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 26, 1998 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 13, 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 DECEMBER 26, 1998
I N D E X
Page
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 26, 1998
and June 27, 1998 3
Condensed Consolidated Statements of Operations for the
Thirteen Weeks Ended December 26, 1998 and December 27, 1997 4
Condensed Consolidated Statements of Operations for the
Twenty-six Weeks Ended December 26, 1998 and December 27,
1997 5
Condensed Consolidated Statements of Comprehensive Income for
the Thirteen Weeks Ended December 26, 1998 and December 27,
1997 6
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the Twenty-six Weeks Ended December 26, 1998 and
December 27, 1997 7
Condensed Consolidated Statements of Cash Flows for the
Twenty-six Weeks Ended December 26, 1998 and December 27,
1997 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 16
Signatures 17
Exhibit Index 18
<PAGE> 3
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS (Unaudited)
December 26, June 27,
1998 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 29,975 $ 44,655
Marketable securities 3,648 9,065
Accounts receivable - net 28,573 20,927
Merchandise inventories 187,138 176,069
Prepaid expenses and other current assets 2,085 2,703
------------ ------------
Total current assets 251,419 253,419
Property and equipment - net 82,518 75,512
Deferred tax asset 8,923 9,281
Investments 6,703 4,275
Investment in Avatex 1,695 3,525
Other assets 3,118 3,443
------------ ------------
Total assets $ 354,376 $ 349,455
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 76,784 $ 67,091
Accrued expenses and other current liabilities 37,950 39,316
Current portion of long-term debt and capital lease obligations 10,320 10,327
------------ ------------
Total current liabilities 125,054 116,734
Long-term debt and capital lease obligations 125,904 130,993
Long-term self insurance reserves 8,021 7,680
Deferred rent and unfavorable lease liability - net 11,488 11,074
------------ ------------
Total liabilities 270,467 266,481
------------ ------------
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 1,768 1,401
Unrealized loss on investment in Avatex, net of related tax
effect of $1,132 and $0, respectively (2,173) (475)
Retained deficit (6,350) (8,585)
------------ ------------
Total stockholders' equity 83,374 82,439
------------ ------------
Total liabilities and stockholders' equity $ 354,376 $ 349,455
========= ===========
</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 26, 1998 December 27, 1997
----------------- -----------------
<S> <C> <C>
Sales $ 296,989 $ 292,212
Less:
Cost of goods sold, including occupancy and
distribution costs 238,285 234,220
Selling, general and administrative expenses 43,675 45,766
Chief Executive Officer severance expenses -- 234
Depreciation and amortization 5,603 5,717
--------------- ---------------
Income from operations before interest expense,
interest income, investment loss and income taxes 9,426 6,275
Interest expense (3,893) (4,163)
Interest income 283 666
Investment loss (579) --
--------------- ---------------
Income before income taxes 5,237 2,778
Income taxes 1,490 --
--------------- ---------------
Net Income $ 3,747 $ 2,778
=============== ===============
Basic income per common share $ .31 $ .23
=============== ===============
Diluted income per common share $ .30 $ .23
=============== ===============
Weighted average number of basic common shares outstanding 12,240,865 12,165,353
Weighted average number of diluted common shares outstanding 12,362,089 12,212,527
</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 26, 1998 December 27, 1997
----------------- -----------------
<S> <C> <C>
Sales $ 566,401 $ 548,544
Less:
Cost of goods sold, including occupancy and
distribution costs 456,882 442,422
Selling, general and administrative expenses 86,199 87,598
Chief Executive Officer severance expenses -- 5,667
Depreciation and amortization 11,278 11,055
--------------- ---------------
Income from operations before interest expense,
interest income, investment loss and income taxes 12,042 1,802
Interest expense (7,884) (8,368)
Interest income 771 1,773
Investment loss (1,204) --
--------------- ---------------
Income (loss) before income taxes 3,725 (4,793)
Income taxes 1,490 --
--------------- ---------------
Net income (loss) $ 2,235 $ (4,793)
=============== ===============
Basic income (loss) per common share $ .18 $ (39)
=============== ===============
Diluted income (loss) per common share $ .18 $ (.39)
=============== ===============
Weighted average number of basic common shares outstanding 12,240,343 12,162,276
Weighted average number of diluted common shares outstanding 12,300,955 12,162,276
</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 COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
December 26, 1998 December 27, 1997
----------------- -----------------
<S> <C> <C>
Net income $ 3,747 $ 2,778
Other comprehensive income:
Unrealized gain (loss) on securities:
Unrealized holding loss on investment in Avatex
arising during period net of tax benefit of $1,132 610 --
------------------ ------------------
Comprehensive income $ 4,357 $ 2,778
================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE> 7
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Twenty-six
Weeks Ended Weeks Ended
December 26, 1998 December 27, 1997
----------------- -----------------
<S> <C> <C>
Net income (loss) $ 2,235 $ (4,793)
Other comprehensive loss:
Unrealized loss on securities:
Unrealized holding loss on investment in Avatex
arising during period net of tax benefit of $1,132 (1,698) --
------------------ ------------------
Comprehensive income (loss) $ 537 $ (4,793)
================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
<PAGE> 8
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 26, 1998 December 27, 1997
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,235 $ (4,793)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Items not requiring the outlay of cash:
Depreciation 7,712 6,982
Amortization of video rental tapes 3,566 4,073
Stock option expense 367 --
Amortization of deferred financing costs and goodwill 138 210
Deferred income taxes 1,490 --
Deferred rent 414 1,162
Gain on equity method investment (387) --
Changes in assets and liabilities:
Accounts receivable (5,646) (3,404)
Marketable securities 5,417 --
Merchandise inventories (10,723) (13,992)
Prepaid expenses 618 1,146
Other assets 164 (898)
Accounts payable 9,693 7,636
Accrued expenses and other current liabilities (1,025) 1,207
--------------- ---------------
Net cash provided by (used for) operating activities 14,033 (671)
--------------- ---------------
INVESTING ACTIVITIES
Additions to rental videotapes (3,889) (4,324)
Additions to property and equipment (14,831) (10,299)
Proceeds on sale of property and equipment 113 --
Investment in Avatex (1,000) --
Loan to Pharmhouse Corp. (2,000) --
Investment in equity securities (2,041) --
--------------- ---------------
Net cash used for investing activities (23,648) (14,623)
--------------- ---------------
FINANCING ACTIVITIES
Principal payments on long-term debt (1,828) (1,093)
Principal payments on capital lease obligations (3,518) (3,510)
Additions to long-term debt 250 --
Issuance of common stock 31 280
--------------- ---------------
Net cash used for financing activities (5,065) (4,323)
--------------- ---------------
Decrease in cash and cash equivalents (14,680) (19,617)
Cash and cash equivalents, beginning of period 44,655 79,847
--------------- ---------------
Cash and cash equivalents, end of period $ 29,975 $ 60,230
=============== ===============
</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 twenty-six weeks ended
December 26, 1998 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 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 twenty-six weeks ended December 26, 1998, 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 loss in the Condensed Consolidated Statements of
Comprehensive Income (Loss). As of January 14, 1999, the quoted market
price of Avatex common stock was $1.125 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 statement of operations.
6. PROPOSED BUSINESS COMBINATION
On December 17, 1998 the Company and Pharmhouse Corp. ("Pharmhouse")
signed a definitive Agreement and Plan of Merger (the "Merger
Agreement"). The definitive terms of the merger are set forth in the
Merger Agreement. Under the terms of the Merger Agreement, a subsidiary
of the Company will be merged with and into Pharmhouse, which will
become a wholly owned subsidiary of the Company, and the common stock
of Pharmhouse will be exchanged into the right to receive $3.25 per
share in cash (the "Merger"), subject to adjustment as provided in the
Merger Agreement.
In connection with the Merger Agreement the Company has loaned
Pharmhouse $2,000 pursuant to a Subordinated Convertible Note Purchase
Agreement (the "Loan Agreement"). The definitive terms of the loan are
set forth in the Loan Agreement. Such loan is convertible into shares
of Pharmhouse common stock under certain circumstances as provided in
the Loan Agreement.
Also in connection with the Merger Agreement, certain stockholders of
Pharmhouse entered into Voting and Payment Agreements with the Company,
pursuant to which such stockholders agreed, among other things, to vote
their shares of Pharmhouse common stock with respect to the Merger in
accordance with the recommendation of the Pharmhouse Board of
Directors.
Consummation of the Merger is subject to satisfaction of certain
conditions, including (a) approval by shareholders of Pharmhouse, (b)
receipt of the necessary regulatory approvals, and (c) other conditions
set forth in the Merger Agreement.
Reference should be made to the Merger Agreement, the Loan Agreement
and the Voting and Payment Agreement, copies of which are filed as
exhibits to the Company's Form 8-K dated December 17, 1998, for
additional disclosures.
<PAGE> 11
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 26, 1998 versus
Thirteen Weeks Ended December 27, 1997
Sales for the second quarter of fiscal year 1999 ("Fiscal 1999") increased 1.6%
compared to the second quarter of fiscal year 1998 ("Fiscal 1998"). Comparable
store sales increased 1.0% from $290,567 for Fiscal 1998 to $293,325 for Fiscal
1999. The increase in comparable store sales was primarily due to a 9.5%
increase in comparable pharmacy store sales.
Cost of sales as a percentage of sales was 80.2% in Fiscal 1999, the same as in
Fiscal 1998. Reductions in warehouse costs were offset by higher promotional
expenses.
Selling, general and administrative expenses as a percentage of sales were 14.7%
in Fiscal 1999 compared to 15.7% in Fiscal 1998, a decrease of 1.0% of sales.
This decrease was due to lower advertising expenses and pre-opening costs
partially offset by higher store wages.
In Fiscal 1998 the Company incurred $234 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 $5,603 in Fiscal 1999 compared to
$5,717 in Fiscal 1998, a decrease of $114. The decrease is the result of lower
video tape amortization expense partially offset by depreciation expense on
capital expenditures made since the first quarter of Fiscal 1998.
Interest income was $283 in Fiscal 1999 compared to interest income of $666 in
Fiscal 1998, a $383 decrease. The decrease in interest income was due to a
decrease in the amount of excess funds available for investment in Fiscal 1999.
Twenty-six Weeks Ended December 26, 1998 versus
Twenty-six Weeks Ended December 27, 1997
Sales for the twenty-six weeks ended December 26, 1998 increased 3.3% compared
to the twenty-six weeks ended December 27, 1997. Comparable store sales
increased 2.5% from $541,561 for the twenty-six weeks ended December 27, 1997 to
$555,092 for the twenty-six weeks ended December 26, 1998. The increase in
comparable store sales was primarily due to an 8.7% increase in comparable
pharmacy store sales and the continued success of the "Super Phar-Mor" store
remodel program. Sales for the ten stores which were remodeled into the "Super
Phar-Mor" format between the end of the second quarter of fiscal year 1998 and
the beginning of the first quarter of fiscal year 1999 increased 10% in the
twenty-six weeks ended December 26, 1998 over the comparable period in the prior
year.
Cost of sales as a percentage of sales was 80.7% in the twenty-six weeks ended
December 26, 1998, the same as in the twenty-six weeks ended December 27, 1997.
Improvements in inventory shrinkage were offset by higher promotional expenses.
Selling, general and administrative expenses as a percentage of sales were 15.2%
in the twenty-six weeks ended December 26, 1998 compared to 16.0% in the
twenty-six weeks ended December 27, 1997. This decrease was due to lower
advertising expenses and pre-opening costs partially offset by higher store
wages and corporate travel expenses.
<PAGE> 12
In the twenty-six weeks ended December 27, 1997 the Company incurred $5,667 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 $11,278 in the twenty-six weeks ended
December 26, 1998 compared to $11,055 in the twenty-six weeks ended December 27,
1997, an increase of $223. The increase is the result of depreciation on capital
expenditures made since the first quarter of Fiscal 1998 partially offset by
lower video tape amortization.
Interest income was $771 in the twenty-six weeks ended December 26, 1998
compared to interest income of $1,773 in the twenty-six weeks ended December 27,
1997, a $1,002 decrease. The decrease in interest income was due to a decrease
in the amount of excess funds available for investment in the twenty-six weeks
ended December 26, 1998.
FINANCIAL CONDITION AND LIQUIDITY (all dollar amounts in thousands)
The Company's cash position as of December 26, 1998 was $29,975. 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.
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.
<PAGE> 13
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.
There have been no borrowings under the Amended Facility. Unused availability
under the Amended Facility, after subtracting amounts used for outstanding
letters of credit, was $84,154 at December 26, 1998.
The Amended Facility expires on September 10, 2001.
Twenty-six weeks ended December 26, 1998
During the twenty-six weeks ended December 26, 1998, the Company's cash position
decreased by $14,680. Net cash provided by operating activities was $14,033. The
major sources of cash from operating activities were net income of $2,235,
depreciation expense of $7,712, amortization of video rental tapes of $3,566,
decrease in marketable securities of $5,417 and an increase in accounts payable
of $9,693 partially offset by an increase in merchandise inventories of $10,723
and an increase in accounts receivable of $5,646.
Capital expenditures of $14,831, additions to video rental tapes of $3,889, an
investment in equity securities of $2,041, an additional $1,000 investment in
Avatex and a $2,000 loan to Pharmhouse Corp. were paid for with the Company's
excess cash position.
Net cash used for financing activities of $5,065 consisted of principal payments
on lease obligations of $3,518 and principal payments on term debt of $1,828 net
of proceeds of $250 from the issuance of long-term debt and $31 from the
exercise of stock options.
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)
On December 17, 1998 the Company and Pharmhouse Corp. signed a definitive
Agreement and Plan of Merger. Under the terms of the Merger Agreement, a
subsidiary of the Company will be merged with and into Pharmhouse, which will
become a wholly owned subsidiary of the Company, and the common stock of
Pharmhouse will be exchanged into the right to receive $3.25 per share in cash,
subject to adjustment as provided in the Merger Agreement. See "NOTE 6 -
Proposed Business Combination of Notes to Condensed Consolidated Financial
Statements."
The Company will use its excess cash position and excess availability under the
Amended Facility to pay off $26,000 in debt that will be assumed as part of the
merger with Pharmhouse.
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.
<PAGE> 14
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.
Many 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 December 26,
1998, 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 April 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
The Company's Annual Meeting of Shareholders was held on
October 30, 1998. The Company received proxies from holders of
11,009,346 shares of the Company's common stock which
constituted more than a majority of all shares issued and
outstanding (12,248,065 shares) at the close of business on
September 25, 1998. The holders of at least 10,909,936 shares
of common stock voted for the election of Arthur G. Rosenberg
and John D. Shulman as directors of the Corporation to hold
office for three years until the 2001 Annual Meeting and until
their successors are duly elected and qualified or until their
resignation or removal.
The second proposal was for the appointment of the firm of
Deloitte & Touche LLP to be the Company's independent
accountants for the fiscal year ending July 3, 1999. The
proposal passed as follows: 10,909,283 shares in favor; and
95,963 shares against.
ITEM 5. OTHER INFORMATION
None.
<PAGE> 16
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
December 26, 1998
Date of Report Date of Filing Description
-------------- -------------- -----------
December 17, 1998 December 22, 1998 Agreement and Plan of Merger
between the Company and
Pharmhouse Corp.
<PAGE> 17
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 5, 1999 By:/s/ Sankar Krishnan
---------------------------------------------
Sankar Krishnan
Senior Vice President and Chief Financial
Officer
Date: February 5, 1999 By:/s/ John R. Ficarro
---------------------------------------------
John R. Ficarro
Senior Vice President and Chief
Administrative Officer
<PAGE> 18
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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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-3-1999
<PERIOD-END> DEC-26-1998
<CASH> 29,975
<SECURITIES> 3,648
<RECEIVABLES> 28,573
<ALLOWANCES> 0
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<PP&E> 82,518
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0
0
<COMMON> 122
<OTHER-SE> 83,252
<TOTAL-LIABILITY-AND-EQUITY> 354,376
<SALES> 566,401
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<INCOME-PRETAX> 3,725
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