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 March 27, 1999
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 _____
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 May 05, 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 MARCH 27, 1999
I N D E X
Page
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 27, 1999 and
June 27, 1998 3
Condensed Consolidated Statements of Operations for the
Thirteen Weeks Ended March 27, 1999 and March 28, 1998 4
Condensed Consolidated Statements of Operations for the
Thirty-nine Weeks Ended March 27, 1999 and March 28, 1998 5
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the Thirteen Weeks Ended March 27, 1999 and March
28, 1998 6
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the Thirty-nine Weeks Ended March 27, 1999 and
March 28, 1998 7
Condensed Consolidated Statements of Cash Flows for the
Thirty-nine Weeks Ended March 27, 1999 and March 28, 1998 8
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II: Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
<PAGE> 3
<TABLE>
<CAPTION>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS (Unaudited)
March 27, June 27,
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,020 $ 44,655
Marketable securities 3,469 9,065
Accounts receivable - net 23,129 20,927
Merchandise inventories 226,676 176,069
Prepaid expenses and other current assets 2,420 2,703
------------ ------------
Total current assets 272,714 253,419
Property and equipment - net 93,534 75,512
Goodwill 16,500 1,667
Deferred tax asset 8,143 9,281
Investments 7,301 4,275
Investment in Avatex 1,694 3,525
Other assets 5,402 1,776
------------ ------------
Total assets $ 405,288 $ 349,455
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 106,796 $ 67,091
Accrued expenses and other current liabilities 40,160 39,316
Current portion of long-term debt and capital lease obligations 10,127 10,327
------------ ------------
Total current liabilities 157,083 116,734
Long-term debt and capital lease obligations 123,900 130,993
Revolving credit facility 20,050 --
Long-term self insurance reserves 7,348 7,680
Deferred rent and unfavorable lease liability - net 11,649 11,074
------------ ------------
Total liabilities 320,030 266,481
------------ ------------
Commitments and contingencies
Minority interests 535 535
------------ ------------
Stockholders' equity:
Preferred stock -- --
Common stock 122 122
Additional paid-in capital 90,007 89,976
Stock options outstanding 1,951 1,401
Unrealized loss on investment in Avatex, net of related tax
effect (2,174) of $1,131 and $0, respectively (2,174) (475)
Retained deficit (5,183) (8,585)
------------ ------------
Total stockholders' equity 84,723 82,439
------------ ------------
Total liabilities and stockholders' equity $ 405,288 $ 349,455
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Thirteen Thirteen
Weeks Ended Weeks Ended
March 27, 1999 March 28,1998
------------ ------------
<S> <C> <C>
Sales $ 290,928 $ 277,319
Less:
Cost of goods sold, including occupancy and
distribution costs 235,910 223,696
Selling, general and administrative expenses 44,482 44,236
Chief Executive Officer severance expenses -- 720
Loss on disposal of equipment -- 4,615
Depreciation and amortization 5,992 5,463
------------ ------------
Income (loss) from operations before interest expense,
interest income, investment income and income taxes 4,544 (1,411)
Interest expense (3,877) (4,194)
Interest income 797 839
Investment income 483 54
------------ ------------
Income (loss) before income taxes 1,947 (4,712)
Income taxes 780 --
------------ ------------
Net Income (loss) $ 1,167 $ (4,712)
============ ============
Basic income (loss) per common share $ .10 $ (.39)
============ ============
Diluted income (loss) per common share $ .09 $ (.39)
============ ============
Weighted average number of basic common shares outstanding 12,240,865 12,229,071
Weighted average number of diluted common shares outstanding 12,317,051 12,229,071
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 5
<TABLE>
<CAPTION>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
March 27, 1999 March 28, 1998
------------ ------------
<S> <C> <C>
Sales $ 857,329 $ 825,863
Less:
Cost of goods sold, including occupancy and
distribution costs 692,792 666,118
Selling, general and administrative expenses 130,681 131,834
Chief Executive Officer severance expenses -- 6,387
Loss on disposal of equipment -- 4,615
Depreciation and amortization 17,270 16,518
------------ ------------
Income from operations before interest expense,
interest income, investment (loss) income and income taxes 16,586 391
Interest expense (11,761) (12,562)
Interest income 1,568 2,612
Investment (loss) income (721) 54
------------ ------------
Income (loss) before income taxes 5,672 (9,505)
Income taxes 2,270 --
------------ ------------
Net income (loss) $ 3,402 $ (9,505)
============ ============
Basic income (loss) per common share $ .28 $ (.78)
============ ============
Diluted income (loss) per common share $ .28 $ (.78)
============ ============
Weighted average number of basic common shares outstanding 12,240,517 12,184,541
Weighted average number of diluted common shares outstanding 12,306,320 12,184,541
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 6
<TABLE>
<CAPTION>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Thirteen Thirteen
Weeks Ended Weeks Ended
March 27, 1999 March 28, 1998
------------ ------------
<S> <C> <C>
Net income (loss) $ 1,167 $ (4,712)
Other comprehensive loss:
Unrealized loss on securities:
Unrealized holding loss on investment in Avatex
arising during period (1) --
Comprehensive income (loss) $ 1,166 $ (4,712)
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 7
<TABLE>
<CAPTION>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
March 27, 1999 March 28, 1998
------------ ------------
<S> <C> <C>
Net income (loss) $ 3,402 $ (9,505)
Other comprehensive loss:
Unrealized loss on securities:
Unrealized holding loss on investment in Avatex
arising during period net of tax benefit of $1,131 (1,699) --
------------ ------------
Comprehensive income (loss) $ 1,703 $ (9,505)
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 8
<TABLE>
<CAPTION>
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
March 27, 1999 March 28, 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,402 $ (9,505)
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Items not requiring the outlay of cash:
Depreciation 11,813 10,470
Amortization of video rental tapes 5,374 6,048
Loss on disposal of equipment -- 4,615
Stock option expense 549 1,218
Amortization of deferred financing costs and goodwill 183 315
Deferred income taxes 2,270 --
Deferred rent (483) (438)
Gain on equity method investment (735) --
Changes in assets and liabilities:
Accounts receivable (586) (4,429)
Marketable securities 5,596 (11,546)
Merchandise inventories (15,271) (14,832)
Prepaid expenses 586 511
Other assets (21) (516)
Accounts payable (5,711) 9,428
Accrued expenses and other current liabilities (9,960) (4,245)
------------ ------------
Net cash used for operating activities (2,994) (12,906)
------------ ------------
INVESTING ACTIVITIES
Additions to rental videotapes (6,000) (6,377)
Additions to property and equipment (18,631) (14,539)
Proceeds on sale of property and equipment 110 --
Investment in Avatex (1,000) --
Investment in Pharmhouse Corp., net of $3,292 cash acquired (4,608) --
Investment in equity securities (2,291) --
------------ ------------
Net cash used for investing activities (32,420) (20,916)
------------ ------------
FINANCING ACTIVITIES
Borrowings under revolving credit facility 20,050 --
Principal payments on long-term debt (28,959) (1,694)
Principal payments on capital lease obligations (5,280) (5,399)
Bank overdrafts 21,687 --
Additions to long-term debt 250 --
Issuance of common stock 31 574
------------ ------------
Net cash provided by (used for) financing activities 7,779 (6,519)
------------ ------------
Decrease in cash and cash equivalents (27,635) (40,341)
Cash and cash equivalents, beginning of period 44,655 79,847
------------ ------------
Cash and cash equivalents, end of period $ 17,020 $ 39,506
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 9
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 income (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 June
27, 1998 for additional disclosures, including a summary of the
Company's accounting policies, which have not changed, except as
discussed in Note 3. Operating results for the thirty-nine weeks ended
March 27, 1999 are not necessarily indicative of the results that may
be expected for the fifty-three weeks ending July 3, 1999.
2. 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 redeemed the 69.8% Avatex interest in
Hamilton Morgan, repaid certain indebtedness and received other
consideration. 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.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("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 entities 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. This statement is
effective for fiscal years beginning after December 15, 1997. The
Company adopted SFAS No. 130 in 1998 and has elected to include the
required items of other comprehensive income in its Condensed
Consolidated Statements of Comprehensive Income (Loss).
4. 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 of
the Company's consolidated financial position or results of operations.
<PAGE> 10
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
5. INVESTMENT IN AVATEX
During the thirty-nine weeks ended March 27, 1999, the Company invested
$1,000 to purchase approximately 3.4% of Avatex common stock, bringing
its total investment in Avatex to approximately 15.1% of Avatex's total
outstanding common stock. This investment is carried at market value as
available-for-sale securities. Unrealized losses on these securities
are excluded from net income but are included as a comprehensive income
(loss) in the Condensed Consolidated Statements of Comprehensive Income
(Loss). As of March 27, 1999, the quoted market price of Avatex common
stock was $.812 per share as compared to $2.1875 per share at June 27,
1998. To the extent that the Company determines in the future that an
other than temporary decline in the common stock value has occurred,
the write-down of the investment will be included in the Consolidated
Statement of Operations.
6. BUSINESS COMBINATION
On March 15, 1999, Phar-Mor, Inc. ("Phar-Mor") completed the merger of
its wholly owned subsidiary Pharmacy Acquisition Corp. ("PAC") with and
into Pharmhouse Corp. ("Pharmhouse"), pursuant to the Agreement and
Plan of Merger dated as of December 17, 1998 among Phar-Mor, PAC and
Pharmhouse (the "Merger Agreement"). As a result of the merger
Pharmhouse became a wholly owned subsidiary of Phar-Mor. In addition,
subject to the terms of the Merger Agreement, each share of the common
stock of Pharmhouse was converted into the right to receive $2.88 per
share in cash (the "Merger").
Phar-Mor and PAC financed the payment of the purchase price and all
other fees and expenses associated with the Merger through cash from
operations and from borrowings under the Company's revolving credit
facility.
The Merger was accounted for under the purchase method of accounting.
The results of operations of Pharmhouse from March 16, 1999 through
March 27, 1999 have been included in the Condensed Consolidated
Statements of Operations for both the thirteen and thirty-nine weeks
ended March 27, 1999. The total purchase price payable in connection
with the Merger was approximately $34.2 million, consisting of $7.5
million in cash and the assumption of $26.7 million in debt. Goodwill
is being amortized using the straight-line method over a period of 25
years. The fair value of the assets acquired and liabilities assumed
was as follows:
Identifiable assets acquired $54,962
Liabilities assumed (61,954)
Goodwill 14,866
-------
Cash paid $7,874
=======
The following supplemental pro forma information is presented as though
the companies combined at the beginning of the respective periods:
<TABLE>
<CAPTION>
Thirty-nine weeks Thirty-nine weeks
ended March 27, 1999 ended March 28, 1998
-------------------- --------------------
<S> <C> <C>
Sales $ 988,012 $ 972,605
==================== ====================
Net loss $ (3,074) $ (13,549)
==================== ====================
Basic and diluted loss per common share $ (.25) $ (1.11)
==================== ====================
</TABLE>
<PAGE> 11
PHAR-MOR, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (dollar amounts in thousands, except per share amounts)
On March 15, 1999, Phar-Mor, Inc. ("Phar-Mor") completed the merger of its
wholly owned subsidiary Pharmacy Acquisition Corp. ("PAC") with and into
Pharmhouse Corp. ("Pharmhouse"), pursuant to the Agreement and Plan of Merger
dated as of December 17, 1998 among Phar-Mor, PAC and Pharmhouse (the "Merger
Agreement"). As a result of the merger Pharmhouse became a wholly owned
subsidiary of Phar-Mor. In addition, subject to the terms of the Merger
Agreement, each share of the common stock of Pharmhouse was converted into the
right to receive $2.88 per share in cash (the "Merger"). The total purchase
price payable in connection with the Merger was approximately $34,200,
consisting of $7,500 in cash and the assumption of $26,700 in debt. See "NOTE 6
- - Business Combination of Notes to Condensed Consolidated Financial Statements."
The Company used its excess cash position and excess availability under its
revolving credit facility to pay off $26,700 in debt that was assumed as part of
the merger with Pharmhouse.
Pharmhouse operates 32 discount drug stores in eight mid-Atlantic and New
England states under the names "Pharmhouse" and "Rx Place" and has annual
revenues of approximately $200 million.
RESULTS OF OPERATIONS (all dollar amounts in thousands)
Thirteen Weeks Ended March 27, 1999 versus
Thirteen Weeks Ended March 28, 1998
Sales for the third quarter of fiscal year 1999 ("Fiscal 1999") increased 4.9%
compared to the third quarter of fiscal year 1998 ("Fiscal 1998"). Comparable
store sales increased 2.5% from $272,780 for Fiscal 1998 to $279,489 for Fiscal
1999. The increase in comparable store sales was primarily due to an 12.0%
increase in comparable pharmacy store sales and the continued success of the
"Super Phar-Mor" store remodel program. Sales for the eleven stores which were
remodeled into the "Super Phar-Mor" format between the end of the third quarter
of Fiscal 1998 and the beginning of the third quarter of fiscal year 1999
increased 13.7% in the thirteen weeks ended March 27, 1999 over the comparable
period in the prior year. Approximately $6,000 of sales for the 32 Pharmhouse
and Rx Place stores was included in the thirteen weeks ended March 27, 1999.
Cost of sales as a percentage of sales was 81.1% in Fiscal 1999, compared to
80.7% in Fiscal 1998. Lower vendor allowances and higher occupancy costs were
partially offset by a $2,505 partial settlement received from a class action
lawsuit against pharmaceutical manufacturers, related to certain product
overcharges to retailers.
Selling, general and administrative expenses as a percentage of sales were 15.3%
in Fiscal 1999 compared to 16.0% in Fiscal 1998, a decrease of 0.7% of sales.
This decrease was due to lower advertising expenses and lower professional fee
expenses.
In Fiscal 1998 the Company incurred $720 in executive severance and related
costs associated with the resignation of the Company's former Chairman of the
Board and Chief Executive Officer.
In Fiscal 1998 the Company recorded a charge of $4,615 for the write-off of the
Company's mainframe computer and other equipment which was replaced during the
third quarter of Fiscal 1998 with the latest technology IBM mainframe computer
equipment.
Depreciation and amortization expense was $5,992 in Fiscal 1999 compared to
$5,463 in Fiscal 1998, an increase of $529. The increase is the result of higher
video rental tape amortization expense, depreciation expense on capital
expenditures made since the second quarter of Fiscal 1998 and the inclusion of
twelve days depreciation and amortization expense from Pharmhouse.
<PAGE> 12
Interest income was $797 in Fiscal 1999 compared to interest income of $839 in
Fiscal 1998, a $42 decrease. The decrease in interest income was due to a
decrease in the amount of excess funds available for investment in Fiscal 1999.
Thirty-nine Weeks Ended March 27, 1999 versus
Thirty-nine Weeks Ended March 28, 1998
Sales for the thirty-nine weeks ended March 27, 1999 increased 3.8% compared to
the thirty-nine weeks ended March 28, 1998. Comparable store sales increased
2.6% from $808,278 for the thirty-nine weeks ended March 28, 1998 to $828,905
for the thirty-nine weeks ended March 27, 1999. The increase in comparable store
sales was primarily due to an 9.7% increase in comparable pharmacy store sales.
Approximately $6,000 of sales for the 32 Pharmhouse and Rx Place stores was
included in the thirty-nine weeks ended March 27, 1999.
Cost of sales as a percentage of sales was 80.8% in the thirty-nine weeks ended
March 27, 1999, Compared to 80.7% in the thirty-nine weeks ended March 28, 1998.
The settlement from the pharmaceutical manufacturers lawsuit and lower
warehousing costs were offset by higher promotional expenses and higher
occupancy costs.
Selling, general and administrative expenses as a percentage of sales were 15.2%
in the thirty-nine weeks ended March 27, 1999 compared to 16.0% in the
thirty-nine weeks ended March 28, 1998. This decrease was due to lower
advertising expenses and corporate professional fees partially offset by higher
corporate travel expenses.
In the thirty-nine weeks ended March 28, 1998 the Company incurred $6,387 in
executive severance and related costs associated with the resignation of the
Company's former Chairman of the Board and Chief Executive Officer.
Depreciation and amortization expense was $17,270 in the thirty-nine weeks ended
March 27, 1999 compared to $16,518 in the thirty-nine weeks ended March 28,
1998, an increase of $752. The increase is the result of depreciation on capital
expenditures made since the second quarter of Fiscal 1998 partially offset by
lower video rental tape amortization.
Interest income was $1,568 in the thirty-nine weeks ended March 27, 1999
compared to interest income of $2,612 in the thirty-nine weeks ended March 28,
1998, a $1,044 decrease. The decrease in interest income was due to a decrease
in the amount of excess funds available for investment in the thirty-nine weeks
ended March 27, 1999.
FINANCIAL CONDITION AND LIQUIDITY (all dollar amounts in thousands)
The Company's cash position as of March 27, 1999 was $17,020. 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. ("BABC"), 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 were available for working capital needs and
general corporate purposes. Up to $50,000 of the Facility at any time was
available for standby and documentary letters of credit. The Facility included
restrictions on, among other things, additional debt, capital expenditures,
investments, restricted payments and other distributions, mergers and
acquisitions, and contained 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.
<PAGE> 13
Credit availability under the Facility at any time was the lesser of the
Aggregate Availability (as defined in the Facility) or $100,000. The 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 Facility would have borne interest at the BABC reference
rate plus 1/2% or London Interbank Offered Rate ("LIBOR") plus the applicable
margin. The applicable margin ranged between 1.50% and 2.00% and was determined
by a formula based on a ratio of (a) the Company's earnings before interest,
taxes, depreciation and amortization to (b) interest. Under the terms of the
Facility, the Company was 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.
There have been no borrowings under the Facility.
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 BABC 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.
The Company had outstanding borrowings of $20,050 under the Amended Facility as
of March 27, 1999. Unused availability under the Amended Facility, after
subtracting amounts used for outstanding letters of credit, was $75,941 at March
27, 1999.
On March 15, 1999 the Amended Facility was amended to include Pharmhouse as a
borrower and to extend the term of the Amended Facility to March 14, 2002.
Thirty-nine weeks ended March 27, 1999
During the thirty-nine weeks ended March 27, 1999, the Company's cash position
decreased by $27,635. Net cash used for operating activities was $2,994. The
major sources of cash from operating activities were net income of $3,402,
depreciation expense of $11,813, amortization of video rental tapes of $5,374
and a decrease in marketable securities of $5,596 offset by an increase in
merchandise inventories of $15,271, a decrease in accrued expenses and other
current liabilities of $9,960 and a decrease in accounts payable of $5,711.
Capital expenditures of $18,631, additions to video rental tapes of $6,000, the
cash expended in the purchase of Pharmhouse of $4,608, an investment in equity
securities of $2,291 and an additional $1,000 investment in Avatex were paid for
with the Company's excess cash position and borrowings under the Company's
revolving credit facility.
<PAGE> 14
Net cash provided by financing activities of $7,779 consisted of borrowings
under the revolving credit facility of $20,050 and bank overdrafts of $21,687
partially offset by principal payments on long-term debt including the
Pharmhouse debt assumed of $28,959 and principal payments on capital lease
obligations of $5,280.
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.
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 its
purchasing and pharmacy systems pose the greatest risk of disrupting its
business if Year 2000 system modifications are not completed in time. Without
modification, the Company may not be able to issue purchase orders with delivery
dates after December 31, 1999 or dispense prescriptions with refill dates
extending beyond December 31, 1999. 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.
Most of the Company's systems are Year 2000 compliant, or have been scheduled
for replacement in the Company's on-going systems plans. As of March 27, 1999,
the Company has incurred approximately $650 related to the assessment of, and
preliminary efforts in connection with, its Year 2000 program and remediation
plan. Future spending for software modifications and testing required for Year
2000 compliance are currently estimated to be approximately $400 with the
majority expected to be incurred by the end of Fiscal 1999. 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. The
Company's target date for completing its Year 2000 modifications is June 30,
1999, including additional testing and refinements to identify the systems
planned for 1999. These expenditures are not expected to have a material impact
on the Company's operating results, liquidity and capital resources.
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about an
Enterprise and Related Information," in February 1998, the FASB issued SFAS No.
132, "Employer's Disclosures about Pensions and Other Postretirement Benefits"
and in June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Management does not believe the adoption of
any of these standards will have a material effect on its financial position or
results of operations.
<PAGE> 15
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 18.
(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 March 27, 1999
Date of Report Date of Filing Description
-------------- -------------- ----------------------------
March 15, 1999 March 15, 1999 Completion of acquisition of
Pharmhouse Corp.
<PAGE> 16
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: May 11, 1999 By: /s/ Sankar Krishnan
-----------------------------------
Sankar Krishnan
Senior Vice President and Chief
Financial Officer
Date: May 11, 1999 By: /s/ John R. Ficarro
-----------------------------------
John R. Ficarro
Senior Vice President and Chief
Administrative Officer
<PAGE> 17
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
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-3-1999
<PERIOD-END> MAR-27-1999
<CASH> 17,020
<SECURITIES> 3,469
<RECEIVABLES> 23,129
<ALLOWANCES> 0
<INVENTORY> 226,676
<CURRENT-ASSETS> 272,714
<PP&E> 93,534
<DEPRECIATION> 0
<TOTAL-ASSETS> 405,288
<CURRENT-LIABILITIES> 157,083
<BONDS> 143,950
0
0
<COMMON> 122
<OTHER-SE> 84,601
<TOTAL-LIABILITY-AND-EQUITY> 405,288
<SALES> 857,329
<TOTAL-REVENUES> 857,329
<CGS> 692,792
<TOTAL-COSTS> 692,792
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<INTEREST-EXPENSE> 11,761
<INCOME-PRETAX> 5,672
<INCOME-TAX> 2,270
<INCOME-CONTINUING> 3,402
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