHAR-MOR, INC.
INDEX TO EXHIBITS
PHAR-MOR, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
PHAR-MOR, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF NET LIABILITIES IN LIQUIDATION (LIQUIDATION BASIS) (UNAUDITED) (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
PHAR-MOR, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF CHANGES IN NET LIABILITIES IN LIQUIDATION (LIQUIDATION BASIS) (UNAUDITED) (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
PHAR-MOR, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEET (GOING CONCERN BASIS) (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE) - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
PHAR-MOR, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (GOING CONCERN BASIS) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
PHAR-MOR, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (GOING CONCERN BASIS) (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
PHAR-MOR, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (GOING CONCERN BASIS) (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------
1. BANKRUPTCY
On September 24, 2001, the Company and certain of its affiliates filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code to restructure their operations in an effort to return to profitability. The Company closed approximately 65 of its 139 stores. These stores were identified as either under-performing or outside the Company's core markets. The Company focused on continuing operations on the 74 remaining stores, while reducing corporate overhead and attempting to solidify its position in markets it served. Based on continued losses, the Company and its Official Committee of General Unsecured Creditors determined in late June 2002 that a sale or liquidation of the Company was in the best interest of all creditors and shareholders.
On July 18, 2002, the Company entered into an agency agreement to sell substantially all of the assets of the stores and distribution center to a joint venture comprised of Hilco Merchant Resources, LLC and The Ozer Group, LLC. This agreement was approved by the bankruptcy court on July 18, 2002 and the Company then commenced an orderly liquidation of its assets and wind down of its operation.
Under its Chapter 11 proceedings, the Company has the right, subject to Court approval, to assume or reject executory contracts and unexpired leases. In this context, "assumption" means that the Company agrees to perform its obligations under the contract or lease but is subject to a claim of damages for the breach thereof. With respect to the orderly wind down of operations, the Company, with Court approval, engaged a third party to market substantially all of its unexpired leases. Those leases, which were successfully sold, were assigned to and assumed by the purchasing parties, with Court approval. The remaining unexpired leases were rejected and may be subject to a claim of damages for breach thereof.
Until a plan of liquidation is confirmed by the Court and becomes effective, it is not possible to predict with certainty the ultimate recoveries for creditors, or the timing of any such distribution of recoveries. While management currently believes the Company has made adequate provision for the liabilities to be incurred in connection with Chapter 11 claims, there can be no assurance as to the final amount of such liabilities or the final impact on such liabilities of a confirmed plan of liquidation. As of October 9, 2002, no plan of reorganization or liquidation had been submitted to the Court. Substantially all of the Company's pre-petition liabilities are subject to compromise under the bankruptcy proceedings.
2. LIQUIDATION BASIS OF ACCOUNTING
The Company's consolidated financial statements have been prepared on a liquidation basis beginning with June 29, 2002. This basis of accounting is appropriate when, among other things, liquidation of a company appears imminent and the net realizable values of its assets are reasonably determinable. Under this basis of accounting, assets are stated at their net realizable values, liabilities are stated at contractual face value and estimated costs through the liquidation date are provided to the extent reasonably determinable. The valuation of assets and liabilities at their estimated net realizable values and anticipated settlement amounts necessarily requires many estimates and assumptions and there are substantial uncertainties in carrying out the orderly wind down of operations. The actual values and costs are expected to differ from the amounts shown herein and could be higher or lower than the amounts recorded. Any differences in realized values from the estimated values will be recognized in the period in which they can be reasonably estimated. Further, it is not possible at this time to determine the amount and timing of any such distribution to the creditors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------
Adjustments from Going Concern to Liquidation Basis of Accounting:
ASSUMPTIONS USED WHEN CONVERTING TO THE LIQUIDATION BASIS OF ACCOUNTING AT JUNE 29, 2002
Management estimated that the Company would spend $19,778 in severance costs, operating costs and wind down expenses through final dissolution. This amount was accrued at June 29, 2002 in accordance with liquidation accounting.
Cash and cash equivalents - Presented at face value.
Accounts receivable - net - Fair value was estimated for each type of receivable by first applying a normal going concern basis allowance for doubtful accounts and then applying an additional allowance based on the probability of collection in a liquidation environment. Management anticipates that receivables from vendors which the Company will no longer be purchasing product from will be much more difficult to collect. This resulted in an adjustment of $5,591.
Merchandise inventories - Fair value was calculated based on the proceeds received on the liquidation of the inventory, which was completed by September 10, 2002. This resulted in an adjustment of $34,304.
Prepaid expenses - Fair value was calculated based on the amount estimated to be returned to the Company for cancelled insurance policies and prorated business taxes. Other prepaid items such as prepaid maintenance contracts or prepaid rents were assumed to have no value. The resulting write down is included in the Write down other assets to expected liquidation value.
Property and equipment - net - Fair value was calculated based on the proceeds received on the liquidation of the property and equipment, which was completed by September 10, 2002. This resulted in an adjustment of $42,921.
Pharmacy files - Fair value was calculated based on the proceeds received on the sale of the pharmacy files which was completed by September 10, 2002. This resulted in an increase in the recorded value of $30,355.
Other assets - Fair value was estimated for each asset that is expected to have a value in liquidation. Other assets such as goodwill and prepaid finance fees were assumed to have no value. The resulting write down is included in the Write down other assets to expected liquidation value.
All pre-petition liabilities have been reclassified to either Liabilities subject to compromise - unsecured claims or Liabilities subject to compromise - priority and administrative claims.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - --------------------------------------------------------------------------------
The following summarizes at face value the unsecured liabilities subject to compromise:
Trade accounts payable $ 67,140 Accrued expenses 13,326 Rejected lease reserve 53,074 Unsecured debt 46,782 Capital leases 4,190 Accrued interest 2,167 ----------
Total unsecured liabilities subject to compromise $ 186,679 ==========
The rejected lease reserve was calculated by multiplying the gross value of the lease rejection claims for the store and distribution center real estate leases that were rejected by 75% to estimate the ultimate lease rejection claims that will be allowed by the court.
Liabilities subject to compromise - priority and administrative claims include vendor reclaimation claims, tax claims and other pre-petition priority and administrative claims.
Self insurance reserves - Fair value was estimated based on the amount of the letters of credit issued by the Company to the workers compensation insurance providers to cover open claims and the amount paid to those insurance providers subsequent to June 29, 2002.
Accounts payable, accrued expenses, borrowings under debtor-in-possession financing arrangements and other liabilities are expected to be paid in full and are reflected at face value.
3. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (GOING CONCERN BASIS)
a. Fiscal Periods Presented - The accompanying consolidated balance sheet were prepared as of June 30, 2001. The accompanying consolidated statements of operations, changes in stockholders' equity and cash flows were prepared for the fifty-two weeks ended June 29, 2002, the fifty-two weeks ended June 30, 2001, and the fifty-two weeks ended July 1, 2000. The Company's fiscal year ends on the Saturday closest to June 30.
b. Business - The Company operates a chain of "deep discount" drugstores primarily located in the mid-west 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 inter-company 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 (losses) gains of $0, $(2,922) and $419 are included in investment loss in the Consolidated Statements of Operations for the fifty-two weeks ended June 29, 2002, the fifty-two weeks ended June 30, 2001 and the fifty-two weeks ended July 1, 2000.
f. Merchandise Inventories - Merchandise inventories are valued at the lower of first-in, first-out ("FIFO") cost or market.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - --------------------------------------------------------------------------------
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. The Company discontinued videotape rental during Fiscal 2001.
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 ($1,933 at June 30, 2001) in which it has 20% or more interest in voting common stock and the cost method of accounting for investments ($1,300 at June 30, 2001) in which it has less than a 20% interest in voting common stock or investments in preferred stock (see Note 11). During fiscal 2001 and 2000 the Company recorded a $1,000 and $5,500, respectively, investment loss resulting from an other than temporary impairment of a cost basis investment.
i. Investment in Avatex - During the three fiscal year ended July 1, 2000, the Company invested $10,725 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 11). 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 48% 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 1,482,424 and 1,354,506 at June 29, 2002 and June 30, 2001, respectively.
During Fiscal 2001, the Company recorded a $4,248 investment loss, included in equity in loss of affiliates in the statement of operations, on its investment in Avatex resulting from an other than temporary impairment of an equity basis investment.
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 $1,775 at June 30, 2001.
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. Accounting for the Impairment of Long-Lived Assets - The Company accounts for impairment of long-lived assets in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of." SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever events or changes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - --------------------------------------------------------------------------------
in circumstances indicate that the book value of the assets may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. In accordance with SFAS No. 121, the Company uses an estimate of the future undiscounted net cash flows of the related asset or asset grouping over the remaining lives in measuring whether the assets are recoverable. During Fiscal 2001, the Company wrote down approximately $12,307 of furniture and fixtures, and leasehold improvements, and $11,070 of goodwill related to certain stores resulting from current year operating losses combined with a history of losses and projected future losses. The impairment losses are included in the statement of operations as impairment of long-lived assets. Based on the Company's expectation of future undiscounted net cash flow, these assets have been written down to their fair value.
p. 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.
q. 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.
r. 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.
s. 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.
t. Income Taxes - The Company accounts for income taxes using the provisions of SFAS No. 109, "Accounting for Income Taxes".
u. 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.
v. Revenue Recognition - Sales are recognized on merchandise inventories sold upon receipt by the customer and are recorded net of returns.
w. Reclassifications - Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation.
x. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - --------------------------------------------------------------------------------
y. In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 changes the accounting for goodwill and certain other intangible assets from an amortization method to an impairment only approach. SFAS No.142 was optional for Fiscal 2002 and required in later years. The Company continued to amortize Goodwill during Fiscal 2002.
z. Advertising Costs - Advertising costs are expensed when incurred. Advertising expenses for the fifty-two weeks ended June 29, 2002, the fifty-two weeks ended June 30, 2001 and the fifty-two weeks ended July 1, 2000 were $19,581, $22,421 and $22,827, respectively.
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
June 30, 2001 ------------- Accounts receivable - vendors $ 9,373 Third-party prescriptions 16,695 Vendor coupons 601 Other 280 ------- 26,949
Less allowance for doubtful accounts 1,454 ------- $25,495 ======= 5. MERCHANDISE INVENTORIES
Merchandise inventories consists of the following:
June 30, 2001 ------------- Store inventories $163,138 Warehouse inventories 35,414 Video rental tapes - net -0- -------- 198,552
Less reserves for markdowns, shrinkage and vendor rebates 12,326 -------- $186,226 ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - --------------------------------------------------------------------------------
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, 2001 ------------- Furniture, fixtures and equipment $ 65,698 Building improvements to leased property 49,583 Land 497 Building 1,517 Capital leases: Buildings 11,076 Furniture, fixtures and equipment 22,072 -------- 150,443
Less accumulated depreciation and amortization 83,399 -------- $ 67,044 ========
7. OTHER ASSETS
Other assets consists of the following:
June 30, 2001 ------------- Purchased pharmacy files $ 2,797 Liquor licenses 994 Deferred debt expense 806 Utility and other deposits 357 Other 639 ------- $ 5,593 =======
Deferred debt expense, liquor licenses and purchased pharmacy files are net of accumulated amortization of $1,159 at June 30, 2001. The deferred debt expense consists of debt origination costs associated with the credit facility (See Note 8).
8. REVOLVING CREDIT FACILITIES
The Company entered into an Amended and Restated Revolving Credit Facility (the "Amended Facility") effective September 10, 1998 with BankAmerica Business Credit, as agent, and other financial institutions that established a credit facility in the maximum amount of $100,000.
Credit availability under the Amended Facility at any time was the lesser of the aggregate availability (as defined in the Amended Facility) or $100,000. The Amended Facility established a first priority lien and security interest in the current assets of the Company, including, among other items, cash, accounts receivable and inventory.
Advances made under the Amended Facility bore 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - -----------------------------------------------------------
July 1 to December 31 each year. Under the terms of the Amended Facility, the Company was 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.
The Amended Facility was terminated on November 16, 2000.
The Company entered into a Loan and Security Agreement (the "Credit Facility") effective November 16, 2000 with Fleet Retail Finance Inc., as agent, and other financial institutions that established a credit facility in the maximum amount of $150,000.
Borrowings under the Credit Facility could be used for working capital needs and general corporate purposes. Up to $20,000 of the Credit Facility at any time could be used for standby and documentary letters of credit. The Credit Facility included restrictions on, among other things, additional debt, investments, dividends and other distributions, mergers and acquisitions and contains no financial covenants as long as unused credit availability is at least $20,000.
Credit availability under the Credit Facility at any time was the lesser of the aggregate availability (as defined in the Credit Facility) or $150,000. The Credit Facility established a first priority lien and security interest in all the assets of the Company excluding real property and equipment.
Advances made under the Credit Facility bore interest at the Fleet National Bank prime rate or LIBOR plus 2.00% to LIBOR plus 2.50% depending on the average unused credit availability in the preceding quarter. Under the terms of the Credit Facility, the Company was required to pay a commitment fee of 0.25% per annum on the unused portion of the facility, letter of credit fees and certain other fees.
The Credit Facility was terminated on September 24, 2001 due to the Company's bankruptcy filing, and outstanding borrowings of $97,022 were repaid using borrowings from the newly secured $135 million Debtor-in-Possession ("DIP") Credit Facility through Fleet Retail Finance.
Borrowings under the DIP Credit Facility may be used for working capital needs and general corporate purposes. Up to $20,000 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 a financial covenant that requires the Company to maintain a minimum excess availability of the greater of $8,000 or 7% of total availability.
Credit availability under the DIP Credit Facility at any time is the lesser of the Availability (as defined in the Facility) or $135,000. Maximum credit availability under the DIP Credit Facility declined to $100,000 on November 1, 2001 at the Company's election. The DIP Credit Facility established a first priority lien and security interest in all of the assets of the Company.
Advances made under the DIP Credit Facility bear interest at the Fleet National Bank prime rate plus 0% to .5% or LIBOR plus 2% to 2.5% depending on the average unused credit availability during the preceding quarter. Under the terms of the DIP Credit Facility, the Company is required to pay a commitment fee of 0.375% per annum on the unused portion of the facility, letter of credit fees and certain other fees.
The DIP Credit Facility was terminated July 19, 2002 and repaid using the proceeds from the sale of substantially all of the store and distribution center assets.
At June 29, 2002 the Fleet reference rate (prime rate) was 4.75% and the LIBOR rate was 1.836%.
At June 29, 2002 there were letters of credit in the amount of $8,201 outstanding under the Credit Facility.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - --------------------------------------------------------------------------------
9. 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 year 2001 the Company recognized extraordinary gains of $19,731 in connection with the retirement of $40,001 of senior unsecured notes.
The Company has mortgage notes and bonds payable collateralized by real estate with an aggregate net book value of $3,694 at June 30, 2001.
10. 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 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 June 29, 2002, the fifty-two weeks ended June 30, 2001 and fifty-two weeks ended July 1, 2000, was $30,644, $43,149 and $43,730, respectively, including $75, $185 and $206 of additional rentals.
11. 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 Morgan, (ii) the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - -----------------------------------------------------------
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 48% 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 continued to provide benefits to him through September 19, 2000.
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 47.1%, the Company's share was 25%, the Avatex officers/designees' share was 19.4%, 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. In May 2001, the Company sold their investment in HPD and realized a gain of $825.
The Company paid $106, $104 and $95 to Human Service Group, Inc. during Fiscal Year 2002, 2001 and 2000, respectively, for secretarial services provided to Mr. Estrin. Human Service Group, Inc. is a corporation wholly owned by Mr. Estrin.
The Company paid CB Equities Corporation $17, $67 and $74 during Fiscal Years 2002, 2001 and 2000, respectively, for office and equipment support for Mr. Butler. Mr. Butler is President of CB Equities Corporation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - -----------------------------------------------------------
Pursuant to a Settlement Agreement by and among Mr. Butler, Mr. Estrin, the Company and the Company's Official Committee of Unsecured Creditors, Messrs. Butler and Estrin resigned from their positions with the Company effective as of July 8, 2002. In addition to general mutual releases, they each received: (i) $1.5 million: (ii) continuing medical benefits until confirmation of a Plan of Reorganization: (iii) their respective Company-leased vehicles until December 2002: (iv) life insurance coverage for up to one year, and (v) one-half of the Company's holdings in Avatex Corporation, Chemlink Acquisition Company, Presby Corporation and its affiliates.
12. WARRANTS AND OPTIONS
WARRANTS
There are warrants to purchase an aggregate of 1,250,000 of the Company's common shares outstanding as of June 30, 2001. Each warrant entitles the holder thereof to acquire one common share at a price of $13.50, subject to certain adjustments. Subsequent to year end all warrants expired.
STOCK OPTIONS
The Company has an incentive stock option plan for officers and key employees which allows for the issuance of a maximum of 5,000,000 options. As of June 29, 2002, options for 534,433 common shares were reserved for future grant, and options for 4,465,567 shares were outstanding and are exercisable upon vesting. Under the terms of the option plan, all options have a seven-year term from date of grant. Generally, the options granted vest with respect to 20% or 33 1/3% of the underlying shares on the grant date, and will vest in additional increments of 20% or 33 1/3% of the underlying shares on each of the subsequent anniversaries of the grant date until 100% vested. To the extent then vested, the options are generally exercisable within one year following the death or disability of the holder of the option, and within six months of any termination event, except where a termination is for cause, in which case the option will then terminate. To the extent then not vested, the options generally will terminate upon the holders' death, disability or termination of employment. The employment agreements of certain executive officers provide for accelerated vesting of options upon specified termination events.
The Company has a stock option plan for directors. Before October 1, 1997, each director received an annual grant of an option to purchase 5,000 shares of Common Stock. Commencing with the grant on October 1, 1997, each director now receives an annual grant of an option to purchase 10,000 shares of Common Stock. The options vest immediately, expire five years after the grant date and are exercisable at an exercise price equal to the market price on the grant date. A maximum of 500,000 common shares may be granted under the stock option plan for directors. As of June 29, 2002, options for 250,000 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.
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 June 29, 2002, the fifty-two weeks ended June 30, 2001 and the fifty-two weeks ended July 1, 2000, the Company recognized $0, $0 and $95, 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 on the following page.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - -----------------------------------------------------------
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 June 29, 2002, 4,670,167 options were exercisable at a weighted average exercise price per share of $4.76.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - -----------------------------------------------------------
The following table stratifies the options as of June 29, 2002:
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. The Employee Stock Purchase Plan was suspended effective June 30, 2001, after which employees were not permitted to contribute or purchase stock.
13. INCOME TAXES
Deferred income taxes at June 30, 2001 reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, the amounts used for income tax purposes and net operating loss carryforwards. Deferred tax assets are recognized to the extent that realization of such benefits is more likely than not.
Changes in tax rates or laws will result in adjustments to the recorded deferred tax assets or liabilities in the period that the change is enacted.
The components of deferred tax assets and liabilities are presented as follows:
June 30, 2001 ------------- Deferred Tax Assets: Operating and restructuring reserves $ 3,696 Net operating losses 135,723 Depreciation and amortization 28,514 Lease escalation accruals 3,772 Jobs tax credit 4,441 Other items 8,112 184,258 Valuation allowance (184,258) --------- Net deferred tax assets $ -0- =========
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. As a result of the losses incurred in Fiscal 2001, the realization of the net deferred tax assets is no longer more likely than not. Therefore, the valuation allowance was increased to fully reserve the net deferred tax assets. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - ----------------------------------------------------------
There is no current income tax provision in fiscal 2002, 2001 or 2000; a deferred tax provision in fiscal 2001 was recorded in the amount of $9,565. 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 $382,000 of tax basis NOLs available to offset future taxable income, as of June 29, 2002. 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 $35,000 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 $4,442 of federal targeted jobs tax credit carryovers, which will expire beginning in 2003.
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.
14. 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 June 29, 2002, the fifty-two weeks ended June 30, 2001 and the fifty-two weeks ended July 1, 2000, were $927, $1,215 and $1,214, respectively.
HEALTH AND WELFARE PLANS
The Company also contributes to a multi-employer union sponsored health and welfare plan covering truck drivers and warehouse personnel. Total expenses for the fifty-two weeks ended June 29, 2002, the fifty-two weeks ended June 30, 2001 and the fifty-two weeks ended July 1, 2000, were $1,586, $2,237 and $2,343, respectively.
The Company has no postretirement health and welfare or benefits programs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - -----------------------------------------------------------
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 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:
June 30, 2001 ------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at the beginning of the year $ 5,382 Service costs with expenses 419 Interest cost 372 Actuarial (gain)/loss (223) Amendments - Benefits paid (28) --------- Benefit obligation at end of year 5,922 ---------
CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 3,704 Actual return on plan assets 24 Employer contributions 67 Benefits paid (28) --------- Fair value of plan assets at end of year 3,767 ---------
Funded status (2,155) Unrecognized net actuarial loss 1,242 Unrecognized prior service cost 0 --------- Net amount recognized $ (913) =========
Amounts recognized in the statement of financial position consist of: Accrued benefit liability $ (913) Intangible asset 0 --------- Net amount recognized $ (913) =========
June 29, 2001 ------------- ASSUMPTIONS Discount rate 6.5% Expected long-term rate of return on assets 8.5% Rate of increase in future compensation levels 4.0%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - -----------------------------------------------------------
15. REORGANIZATION ITEMS
Reorganization items that were directly associated with the Company's Chapter 11 reorganization proceedings and the resulting restructuring of its operations consisted of the following for the fifty-two weeks ended June 29, 2002:
52 weeks ended June 29, 2002 ------------- Gain on sale of prescription files $ (21,148) Write-down inventory to expected net realizable value 16,601 Impairment of long-lived assets 13,775 Lease rejection costs, net 12,380 Professional fees 6,192 Severance and retention costs 8,232 Non-cash portion of severance 1,250 Gain on sale of lease (724) Other 612 --------- Total provision for reorganization $ 37,170 =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - -----------------------------------------------------------
16. SELECTED QUARTERLY FINANCIAL DATA (GOING CONCERN BASIS)
FISCAL 2002
FISCAL 2001
In the thirteen weeks ended June 30, 2001, the Company recorded an impairment of long-lived assets in the amount of $23,377 (see Note 3.o.), increased the valuation allowance on deferred taxes by $9,565 to fully reserve the net deferred tax assets (see Note 13) and recorded an other than temporary loss on its investment in Avatex in the amount of $4,248 (see Note 3.i.).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, CONTINUED) - -----------------------------------------------------------
17. LOSS PER SHARE
Basic earnings per share is computed by dividing net loss by the average number of common shares outstanding during the period. The diluted loss per share calculation assumes the conversion of dilutive stock options and warrants into common shares. Due to the losses incurred during each year, the stock options and warrants have been excluded, as they would be anti-dilutive.
18. 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.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS