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 January 1, 2000 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
----- -----
On January 13, 2000, there were 12,240,865 shares of the registrant's common
stock outstanding before deducting 1,207,979 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 JANUARY 1, 2000
I N D E X
Page
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of January 1,
2000 and July 3, 1999 3
Condensed Consolidated Statements of Operations for the
Thirteen Weeks Ended January 1, 2000 and December 26, 1998 4
Condensed Consolidated Statements of Operations for the
Twenty-six Weeks Ended January 1, 2000 and December 26, 1998 5
Condensed Consolidated Statements of Cash Flows for the
Twenty-six Weeks Ended January 1, 2000 and December 26, 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II: Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
Exhibit Index 14
<PAGE>3
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS (Unaudited)
January 1, July 3,
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 14,275 $ 17,346
Marketable securities -- 3,254
Accounts receivable - net 30,917 28,293
Merchandise inventories 220,272 218,945
Prepaid expenses and other current assets 5,336 7,418
----- -----
Total current assets 270,800 275,256
Property and equipment - net 94,607 93,738
Goodwill 15,919 16,234
Deferred tax asset 6,508 9,049
Investments 18,797 8,314
Investment in Avatex 4,366 --
Other assets 4,620 5,133
----- -----
Total assets $ 415,617 $ 407,724
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 95,367 $ 119,843
Accrued expenses and other current liabilities 43,501 37,104
Current portion of long-term debt and capital
lease obligations 7,554 8,946
----- -----
Total current liabilities 146,422 165,893
Long-term debt and capital lease obligations 167,697 142,947
Long-term self insurance reserves 8,235 8,032
Deferred rent and unfavorable lease liability - net 10,819 11,073
------ ------
Total liabilities 333,173 327,945
------- -------
Commitments and contingencies -- --
Minority interests 535 535
------ ------
Stockholders' equity:
Preferred stock -- --
Common stock 122 122
Additional paid-in capital 90,007 90,007
Stock options outstanding 2,200 2,105
Retained deficit (4,061) (7,989)
------ ------
88,268 84,245
Less: equity in cost of common stock of the Corporation
held by Avatex, Inc. (6,359) (5,001)
------ ------
Total stockholders' equity 81,909 79,244
------ ------
Total liabilities and stockholders' equity $ 415,617 $ 407,724
========= =========
</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
January 1, 2000 December 26, 1998
--------------- -----------------
<S> <C> <C>
Sales $ 350,411 $ 296,989
Less:
Cost of goods sold, including occupancy and
distribution costs 280,350 238,285
Selling, general and administrative expenses 53,993 43,595
Depreciation and amortization 6,092 5,683
----- -----
Income from operations before interest expense, interest
income, investment income (loss), income taxes and
extraordinary gain 9,976 9,426
Interest expense (4,884) (3,893)
Interest income 11 283
Investment income (loss) 5,290 (579)
----- ----
Income before income taxes and extraordinary gain 10,393 5,237
Income taxes 2,481 1,490
----- -----
Income before extraordinary gain 7,912 3,747
Extraordinary gain on extinguishment of debt - net of
$137 tax 206 --
----- -----
Net income $ 8,118 $ 3,747
============ ============
Income per basic common share:
Income before extraordinary gain $ .69 $ .33
Extraordinary gain .02 --
----- -----
Net income $ .71 $ .33
============ ============
Income per diluted common share:
Income before extraordinary gain $ .69 $ .32
Extraordinary gain .02 --
----- -----
Net income $ .71 $ .32
============ ============
Weighted average number of basic common shares outstanding 11,383,411 11,516,220
Weighted average number of diluted common shares outstanding 11,383,411 11,637,444
</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
January 1, 2000 December 26, 1998
--------------- -----------------
<S> <C> <C>
Sales $ 668,246 $ 566,401
Less:
Cost of goods sold, including occupancy and
distribution costs 537,133 456,882
Selling, general and administrative expenses 107,448 86,056
Depreciation and amortization 13,267 11,421
------ ------
Income from operations before interest expense, interest
income, investment income (loss), income taxes and
extraordinary gain 10,398 12,042
Interest expense (9,438) (7,884)
Interest income 20 771
Investment income (loss) 5,222 (1,204)
----- ------
Income before income taxes and extraordinary gain 6,202 3,725
Income taxes 2,481 1,490
----- -----
Income before extraordinary gain 3,721 2,235
Extraordinary gain on extinguishment of debt- net of $137 tax 206 --
----- -----
Net income $ 3,927 $ 2,235
============ ============
Income per basic common share:
Income before extraordinary gain $ .32 $ .19
Extraordinary gain .02 --
----- -----
Net income $ .34 $ .19
============ ============
Income per diluted common share:
Income before extraordinary gain $ .32 $ .19
Extraordinary gain .02 --
----- -----
Net income $ .34 $ .19
============ ============
Weighted average number of basic common shares outstanding 11,449,798 11,529,110
Weighted average number of diluted common shares outstanding 11,449,798 11,589,722
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>6
PHAR-MOR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Twenty-six
Weeks Ended Weeks Ended
January 1, 2000 December 26, 1998
--------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,927 $ 2,235
Adjustments to reconcile net income to net
cash (used for) provided by operating activities:
Items not requiring the outlay of cash:
Depreciation 9,257 7,712
Amortization of video rental tapes 3,306 3,566
Stock option expense 95 367
Amortization of deferred financing costs and goodwill 838 138
Deferred income taxes 2,618 1,490
Deferred rent (254) 414
Gain on equity method investment (5,883) (387)
Gain on extinguishment of debt (343) --
Changes in assets and liabilities:
Accounts receivable (2,624) (5,646)
Marketable securities 3,254 5,417
Merchandise inventories (3,828) (10,723)
Prepaid expenses 2,005 618
Other assets (10) 164
Accounts payable (20,151) 9,693
Accrued expenses and other current liabilities 6,615 (1,025)
----- ------
Net cash (used for) provided by operating activities (1,178) 14,033
------ ------
INVESTING ACTIVITIES
Additions to rental videotapes (805) (3,889)
Additions to property and equipment (10,161) (14,831)
Proceeds on sale of property and equipment 33 113
Investment in Avatex (5,724) (1,000)
Loan to Pharmhouse Corp. -- (2,000)
Investment in equity securities (4,600) (2,041)
------ ------
Net cash used for investing activities (21,257) (23,648)
------- -------
FINANCING ACTIVITIES
Borrowings under revolving credit facility 31,032 --
Bank overdrafts (4,337) --
Principal payments on long-term debt (3,672) (1,828)
Principal payments on capital lease obligations (3,659) (3,518)
Additions to long-term debt -- 250
Issuance of common stock -- 31
------- -------
Net cash provided by (used for) financing activities 19,364 (5,065)
------- -------
Decrease in cash and cash equivalents (3,071) (14,680)
Cash and cash equivalents, beginning of period 17,346 44,655
------- -------
Cash and cash equivalents, end of period $ 14,275 $ 29,975
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>7
PHAR-MOR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. They do not
include all information and footnotes which would be required by
generally accepted accounting principles for complete financial
statements. In the opinion of management of Phar-Mor, Inc. (the
"Company") and its subsidiaries, these interim financial statements
contain all adjustments considered necessary for a fair presentation of
financial position, results of operations, comprehensive 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 July
3, 1999 for additional disclosures, including a summary of the
Company's accounting policies, which have not changed. Operating
results for the twenty-six weeks ended January 1, 2000 are not
necessarily indicative of the results that may be expected for the
fifty-two weeks ending July 1, 2000.
2. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial 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 No. 137) is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Management does not believe that the
adoption of SFAS No. 133 will have a material impact on its financial
position or results of operations.
3. LITIGATION
The Company and its subsidiaries are involved in legal proceedings,
claims and litigation arising in the ordinary course of business. In
the opinion of management, the outcome of such current legal
proceedings, claims and litigation will not have a material impact of
the Company's consolidated financial position or results of operations.
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 1,207,979. The financial statements
of prior years have been restated to reflect the adoption of the equity
method in a manner consistent with the accounting for 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 Corporation 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. This
excess was $3,628 at January 1, 2000 and is being amortized on a
straight-line basis over 20 years.
<PAGE>8
PHAR-MOR, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (all dollar amounts in thousands)
Thirteen Weeks Ended January 1, 2000 versus
Thirteen Weeks Ended December 26, 1998
Sales for the second quarter of fiscal year 2000 ("Fiscal 2000") increased 18.0%
compared to the second quarter of fiscal year 1999 ("Fiscal 1999") primarily due
to the acquisition of the 32 Pharmhouse stores which were acquired in March
1999. Comparable store sales increased 3.2% from $293,338 for Fiscal 1999 to
$302,720 for Fiscal 2000. The increase in comparable store sales was primarily
due to an 10.7% increase in comparable pharmacy store sales.
Cost of sales as a percentage of sales was 80.0% in Fiscal 2000 compared to
80.2% in Fiscal 1999, a decrease of 0.2% of sales. The decrease was due to
higher product margins in the Pharmhouse stores combined with lower occupancy
costs as a percentage of sales.
Selling, general and administrative expenses as a percentage of sales were 15.4%
in Fiscal 2000 compared to 14.7% in Fiscal 1999, an increase of 0.7% of sales.
This increase was primarily due to higher wages and other store operating
expenses as a percentage of sales partially offset by lower corporate expenses
as a percentage of sales. The increase in wages was due to the inclusion of the
lower volume Pharmhouse stores and a 5% increase in the average hourly rate paid
to store level employees. The market for pharmacists is very competitive and as
a result the average hourly rate paid to pharmacists has increased 9% over the
past year. The increase in other expenses was primarily due to the inclusion of
the lower volume Pharmhouse stores and increases in credit card fees due to an
increase in the interchange fees charged by VISA and Master Card and higher
repairs and maintenance expenses due to the relamping of approximately one third
of the Phar-Mor stores in the first six months of the fiscal year.
Depreciation and amortization expense was $6,092 in Fiscal 2000 compared to
$5,683 in Fiscal 1999, an increase of $409. Depreciation expense increased $588
as a result of an increase in depreciation on capital expenditures made since
the second quarter of Fiscal 1999 and the depreciation on the assets acquired in
the Pharmhouse acquisition. Amortization of goodwill and other intangibles
increased $317 as a result of the assets acquired in the Pharmhouse acquisition.
These increases were partially offset by a $496 decrease in video tape
amortization due to the closure of approximately one half of its poorer
performing video rental departments in the past year combined with lower video
rental tape purchases in continuing video rental departments.
Interest income was $11 in Fiscal 2000 compared to interest income of $283 in
Fiscal 1999, a $272 decrease. The decrease in interest income was due to a
decrease in the amount of excess funds available for investment in Fiscal 2000.
Investment income was $5,290 in Fiscal 2000 compared to an investment loss of
$579 in Fiscal 1999, a $5,869 increase. The increase was primarily due to a
$5,347, or 81%, increase in the value of the Company's limited partnership
interest in an investment partnership.
The Company repurchased $3,110 of its 11.72% senior notes during Fiscal 2000 at
a discount that resulted in a pretax extraordinary gain of $343.
<PAGE>9
Twenty-six Weeks Ended January 1, 2000 versus
Twenty-six Weeks Ended December 26, 1998
Sales for the twenty-six weeks ended January 1, 2000 increased 18.0% due to the
acquisition of the 32 Pharmhouse stores which were acquired in March 1999.
Comparable store sales increased 3.3% from $559,489 for the twenty-six weeks
ended December 26, 1998 to $577,787 for the twenty-six weeks ended January 1,
2000. The increase in comparable store sales was primarily due to a 10.0%
comparable store pharmacy sales increase.
Cost of sales as a percentage of sales was 80.4% in the twenty-six weeks ended
January 1, 2000, compared to 80.7% in the twenty-six weeks ended December 26,
1998, a 0.3% improvement. The improvement is primarily due to increased vendor
income related to the remerchandising activities in the Pharmhouse stores
partially offset by lower video rental tape sales. In the last year the Company
closed approximately one half of its poorer performing video rental departments
and liquidated the video rental tape inventory in those stores.
Selling, general and administrative expenses as a percentage of sales were 16.1%
in the twenty-six weeks ended January 1, 2000 compared to 15.2% in the
twenty-six weeks ended December 26, 1998. This increase was primarily due to
higher wages, advertising and other store operating expenses as a percentage of
sales due to the inclusion of the lower volume Pharmhouse stores partially
offset by lower corporate expenses as a percentage of sales.
Depreciation and amortization expense was $13,267 in the twenty-six weeks ended
January 1, 2000 compared to $11,421 in the twenty-six weeks ended December 26,
1998, an increase of $1,846. The increase is the result of depreciation on
capital expenditures made since the second quarter of Fiscal 1999 and the
depreciation and amortization on the assets acquired in the Pharmhouse
acquisition.
Interest income was $20 in the twenty-six weeks ended January 1, 2000 compared
to interest income of $771 in the twenty-six weeks ended December 26, 1998, a
$751 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
January 1, 2000.
Investment income was $5,222 in Fiscal 2000 compared to an investment loss of
$1,204 in Fiscal 1999, a $6,426 increase. The increase was primarily due to a
$5,980, or 100%, increase in the value of the Company's limited partnership
interest in an investment partnership.
The Company repurchased $3,110 of its 11.72% senior notes during the twenty-six
weeks ended January 1, 2000 at a discount that resulted in a pretax
extraordinary gain of $343.
FINANCIAL CONDITION AND LIQUIDITY (all dollar amounts in thousands)
The Company's cash position as of January 1, 2000 was $14,275. 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.
<PAGE>10
Credit availability under the Amended Facility at any time is the lesser of the
aggregate availability (as defined in the Amended Facility) or $100,000. The
Amended Facility establishes a first priority lien and security interest in the
current assets of the Company, including, among other items, cash, accounts
receivable and inventory.
Advances made under the Amended Facility bear interest at the BankAmerica
reference rate plus 1/2% or LIBOR plus 2.00%. Under the terms of the Amended
Facility, the Company is required to pay a commitment fee of between 0.25% and
0.35% per annum on the unused portion of the facility, letter of credit fees and
certain other fees.
Unused availability under the Amended Facility, after subtracting amounts used
for outstanding letters of credit, was $43,818, at January 1, 2000.
The Amended Facility expires on March 14, 2002.
Twenty-six weeks ended January 1, 2000
During the twenty-six weeks ended January 1, 2000, the Company's cash position
decreased by $3,071. Net cash used for operating activities was $1,178. The
major sources of cash from operating activities were net income of $3,927,
depreciation expense of $9,257, amortization of video rental tapes of $3,306,
decrease in marketable securities of $3,254 and an increase in accrued expenses
and other current liabilities of $6,615 offset by a decrease in accounts payable
of $20,151, an increase in merchandise inventories of $3,828 and an increase in
accounts receivable of $2,624.
Capital expenditures of $10,161, additions to video rental tapes of $805, an
investment in equity securities of $4,600 and an additional $5,724 investment in
Avatex were paid for with the Company's revolving credit facility.
Net cash provided by financing activities of $19,364 consisted of borrowings
under the revolving credit facility partially offset by decreases in bank
overdrafts, principal payments on lease obligations and principal payments on
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)
Certain Company information systems had 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
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 initiated formal communication
with all of its significant vendors and other external interfaces to determine
the extent to which the Company was 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 have caused disruption of the
Company's systems.
The Company completed all of the software modifications necessary to make its
systems Year 2000 compliant and as a result has not experienced any operational
problems or disruptions as of January 28, 2000
<PAGE>11
The Company incurred approximately $1,300 related to the assessment of, and
efforts in connection with, its Year 2000 program and remediation plan. The
Company accelerated by one year the purchase of approximately $5,000 in
replacement hardware in order to ensure the associated system was Year 2000
compliant.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value,
with the potential effect on operations dependent upon certain conditions being
met. SFAS No. 133 (as amended by SFAS No. 137) is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. Management does not
believe that the adoption of SFAS No. 133 will have a material impact on its
financial position or results of operations.
<PAGE>12
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
December 10, 1999. The Company received proxies from holders
of 11,283,354 shares of the Company's common stock which
constituted more than a majority of all shares issued and
outstanding (12,240,865 shares) at the close of business on
October 1, 1999. The holders of at least 11,007,713 shares of
common stock voted for the election of Monroe Osterman as
director of the Corporation to hold office for three years
until the 2002 Annual Meeting and until his successor is duly
elected and qualified or until his resignation or removal.
The second proposal was for an amendment to the Phar-Mor
Director Stock Plan to change the annual automatic grant date
to July 1. The proposal passed as follows: 10,530,734 shares
in favor; 362,108 shares against; and 390,512 shares
abstaining.
The third 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 1, 2000. The
proposal passed as follows: 11,080,703 shares in favor;
194,011 shares against; and 8,640 shares abstaining.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on page 14.
(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
January 1, 2000
None.
<PAGE>13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHAR-MOR, INC.
Date: February 7, 2000 By: /s/ Sankar Krishnan
-----------------------
Sankar Krishnan
Senior Vice President and Chief
Financial Officer
Date: February 7, 2000 By: /s/ John R. Ficarro
-----------------------
John R. Ficarro
Senior Vice President and Chief
Administrative Officer
<PAGE>14
PHAR-MOR, INC.
INDEX TO EXHIBITS
Exhibit No.
*3.1 Amended and Restated Articles of Incorporation
**3.2 Amended and Restated By-laws
*4.1 Indenture dated September 11, 1995 between Phar-Mor, Inc. and
IBJ Schroder Bank & Trust Company
*4.2 Warrant Agreement dated September 11, 1995 between Phar-Mor,
Inc. and Society National Bank
***10.1 Loan and Security Agreement, dated as of September 10, 1998,
by and among the financial institutions listed on the
signature pages therein, BankAmerica Business Credit, Inc., as
agent, and Phar-Mor, Inc., Phar-Mor, Inc., LLC, Phar-Mor of
Delaware, Inc., Phar-Mor of Florida, Inc., Phar-Mor of Ohio,
Inc., Phar-Mor of Virginia, Inc., and Phar-Mor of Wisconsin,
Inc.
****10.2 Amendment to the Supply Agreement dated November 5, 1999
between Phar-Mor, Inc. LLC and its affiliates and McKesson
Drug Company, a division of McKesson HBOC, 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
**** Confidential treatment requested. The redacted material, indicated by
[*], has been separately filed with the Commission.
CONFIDENTIAL TREATMENT REQUESTED
(The redacted material, indicated by [*], has been separately filed with the
Commission)
AMENDMENT TO SUPPLY AGREEMENT
This Amendment to the Supply Agreement ("Amendment") is entered into this 5th
day of November, 1999 by and between Phar-Mor, Inc. LLC and its affiliates
("Phar-Mor") and McKesson Drug Company, a division of McKesson HBOC, Inc.
("McKesson"), formerly McKesson Corporation.
INTRODUCTION
Pursuant to the terms of the Supply Agreement dated June 19, 1997 (the "Supply
Agreement"), McKesson and Phar-Mor, Inc. entered into an agreement to establish
a prime vendor relationship whereby McKesson serves as the supply source of
pharmaceutical and OTC products for Phar-Mor and its retail pharmacies.
Phar-Mor, Inc. has recently purchased all of the assets of Pharmhouse (the
"Transaction"). In view of the Transaction, Phar-Mor and McKesson now desire to
amend the Supply Agreement as set forth below.
AGREEMENT
For good and valuable consideration, McKesson and Phar-Mor hereby agree as
follows:
1. McKesson hereby acknowledges the assignment of all of the tangible
assets, rights and obligations of Phar-Mor, Inc. including the Supply
Agreement, to its affiliate, Phar-Mor, Inc. LLC on June 27, 1997.
Phar-Mor, Inc. LLC remains a wholly-owned affiliate of Phar-Mor, Inc.
and its wholly-owned subsidiary, Phar-Mor of Wisconsin, Inc. Inasmuch
as the retail pharmacies subject to this Agreement are operated by
wholly-owned subsidiaries and affiliates of Phar-Mor, Inc., the parties
agree that the appropriate parties to the Supply Agreement, as amended,
should be Phar-Mor, Inc. LLC and its affiliates, and McKesson hereby
agrees to such assignment of the Supply Agreement. Accordingly,
hereinafter all references to Phar-Mor shall refer to Phar-Mor, Inc.
LLC and its affiliates.
2. Section 8 of the Supply Agreement shall be amended to reflect an annual
purchase commitment of [ * ] (net of returns, allowances and rebates)
in volume of D.S.D. Merchandise by Phar-Mor.
3. The term of the Supply Agreement as defined in Section 11 thereof shall
be modified by this Amendment to extend for an additional four-year
period through November 15, 2005. For purposes hereof, each Contract
Year during the term of the Supply Agreement shall be defined as the
twelve (12) month period commencing on November 15.
4. Section 9 of the Agreement shall be modified by adding the following
payment terms:
McKesson agrees to provide Phar-Mor with [ * ] [(*)] day payment terms.
All invoices for each week (Sunday through Saturday) will be due and
payable via wire transfer on the [ * ] day following the end of each
week. If any of the due dates herein fall on a weekend or holiday,
payment will be due the next business day. All late charges as noted in
Section 9 of the Supply Agreement will apply to unpaid balances. The
availability of such payment terms and conditions as specified in this
Section 4 of the Amendment is based on and contingent upon payment by
Phar-Mor via wire transfer. Until such time as Phar-Mor begins payment
by wire transfer, the existing payment terms in the Supply Agreement
shall apply.
5. The first paragraph of Section 7 Purchase Price: Definition of Cost
will be deleted in its entirety and replaced with the following:
The purchase price of the Merchandise delivered to Phar-Mor shall be
the Cost of the Merchandise less the reductions or plus the markup, as
applicable, set forth in the cost of goods schedule set forth in
Section 19 below. Except in the case of contract items as discussed
below, "Cost" means the manufacturer's published acquisition cost
(exclusive of cash discounts) on the date of McKesson's invoice to
Phar-Mor, adjusted for selected bonus goods, manufacturers' off-invoice
allowances and manufacturers' deal prices to be made available to
Phar-Mor in accordance with McKesson's established policies. For
purchases of Merchandise with respect to which Customer has entered
into a vendor contract with a manufacturer ("Contract Products") loaded
with McKesson, "Cost" shall mean the "bid price" of the product as set
forth in the vendor contract.
6. The Developmental Funds subsection in Section 8 of the Supply Agreement
-------------------
will be deleted in its entirety and replaced with the following:
In consideration for the initial two years of the four-year term
extension as specified in Section 3 of this Amendment, McKesson agrees
to pay to Phar-Mor the following amounts:
(i) the sum of [ * ] ("Developmental Funds") within ten (10) days
of the Select Implementation Date as herein defined. For
purposes hereof, the Select Implementation Date shall mean the
date on which all Phar-Mor and Pharmhouse locations are fully
participating in the McKesson Select Generics
auto-substitution program; and
(ii) the sum of [ * ] ("Continuing Commitment Funds") on November
15, 2001.
In the event that the Supply Agreement is terminated by either party
for any reason during the term hereof (other than a material breach of
the Supply Agreement by McKesson that is not cured by McKesson within
sixty (60) days of Phar-Mor's notice thereof, upon termination for
which Phar-Mor shall not be required to repay such amounts already
paid), Phar-Mor shall immediately reimburse to McKesson the then
applicable portion of the above-specified Developmental Funds and
Continuing Commitment Funds as determined by the following pro-rata
reimbursement formulas:
Reimbursement Formula for Previously Paid Developmental Funds
-------------------------------------------------------------
|----- -----|
| |
| Number of months remaining in the Supply |
| Agreement between the date of termination |
| [ * ] times and November 15, 2003 |
| ---------------------------------------- |
| 60 |
| |
| |
|----- -----|
Reimbursement Formula for Previously Paid Continuing Commitment Funds
|----- -----|
| |
| Number of months remaining in the Supply |
| Agreement between the date of termination |
| [ * ] times and November 15, 2003 |
| ----------------------------------------- |
| 24 |
| |
|----- -----|
7. Section 19 Cost of Goods, will be deleted in its entirety and replaced
-------------
with the following:
The Retail Cost of Goods set forth in this Section 19 is based on
Phar-Mor achieving the following purchase volumes in Direct Store
Delivery ("D.S.D.") prescription drug and OTC product purchases (net of
returns, allowances and rebates) from McKesson throughout the term of
this Agreement:
(i) $[ * ] in total chainwide annual purchases; and
(ii) minimum chainwide average of $[ * ] per store per month.
Retail Direct Store Delivery
- ----------------------------
RX Cost Minus [ * ]%
OTC Cost Minus [ * ]%
Pharmhouse Transition OTC Cost of Goods
Subject to the terms and conditions herein, all former Pharmhouse locations will
be billed at Cost Minus [ * ]% on OTC products as per this Section 19 of the
Supply Agreement. This cost will remain effective as long as such OTC purchases
remain consistent with Phar-Mor's current practices and do not include
Non-Ethical OTC and General Sundries which are to be provided to the Phar-Mor
and Pharmhouse stores by the Phar-Mor warehouse.
Phar-Mor stores will be invoiced at Cost Plus [ * ]%. Provided that Phar-Mor is
maintaining a minimum chainwide monthly average net volume of [ * ] in D.S.D.
purchases per store, McKesson will provide a monthly rebate to Phar-Mor's
corporate offices in the amount of [ * ]% on discountable Rx purchases and [ *
]% of discountable OTC purchases (net of returns and allowances). In the event
that Phar-Mor's chainwide monthly average net purchase volume per store is less
than $[ * ], the monthly rebate will be the difference between the invoice price
and the applicable cost of goods. Items that are billed at a net price as
outlined in Section 7 of the Supply Agreement will be excluded from the monthly
rebate.
In the event that Phar-Mor fails to maintain a minimum chainwide average volume
of $[ * ] in net D.S.D. prescription drug and OTC product purchases per store
per month from McKesson during any three (3) consecutive months of this
Agreement, all retail cost of goods pricing hereunder shall be increased to the
then applicable pricing based on the following schedule until such time as the
minimum chainwide D.S.D. prescription drug and OTC product net purchase volume
requirement of $[ * ] is met for three (3) consecutive months, at which time the
retail cost of goods pricing shall return to Cost minus [ * ]% for Rx and Cost
minus [ * ]% for OTC products.
Chainwide Monthly
Average Per Store Rx OTC
(net of returns, -- ---
allowances and rebates)
-----------------------
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
$[ * ] [ * ] [ * ]
It is further understood and agreed by both parties that if Phar-Mor
fails to maintain a minimum chainwide average volume of [ * ] in net
D.S.D. prescription drug and OTC product purchases per store per month
from McKesson during any rolling three (3) month period of this
Agreement, such failure shall constitute a default of this Agreement by
Phar-Mor.
8. The Annual Volume Incentive subsection as set forth in Section 19 of
-------------------------
the Supply Agreement will be deleted in its entirety; provided however
that within thirty (30) days of the execution of this Amendment by both
parties, McKesson will pay to Phar-Mor a volume incentive payment based
on Phar-Mor's purchase volume of D.S.D. prescription drug and OTC
products (net of returns, allowances and rebates) for the period
between November 1, 1998 and July 1, 1999 in the amount of [ * ]% of
net total purchases during such period.
9. Section 20 Generic Pharmaceuticals will be deleted in its entirety and
------------------------
replaced with the following:
Phar-Mor agrees to participate in McKesson's Select Generics Program
through its auto-substitution feature and to thereby designate this
program as the primary source of generic pharmaceuticals for all
Phar-Mor and Pharmhouse stores. The Select Implementation Date for all
such stores will occur on or before-January 31, 2000. All
Phar-Mor/Pharmhouse pharmacies will be billed for McKesson Select
Generics at discounted bid prices, which are subject to change due to
market conditions. In addition, a quarterly rebate will be paid
Phar-Mor following the Select Implementation Date in accordance with
the following schedule:
Chainwide Quarterly McKesson Select Generics Rebate Percent
Purchases (net on Net McKesson
of returns allowances and rebates) Select Generics Purchases
---------------------------------- -------------------------
Less than [ * ] [ * ]%
and above [ * ]%
[ * ]%
All Phar-Mor/Pharmhouse locations must be fully participating in the McKesson
Select Generic auto-substitution program in order for Phar-Mor to qualify for
any quarterly rebate hereunder. Notwithstanding anything herein to the contrary,
the quarterly McKesson Select Generics minimum purchase volume of [ * ] required
to obtain the above-specified rebate will be waived for the period between the
Select Implementation Date as referenced above and March 31, 2000, and with
respect to such period the following rebate payment percentages shall apply:
|X| [ * ]% if net McKesson Select Generics purchase volume is less than
$[ * ].
|X| [ * ]% if net McKesson Select Generics purchase volume is $[ * ] or
greater.
Rebate payments pursuant to this Section 20 will be made to Phar-Mor's corporate
offices within 30 days of the end of each quarter.
a. Market Competitiveness
----------------------
McKesson shall provide a Select Generics Benchmark each quarter to
ensure Phar-Mor of the market competitiveness of the McKesson Select
Generics Program.
b. Service Level
-------------
McKesson will ensure a [ * ] service level, as defined in Section 13.A
of the Supply Agreement for products purchased on the McKesson Select
Generics Program. If McKesson fails to meet this [ * ]% service level
for Select Generics Program purchases for two (2) consecutive quarters,
then McKesson will pay Phar-Mor an amount equal to [ * ] basis points
([ * ]%) of Phar-Mor's total Select Generics purchases (net of returns,
allowances and rebates) during the subject period within fifteen (15)
days following Phar-Mor's demand for same.
c. New-to-Market Generics Features
-------------------------------
|X| Stocking allowances / slotting fees on New-to-Market products
will be passed to Phar-Mor when made available to McKesson
from the manufacturer.
|X| Free goods and/or automatic shipment for New-to-Market
products will be provided to Phar-Mor when made available to
McKesson from the manufacturer.
10. Section 21. Repack Pharmaceuticals will be deleted in its entirety and
-----------------------
replaced by the following:
Repack Pharmaceuticals
----------------------
A comprehensive program will be made available to Phar-Mor for repacked
pharmaceuticals. Stores shall be net-billed with an additional volume
rebate to be paid to Phar-Mor headquarters, each quarter.
Quarterly RxPak Volume Rebate % on
(net of returns, allowances & rebates) Net RxPak Volume
-------------------------------------- ----------------
Less than $ [ * ] [ * ]%
$ [ * ] - $[ * ] million [ * ]%
$ [ * ] - $[ * ] million [ * ]%
$ [ * ] - $[ * ] million [ * ]%
$ [ * ] - $[ * ] million [ * ]%
$ [ * ] million and above [ * ]%
11. The reimbursement formula specified at the end of Section 15 of the
Supply Agreement shall be deleted in its entirety and replaced with the
following:
|----- -----| |----- -----|
| Total amount of On-Site | | Number of months remaining |
| Support Monies paid by | | in the then current Contract |
| McKesson to Phar-Mor for | times | year upon date of termination |
| the then current Contract Year| | ----------------------------- |
| | | 12 |
|----- -----| |----- -----|
12. Provided that all of Phar-Mor's material contractual commitments
required under this Supply Agreement have been met for the then
concluding Contract Year as of each of the designated dates below,
McKesson will provide to Phar-Mor an annual compliance payment in
accordance with the following schedule:
$[ * ] payable November 15, 2000
$[ * ] payable November 15, 2001
$[ * ] payable November 15, 2002
$[ * ] payable November 15, 2003
$[ * ] payable November 15, 2004
$[ * ] payable November 15, 2005
In the event that Phar-Mor fails to qualify for any of the
above-specified payments due to nonperformance of its material contract
commitments in any given Contract Year, that particular payment will be
deemed forfeited and McKesson will have no liability or obligation to
subsequently make such payment available to Phar-Mor.
13. The Supply Agreement between Pharmhouse Corporation and the McKesson
U.S. Healthcare division of McKesson Corporation, dated May 1, 1998,
shall be deemed terminated upon the execution of this Amendment. No
damages or other amounts, other than trade payables and McKesson
PaySystem receivables, shall be owed to McKesson by Pharmhouse
Corporation or by Phar-Mor, Inc. or its subsidiaries or affiliates
based on that Supply Agreement.
14. All terms and conditions of this Amendment shall be deemed effective as of
July 1, 1999.
15. Except as modified above, the Supply Agreement remains unchanged and in full
force and effect.
IN WITNESS WHEREOF the parties have caused this Amendment to the Supply
Agreement to be duly executed as, of the day and year specified above.
PHAR-MOR, INC. LLC AND ITS AFFILIATES, McKESSON DRUG COMPANY,
BY PHAR-MOR, INC.LLC a division of McKesson HBOC, Inc.
By: /s/ David Schwartz By: /s/ Mark J. Majeske
------------------ -------------------
Name: David Schwartz Name: Mark T. Majeske
----------------- -----------------
Title: President & COO Title: Group President, Retail
--------------- and Customer Operations
-----------------------
Date: November 5, 1999 Date: November 10, 1999
---------------- -----------------
dc-186344
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