SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
------ Exchange Act of 1934
For the quarterly period ended September 27, 1997 Commission File
Number 0-27050
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Transition report pursuant to Section 13 or 15(d) of the Securities
------ Exchange Act of 1934
For the transition period from to
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PHAR-MOR, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1466309
- -------------------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Federal Plaza West, Youngstown, Ohio 44501-0400
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (330) 746-6641
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X No
------ ------
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X No
------ -----
As of October 13, 1997, 12,159,199 shares of the registrant's common stock were
outstanding.
<PAGE>2
PHAR-MOR, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 1997
I N D E X
Page
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 27,
1997 and June 28, 1997 3
Condensed Consolidated Statements of Operations for the
Thirteen Weeks Ended September 27, 1997 and September 28,
1996 4
Condensed Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended September 27, 1997 and September 28,
1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II: Other Information
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Defaults Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
Exhibit Index 11
<PAGE>3
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 27, June 28,
1997 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 55,425 $ 79,847
Accounts receivable - net 20,421 21,614
Merchandise inventories 189,836 169,103
Prepaid expenses and other current assets 5,076 5,743
--------- --------
Total current assets 270,758 276,307
Property and equipment - net 73,962 72,835
Deferred tax asset 9,255 9,255
Other assets 4,200 4,208
--------- --------
Total assets $ 358,175 $362,605
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 71,402 $ 61,808
Accrued expenses and other current liabilities 35,638 40,534
Current portion of long-term debt and capital lease obligations 9,155 9,155
--------- --------
Total current liabilities 116,195 111,497
Long-term debt and capital lease obligations 138,085 140,213
Long-term self insurance reserves 7,941 8,098
Deferred rent and unfavorable lease liability - net 13,221 12,493
--------- --------
Total liabilities 275,442 272,301
--------- --------
Commitments and contingencies -- --
Minority interests 535 535
--------- --------
Stockholders' equity:
Preferred stock -- --
Common stock 122 122
Additional paid-in capital 89,402 89,402
Retained (deficit) earnings (7,326) 245
--------- --------
Total stockholders' equity 82,198 89,769
--------- --------
Total liabilities and stockholders' equity $ 358,175 $362,605
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>4
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
September 27, 1997 September 28, 1996
------------------ ------------------
<S> <C> <C>
Sales $ 256,332 $ 264,551
Less:
Cost of goods sold, including occupancy and
distribution costs 208,202 219,091
Selling, general and administrative expenses 41,832 41,272
Chief Executive Officer severance expenses 5,433 --
Depreciation and amortization 5,338 4,908
------------------ ------------------
Loss from operations before interest expense and
income taxes (4,473) (720)
Interest expense - net 3,098 2,939
------------------ ------------------
Loss before income taxes (7,571) (3,659)
Income tax benefit -- (1,464)
------------------ ------------------
Net loss $ (7,571) $ (2,195)
================== ==================
Net loss per common share $ (.62) $ (.18)
================== ==================
Weighted average number of common shares outstanding 12,159,199 12,157,054
================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>5
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
September 27, 1997 September 28, 1996
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (7,571) $ (2,195)
Adjustments to reconcile net loss to net cash (used for)
provided by operating activities:
Items not requiring the outlay of cash:
Depreciation 3,367 2,759
Amortization of video rental tapes 1,971 2,149
Amortization of deferred financing costs 105 93
Deferred income taxes -- (1,464)
Deferred rent 728 447
Changes in assets and liabilities:
Accounts receivable 1,193 (1,538)
Merchandise inventories (20,630) (15,539)
Prepaid expenses 667 97
Other assets (108) (213)
Accounts payable 9,594 20,966
Accrued expenses and other current liabilities (5,054) (3,943)
------------------ ------------------
Net cash (used for) provided by operating activities (15,738) 1,619
------------------ ------------------
INVESTING ACTIVITIES
Additions to rental videotapes (2,063) (2,245)
Additions to property and equipment (4,493) (3,983)
------------------ ------------------
Net cash used for investing activities (6,556) (6,228)
------------------ ------------------
FINANCING ACTIVITIES
Principal payments on long-term debt (547) (1,210)
Principal payments on capital lease obligations (1,581) (1,456)
------------------ ------------------
Net cash used for financing activities (2,128) (2,666)
------------------ ------------------
Decrease in cash and cash equivalents (24,422) (7,275)
Cash and cash equivalents, beginning of period 79,847 104,265
------------------ ------------------
Cash and cash equivalents, end of period $ 55,425 $ 96,990
================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE>6
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. They do not
include all information and footnotes which would be required by
generally accepted accounting principles for complete financial
statements. In the opinion of management of Phar-Mor, Inc. (the
"Company") and its subsidiaries, these interim financial statements
contain all adjustments considered necessary for a fair presentation of
financial position, results of operations and cash flows for the
periods presented. Reference should be made to the Company's Annual
Report on Form 10-K for the fiscal year ended June 28, 1997 for
additional disclosures, including a summary of the Company's accounting
policies, which have not changed. Operating results for the thirteen
weeks ended September 27, 1997 are not necessarily indicative of the
results that may be expected for the fifty-two weeks ending June 27,
1998.
2. REORGANIZATION
On August 17, 1992, the Company and its subsidiaries filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code
("Chapter 11"). From that time until September 11, 1995, the Company
operated its business as a debtor-in-possession subject to the
jurisdiction of the United States Bankruptcy Court for the Northern
District of Ohio (the "Bankruptcy Court"). On September 11, 1995, the
Company and its subsidiaries emerged from reorganization proceedings
under Chapter 11 pursuant to the confirmation order entered on August
29, 1995 by the Bankruptcy Court confirming the Third Amended Joint
Plan of Reorganization dated May 25, 1995.
3. CHIEF EXECUTIVE OFFICER RESIGNATION
On September 19, 1997, Robert Haft and Avatex Corporation ("Avatex")
finalized an agreement regarding Hamilton Morgan LLC ("Hamilton
Morgan"), (the "Hamilton Morgan Agreement"). In exchange for 3,750,000
shares of the Company's stock and the return of a voting proxy on other
Company shares, Hamilton Morgan will redeem the 69.8% Avatex interest
in Hamilton Morgan, repay certain indebtedness and receive other
consideration. As of September 27, 1997, Avatex beneficially owns 39.1%
of the Company's outstanding 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 Company's Board of Directors and as the Company's Chief
Executive Officer and received a lump sum cash payment of $4,417. Under
the terms of the Severance Agreement, the Company will continue to
provide benefits to him through September 19, 2000. He is indemnified
and entitled to tax reimbursement in respect to any payments that
constitute excess parachute payments under Federal Income Tax laws. The
Company has provided a letter of credit in the amount of approximately
$2,900 to secure its contractual obligations under the Severance
Agreement.
<PAGE>7
PHAR-MOR, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (all dollar amounts in thousands)
Thirteen Weeks Ended September 27, 1997 versus
Thirteen Weeks Ended September 28, 1996
Sales for the first quarter of fiscal year 1998 ("Fiscal 1998") decreased 3.1%
compared to the first quarter of fiscal year 1997 ("Fiscal 1997"). Comparable
store sales decreased 4.8% from $264,551 for Fiscal 1997 to $251,944 for Fiscal
1998. The decrease in comparable store sales was primarily due to the
discontinuance of certain promotional discount programs since the first quarter
of fiscal year 1997.
Cost of sales as a percentage of sales was 81.2% in Fiscal 1998 compared to
82.8% in Fiscal 1997, a 1.6% decrease. This decrease is primarily due to lower
inventory shrinkage, higher product margins, lower promotional discounts, higher
vendor income and higher cash discounts partially offset by higher warehouse and
transportation expenses and store occupancy costs. In August 1997 the Company
discontinued purchasing grocery products from a wholesaler and began
distributing these products from its distribution center. The increase in
warehouse and transportation costs associated with this change was more than
offset by higher product margins, increased cash discounts and increased vendor
income.
Selling, general and administrative expenses as a percentage of sales were 16.3%
in Fiscal 1998 compared to 15.6% in Fiscal 1997. This increase was due to an
increase in wages caused by the increase in the minimum wage, and by pre-opening
costs associated with the opening of the Company's 104th store in July 1997,
partially offset by lower advertising expenses.
In Fiscal 1998 the Company incurred $5,433 in executive severance and related
costs associated with the resignation of Robert Haft, the Company's former
Chairman of the Board and Chief Executive Officer.
Depreciation and amortization expense was $5,338 in Fiscal 1998 compared to
$4,908 in Fiscal 1997, an increase of $430. The increase is the result of
depreciation on capital expenditures made since the first quarter of Fiscal
1997.
Net interest expense was $3,098 in Fiscal 1998 compared to net interest expense
of $2,939 in Fiscal 1997, a $159 increase. The increase in net interest expense
was primarily due to a decrease in interest income in Fiscal 1998.
FINANCIAL CONDITION AND LIQUIDITY (all dollar amounts in thousands)
The Company's cash position as of September 27, 1997 was $55,425. The Company's
cash position may fluctuate as a result of seasonal merchandise purchases and
timing of payments.
On September 11, 1995, the Company entered into the Revolving Credit Facility
(the "Facility") with BankAmerica Business Credit, Inc., as agent, and other
financial institutions (collectively, the "Lenders"), that established a credit
facility in the maximum amount of $100,000.
Borrowings under the Facility may be used for working capital needs and general
corporate purposes. Up to $50,000 of the Facility at any time may be used for
standby and documentary letters of credit. The Facility includes restrictions
on, among other things, additional debt, capital expenditures, investments,
dividends and other distributions, mergers and acquisitions, and contains
covenants requiring the Company to meet a specified quarterly minimum EBITDA
Coverage Ratio (the sum of earnings before interest, taxes, depreciation and
<PAGE>8
amortization, as defined, divided by interest expense), calculated on a rolling
four quarter basis, and a monthly minimum net worth test. As of the date hereof,
the Company is in compliance with all such financial covenants.
Credit availability under the Facility at any time is the lesser of the
Aggregate Availability (as defined in the Facility) or $100,000. The Facility
establishes a first priority lien and security interest in the current assets of
the Company, including, among other items, cash, accounts receivable and
inventory. Advances made under the Facility bear interest at the BankAmerica
reference rate plus 0.50% or, at the option of the Company, the London Interbank
Offered Rate ("LIBOR") plus the applicable margin (as defined in the Facility),
which ranges between 1.50% and 2.00%. Under the terms of the Facility, the
Company is required to pay a commitment fee of 0.28125% per annum on the unused
portion of the Facility, letter of credit fees and certain other fees. As of
September 27, 1997, letters of credit totaling $5,709 were outstanding under the
Facility. The Facility expires on September 10, 1998.
Thirteen weeks ended September 27, 1997
During the thirteen weeks ended September 27, 1997, the Company's cash position
decreased by $24,422. Net cash used by operating activities was $15,738. The
major uses of cash from operating activities were for a net loss of $7,571, an
increase in seasonal and grocery warehouse inventories of $20,630 and a decrease
in accrued expenses of $5,054, which were partially offset by an increase in
accounts payable of $9,594.
Capital expenditures of $4,493 and additions to video rental tapes of $2,063
were paid for with the Company's excess cash position.
Net cash used for financing activities of $2,128 consists of principal payments
on lease obligations of $1,581 and principal payments on term debt of $547.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
<PAGE>9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on page 11.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the
Securities and Exchange Commission during the quarter ended
September 27, 1997:
Date of Report Date of Filing Description
-------------- -------------- -----------
August 22, 1997 August 29, 1997 Press release on agreement between
Hamilton Morgan LLC and Avatex
resolving buy/sell agreement.
September 19, 1997 September 23, 1997 Press release on resignation of
Robert M. Haft as Chairman and
Chief Executive Officer.
<PAGE>10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHAR-MOR, INC.
Date: October 21, 1997 By: /s/ Sankar Krishnan
-------------------------------
Sankar Krishnan
Senior Vice President
and Chief Financial Officer
Date: October 21, 1997 By: /s/ John R. Ficarro
-------------------------------
John R. Ficarro
Senior Vice President and
Chief Administrative Officer
<PAGE>11
PHAR-MOR, INC.
INDEX TO EXHIBITS
Exhibit No.
*3.1 Amended and Restated Articles of Incorporation
*3.2 By-laws
*4.1 Indenture dated September 11, 1995 between Phar-Mor, Inc. and IBJ
Schroder Bank & Trust Company
*4.2 Warrant Agreement dated September 11, 1995 between Phar-Mor, Inc. and
Society National Bank
27 Financial Data Schedule
- -----------------------------------------------------------------
* Previously filed in connection with the filing of Phar-Mor's Form 10,
on October 23, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-END> SEP-27-1997
<CASH> 55,425
<SECURITIES> 0
<RECEIVABLES> 20,421
<ALLOWANCES> 0
<INVENTORY> 189,836
<CURRENT-ASSETS> 270,758
<PP&E> 73,962
<DEPRECIATION> 0
<TOTAL-ASSETS> 358,175
<CURRENT-LIABILITIES> 116,195
<BONDS> 138,085
0
0
<COMMON> 122
<OTHER-SE> 82,076
<TOTAL-LIABILITY-AND-EQUITY> 358,175
<SALES> 256,332
<TOTAL-REVENUES> 256,332
<CGS> 208,202
<TOTAL-COSTS> 208,202
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,098
<INCOME-PRETAX> (7,571)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,571)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,571)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
