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 December 27, 1997 Commission File
Number 0-27050
-------
Transition report pursuant to Section 13 or 15(d) of the Securities
------- Exchange Act of 1934
For the transition period from to
-------- --------
PHAR-MOR,INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1466309
- --------------------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Federal Plaza West, Youngstown, Ohio 44501-0400
- --------------------------------------------------- ------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (330) 746-6641
------------------------
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 January 30, 1998, 12,230,865 shares of the registrant's common stock were
outstanding.
<PAGE>2
PHAR-MOR, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 27, 1997
I N D E X
Page
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 27,
1997 and June 28, 1997 3
Condensed Consolidated Statements of Operations for the
Thirteen Weeks Ended December 27, 1997 and December 28,
1996 4
Condensed Consolidated Statements of Operations for the
Twenty-six Weeks Ended December 27, 1997 and December 28,
1996 5
Condensed Consolidated Statements of Cash Flows for the
Twenty-six Weeks Ended December 27, 1997 and December 28,
1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II: Other Information
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Exhibit Index 12
<PAGE>3
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
December 27, June 28,
1997 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60,230 $ 79,847
Accounts receivable - net 25,018 21,614
Merchandise inventories 183,369 169,103
Prepaid expenses and other current assets 4,597 5,743
--------- ---------
Total current assets 273,214 276,307
Property and equipment - net 76,151 72,835
Deferred tax asset 9,255 9,255
Other assets 4,873 4,208
--------- ---------
Total assets $ 363,493 $ 362,605
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 69,444 $ 61,808
Accrued expenses and other current liabilities 41,776 40,534
Current portion of long-term debt and capital lease obligations 9,140 9,155
--------- ---------
Total current liabilities 120,360 111,497
Long-term debt and capital lease obligations 135,625 140,213
Long-term self insurance reserves 8,062 8,098
Deferred rent and unfavorable lease liability - net 13,655 12,493
--------- ---------
Total liabilities 277,702 272,301
--------- ---------
Commitments and contingencies -- --
Minority interests 535 535
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 122 122
Additional paid-in capital 89,682 89,402
Retained (deficit) earnings (4,548) 245
--------- ---------
Total stockholders' equity 85,256 89,769
--------- ---------
Total liabilities and stockholders' equity $ 363,493 $ 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
December 27, 1997 December 28, 1996
----------------- -----------------
<S> <C> <C>
Sales $ 292,212 $ 290,933
Less:
Cost of goods sold, including occupancy and
distribution costs 234,220 235,943
Selling, general and administrative expenses 45,766 43,644
Chief Executive Officer severance expenses 234 --
ShopKo business combination expenses -- 2,185
Depreciation and amortization 5,717 5,339
----------------- -----------------
Income from operations before interest expense and
income taxes 6,275 3,822
Interest expense - net 3,497 2,906
----------------- -----------------
Income before income taxes 2,778 916
Income tax expense -- 1,464
----------------- -----------------
Net income (loss) $ 2,778 $ (548)
================= =================
Earnings (loss) per common share $ .23 $ (.05)
================= =================
Diluted earnings (loss) per common share $ .23 $ (.05)
================= =================
Weighted average number of common shares outstanding 12,165,353 12,157,054
================= =================
Weighted average number of common shares outstanding - diluted 12,212,527 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 OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Twenty-six
Weeks Ended Weeks Ended
December 27, 1997 December 28, 1996
----------------- -----------------
<S> <C> <C>
Sales $ 548,544 $ 555,484
Less:
Cost of goods sold, including occupancy and
distribution costs 442,422 455,034
Selling, general and administrative expenses 87,598 84,916
Chief Executive Officer severance expenses 5,667 --
ShopKo business combination expenses -- 2,185
Depreciation and amortization 11,055 10,247
----------------- -----------------
Income from operations before interest expense and
income taxes 1,802 3,102
Interest expense - net 6,595 5,845
----------------- -----------------
Loss before income taxes (4,793) (2,743)
Income taxes -- --
----------------- -----------------
Net loss $ (4,793) $ (2,743)
================= =================
Loss per common share $ (.39) $ (.23)
================= =================
Diluted loss per common share $ (.39) $ (.23)
================= =================
Weighted average number of common shares outstanding 12,162,276 12,157,054
================= =================
Weighted average number of common shares outstanding - diluted 12,162,276 12,157,054
================= =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>6
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Twenty-six
Weeks Ended Weeks Ended
December 27, 1997 December 28, 1996
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,793) $ (2,743)
Adjustments to reconcile net loss to net cash (used for)
provided by operating activities:
Items not requiring the outlay of cash:
Depreciation 6,982 5,753
Amortization of video rental tapes 4,073 4,494
Amortization of deferred financing costs 210 198
Deferred income taxes -- (120)
Deferred rent 1,162 831
Changes in assets and liabilities:
Accounts receivable (3,404) (4,639)
Merchandise inventories (13,992) (17,196)
Prepaid expenses 1,146 952
Other assets (898) (208)
Accounts payable 7,636 34,995
Accrued expenses and other current liabilities 1,207 2,407
----------------- -----------------
Net cash (used for) provided by operating activities (671) 24,724
----------------- -----------------
INVESTING ACTIVITIES
Additions to rental videotapes (4,324) (4,723)
Additions to property and equipment (10,299) (11,431)
----------------- -----------------
Net cash used for investing activities (14,623) (16,154)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 280 --
Principal payments on long-term debt (1,093) (1,734)
Principal payments on capital lease obligations (3,510) (2,943)
----------------- -----------------
Net cash used for financing activities (4,323) (4,677)
(Decrease) increase in cash and cash equivalents (19,617) 3,893
Cash and cash equivalents, beginning of period 79,847 104,265
----------------- -----------------
Cash and cash equivalents, end of period $ 60,230 $ 108,158
================= =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>7
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. and its
subsidiaries (the "Company"), 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. Operating results for the thirteen and twenty-six weeks ended
December 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 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 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, 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 reimbursement for any tax payments he is required to make
that constitute excess parachute payments under Federal Income Tax laws
resulting from the severance benefits he received.
4. PROPOSED BUSINESS COMBINATION
The Company entered into an Agreement and Plan of Reorganization dated
September 7, 1996 (as amended as of October 9, 1996) with ShopKo
Stores, Inc. ("ShopKo"), a retailer specializing in prescription and
vision benefit management and health decision support services, to
combine the respective companies under Cabot Noble, Inc. ("Cabot
Noble"), a newly organized Delaware holding company (the "Proposed
Transaction").
On April 1, 1997, the Company, ShopKo and Cabot Noble entered into a
Termination Agreement mutually terminating the Agreement and Plan of
Reorganization effective as of April 1, 1997.
5. ADOPTION OF ACCOUNTING PRONOUNCEMENT
For the quarter ended December 27, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share," which establishes standards for computing
and presenting earnings per share. This statement requires restatement
of all prior period earnings per share data presented. The basic
earnings per share and diluted earnings per share as defined by SFAS
No. 128 approximates the historically presented net income (loss) per
common share.
<PAGE>8
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 December 27, 1997 versus
Thirteen Weeks Ended December 28, 1996
Sales for the second quarter of fiscal year 1998 ("Fiscal 1998") increased 0.4%
compared to the second quarter of fiscal year 1997 ("Fiscal 1997"). Comparable
store sales for the second quarter decreased 1.4% from $289,905 for Fiscal 1997
to $285,851 for Fiscal 1998. The decrease in comparable store sales was
primarily due to the discontinuance of certain promotional discount programs
since the second quarter of fiscal year 1997.
Cost of sales as a percentage of sales was 80.2% in Fiscal 1998 compared to
81.1% in Fiscal 1997, a 0.9% decrease. This decrease is primarily due to lower
inventory shrinkage, 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 15.7%
in Fiscal 1998 compared to 15.0% in Fiscal 1997. This increase was due to an
increase in wages caused by the increase in the minimum wage, increased
advertising expenses and higher corporate overhead expenses. The increase in
corporate overhead expenses was primarily due to increased professional fees and
severance costs.
Depreciation and amortization expense was $5,717 in Fiscal 1998 compared to
$5,339 in Fiscal 1997, an increase of $378. The increase is the result of
depreciation on capital expenditures made since the second quarter of Fiscal
1997.
Net interest expense was $3,497 in Fiscal 1998 compared to net interest expense
of $2,906 in Fiscal 1997, a $591 increase. The increase in net interest expense
was primarily due to a decrease in interest income in Fiscal 1998 resulting from
lower cash balances.
Twenty-six Weeks Ended December 27, 1997 versus
Twenty-six Weeks Ended December 28, 1996
Sales for the twenty-six weeks ended December 27, 1997 decreased 1.2% compared
to the twenty-six weeks ended December 28, 1996. Comparable store sales for the
twenty-six weeks ended December 27, 1997 decreased 3.0% from $554,457 to
$537,795. The decrease in comparable store sales was primarily due to the
discontinuance of certain promotional discount programs since the beginning of
fiscal year 1997.
Cost of sales as a percentage of sales was 80.7% in the twenty-six weeks ended
December 27, 1997 compared to 81.9% in the prior year, a 1.2% decrease. This
decrease is primarily due to lower inventory shrinkage, higher product margins,
higher vendor income and higher cash discounts partially offset by higher
warehouse and transportation expenses and store occupancy costs.
Selling, general and administrative expenses as a percentage of sales were 16.0%
in the twenty-six weeks ended December 27, 1997 compared to 15.3% in the prior
year. This increase was due to an increase in wages caused by the increase in
the minimum wage, preopening costs associated with the opening of two new stores
in the current year versus one new store in the previous year and higher
corporate overhead expenses. The increase in corporate overhead expenses was
primarily due to increased professional fees and severance costs.
<PAGE>9
FINANCIAL CONDITION AND LIQUIDITY (all dollar amounts in thousands)
The Company's cash position as of December 27, 1997 was $60,230. 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
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
December 27, 1997, letters of credit totaling $5,709 were outstanding under the
Facility. The Facility expires on September 10, 1998.
Twenty-six weeks ended December 27, 1997
During the twenty-six weeks ended December 27, 1997, the Company's cash position
decreased by $19,617. Net cash used by operating activities was $671. The major
uses of cash from operating activities were for a net loss of $4,793, an
increase in seasonal and grocery warehouse inventories of $13,992 and an
increase in accounts receivable of $3,404, which were partially offset by an
increase in accounts payable of $7,636 and non-cash expenses of $12,427.
Capital expenditures of $10,299 and additions to video rental tapes of $4,324
were paid for with the Company's excess cash position.
Net cash used for financing activities of $4,323 consists of principal payments
on lease obligations of $3,510 and principal payments on term debt of $1,093
partially offset by the proceeds from the issuance of common stock as a result
of the exercise of stock options.
<PAGE>10
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on page 12.
(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
December 27, 1997:
None.
<PAGE>11
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: February 3, 1998 By: /s/ Sankar Krishnan
---------------------------------------
Sankar Krishnan
Senior Vice President and Chief
Financial Officer
Date: February 3, 1998 By: /s/ John R.Ficarro
---------------------------------------
John R. Ficarro
Senior Vice President and Chief
Administrative Officer
<PAGE>12
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> DEC-27-1997
<CASH> 60,230
<SECURITIES> 0
<RECEIVABLES> 25,018
<ALLOWANCES> 0
<INVENTORY> 183,369
<CURRENT-ASSETS> 273,214
<PP&E> 76,151
<DEPRECIATION> 0
<TOTAL-ASSETS> 363,493
<CURRENT-LIABILITIES> 120,360
<BONDS> 135,625
0
0
<COMMON> 122
<OTHER-SE> 85,134
<TOTAL-LIABILITY-AND-EQUITY> 363,493
<SALES> 548,544
<TOTAL-REVENUES> 548,544
<CGS> 442,422
<TOTAL-COSTS> 442,422
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,595
<INCOME-PRETAX> (4,793)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,793)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,793)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
