SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
-------- Exchange Act of 1934
For the quarterly period ended September 30, 2000 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.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1466309
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Federal Plaza West, Youngstown, Ohio 44501-0400
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (330) 746-6641
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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
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On October 16, 2000, there were 12,240,865 shares of the registrant's common
stock outstanding before deducting 1,261,643 shares which represent the
Company's 25.2% equity interest in common stock of the Company owned by Avatex,
Inc.
<PAGE>2
PHAR-MOR, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
I N D E X
Page
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Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2000 and July 1, 2000 3
Condensed Consolidated Statements of Operations for the
Thirteen Weeks Ended September 30, 2000 and October 2, 1999 4
Condensed Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended September 30, 2000 and October 2, 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II: Other Information
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Defaults Upon Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
Exhibit Index 11
<PAGE>3
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS (Unaudited)
September 30, July 1,
2000 2000
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,797 $ 16,752
Marketable securities 2,516 3,019
Accounts receivable - net 30,055 25,017
Merchandise inventories 224,733 207,228
Prepaid expenses and other current assets 6,852 6,538
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Total current assets 278,953 258,554
Property and equipment - net 88,505 91,801
Goodwill 15,648 15,809
Deferred tax asset 9,126 9,126
Investments 13,443 13,682
Investment in Avatex 3,948 3,691
Other assets 5,288 5,241
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Total assets $ 414,911 $ 397,904
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 103,647 $ 97,461
Accrued expenses and other current liabilities 35,148 40,621
Current portion of long-term debt and capital lease
obligations 6,356 6,499
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Total current liabilities 145,151 144,581
Long-term debt and capital lease obligations 193,288 167,856
Long-term self insurance reserves 7,184 7,335
Deferred rent and unfavorable lease liability - net 10,296 10,639
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Total liabilities 355,919 330,411
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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 2,200
Retained deficit (27,513) (19,012)
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64,816 73,317
Less: equity, through investment in Avatex, in cost of
common stock of the Company held by Avatex, Inc. (6,359) (6,359)
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Total stockholders' equity 58,457 66,958
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Total liabilities and stockholders' equity $ 414,911 $ 397,904
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>4
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
September 30, 2000 October 2, 1999
------------------ ---------------
<S> <C> <C>
Sales $ 308,187 $ 317,835
Less:
Cost of goods sold, including occupancy and
distribution costs 255,278 256,783
Selling, general and administrative expenses 50,422 53,455
Depreciation and amortization 5,374 7,175
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(Loss) income from operations before interest expense,
investment loss and equity in (loss) income of affiliates (2,887) 422
Interest expense (5,022) (4,545)
Investment loss (503) (658)
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Loss before equity in (loss) income of affiliates (8,412) (4,781)
Equity in (loss) income of affiliates (90) 590
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Net loss $ (8,502) $ (4,191)
============ ============
Loss per basic and diluted common share $ (.77) $ (.36)
============ ============
Weighted average number of basic and diluted common shares
outstanding 11,019,871 11,516,185
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>5
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
September 30, 2000 October 2, 1999
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (8,502) $ (4,191)
Adjustments to reconcile net loss to net
cash used for operating activities:
Items not requiring the outlay of cash:
Depreciation 4,546 4,641
Amortization of video rental tapes 519 2,241
Stock option expense -- 95
Amortization of deferred financing costs and goodwill 377 361
Deferred rent and unfavorable lease liability (343) 121
Equity in loss (income) of affiliates 90 (590)
Changes in assets and liabilities:
Accounts receivable (5,038) (3,482)
Marketable securities 503 1,713
Merchandise inventories (17,687) (14,821)
Prepaid expenses (314) 1,008
Other assets (264) (51)
Accounts payable 5,258 (22,088)
Accrued expenses and other current liabilities (5,622) 699
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Net cash used for operating activities (26,477) (34,344)
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INVESTING ACTIVITIES
Additions to rental videotapes (337) (454)
Additions to property and equipment (1,251) (4,448)
Investment in equity securities (107) (4,600)
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Net cash used for investing activities (1,695) (9,502)
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FINANCING ACTIVITIES
Borrowings under revolving credit facility 26,890 30,969
Bank overdrafts 928 13,495
Principal payments on long-term debt (502) (446)
Principal payments on capital lease obligations (1,099) (1,651)
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Net cash provided by financing activities 26,217 42,367
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Decrease in cash and cash equivalents (1,955) (1,479)
Cash and cash equivalents, beginning of period 16,752 17,346
------- -------
Cash and cash equivalents, end of period $ 14,797 $ 15,867
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>6
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share
amounts)
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1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. They do not
include all information and footnotes which would be required by
generally accepted accounting principles for complete financial
statements. In the opinion of management of Phar-Mor, Inc. (the
"Company") and its subsidiaries, these interim financial statements
contain all adjustments considered necessary for a fair presentation of
financial position, results of operations and cash flows for the
periods presented. Reference should be made to the Company's Annual
Report on Form 10-K for the fiscal year ended July 1, 2000 for
additional disclosures, including a summary of the Company's accounting
policies, which have not changed except for the new accounting
pronouncement discussed in note 2. Operating results for the thirteen
weeks ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the fifty-two weeks ending June 30,
2001.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("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 Nos. 137 and 138) is
effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The Company adopted SFAS 133 effective July 2, 2000, and the
adoption of this standard did not have an impact on its consolidated
financial position, results of operations or cash flows.
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 of
the Company's consolidated financial position, results of operations or
cash flows.
4. INVESTMENT IN AVATEX
On December 6, 1999, the Company invested $5,724 to purchase an
additional 2,862,400 shares of Avatex common stock, increasing its
investment from 15.1% to approximately 25.2% of Avatex's total
outstanding common stock. Accordingly, the Company changed its method
of accounting for the investment from cost to equity basis as required
by generally accepted accounting principles and treats Avatex's
investment in the Company's common stock similar to treasury stock,
with a reduction in the number of shares outstanding for calculating
earnings per share of 1,220,994. The financial statements of prior
years have been restated to reflect the adoption of the equity method
in a manner consistent with the accounting of a step by step
acquisition of Avatex. The effect of the restatement was to increase
net income for fiscal 1999 by $2,188, eliminate comprehensive income
(loss) for all prior periods and reclassify all of the Company's
investment in Avatex common stock prior to fiscal 2000 from Investment
in Avatex to Equity in cost of common stock of the Company held by
Avatex, Inc. on the Condensed Consolidated Balance Sheets.
The Company's investment in Avatex includes the unamortized excess of
the Company's investment over its equity in Avatex's net assets. The
original excess was $3,628 at January 1, 2000 and is being amortized on
a straight-line basis over 20 years.
<PAGE>7
PHAR-MOR, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (all dollar amounts in thousands)
Thirteen Weeks Ended September 30, 2000 versus
Thirteen Weeks Ended October 2, 1999
Sales for the first quarter of fiscal year 2001 ("Fiscal 2001") decreased 3.0%
compared to the first quarter of fiscal year 2000 ("Fiscal 2000"). Comparable
store sales decreased 2.9% from $314,949 for Fiscal 2000 to $305,866 for Fiscal
2001. Comparable store pharmacy sales increased 5.6% while comparable store
front-end sales decreased 6.5%. Front-end sales were afected by unseasonably
cool and wet summer weather which negatively impacted the sale of summer
seasonal merchandise.
Cost of sales as a percentage of sales was 82.8% in Fiscal 2001 compared to
80.8% in Fiscal 2000, an increase of 2.0% of sales. The increase was primarily
due to the inclusion of vendor allowances for the remerchandising of the
Pharmhouse stores in Fiscal 2000 and a reduction in video rental tape sales and
gross margin due to the elimination of underperforming video rental departments.
Selling, general and administrative expenses as a percentage of sales were 16.4%
in Fiscal 2001 compared to 16.8% in Fiscal 2000, a decrease of .4% of sales.
This decrease was primarily due to lower store wages, lower corporate incentive
compensation accruals and lower credit card fees. The decrease in store wages is
due to an increase in productivity as a result of improved labor scheduling. The
decrease in credit card fees is the result of increased efforts to convert
customers to the use of debit cards.
Depreciation and amortization expense was $5,374 in Fiscal 2001 compared to
$7,175 in Fiscal 2000, a decrease of $1,801. The decrease was primarily due to a
$1,722 decrease in video tape amortization due to the closure of approximately
one half of the Company's poorer performing video rental departments since the
beginning of Fiscal 2000 combined with lower video rental tape purchases in
continuing video rental departments.
Interest expense was $5,022 in Fiscal 2001 compared to interest expense of
$4,545 in Fiscal 2000, a $477 increase. The increase in interest expense was due
to increased boirrowings under the revolving credit facility partially offset by
lower interest expense on the senior notes due to the repurchase of $10,149 in
senior notes in Fiscal 2000.
Equity in loss (income) of affiliates declined from a $590 income in Fiscal 2000
to a $90 loss in Fiscal 2001, primarily due to lower income realized by an
investment partnership for which the Company has an investment.
FINANCIAL CONDITION AND LIQUIDITY (all dollar amounts in thousands)
The Company's cash position as of September 30, 2000 was $14,797. 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% from January 1 to June 30 each year
and the BankAmerica reference rate plus 3/4% or LIBOR plus 2.25% from July 1 to
December 31 each year. 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 $10,776 at September 30, 2000.
The Amended Facility expires on March 14, 2002.
On October 6, 2000 the Company received a commitment from Fleet Retail Finance,
Inc. to provide a senior secured revolving credit facility for up to $150,000
that would replace the Amended Facility. The closing date for this facility is
expected to occur on or before November 30, 2000.
Thirteen weeks ended September 30, 2000
During the thirteen weeks ended September 30, 2000, the Company's cash position
decreased by $1,955. Net cash used for operating activities was $26,477. The
major uses of cash from operating activities were net loss of $8,502, an
increase in inventories of $17,687, an increase in accounts receivable of $5,038
and a decrease in accrued expenses and other current liabilities of $5,622.
These were partially offset by an increase in acounts payable of $5,258 and
depreciation expense of $4,546.
Capital expenditures of $1,251, additions to video rental tapes of $337 and an
investment in equity securities of $107 were paid for with borrowings under the
Company's revolving credit facility.
Net cash provided by financing activities of $26,217 consisted of borrowings
under the revolving credit facility and decreases in bank overdrafts partially
offset by principal payments on lease obligations and principal payments on
long-term debt.
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)
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 Nos. 137 and 138) is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
adopted SFAS 133 effective July 2, 2000, and the adoption of this standard did
not have an impact on its consolidated financial position, results of operations
or cash flows.
<PAGE>9
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 11.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the
Securities and Exchange Commission during the quarter ended
September 30, 2000
None.
<PAGE>10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHAR-MOR, INC.
Date: November 9, 2000 By: /s/ Martin S. Seekely
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Martin S. Seekely
Vice President and Chief
Financial Officer
Date: November 9, 2000 By: /s/ John R. Ficarro
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John R. Ficarro
Senior Vice President and Chief
Administrative Officer
<PAGE>11
PHAR-MOR, INC.
INDEX TO EXHIBITS
Exhibit No.
*3.1 Amended and Restated Articles of Incorporation
**3.2 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
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* 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
