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 October 2, 1999 Commission File Number
0-27050
-------
Transition report pursuant to Section 13 or 15(d) of the Securities
- -------- Exchange Act of 1934 For the transition period from________ to ________
PHAR-MOR, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1466309
- ------------------------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Federal Plaza West, Youngstown, Ohio 44501-0400
- ------------------------------------------------ ---------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (330) 746-6641
--------------
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 20, 1999, 12,240,865 shares of the registrant's common stock were
outstanding .
<PAGE> 2
PHAR-MOR, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 2, 1999
I N D E X
Page
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of October
2, 1999 and July 3, 1999 3
Condensed Consolidated Statements of Operations for the
Thirteen Weeks Ended October 2, 1999 and September 26, 1998 4
Condensed Consolidated Statements of Comprehensive Loss for
the Thirteen Weeks Ended October 2, 1999 and September 26,
1998 5
Condensed Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended October 2, 1999 and September 26, 1998 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 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit Index 14
<PAGE> 3
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS (Unaudited)
October 2, July 3,
1999 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,867 $ 17,346
Marketable securities 1,541 3,254
Accounts receivable - net 31,775 28,293
Merchandise inventories 231,979 218,945
Prepaid expenses and other current assets 6,333 7,418
------- -------
Total current assets 287,495 275,256
Property and equipment - net 93,545 93,738
Goodwill 16,079 16,234
Deferred tax asset 9,331 9,254
Investments 13,504 8,314
Investment in Avatex 2,476 2,608
Other assets 4,978 5,133
------- -------
Total assets $ 427,408 $ 410,537
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 111,161 $ 119,843
Accrued expenses and other current liabilities 37,624 37,104
Current portion of long-term debt and capital lease obligations 8,946 8,946
------- -------
Total current liabilities 157,731 165,893
Long-term debt and capital lease obligations 171,819 142,947
Long-term self insurance reserves 8,299 8,032
Deferred rent and unfavorable lease liability - net 11,194 11,073
------- -------
Total liabilities 349,043 327,945
------- -------
Commitments and contingencies
Minority interests 535 535
------- -------
Stockholders' equity:
Preferred stock -- --
Common stock 122 122
Additional paid-in capital 90,007 90,007
Stock options outstanding 2,200 2,105
Other comprehensive income (loss):
Unrealized loss on investment in Avatex (131) --
Retained deficit (14,368) (10,177)
------- -------
Total stockholders' equity 77,830 82,057
------- -------
Total liabilities and stockholders' equity $ 427,408 $ 410,537
========= =========
</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
October 2, 1999 September 26, 1998
--------------- ------------------
<S> <C> <C>
Sales $ 317,835 $ 269,412
Less:
Cost of goods sold, including occupancy and
distribution costs 256,783 218,597
Selling, general and administrative expenses 53,455 42,461
Depreciation and amortization 7,175 5,738
------- -------
Income from operations before interest expense,
interest income, investment loss and income taxes 422 2,616
Interest expense (4,554) (3,991)
Interest income 9 488
Investment loss (68) (625)
------- -------
Loss before income taxes (4,191) (1,512)
Income taxes -- --
------- -------
Net loss $ (4,191) $ (1,512)
============ ============
Basic and diluted loss per common share $ (.34) $ (.12)
============ ============
Weighted average number of basic and diluted common
shares outstanding 12,240,865 12,239,821
</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 COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
October 2, 1999 September 26, 1998
--------------- ------------------
<S> <C> <C>
Net loss $(4,191) $(1,512)
Other comprehensive loss:
Unrealized loss on securities:
Unrealized holding loss on investment in Avatex
arising during period (131) (2,308)
------ ------
Comprehensive loss $(4,322) $(3,820)
======= =======
</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>
Thirteen Thirteen
Weeks Ended Weeks Ended
October 2, 1999 September 26, 1998
--------------- ------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (4,191) $ (1,512)
Adjustments to reconcile net loss to net cash used for
operating activities:
Items not requiring the outlay of cash:
Depreciation 4,641 3,682
Amortization of video rental tapes 2,241 1,981
Stock option expense 95 183
Amortization of deferred financing costs and goodwill 361 105
Unrealized gain on equity investments (590) --
Deferred rent 121 11
Changes in assets and liabilities:
Accounts receivable (3,482) (2,027)
Marketable securities 1,713 2,463
Merchandise inventories (14,821) 137
Prepaid expenses 1,008 659
Other assets (51) 326
Accounts payable (22,088) (7,103)
Accrued expenses and other current liabilities 699 (6,236)
------- -------
Net cash used for operating activities (34,344) (7,331)
------- -------
INVESTING ACTIVITIES
Additions to rental videotapes (454) (1,850)
Additions to property and equipment (4,448) (7,743)
Investment in Avatex -- (1,000)
Investment in equity securities (4,600) (251)
------- -------
Net cash used for investing activities (9,502) (10,844)
------- -------
FINANCING ACTIVITIES
Borrowings under revolving credit facility 30,969 --
Bank overdrafts 13,495 --
Principal payments on long-term debt (446) (977)
Principal payments on capital lease obligations (1,651) (1,607)
Issuance of common stock -- 31
------- -------
Net cash from (used for) financing activities 42,367 (2,553)
------- -------
Decrease in cash and cash equivalents (1,479) (20,728)
Cash and cash equivalents, beginning of period 17,346 44,655
------- -------
Cash and cash equivalents, end of period $ 15,867 $ 23,927
============ ============
</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, except per share amounts)
- --------------------------------------------------------------------------------
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, comprehensive loss 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 July 3,
1999 for additional disclosures, including a summary of the Company's
accounting policies, which have not changed. Operating results for the
thirteen weeks ended October 2, 1999 are not necessarily indicative of
the results that may be expected for the fifty-two weeks ending July 1,
2000.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and its
components, some of which have been historically excluded from the
Consolidated Statement of Operations and recorded directly to the
equity section of an entity's statement of financial position. SFAS No.
130 also requires that the cumulative balance of these items of other
comprehensive income are reported separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. The Company adopted SFAS No. 130 in fiscal year
1999 and has elected to include the required items of other
comprehensive income in its Condensed Consolidated Statements of
Comprehensive Income (Loss). The Company reported other comprehensive
income (loss) in each of the first three quarters of fiscal year 1999,
however in the fourth quarter the Company recorded an other than
temporary impairment write-down in its statement of operation which
effectively eliminated the other comprehensive income (loss) for fiscal
year 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value, with the potential effect on
operations dependent upon certain conditions being met. SFAS No. 133
(as amended by SFAS No. 137) is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. Management does not believe
that the adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
3. 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.
<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 October 2, 1999 versus
Thirteen Weeks Ended September 26, 1998
Sales for the first quarter of fiscal year 2000 ("Fiscal 2000") increased 18.0%
compared to the first quarter of fiscal year 1999 ("Fiscal 1999"). Sales
increased 14.2% due to the acquisition of the 32 Pharmhouse stores which were
acquired in March 1999. Comparable store sales increased 3.4% from $266,152 for
Fiscal 1999 to $275,067 for Fiscal 2000. The increase in comparable store sales
was primarily due to a 9.2% comparable store pharmacy sales increase.
Cost of sales as a percentage of sales was 80.8% in Fiscal 2000 compared to
81.1% in Fiscal 1999, a 0.3% improvement. The improvement is primarily due to
increased vendor income related to the remerchandising activities in the
Pharmhouse stores partially offset by lower video rental tape sales. In the last
year the Company closed approximately one half of its poorer performing video
rental departments and liquidated the video rental tape inventory in those
stores.
Selling, general and administrative expenses as a percentage of sales were 16.8%
in Fiscal 2000 compared to 15.8% in Fiscal 1999. This increase was primarily due
to higher wages, advertising and other store operating expenses as a percentage
of sales due to the inclusion of the lower volume Pharmhouse stores partially
offset by lower corporate expenses as a percentage of sales.
Depreciation and amortization expense was $7,175 in Fiscal 2000 compared to
$5,738 in Fiscal 1999, an increase of $1,437. The increase is the result of
depreciation on capital expenditures made since the first quarter of Fiscal 1999
and the depreciation and amortization on the assets acquired in the Pharmhouse
acquisition.
Interest income was $9 in Fiscal 2000 compared to interest income of $488 in
Fiscal 1999, a $479 decrease. The decrease in interest income was due to a
decrease in the amount of excess funds available for investment in Fiscal 2000.
FINANCIAL CONDITION AND LIQUIDITY (all dollar amounts in thousands)
The Company's cash position as of October 2, 1999 was $15,867. The Company's
cash position may fluctuate as a result of seasonal merchandise purchases and
timing of payments.
The Company entered into an Amended and Restated Revolving Credit Facility (the
"Amended Facility") effective September 10, 1998 with BABC, as agent, and other
financial institutions that establishes a credit facility in the maximum amount
of $100,000.
Borrowings under the Amended Facility may be used for working capital needs and
general corporate purposes. Up to $50,000 of the Amended Facility at any time
may be used for standby and documentary letters of credit. The Amended Facility
includes restrictions on, among other things, additional debt, investments,
dividends and other distributions, mergers and acquisitions and contains no
financial covenants.
Credit availability under the Amended Facility at any time is the lesser of the
aggregate availability (as defined in the Amended Facility) or $100,000. The
Amended Facility establishes a first priority lien and security interest in the
current assets of the Company, including, among other items, cash, accounts
receivable and inventory.
Advances made under the Amended Facility bear interest at the BankAmerica
reference rate plus 1/2% or LIBOR plus 2.00%. Under the terms of the Amended
Facility, the Company is required to pay a commitment fee of between 0.25% and
0.35% per annum on the unused portion of the facility, letter of credit fees and
certain other fees.
Unused availability under the Amended Facility, after subtracting amounts used
for outstanding letters of credit, was $43,763 at October 2, 1999.
The Amended Facility expires on March 14, 2002.
Thirteen weeks ended October 2, 1999
During the thirteen weeks ended October 2, 1999, the Company's cash position
decreased by $1,479. Net cash used by operating activities was $34,344. The
major uses of cash from operating activities were for an increase in accounts
receivable of $3,482, an increase in inventories of $14,821 in anticipation of
the holiday season and a decrease in accounts payable of $22,088 due to the
timing of payments.
<PAGE> 9
Capital expenditures of $4,448, additions to video rental tapes of $454 and an
additional $4,600 investment in equity securities were paid for with the
Company's revolving credit facility.
Net cash from financing activities of $42,367 consisted of borrowings under the
revolving credit facility and increases in bank overdrafts partially offset by
principal payments on lease obligations of $1,651 and principal payments on term
debt of $446.
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.
<PAGE> 10
Trends, Demands, Commitments, Events or Uncertainties (all dollar amounts in
thousands)
Certain Company information systems have potential operational problems in
connection with applications that contain a date and/or use a date in a
comparative manner as the date transitions into the Year 2000. The Company has
implemented a comprehensive program to identify and remediate potential problems
related to the Year 2000 in its information systems, infrastructure, logistics
and retail facilities. In addition, the Company has initiated formal
communication with all of its significant vendors and other external interfaces
to determine the extent to which the Company is vulnerable to a third-party's
failure to remediate their own potential problems related to the Year 2000. The
inability of the Company or significant vendors and/or external interfaces of
the Company to adequately address Year 2000 issues could cause disruption of the
Company's systems.
Management believes, based on its assessment of all of its systems, that it has
completed all of the software modifications necessary to make its systems year
2000 compliant. The Company will replace certain personal computer related
hardware before December 31, 1999 to ensure that those systems will be Year 2000
compliant. The Company has developed or is in the process of developing
contingency plans that include manually performing work in place of affected
systems and the renting of back-up systems and generators.
As of October 2, 1999, the Company has incurred approximately $1,300 related to
the assessment of, and efforts in connection with, its Year 2000 program and
remediation plan. The Company has completed all of the software modifications
necessary to make its systems Year 2000 compliant and anticipates no future
expenditures for software modifications will be necessary. Future spending for
hardware purchases required for Year 2000 are currently estimated to be
approximately $200. The Company has accelerated by one year the purchase of
approximately $5,000 in replacement hardware in order to ensure the associated
system is Year 2000 compliant. These expenditures are not expected to have a
material impact on the Company's operating results, liquidity and capital
resources.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value,
with the potential effect on operations dependent upon certain conditions being
met. SFAS No. 133 (as amended by SFAS No. 137) is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Management does not
believe that the adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
<PAGE> 11
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> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on page 15.
(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
October 2, 1999
None.
<PAGE> 13
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: November 3, 1999 By: /s/ Sankar Krishnan
-------------------
Sankar Krishnan
Senior Vice President and
Chief Financial Officer
Date: November 3, 1999 By: /s/ John R. Ficarro
-------------------
John R. Ficarro
Senior Vice President and
Chief Administrative Officer
<PAGE>14
PHAR-MOR, INC.
INDEX TO EXHIBITS
Exhibit No.
*3.1 Amended and Restated Articles of Incorporation
**3.2 Amended and Restated By-laws
*4.1 Indenture dated September 11, 1995 between Phar-Mor, Inc. and IBJ
Schroder Bank & Trust Company
*4.2 Warrant Agreement dated September 11, 1995 between Phar-Mor, Inc. and
Society National Bank
***10.1 Loan and Security Agreement, dated as of September 10, 1998, by and
among the financial institutions listed on the signature pages therein,
BankAmerica Business Credit, Inc., as agent, and Phar-Mor, Inc.,
Phar-Mor, Inc., LLC, Phar-Mor of Delaware, Inc., Phar-Mor of Florida,
Inc., Phar-Mor of Ohio, Inc., Phar-Mor of Virginia, Inc., and Phar-Mor
of Wisconsin, Inc.
27 Financial Data Schedule
- -----------------------------------------------------------------
* Previously filed in connection with the filing of Phar-Mor's Form 10,
on October 23, 1995
** Previously filed in connection with the filing of Phar-Mor's quarterly
report on Form 10-Q, on May 1, 1998
*** Previously filed in connection with the filing of Phar-Mor's quarterly
report on Form 10-Q, on November 2, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-1-2000
<PERIOD-END> OCT-2-1999
<CASH> 15,867
<SECURITIES> 1,541
<RECEIVABLES> 31,775
<ALLOWANCES> 0
<INVENTORY> 231,979
<CURRENT-ASSETS> 287,495
<PP&E> 93,545
<DEPRECIATION> 0
<TOTAL-ASSETS> 427,408
<CURRENT-LIABILITIES> 157,731
<BONDS> 171,819
0
0
<COMMON> 122
<OTHER-SE> 77,708
<TOTAL-LIABILITY-AND-EQUITY> 427,408
<SALES> 317,835
<TOTAL-REVENUES> 317,835
<CGS> 256,783
<TOTAL-COSTS> 256,783
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,554
<INCOME-PRETAX> (4,191)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,191)
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
